Chapter 7: Introduction to accounts (continue…)

Accounting standards are based on concepts and conventions. neutralityprudence Accounting standards placed greater emphasis on neutrality rather than prudence And also… historical cost fair values Moved away from historical cost towards fair values

 Non-current assets: disclosed at cost less depreciation less any impairment Depreciation is a write off every year due to diminishing value of the asset due to usage  Example: Machinery / Office furniture / Vehicles  Investment type assets recorded at fair value (market value) Conservative, move towards the market value E.g. Securities / derivatives  Example page 20

 AFS is restricted to what can be measured in monetary terms  Do not include for example the value of its customer base or value of its brand names (goodwill)

 A business is an entity for accounting purposes and its finances is kept separate from the owner’s finances  A limited company has its own legal identity  Sole traders and partnerships – owners need to keep financial affairs separate from business

Realisation:  Income is recognised when earned, not when cash is received  Example: Edgars clothing account income is recognised when the customer buyes the clothes on account not when the account is settledAccrual:  Expenses are recognised when incurred and not when paid for.  Example: On 1 Feb 2013 Company A pays R rentals for Feb, March and April. Year end = 31 March. How much rent should be disclosed in 2013’s AFS?

 Income and expenses relating to each other should be disclosed in the same Income Statement….when earned/incurred

 Every transaction will affect two figures  Example: Pay employees:  Salaries expense  Cash  Forms the basis for double-entry bookkeeping

 Not all detail disclosed – some meaningless  Disclose issues only if material and …“would add to the reader’s understanding of the business”  Material if effect on users economic decision- making  Materiality principle has to be interpreted carefully for example if company is fined for breaching guidelines the fine should be disclosed even though amount is insignificant

 AFS should not present unduly optimistic results  Assets and profits: lowest reasonable figure  Liabilities and expenses: highest reasonable figure Prudence only applied when uncertainty: Prudence only applied when uncertainty:  Provision made for known liabilities, expenses and losses (actual amount known or best estimate)  Profits are not anticipated  Profits only reflected in I/S when realised (cash received)

 Assumes that the business will continue in operational existence for the foreseeable future (at least the next 12 months)  If not: liquidation basis (winding-up)  Directors should report that “the business is a going concern” and auditors need to comment on the statement that “the business is a going concern”

 AFS figures should be comparable from one year to the next  Changes to accounting policies should  Only be done if circumstances changed or required to do so and  be disclosed + the impact explained

 If no accounting rule exists, disclose as such that info is relevant and reliable relevant  Information is relevant if it informs decisions taken by users of AFS  Reliable  Reliable when:  Faithful representation of financial position, performance and cashflows  Reflects economic substance of the transactions, rather than legal form  Neutral and free from bias  Prudent  Complete in all material aspects

 Question 7.2 p6 AFS  Question 7.4 p8 True and fair view  Find a set of AFS (internet / Newspaper) and look for the elements per page 12  Question 7.6 p17 Auditor’s opinion  Question 7.8 p22 Accrual concept  Question 7.9 (good question!)  Also work through the example on page 26

15:30  During lecture time 15:30  No sick notes will be accepted (if you do not write no mark for the test)  Scope: Chapters 1 & 2 (LA 1 & 2)   The venue: GW / HB 4 - 2

 Wednesdays 9:30 – 12:00  Thursdays 14:30 – 16:15  By appointment only!! Please book me in advance on