3/12/2025

WHAT IS FINANCIAL ACCOUNTING?

a branch of science that
deals with the physical
world
Human
Knowledge

a branch of science that

deals with human society
Natural and social relationships Social
Sciences Sciences

UNIT 1 - THE CONCEPTUAL FRAMEWORK Physics Chemistry Physiology Psychology Economics

CHAPTER 1 – Financial Accounting – An Introduction

WHAT IS FINANCIAL ACCOUNTING? THE EVOLUTION OF FINANCIAL ACCOUNTING

• The practice and knowledge See video on

Moodle Professional
• of systematically double-entry Movements
system by Luca
identifying, Pacioli
Forms of
measuring, entities Accountants and
Technological Auditors
recording and Influences professional
Sole Props
bodies
reporting Origin of Partnerships
Companies
• of quantitative and qualitative information Accounting
Industrial
revolutions >>>
• in respect of economic activities of entities, 4IR and 5IR

• that is useful for users in making economic decisions.

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INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) WELCOME TO ACCOUNTING 100!

• IASB - 2001
• Sets out recognition, measurement, presentation and disclosure requirements for transactions and events in
general purpose financial statements
• Conceptual Framework for Financial Reporting
• International Financial Reporting Standards (IFRSs) = 18
• International Accounting Standards = (IAS’s) = 24
“The illiterate of the 21st century will not be those who
Preface to International Financial Reporting Standards
Conceptual Framework for Financial Reporting;
IAS 33 Earnings per Share;
IAS 36 Impairment of Assets;
cannot read and write, but those who cannot learn,
IFRS 18 & Disclosure Presentation of Financial
Statements;
IAS 37 Provisions, Contingent Liabilities and Contingent
Assets; unlearn, and relearn”
IAS 2 Inventories; IAS 38 Intangible Assets;
IAS 7 Statement of Cash Flows; IAS 40 Investment Property; Alvin Toffler (Futurist and Philosopher )
IAS 10 Events after the Reporting Period; IFRS 7 Financial Instruments: Disclosure;
IAS 16 Property, Plant and Equipment; IFRS 9 Financial Instruments;
IAS 23 Borrowing Costs; IFRS 15 Revenue from Contracts with Customers; and
IAS 32 Financial Instruments: Presentation; IFRS 16 Leases
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LEARN, UNLEARN & RELEARN THEORY

INTRODUCTION
CHAPTER 1 – Financial Accounting – An Introduction

OVERVIEW – LEARNING OUTCOMES OVERVIEW – LEARNING OUTCOMES

• After studying this unit you should be able to: • After studying this unit you should be able to:
explain the purpose and status of the Conceptual Framework for Financial Reporting; explain and apply the elements of the financial statements: assets, liabilities, equity, income,
explain how the Conceptual Framework for Financial Reporting interacts with IFRS Standards; expenses and understand the relationship between each in the accounting equation,
explain the mission of the IFRS Foundation and the International Accounting Standards Board; explain the concept of recognition, understand its relationship to the accounting equation
explain the objective of general purpose financial reports; and the double-entry system;
explain who the primary users of the financial reports are, their specific information needs explain the concept of measurement, and the different measurement bases available;
and why they need that information; explain the recognition and measurement of share capital and dividends;
explain each of the components of the financial statements; explain the derecognition of assets and liabilities, specifically trade receivables, trade payables
explain the concepts of reporting entity, reporting period, reporting date, accrual accounting and loan; and
and going concern; explain the principles supporting presentation and disclosure
explain the fundamental and enhancing qualitative characteristics;
explain the difference between transactions and events;

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IFRS ACCOUNTING STANDARDS

HISTORY OF FINANCIAL ACCOUNTING • What are IFRS Accounting Standards?
• Preparers (Input) and Users (Output)
1458 • GLOBALLY - Relevant, reliable, comparable and understandable
1494 Modern
3000 BCE Benedetto • Developed and published by the International Accounting
Luca Pacioli Accounting
Cotrugli Standard Board (IASB)
• Sets out recognition, measurement, presentation and
disclosure requirements dealing with transactions and events
• For general purpose financial statements of for-profit entities
• i.e. the financial position, performance, cash flows and notes
useful to users in making economic decisions
• IFRS Accounting standards
• Conceptual framework for Financial Reporting (Ch 2)
• 18 x IFRSs (International Financial Reporting Standards)
See online video on the history of Accounting
• 24 x IASs (International Accounting Standards)

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Objective of general purpose financial reports

• To provide financial information about

the financial position,
the financial performance
and the cash flow of the reporting entity,
• which is useful to
existing and potential investors,
lenders and
other creditors
• in making economic decisions relating to providing resources to the reporting
UNIT 1 - THE CONCEPTUAL FRAMEWORK entity.
Chapter 2 – Conceptual Framework for Financial Reporting

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USERS OF FINANCIAL REPORTS COMPONENTS OF FINANCIAL STATEMENTS Notes

What about
management???

Users of
Financial
Reports
Statement of
profit or loss Statement of
financial
position
Primary Secondary
Statement of
Statement of cash flows
changes in
Investors Government equity
Other and
(existing and Lenders Customers Employees Community
creditors government
potential) institutions

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REPORTING ENTITY AND RELATED CONCEPTS QUALITATIVE CHARACTERISTICS

• (PTY) LTD and LTD

What does
• Reporting date and reporting period fundamental
mean?
QUALITATIVE CHARACTERISTICS
• Accrual basis of accounting
Items are recognised as assets, liabilities, equity, income and expenses (that is the elements of
financial statements) when the items satisfy the definition of that element and the recognition
criteria FUNDAMENTAL ENHANCING
• Going concern basis
• neither the intention
• nor the need to liquidate or curtail materially RELEVANT
FAITHFUL
REPRESENTATION
COMPARABLE VERIFIABLE TIMELY UNDERSTANDABLE

• the scale of its operations (in the foreseeable future)

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QUALITATIVE CHARACTERISTICS - FUNDAMENTAL QUALITATIVE CHARACTERISTICS - FUNDAMENTAL

• RELEVANCE • FAITHFUL REPRESENTATION

Capable of making a difference Faithful Representation of the substance of the phenomena it purports to
Confirmatory or predictive value represent.
Materiality Substance over form

if the omission, Complete

misstatement or Neutral
obscuring thereof Without bias i.e. does not force a certain outcome or position
could have an influence on the decisions that the primary users make based on that information Prudence
Free from error

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QUALITATIVE CHARACTERISTICS - ENHANCING

QUALITATIVE CHARACTERISTICS - ENHANCING Tiger Brands Sasol Woolworths

• COMPARABILITY
Over time
Across entities
Consistency
• VERIFIABILITY
• TIMELINESS
• UNDERSTANDABILITY
Appropriate classification and categorization of information

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QUALITATIVE CHARACTERISTICS - ENHANCING

BP (UK) Sasol (South Africa) Aramco (Saudi Arabia)
TRANSACTIONS AND EVENTS
IAS 2 – Inventories IAS 16 – Property plant and equipment
•TRANSACTION
Two or more parties Transactions and events are
accumulated in the accounting
Exchange records under the ELEMENTS
of the financial statements
Established through contract or legislation ASSETS
LIABILITIES
•EVENT EQUITY
INCOME
No exchange EXPENSES

Originate from accounting processes

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ELEMENTS OF THE FINANCIAL STATEMENTS:

THE ACCOUNTING CYCLE ELEMENTS OF FINANCIAL STATEMENTS

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

The occurrence of a The purchase of the The journal is posted Preparation of the trial Preparation of the
transaction or event vehicle for cash is to the general ledger balance which is the financial statements
Example: The recorded by way of accounts (or t – list of all debits and
purchase of a vehicle journal entries at accounts) credits in the books of
by the entity for cash initial recognition in the entity
the books of the entity
i.e. debits and credits Vehicles
01-Mar-17 Bank 25000
31-Dec-17 Bal c/f 25 000

DR Vehicles 25 000 25000

CR Bank 01-Jan-17 Bal b/d 25 000

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ELEMENTS OF THE FINANCIAL STATEMENTS – ELEMENTS OF THE FINANCIAL STATEMENTS –

FINANCIAL POSITION HOW TO STUDY THE DEFINITIONS

•Step 1: State the theory i.e. provide the definition

•Step 2: Apply the theory – break up the definition into its
significant components (i.e. separately defined components)
•Step 3: Conclude
LIABILITIES
ASSETS

EQUITY

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ELEMENTS OF THE FINANCIAL STATEMENTS – ELEMENTS OF THE FINANCIAL STATEMENTS –

FINANCIAL POSITION: ASSETS FINANCIAL POSITION: ASSETS

• An asset is: Potential to produce economic benefits (cont…)

a present economic resource Does not have to certain or even likely
Examples –
controlled by the entity
• Receive contractual cash flows or another economic resource;
as a result of past events (Conceptual Framework 4.3).
• Exchange economic resources with another party on favourable terms;
• A present economic resource • Produce cash inflows or avoid cash outflows

right that has the potential to produce economic benefits (Conceptual Framework 4.4). • Receive cash or other economic resources by selling the economic resource;
• Extinguish liabilities by transferring the economic resource.
Examples of such rights
correspond to an obligation of another party i.e. to receive cash or goods and or services • Controlled by the entity
do not correspond to an obligation of another party i.e. rights over physical items Present ability to direct the use and obtain the economic benefits incl…preventing others
Established by contract, legislation or other customary or published practice or policy Ownership??? Necessary and when does it transfer

Potential to produce economic benefits Rights to claim i.e. receivables

Does not have to certain or even likely

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ELEMENTS OF THE FINANCIAL STATEMENTS – ELEMENTS OF THE FINANCIAL STATEMENTS –

FINANCIAL POSITION: ASSETS FINANCIAL POSITION: LIABILITIES

• As a result of a past event • A liability is:

Past event = date when control is transferred (delivery, registration etc…) a present obligation of the entity
(land and buildings (property), vehicles, other assets) to transfer an economic resource
as a result of past events (Conceptual Framework 4.26).
Therefore: • Obligation (present)
An asset is: Duty or responsibility that the entity has no practical ability to avoid
a present economic resource Enforceable by contract, legislation (i.e. legal), other customary or published practice or
controlled by the entity policy (i.e. constructive)
as a result of past events (Conceptual
• To transfer an economic resource
Framework 4.3).
potential to require the entity to transfer an economic resource to another party or parties.
to pay cash or deliver goods and or services
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ELEMENTS OF THE FINANCIAL STATEMENTS – ELEMENTS OF THE FINANCIAL STATEMENTS –

FINANCIAL POSITION: LIABILITIES FINANCIAL POSITION: EQUITY

• As a result of past events (Conceptual Framework 4.26). • Equity is the

Past event = date when the present obligation exists residual interest in the assets of the entity
E.g. Loan agreement??? after deducting all its liabilities (Conceptual Framework 4.63).
• Claims against the entity that are NOT LIABILITIES
Therefore: • Established by contract, legislation or other means
• Claims to receive dividends
A liability is:
• Capital portion???
a present obligation of the entity
to transfer an economic resource
as a result of past events (Conceptual EQUITY ASSETS LIABILITIES
Framework 4.26).
• Please refer to par 93 – 100 of the textbook
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ELEMENTS OF FINANCIAL STATEMENTS – FINANCIAL ELEMENTS OF THE FINANCIAL STATEMENTS –

PERFORMANCE: INCOME AND EXPENSES FINANCIAL PERFORMANCE: INCOME & EXPENSES
• Income is
increases in assets or
INCOME decreases in liabilities

EXPENSES that result in increases in equity,

other than those relating to contributions from holders of equity claims (Conceptual Framework 4.68).
• Examples of income????

• Expenses are
decreases in assets, or
increases in liabilities,
that result in decreases in equity, other than those relating to distributions to holders of equity claims
(Conceptual Framework 4.69).
• Examples of expenses?????

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ELEMENTS OF THE FINANCIAL STATEMENTS –

CONCEPTUAL FRAMEWORK RECAP A liability is:
FINANCIAL PERFORMANCE: INCOME & EXPENSES a present obligation of the entity
to transfer an economic resource
An asset is: as a result of past events
a present economic resource
controlled by the entity
• Equity is the
INCOME EXPENSES as a result of past events
residual interest in the assets of the
entity
NET RETAINED SHARE
• Expenses are after deducting all its liabilities
PROFIT EARNINGS CAPITAL
decreases in assets, or
Income is
increases in liabilities,
increases in assets or
that result in decreases in equity,
EQUITY ASSETS LIABILITIES decreases in liabilities
other than those relating to
distributions to holders of equity that result in increases in equity,
claims other than those relating to contributions
from holders of equity claims
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RECOGNITION CRITERIA MEASUREMENT

• Only items that meet the definition of an asset, liability or equity are recognised in the statement of
• Measurement is the process whereby an entity determines the monetary amount
financial position.
at which assets, liabilities, equity, income and expenses must be recognised
• Only items that meet the definition of income and expenses are recognised in the statement of profit
or loss. (Conceptual Framework 6.1).
• BUT… NOT ALL ITEMS THAT MEET THE DEFINITIONS CAN BE RECOGNISED!!!!!! INITIAL MEASUREMENT
• WHY???? • Historical Cost Model
• Fair Value Model
• AN ITEM MUST MEET THE DEFINITION OF AN ELEMENT AND BOTH OF THE RECOGNITION
CRITERIA SUBSEQUENT MEASUREMENT
• Land – not depreciated – stays at historical cost or revalued amount
• An asset or liability is recognised only if
• Depreciable non current assets – depreciated value i.e. carrying amount
• recognition of that asset or liability and of any resulting income, expense or change in equity
• Trade inventories?
• provides a user of financial statements with information that is useful, that is to say:
• Term deposit? – amortised cost
a) relevant information about the asset or liability and about any resulting income, expenses or changes
in equity; and • Trade receivables? – outstanding invoice less allowance for doubtful debts
• Trade payables? – outstanding invoice price
b) a faithful representation of the asset or liability and of any resulting income, expenses or changes in
equity. • Loan? Amortised cost
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RECOGNITION AND MEASUREMENT - EQUITY PRESENTATION & DISCLOSURE

• EQUITY = Claims against the entity that are NOT LIABILITIES • Similarity of characteristics
NO PRESENT OBLIGATION • Current vs non-current
 SHARE CAPITAL REPAYMENT OR DIVIDEND DISTRIBUTION
• Offsetting
• SHARE CAPITAL
• Aggregation
Contribution by the shareholders to the entity
• Income and expense related to a particular item – e.g. Fair value
• DIVIDEND
changes vs Interest – presented and disclosed separately
Cash dividend = share of profits of the entity
Paid out of RETAINED EARNINGS – NOT SHARE CAPITAL

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PRESENTATION & DISCLOSURE

Tiger Brands Sasol Woolworths
WHAT HAPPENS NEXT?

APPLICATION

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HOW TO ANSWER A THEORY BASED QUESTION

•THREE STEP APPROACH

STEP 1: State the theory
STEP 2: Apply the theory
STEP 3: Conclude

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