Chapter 7: Introduction to accounts

* Define accounting terms * Reasons why companies are required to produce annual reports and financial statements * Accounting framework * Users of AFS * List and describe the financial statements to be prepared

* Statement of Comprehensive Income How much profit? * Statement of Financial Position Assets, Liabilities and Shareholders funds * Cashflow statementHow was cash generated and used during the year? * Statement of changes in equityChanges in equity * Notes to the AFS * Auditors report * Directors report

UserUse of AFS Potential shareholders (investors) Current shareholders Info regarding profits, level of debt etc to make investment decisions How is company performing? Loan creditorsMeasurement of the risk of default SARSTax calculated on info per AFS EmployeesAbility to pay salaries / bonuses Job security Customers and suppliers Continuity of sales and of purchases

* Companies Act of 1973, was replaced by New Companies Act (Act 71 of 2008) and regulations promulgated in 2011 * International Accounting Standards (IFRS) * Stock exchange requirements (JSE) * Other legislation e.g. King III, LTIA, STIA, FAIS, FICA

* A report, usually at the first/second page of the AFS by the directors. * Contain: * Detail about companies’ activities * Summary of financial decisions by the directors e.g dividend proposed, donations etc. * Details of who were directors, their shareholding and interests in the company * hollard-financial-report-2013.pdf hollard-financial-report-2013.pdf

* Accounting standards – International Financial Reporting Standards (IFRS) * IASB no authority to comply, but other regulations e.g. Johannesburg Stock Exchange * In SA: GAAP / gaap (General Accepted Accounting Standards). Large companies: GAAP (= IFRS) * Why would companies use a standard set of ‘rules’ how to report financial issues? (Arguments for and against p10)

* Eliminate variations between companies in the way they prepare accounts. * The discussion process on standard being issued focusses attention on particular areas for debate about accounting practice. * They oblige companies to disclose more information that that required by national law. * Allows some degree of flexibility. * The sets of rules may not always be appropriate to all companies in all circumstances. * Standard-setting may not be entirely objective. * Standards often allow more than one alternative treatment, which negates the attempt to ensure conformity between companies. * Some standards are so general as to be meaningless, while others are far to detailed.

* All widely held companies and some other companies should appoint an auditor to report on the AFS * Appointed by the shareholders * Shareholders approve the auditors’ fee * Auditors must comment on whether, in their opinion, the AFS have been properly prepared in accordance with the Companies Acts and relevant accounting standards, and whether, in their opinion, the accounts give a true and fair view * The fundamental purpose of the audit report is to add credibility to the AFS * Read p14 and 15 – an example of an auditor’s report

Type of reportCircumstances when issuedWording Unqualified report AFS true and fair view Emphasis of matter Uncertainty disclosed properly in AFS Highlights issue “…uncertainty as described in note 4.2 on page 16…” QualifiedAn uncertainty or restriction on info for one matter “Except for…” Disclaimer of opinion Restriction on most of info, major uncertainty “we are unable to form an opinion” Adverse opinionExtreme disagreement. AFS is misleading. “the AFS do not provide a true and fair view”

* Companies Act * Auditing Practice Board – International Auditing Standards * SA: IRBA (Independent Regulatory Board for Auditors), may only sign off if a registered auditor * Regulator (FSB) needs to approve auditor (insurance industry) * NB that an auditor is independent from the company!

* REMEMBER!!!!! * CHAPTER 2: SELF STUDY * MONDAY 17 FEBRUARY 2014: CLASS TEST ON CHAPTER 1 and 2