CHAPTER 1

The financial reporting environment

What is Financial Reporting? ● Accounting – double entry system

● Accounting equation

● Applying International Financial Reporting Standards (IFRS)

● Prepare Annual Financial Statements (AFS)

A history lesson ... Where did it all begin?

SA developed its own AC standards

International Accounting Standards Committee

‘IASC’ (1972)

International Accounting Standards Board ‘IASB’

(2001)

2005: EU adopted IFRS standards

2005: JSE required all listed companies to comply with IFRS

2002: MOU IASB & FASB

2008: Start of convergence

process

2007: SEC eliminated requirement for

dually listed entities to present IFRS reconciliation

2013: Still busy ...

US GAAP [Rules based]

Global financial

crisis

Different standards different profits being reported in different

countries

What [who] is the IASB?

International Accounting Standards

Board ‘IASB’

First SA member: Bob Garnett (retired)

Responsible for standard setting:

IFRS & IFRS for SMEs

First Chairman: Sir David Tweedie

Comprises 16 members – Experts: recent practical

experience in setting accounting standards, auditing, using financial statements and

accounting education

Current SA member: Darryl Scott

Why IFRS? ● Set of high-quality, enforceable standards

● Adopted by roughly 100 countries

● Requirement by Companies Act (and JSE listing requirement) that companies must prepare AFS in compliance with either:

‒ IFRS , or

‒ IFRS for SMEs

Who decides on IFRS? The IASB is responsible for the development and

approval of IFRS and related documents. IFRS are developed through an international due process. • Conceptual Framework • Standards (IFRS, IAS, IFRS for SMEs) • Exposure Drafts

International Financial Reporting Interpretations Committee (IFRIC) prepares interpretations of IFRSs i.e. Guidance on financial reporting issues

Standing Advisory Council (SAC) : individuals & organisations giving advice to IASB

Who decides on IFRS?

IASB (www.iasb.org) Objectives and responsibilities of IASB:

● To develop and issue accounting standards (IFRSs) and exposure drafts of a high quality, understandable and enforceable

‒ IFRS = International Financial Reporting Standard

‒ IAS = International Accounting Standard

● To approve interpretations developed by IFRIC

● To promote the use and rigorous application of IFRS

● To bring about convergence of national accounting standards and IFRS

Who decides on IFRS?

Advisory bodies: • IFRS Advisory Council • Capital Markets Advisory

Committee • Emerging Economies Group • Financial Crisis Advisory Group • Global Preparers Forum • SME Interpretations Group

Which countries use IFRS?

What were the main events that resulted in the development and adoption of IFRS? • Globalisation

• Technology & internet • Different standards result in different

reported results • Corporate Collapses • Global Financial Crises • Need to standardized set of

international standards of high quality

What are the benefits of international use of IFRS?

• Improvement in quality of financial reporting • Easier to list on foreign stock exchanges • Can understand foreign company’s financial statements • Encourage foreign/international investors • Accountants can work overseas • Can combine results of local and foreign companies to

produce group accounts without have to redo

South African position ● Legal requirement

to comply with GAAP:

‒ Section 29 of Companies Act 71 of 2008

● JSE requirements

‒ All listed companies should comply with IFRS with effect from 1 January 2005

Types of Companies in SA

Companies Act 71 of 2008

A company may be classified as a profit company, or a non-profit company. Profit companies are further classified as:

‒ State-owned company (‘SOC’)

‒ Private company (‘Proprietary Limited’)

‒ Personal liability company (‘Incorporated’)

‒ Public company (‘Limited’)

Preparation of Financial Statements in compliance with IFRS

NEED TO IDENTIFY REPORTING FRAMEWORK USED

● IFRS (2972 pages)

‒ general purpose financial statements for all companies

‒ except if they meet requirements for IFRS for SMEs, and

‒ decide to use IFRS for SMEs

● IFRS for SMEs (230 pages)

‒ small and medium-sized entities, private

‒ companies with no public accountability

‒ Section 1.2 & 1.3