ACCA1 DIPAC Framework - Presentation - Revenue - Change in Acc Policies - Income Tax

TO BE SCANNED IN STILL .......................................................................................................................................................................................................... 7 (A ........................................................................................................................................................................................................................................................ 8 (C)TERMS: ..............................................................................................................................................................................................................................................................8 (D) TRICKS: ............................................................................................................................................................................................................................................................
8
PARTNERSHIPS:.....................................................................................................................................................................................................................................................................8 COMPANIES. .............................................................................................................................................................................................................................................................................9
(E) EXAM TIPS: .....................................................................................................................................................................................................................................................9

general ..............................................................................................................................................................................................................................................................................................9 partnerships ...................................................................................................................................................................................................................................................................................9 Statement of changes in equity and share transactions: ..........................................................................................................................................................................................9
EFFECTIVE INTEREST RATE METHOD............................................................................................................................................................................... 10 1 CONCEPTUAL FRAMEWORK .............................................................................................................................................................................................. 12 WHAT IS A FRAMEWORK / conceptual framework: ..................................................................................................................................................................... 12 1-The SCOPE of the framework: ............................................................................................................................................................................................................. 12 PURPOSE AND STATUS OF THE FRAMEWORK ............................................................................................................................................................................... 12
A) PURPOSE OF THE FRAMEWORK .................................................................................................................................................................................................................... 12 B) STATUS OF THE FRAMEWORK ....................................................................................................................................................................................................................... 13
USERS OF FINANCIAL STATEMENTS : THE SPECIFIC INFORMATION NEEDS OF EQUITY INVESTORS AND THE GENERAL INFORMATION NEEDS OF OTHER USERS , specify the users and their need for information . .................................................................................... 13 DEFINE THE OBJECTIVE OF FINANCIAL STATEMENTS .............................................................................................................................................................. 13 THE QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS: define and discuss, and apply them to fair presentation and measurement issues to enhance the decision-usefulness of financial reporting................................................................................................................. 14
The 2 FUNDAMENTAL QUALITATIVE CHARACTERISTICS: are ....................................................................................................................................................................... 14 1. 2. RELEVANCE .............................................................................................................................................................................................................................................................. 14 FAITHFUL REPRESENTATION......................................................................................................................................................................................................................... 15 2.1.1. 2.1.2. 2.1.3. COMPLETE .................................................................................................................................................................................................................................................... 15 NEUTRAL ....................................................................................................................................................................................................................................................... 15 FREE FROM ERROR .................................................................................................................................................................................................................................. 15
The 4 ENHANCING QUALITATIVE CHARATERISTICS : are ................................................................................................................................................................................. 15 1.1. COMPARABILITY .............................................................................................................................................................................................................................................. 15 1.2. VERIFIABILITY :................................................................................................................................................................................................................................................ 15 1.2.1. MEANS it is necessary to disclose underlying assumptions & methods of compiling info & other factors that support the info, so users can verify it themselves. ..................................................................................................................................................................................................................................... 15 1.2.2. Means different knowledgable & independent observers could reach consensus on the same issue. .................................................................. 15 1.3. TIMELINESS : ..................................................................................................................................................................................................................................................... 15 1.3.1. In time to influencetheusers decisionsnot 10 years later......................................................................................................................................................... 15 1.4. UNDERSTANDABILITY .................................................................................................................................................................................................................................. 15 1.5. THIS ONE HAS BEEN SCRAPPED AS FROM 2012 : no more prudent or complete RELIABILITY...................................................................... 16
THE UNDERLYING ASSUMPTION OF FINANCIAL STATEMENTS. ........................................................................................................................................ 16 The 5 ELEMENTS OF FINANCIAL STATEMENTS ............................................................................................................................................................................ 16 RECOGNITION CRITERIA OF ALL ALL ALL ALL ALL ELEMENTS OF FINANCIAL STATEMENTS ................................................................................ 18 MEASUREMENT BASES TO MEASURE THE ELEMENTS : THE FOUR DIFFERENT TYPES. ............................................................................................ 19 CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE .............................................................................................................................................................. 19
LEGAL BACKING FOR COMPLIANCE. .............................................................................................................................................................................................................................. 20 DESCRIBE THE PROCESSES INVOLVED IN DRAFTING AND SETTING STANDARDS OF GENERALLY ACCEPTED ACCOUNTING PRACTICE. ........... 20
1 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
MATCHING CONCEPT ............................................................................................................................................................................................................................................................. 20
.QUESTIONS GIVEN BY SAICA ABOUT FRAMEWORK 2011 . ...................................................................................................................................... 22 The South African Institute of Chartered Accountants includes the following study objectives, for external financial reporting, that students must learn in their curriculum: ............................................................................................................................................................................................ 22 KEY QUESTIONS TO BE ABLE TO ANSWER : as per SAICA, and UNISA key questions for this chapter: .............................................................. 22 THE IASB FRAMEWORK GENERAL POINTS, ARRRANGED ACCORDING TO QUESTIONS THAT ARE REQUIRED TO BE ABLE TO BE ANSWERED , GIVEN NEARLY VERTABIM BY SAICA AND UNISA, FOR STUDENTS TO BE ABLE TO ANSWER(syllabus key points): .......... 23
1-BACKGROUND : Explain the (a) need for and the (b) application of a 1-conceptual framework and 2-standards for financial reporting. .......... 23
WHAT IS A FRAMEWORK / conceptual framework: ..................................................................................................................................................................... 23 1-The SCOPE of the framework: ............................................................................................................................................................................................................. 24 PURPOSE AND STATUS OF THE FRAMEWORK ............................................................................................................................................................................... 24
A) PURPOSE OF THE FRAMEWORK .................................................................................................................................................................................................................... 24 B) STATUS OF THE FRAMEWORK ....................................................................................................................................................................................................................... 24
USERS OF FINANCIAL STATEMENTS : THE SPECIFIC INFORMATION NEEDS OF EQUITY INVESTORS AND THE GENERAL INFORMATION NEEDS OF OTHER USERS , specify the users and their need for information . .................................................................................... 24 DEFINE THE OBJECTIVE OF FINANCIAL STATEMENTS .............................................................................................................................................................. 25 THE QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS: define and discuss, and apply them to fair presentation and measurement issues to enhance the decision-usefulness of financial reporting................................................................................................................. 25
The 2 FUNDAMENTAL QUALITATIVE CHARACTERISTICS: are ....................................................................................................................................................................... 26 3. 4. RELEVANCE .............................................................................................................................................................................................................................................................. 26 FAITHFUL REPRESENTATION......................................................................................................................................................................................................................... 26 4.1.1. 4.1.2. 4.1.3. COMPLETE .................................................................................................................................................................................................................................................... 26 NEUTRAL ....................................................................................................................................................................................................................................................... 26 FREE FROM ERROR .................................................................................................................................................................................................................................. 27
The 4 ENHANCING QUALITATIVE CHARATERISTICS : are ................................................................................................................................................................................. 27 1.6. COMPARABILITY .............................................................................................................................................................................................................................................. 27 1.7. VERIFIABILITY :................................................................................................................................................................................................................................................ 27 1.7.1. MEANS it is necessary to disclose underlying assumptions & methods of compiling info & other factors that support the info, so users can verify it themselves. ..................................................................................................................................................................................................................................... 27 1.7.2. Means different knowledgable & independent observers could reach consensus on the same issue. .................................................................. 27 1.8. TIMELINESS : ..................................................................................................................................................................................................................................................... 27 1.8.1. In time to influencetheusers decisionsnot 10 years later......................................................................................................................................................... 27 1.9. UNDERSTANDABILITY .................................................................................................................................................................................................................................. 27 1.10. THIS ONE HAS BEEN SCRAPPED AS FROM 2012 : no more prudent or complete RELIABILITY...................................................................... 27
THE UNDERLYING ASSUMPTION OF FINANCIAL STATEMENTS. ........................................................................................................................................ 28 The 5 ELEMENTS OF FINANCIAL STATEMENTS ............................................................................................................................................................................ 28
RECOGNITION CRITERIA OF ALL ALL ALL ALL ALL ELEMENTS OF FINANCIAL STATEMENTS ..................................................................................................... 30 MEASUREMENT BASES TO MEASURE THE ELEMENTS : THE FOUR DIFFERENT TYPES. .................................................................................................................. 30 CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE ....................................................................................................................................................................................... 31 CURRENT OR NON-CURRENT DISTINCTION ,ASSETS & LIABILITES............................................................................................................................................................. 32 LEGAL BACKING FOR COMPLIANCE. .............................................................................................................................................................................................................................. 33 KNOW OF, UNDERSTAND AND EXPLAIN THE MEANING OF FAIR PRESENTATION. ............................................................................................................................ 33 DESCRIBE THE PROCESSES INVOLVED IN DRAFTING AND SETTING STANDARDS OF GENERALLY ACCEPTED ACCOUNTING PRACTICE. ........... 33 MATCHING CONCEPT ............................................................................................................................................................................................................................................................. 33 DEFINITION OF ACCOUNTING&BOOKKEEPING: ..................................................................................................................................................................................................... 33
The Application of statements of GAAP ............................................................................................................................................................................................... 34 UNIVERSAL ACCOUNTING DENOMINATOR The common unit of measurement in Acc. is money. ............................................................................. 34
The Components of Fin stats( some dof addition from old 2010 framework now removed in 2012 framwork )s ........................................................... 34
2..PRESENTATION : IAS1 ..................................................................................................................................................................................................... 36 1) Background SCOPE AND OBJECTIVES OF FIN. STATS. ............................................................................................................................................................ 36 2)General Features for the Presentation of Fin Stats. ................................................................................................................................................................... 36
FAIR PRESENTATION AND COMPLIANCE WITH IFRSs : ..................................................................................................................................................................................... 36 GOING CONCERN : for 12 mnths from fin. Stat. date : or....................................................................................................................................................................................... 37 ACCRUAL BASIS: ....................................................................................................................................................................................................................................................................... 37 MATERIALITY AND AGGREGATION : ............................................................................................................................................................................................................................ 37 OFFSETTING ............................................................................................................................................................................................................................................................................... 37 FREQUENCY OF REPORTING : ........................................................................................................................................................................................................................................... 37 COMPARATIVE INFORMATION:........................................................................................................................................................................................................................................ 38 CONSISTENCY OF PRESENTATION: ................................................................................................................................................................................................................................ 38
5)Jse Listing Requirements: ..................................................................................................................................................................................................................... 38

CURRENT OR NON-CURRENT DISTINCTION ,ASSETS & LIABILITES............................................................................................................................................................. 39
ACTUAL FINANCIAL STATEMENTS : STRUCTURE AND CONTENT OF FINANCIAL STATEMENTS ........................................................................................................... 40 GENERAL ACCOUNTING POLICY IN THE NOTES: ........................................................................................................................................................................... 40
Generally accepted accounting practice ........................................................................................................................................................................................................................ 40 Accounting Policy ..................................................................................................................................................................................................................................................................... 40
Profit before tax note : ............................................................................................................................................................................................................................... 41 1) IDENTIFICATION OF FINANCIAL STATEMENTS:...................................................................................................................................................................... 41 ) COMPONENTS OF FIN STATS............................................................................................................................................................................................................... 42 SFP ..................................................................................................................................................................................................................................................................... 43
GENERAL RULES ....................................................................................................................................................................................................................................................................... 43 CURRENT OR NON-CURRENT DISTINCTION ,ASSETS & LIABILITES............................................................................................................................................................. 43 IAS 1.54 AT A MINIMUM TO BE SHOWN ON FACE OF SFP ................................................................................................................................................................................. 43 EQUITY........................................................................................................................................................................................................................................................................................... 44 SFP COMPREHENSIVE SAMPLE : ...................................................................................................................................................................................................................................... 44 SFP NOTES TO THE FINANCIAL STATEMENTS : further sub-classification of SFP info. required in the notes OR on face of SFP........................... 46 NOTES TO SFP : 100% COMPREHENSIVE EXAMPLE ................................................................................................................................................................................. 47
SCI ...................................................................................................................................................................................................................................................................... 52
COST OF SALES .......................................................................................................................................................................................................................................................................... 52 DIRECTORS REMUNERATION: .......................................................................................................................................................................................................................................... 53 Pensions ........................................................................................................................................................................................................................................................................................ 54 Compensation In respect of loss of office ..................................................................................................................................................................................................................... 54 Details of directors service contracts ............................................................................................................................................................................................................................ 54 SCI: AT A MINIMUM ITEMS TO BE PRESENTED ON FACE OF SCI................................................................................................................................................................... 55 SCI COMPREHENSIVE SAMPLE in NATURE and FUNCTIONS formats :. ........................................................................................................................................... 56 ONE STATEMENT FORMAT : SCI in FUNCTION of EXPENSES (note not income) FORMAT : .................................................................... 57 NATURE Format :STATEMENT OF COMPREHENSIVE INCOME ..................................................................................................................................................... 59 SCI : NOTES TO THE FINANCIAL STATEMENTS .......................................................................................................................................................................................... 59
STATEMENT OF CHANGES IN EQUITY : COMPREHENSIVE EXAMPLE: ................................................................................................................................... 63
STATEMENT OF CHANGES IN EQUITY. .............................................................................................................................................................................................. 63

AS PER IAS 1 : ............................................................................................................................................................................................................................................................................. 63 PER IAS 1 : THE NOTES ................................................................................................................................................................................................................................................... 64 OWN NOTES:............................................................................................................................................................................................................................................................................... 64
3..REVENUE : IAS 18 (AC111) ; SIC31(AC431); ED204; CIRCULAR09/06; IFRIC12(AC445); IFRIC13(AC446); IFRIC 15 (AC448) 67 EXAM QUESTIONS GUIDE: ....................................................................................................................................................................................................................... 67 OBJECTIVE ...................................................................................................................................................................................................................................................... 67 scope.................................................................................................................................................................................................................................................................. 67 Recent important changes ....................................................................................................................................................................................................................... 68 definition: ........................................................................................................................................................................................................................................................ 68 MEASUREMENT AND RECOGNITION REQUIREMENTS OF REVENUE: per IAS18 ............................................................................................................ 68 1- measurement of revenue: .................................................................................................................................................................................................................... 69
SUMMARY : SETTLEMENT DISCOUNT METHOD: .................................................................................................................................................................................................... 69 SUMMARY : EXTENDED PAYMENT TERMS METHOD : ......................................................................................................................................................................................... 70 5.4. 2. R ................................................................................................................................................................................................................................................................................ 71
CREDIT TERMS GRANTED / TIME VALUE OF MONEY / DEFERRED PAYMENT: ......................................................................................................................... 74 DISCOUNT RATE USED is EITHER : .......................................................................................................................................................................................................................... 75 NB : CALCULATING THE INTEREST PORTION using time value of money formula !NB! ............................................................................................................... 75 JOURNALISATION method ............................................................................................................................................................................................................................................ 76
2- Recognition of revenuE ........................................................................................................................................................................................................................ 78 NOTES : ............................................................................................................................................................................................................................................................ 78 The Basic REQUIREMENTS FOR RECOGNITION for all Revenue , no matter what type: is ............................................................................................ 79 (2) SALE OF GOODS: 6 POINTS FOR BOTH ........................................................................................................................................................................................ 79
1. 3. REVENUE SHALL BE RECOGNISED WHEN THE FOLLOWING CONDITIONS MUST BE SATISFIED : ..................................................................... 79 REQUIREMENT OF RELIABLE MEASUREMENT :............................................................................................................................................................................. 80
(3) RENDERING OF SERVICES:ias 18.20-28 ...................................................................................................................................................................................... 81

REQUIREMENTS FOR RECOGNITION: ......................................................................................................................................................................................................... 81 1) THE PROBABILITY REQUIREMENT .............................................................................................................................................................................................................. 81 2) REQUIREMENT OF RELIABLE MEASUREMENT: .................................................................................................................................................................................... 82
INTEREST ,ROYALTIES & DIVIDENDS................................................................................................................................................................................................. 83

REQUIREMENTS FOR RECOGNITION: ........................................................................................................................................................................................................................... 83 1) THE PROBABILITY REQUIREMENT .................................................................................................................................................................................................................... 83 2) REQUIREMENT OF RELIABLE MEASUREMENT ............................................................................................................................................................................................ 83 When these requirements are met then the following then applies : ....................................................................................................................................................... 83 1 - Transaction for SALE OF GOODS AND RENDERING OF SERVICES AT SAME TIME .......................................................................................................................... 85
2 - CUSTOMER LOYALTY PROGRAMS (IFRIC 13) ............................................................................................................................................................................ 86 3 - SERVICE CONCESSION ARRANGEMENTS (IFRIC 12 AC445) ............................................................................................................................................ 90 4 - AGREEMENTS FOR THE CONSTRUCTION OF REAL ESTATE: IFRIC 15 ........................................................................................................................... 91 5 - EXCHANGE TRANSACTIONS : ........................................................................................................................................................................................................... 92
5.1 EXCHANGE TRANSACTIONS involving ADVERTISING SERVICES (SIC 31/AC431)...................................................................................................................... 93
7-DISCLOSURES ............................................................................................................................................................................................................................................ 94
PER IAS 18 VERTABIM: ......................................................................................................................................................................................................................................................... 94 NOTES ON EXACT DISCLOSURES FOR REVENUE: ................................................................................................................................................................................................... 94
INCOME TAXES IAS 12 , SIC 21, SIC 25 , AC501 , AC502 & CIRCULAR 1/2006 ..................................................................................................... 97 SPECIAL OWN NOTES .......................................................................................................................................................................................................................................... 97 BACKGROUND ......................................................................................................................................................................................................................................................... 99 CURRENT TAX ................................................................................................................................................................................................................................................... 99 Disclosure of Current Tax in Financial Statements ......................................................................................................................................................................100 Penalties & Interest ...................................................................................................................................................................................................................................100 GOV. GRANT : If SARS Grants Extended Payment Terms Specially To A Specific Company. .....................................................................................100 Current Income Tax on Companies:....................................................................................................................................................................................................100 Capital Gains on Companies ..................................................................................................................................................................................................................101 WITHHOLDING TAX on Companies: ...................................................................................................................................................................................................101 DEFERRED TAX:............................................................................................................................................................................................................................................. 101 INTRO: ............................................................................................................................................................................................................................................................101 STEPS OF DOING DEFERRED TAX: .....................................................................................................................................................................................................102
PERMANENT DIFFERENCES ............................................................................................................................................................................................................................................ 103
STEP 1 : CALCULATING TEMPORARY DIFFERENCES .................................................................................................................................................................103

HOW TAX BASE WORKS .................................................................................................................................................................................................................................................. 103 HOW TEMPORARY DIFFERENCE WORKS: .............................................................................................................................................................................................................. 104 HOW THE DEFERRED TAX WORKS: ............................................................................................................................................................................................................................ 104 EXAMPLES OF EXPENSES caused: BASES (THERE IS NO EXPENSE TAX BASE, THEY ARE ODD CASES THAT FALL IN THE OTHER 3) .......... 110 EXAMPLES OF INCOME caused : TAX BASES (THERE IS NO EXPENSE TAX BASE, THEY ARE ODD CASES THAT FALL IN THE OTHER 3) ..... 111 TAX BASE OF AN ASSET ..................................................................................................................................................................................................................................................... 111 6 SPECIAL CASES OF ASSETS: ................................................................................................................................................................................................................................... 111 EXAMPLES OF ASSET TAX BASES: .......................................................................................................................................................................................................................... 112 TAX BASE OF LIABILITIES. ............................................................................................................................................................................................................................................... 125 TAX BASE OF REVENUE RECEIVED IN ADVANCE ................................................................................................................................................................................................. 130
STEP 2 : CHECK FOR EXEMPTIONS FROM RECOGNITION OF DEFERRED TAX for certain temp .differences .....................................................134 STEP 3 :CONSIDER LIMITATIONS FOR DEFERRED TAX ASSET FOR DEDUCTABLE TEMPORARY DIFFERENCES AND UNUSED TAX LOSSES OR CREDITS .................................................................................................................................................................................................................................138
3.1). UNUSED TAX CREDITS AND UNUSED TAX LOSSES. .................................................................................................................................................................................. 139 3.2). RE- ASSEMENT EACH YEAR : at each reporting date, the following musty be re-assesed ................................................................................................... 140
STEP 4 : APPROPRIATE TAX RATES & LAWS .................................................................................................................................................................................140

1 of 2 :Enacted or Substantively Enacted Tax Laws and Tax Rates .............................................................................................................................................................. 140 2 of 2 : EXPECTED MANNER OF RECOVERY: ........................................................................................................................................................................................................... 142
STEP 5: RECOGNITION OF THE DEFERRED TAX INCOME OR EXPENDITURE .................................................................................................................143

1). TRANSACTION RECOGNISED OUTSIDE PROFIT & LOSS ............................................................................................................................................................................ 143
2). BUSINESS COMBINATION .......................................................................................................................................................................................................................................... 144 3). CHANGES IN DEFERRED TAX BALANCES WITHOUT CHANGES IN TEMPORARY DIFFERENCES: ........................................................................................ 144
SPECIFIC ISSUES ............................................................................................................................................................................................................................................ 144

1]. CHANGES IN THE TAX STATUS OF AN ENTERPRISE or SHAREHOLDERS ............................................................................................................................. 144 2]. CHANGES IN CARRYING AMOUNTS OF INVESTMENTS IN ASSOSIATES &SUBSIDIARIES &BRANCHES &JOINT VENTURES ................................. 144 3]. DEFERRED TAX ON FINANCE LEASES ................................................................................................................................................................................................................. 145 4].WITHFOLDING TAX ON DIVIDENDS ...................................................................................................................................................................................................................... 146
FINANCIAL STATEMENT PREPARATION: ......................................................................................................................................................................................... 146 Rules 1: ias 1 REQUIREMENTS ............................................................................................................................................................................................................146 Rules 2: IAS 12 REQUIREMENTS : ......................................................................................................................................................................................................146 1). OFFSETTING..........................................................................................................................................................................................................................................146 2). Disclosure : IAS 12 REQUIREMENTS : PRESENTATION & DISCLOSURE ....................................................................................................................147 3). Discosure : IAS 12 REQUIREMENTS : THE TAX RECONCILLIATION or TAX RATE RECONCILLIATION ........................................................148 4). DISCLOSURE : ......................................................................................................................................................................................................................................151
ACCOUNTING POLICIES: .................................................................................................................................................................................................................................................... 151 INCOME TAX EXPENSE NOTE : ( REFERENCE TO Income Tax Expense line item number in P&L Statement Only) ...................................................... 151 DEFERRED TAX NOTE : (REFERENCE TO Deferred Tax Balance line item number in SFP Statement Only) ...................................................... 154 Circular 1/2006 Special DISCLOSURES IN RELATION TO DEFERRED TAX: ............................................................................................................................................ 155 TAX IMPLICATIONS of CAPITALISTAION OF BORROWINGS: ......................................................................................................................................................................... 156
INCOME STATEMENT METHOD (for interest sakes)...................................................................................................................................................................156 IAS 8 CHANGE IN ACCOUNTING ESTIMATE/ERRORS ................................................................................................................................................. 158 SCOPE: ................................................................................................................................................................................................................................................................ 158 DEFINITIONS: ................................................................................................................................................................................................................................................. 158 HOW MANY YEARS BACK DO YOU DO RESTATEMENTS? (ERRORS+ ACCOUNTING POLICIES +ESTIMATES) ..................................................................... 159 IMPORTANT: (FOR ERRORS+ ACCOUNTING POLICIES +ESTIMATES).................................................................................................................................................... 159 SECTION 1 : ACCOUNTING POLICIES ................................................................................................................................................................................................... 160 APPLYING ACCOUNTING POLICIES: ...................................................................................................................................................................................................160 WHEN TO CHANGE ACCOUNTING POLICIES .................................................................................................................................................................................160 METHOD OF CHANGING ACCOUNTING POLICIES ........................................................................................................................................................................161 DISCLOSURE ................................................................................................................................................................................................................................................162 CHANGING ACCOUNTING POLICY ON INVENTORY VALUATION ...........................................................................................................................................163
Deferred Tax & Temporary differences ...................................................................................................................................................................................................................... 163 General : ..................................................................................................................................................................................................................................................................................... 164
SECTION 2 : CHANGES IN ACCOUNTING ESTIMATES: .................................................................................................................................................................. 166 DISCLOSURE FOR ESTIMATES: ............................................................................................................................................................................................................166 METHOD OF DOING DEPRECIATION CHANGE . ..........................................................................................................................................................................166 ERRORS.............................................................................................................................................................................................................................................................. 167 DISCLOSURE FOR ERRORS: ( see example 1 in volume 2 IFRS application guidance) ..................................................................................................168 correcting a error of not capitalising some interest payments to an asset . .....................................................................................................................168
To be scanned in still 1. Government grants :grants related to income section : see example of complex salaries on page 328 gaap text. SCAN it in ! 2.
(A
(C)TERMS: 1) REDEEM : -1-to redeem or pay creditors / or -2- redeem a bond which is collect the payment. 2) DISTRIBUTE : TO DISTRIBUTE profit /loss between the partners in a business etc. 3) PECUNIARY (INTEREST) : asset/monetary/patrimonial/ type of interest in a matter: owes him money , or it is his car ,etc. 4) REMUNERATION ?: salary / wages for work(?salary or payment to contractor or if you buy something? 5) CONSIDERATION ?: like a payment ???? 6) RE-IMBURSEMENT: pay you back, eg: for returned goods. 7) AMORTISE :??? 8) SoFP Statement of Financial position 9) SoCI- Statement of Comprehensive Income 10) 11) Allocated : you allocate to an account, not put, eg allocate excess of the par value of shares to the share premium account. 12) Nominal amount : if shares are issued at a premium, then the premium is called the share premium and the other part is called the nominal part ie the actual share face value. 13) That will be in order , Regards xyz , instead of cool bra, cheers 14) The 3 Business Areas of an enterprise: (this is the common term for the 3 cash flow statement headings ) a) Operating activities b) Investment activities c) Finance Activities. 15) Subsidiary Ledger: the creditors&debtors ledgers etc. or other ledgers which are subsidiary to the Main General Ledger. 16) SHARES ARE CONSIDERED OUTSTANDING : WHAT DOES this phrase mean. 17) RANK :The date from which shares RANK : means the date from which they are included in the calculations for dividends or pref.dividedns etc ie effective date from which shares count. (D) TRICKS: PARTNERSHIPS: 1. If new members contribution toward goodwill is indicated , allways work out the total goodwill befor new member from this amount , even if goodwill is stated in the balance sheet( it could be a trick quetion where ther should be a revaluation before new admittal , but you only see it from this new member indication. METHOD: Then total goodwill must be 15/15 of 3/15 (if 3/15 is new members ratio) etc etc and this 15/15 MUST be in the books and already distributed before the new member is admitted. 2. Bal sheet changes : only on date of new members or fin year end .
3. Write out Goodwill + General reserve Current accounts of partners before new/old members ALLWAYS. 4. Profit sharing allways changes partners capital account ratios. 5. If liquidation expenses are dated april ,do not take of this month already when you do the liquidation schedule , only do next month as dated!!!! 6. For Gradual liquidation: you apportion final Deficit in Liquidation account, NOT in Distribution Account! COMPANIES. 1. IF shares are issued at a discount ,A separate DISCOUNT ON ISSUE OF SHARES expense ACCOUNT is used for all discount,but shares are issued at old/ par value into Share Account, so normally, as if no discount.(plus court allow,+1 year since first issue,+special resolution specify discount rate etc)
(E) EXAM TIPS: general NOTE:IF INVENTORIES CURRENT on stock take do not match the amount in the "inventory account"(calculated amount) it is called a "deficit on inventory account" and is put as expense in the income statement ie goods stolen/lost etc.!
partnerships 1. Check for boxing/splitting of Property, Plant ,Equip into Property separate+ Plant separate+ Equip 2. Check which category loans to/or from PARTNERS are in balance sheet to deduce if to or from, AND ask lecturer which it is in case he did mean differently even if it is in the correct category of Bal Sheet for what you thought it was(to or from) 3. Check for accumulated depreciation before you do revaluations on the n-c assets.! 4. Statement of changes in equity and share transactions: Note:Rem: in exam watch out for the pref. shares given at date of current balance sheet, but the other shares at date of last balance sheet.So all this years share transactions on Pref. shares are to be subtracted from value given on balance sheet to get opening balance for this year on your Statement of changes in Equity.
EFFECTIVE INTEREST RATE METHOD

1. The effective interest rate : method is simply using PV and FV to work out the interest ratefrom a transaction, if given PV and FV then you must find the interest rate that disclouts PV to FV. 2. Compounding : The trick with effective interest rate comes in with COMPOUNDING, compunding is the reason the effective interest rate is not simply PV-FV /PV or similar. The reason is that in month 1 you will pay interest on the principle ONLY. In month 2 you pay interest on the principle + month 1 s interest added to it,and so on. 3. Calculator : a. PV/ FV : Be very careful when entering FV and PV. (see example 2 below)If the sale is for 120 000 with 20 000 mnthly payments over 6 mnths, and you put FV or PV as 120 000, then you will get it WRONG(all the amortisation from AMORT willbe wrong, as well as principle/interest etc) . i. SOLUTION : Put TRUE Cash Flow as your PV or FV: so if someone owes you 10 000 and only pays full amount in 12 months, put 0 as PV(no cash flow yet), and 10000 as FV( 10000 flows in in 12mnths time). b. INTEREST RATE : REM if you use N= months , then you must divide the yearly interest rate by 12 to get monthly I/Y. c. PAYMENTS: rem :allways put true cash flow as PV or FV or PMNT. So if someone owes you 120 , and will pay it off over 12 mnths as 10 per mnth, then PV = ZERO, and FV = ZERO , ONLY PMNT is a cash flow = 10 . If you also say FV =120 PV and PV = 0 or something similar, you will get a complete wrong answer. d.
1 CONCEPTUAL FRAMEWORK WHAT IS A FRAMEWORK / CONCEPTUAL FRAMEWORK: A GENERAL FRAME OF REFERENCE FOR A SPECIFIC AREA OF ENQUIRY. SET OF acc. Principles which serve as basis for evaluate current practices & develop new acc. practices. Part of normative theory of accounting- ie: based on what info people need , Not want. Accounting is a means of communication. The old IASB called the IASC only issued the FPPFS The framework for the preparation and presentation of financial statements, in 1989., this has been and is still being replaced by the newconceptual framework, where only 2chapters out of the 4 are properly finished already. It does not have the same authority as IFRS (& ISAs I think) , if there is conflict IFRs prevails. Trend is toward developing Principles based frameworks , not rules based- it is more difficult to bypass a principle than a rule.(for every circumstance) APPLICATION of framework :Just say : what is a framework , and the purpose of it : ie to provide a basis / frame of reference on which the IAS s are built , defining qualitative + assumptions + definitions of elements etc so people can use it to understand what is in the IASs and other statements and users understand fin stats. 1-THE SCOPE OF THE FRAMEWORK: 1. The SCOPE is:(per 2012 new framework) 1.1. OBJECTIVE of fin reporting : ie namely defining it as defined below. 1.2. ELEMENTS : definition + recognition + measurement (ie assets, liabilites, income, expense, revenue definition) 1.3. QUALITATIVE CHARACTERISTICS 1.4. CAPITAL & CAPITAL MAINTENANCE 2. APPLICABLE TO GENERAL PURPOSE FINANCIAL STATEMENTS OF ALL COMMERCIAL, STATE, reporting entities in order to satisfy the needs of FROM 2012ONLY INVESTORS,LENDERS AND CREDITORS , NOBODY ELSE !!!! , and not for THE PUBLIC OR FOR REGULATORS, or directors/management etc who have other sources of info available, Also not for tax or prospectuses. although these other parties may also , use this info.
PURPOSE AND STATUS OF THE FRAMEWORK A) PURPOSE OF THE FRAMEWORK The purpose of the Framework is to: (a) assist the Board of IASC in the development of future International Accounting Standards and in its review of existing International Accounting Standards; (b) assist the Board of IASC in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by International Accounting Standards; (c) assist national standard-setting bodies in developing national standards; (d) assist preparers of financial statements in applying International Accounting Standards and in dealing with topics that have yet to form the subject of an International Accounting Standard; (e) assist auditors in forming an opinion as to whether financial statements conform with International Accounting Standards;
(f) assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with International Accounting Standards; and (g) provide those who are interested in the work of IASC with information about its approach to the formulation of International Accounting Standards. B) STATUS OF THE FRAMEWORK 1. The Status of the framework is that : a. It is not an IFRS and thus does not DEFINE any standards for any measurement or disclosure issue. Nothing in it overrides any IFRS (vertabim per IAS1 itself) b. If there is a dispute between the framework and an IAS, then the IAS is the one that must be followed.
USERS OF FINANCIAL STATEMENTS : THE SPECIFIC INFORMATION NEEDS OF EQUITY INVESTORS AND THE GENERAL INFORMATION NEEDS OF OTHER USERS , SPECIFY THE USERS AND THEIR NEED FOR INFORMATION . Most important users = 1-Providers of finance eg banks 2- Equity investors, namely shareholders. 3-creditors (b) GENERAL INFO NEEDS OF OTHER USERS The framework mentions that if the fin stats provide sufficiently for needs of equity investors, that it should be good enough for all other users as well. (a) EQUITY INVESTORS. : Ability of the entity to pay 1-Dividends & 2-Buy, Hold or Sell : The providers of risk capital and their advisers are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends. (b) Lenders. Paid when due. (c) Suppliers and other trade creditors.: Paid when due (d) Customers. continuance of an entity , some are quite dependent on entity. (e) Governments and their agencies. regulate the activities of entities, determine taxation statistics allocation of resources. (f) Public. Local economy , people they employ , and their patronage of local suppliers (g) Employees. Stability and profitability remuneration, retirement benefits and employment opportunities. DEFINE THE OBJECTIVE OF FINANCIAL STATEMENTS 1. Conceptual Framework : OB 1 : The Objective of the Fin Stats is: (NB changed from last year 2010/ 2011, this is vertabim from NEW CHANGED 2011/2012 VERSION OF FRAMEWORK itself) 1.1. To provide financial info about the reporting entity 1.2. That is useful to a existing and potential investors, lenders, and other creditors 1.3. in making decisions about providing resources to the entity. 1.4. These decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit. 2. Although IFRS states users should not rely only on Fin stats for making economic decision because it is past info- not present or future info- the trend today is toward IFRS stating that more future & nonfinancial info is disclosed in Fin Stats.Also users must study, company and political outlooks and economic conditions separately as well, not just rely on Fin Stats.
3. This Appears in Qualitative Characteristics under Understanding: And furthermore ,it should contain info that is 1- understandable to those with a reasonable understanding of business and a willingness to study the info. with the necessary diligence 2- on how management performed its stewardship function 3-useful to directors & mngmnt in making decisions that affect the owners of the company.
THE QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS: define and discuss, and apply them to fair presentation and measurement issues to enhance the decision-usefulness of financial reporting. 1. Constraints on relevant and reliable information 1.1. Timeliness 1.2. Balance between benefit and cost : Cost vs Benefits : where the cost exceeds the benefits, the info will not (could not) be reported even though it may meet all the characteristics of usefull information. 1.3. Balance between qualitative characteristics 1.3.1. Interaction between the qualitative characteristics : 1.3.1.1. para. 32 of Framework states : information may be relevant but so unreliable in nature or representation that its recognition may be potentially misleading.(eg not showing a disputed claim in balance sheet as a provision,only in the the notes) 1.3.1.2. There is also the tradeoff problem between relevance and reliability concering historical VS fair value amounts to be shown in Fin Stats. Historical is seen as more reliable while fair value is seen as more relevant. 1.3.1.3.It is sometimes also necessary to report on a transaction before all aspects of it are known : reliability vs fair presentation as a whole. You should report it, or at least achieve a balancing act. . The 2 FUNDAMENTAL QUALITATIVE CHARACTERISTICS: are These are the main 2 to use to determine if info is to be included or not. The others only enhance these 2 later on, and are skipped when actually choosing what major economic data to include or exclude from the fin stats.-see Cons.Framework QC18. 1. RELEVANCE . 1.1. Definition : Affect Decisions : Relevant info. is useful and can therefore affect the economic decision making of users. 1.2. Materiality : is the one characteristic of relevance. 1.2.1. Definition : following 3 points are to be considered in assessing the materiality of an item. 1.2.1.1.1- Omission Or 2- Misstatement affect Decisions : Material is considered to be material if its omission or misstatement could affect users decisions made regarding the Financial Statements. 1.2.1.2.In terms of Nature or Magnitude or Both : 1.2.1.3.Entity Specific aspect , in terms of Fin Stats as a whole : The materiality of an item is to be assessed in terms of the Financial Statements as a whole., and depends on individual entity, so IFRS cannot give specific numerical guidelines for all entities. 1.2.2. Increase usefulness : The disclosure of material items increases the usefulness of the Financial Statements 1.2.3. Materiality refers to individual items, not groups of items. 1.2.4. Two or more similar and material items may not be offset against each other , with the net result that they become a non-material item.
1.3. Constraints on relevant and reliable information 1.3.1. Timeliness 1.3.2. Balance between benefit and cost 1.3.3. Balance between qualitative characteristics 2. FAITHFUL REPRESENTATION : 2.1. Must have following 3 to be perfectly Faithful, but seldom if ever achievableper QC11 of Conceptual Framework 2.1.1. COMPLETE : to be complete it must incl. all info necessary for user to understand, namely : to incl. 1-NUMBERS(eg: value of asset) & 2-DESCRIPTIONS (eg type of asset) & 3-EXPLANATIONS (eg: process used to estimate numbers) 2.1.2. NEUTRAL : without BIAS : not slanted, weighted, emphasized, de-emphasised, to incr probability info will be received favourably or unfavourably. DOES NOT mean with no purpose or influence on behavior. cause it must still be relevant. 2.1.3. FREE FROM ERROR .: does NOT mean perfectly free from error, BUT descr.& process used must be accurate eg an estimation: disclose that it is an estimate + process must be accurateeven if it is proved a bit wrong later by actual figures it was still FREE FROM ERROR. The 4 ENHANCING QUALITATIVE CHARATERISTICS : are These Enhancing Characteristics can help choose which of 2 ways to choose if both are equally relevant & faithfully represented. Per IFRS 1.1. COMPARABILITY . 1.1.1. Definition :The accounting treatment should be the same for : 1.1.1.1.The same items over time 1.1.1.2.Same items in the same period and 1.1.1.3.Similar items of different but similar companies over time and in the same period. 1.1.2. Main reason is to assist users to compare Fin stats. of different companies, and also compare different periods in one entity. 1.1.3. It is not however desirable to pursue comparability at all costs, where a new Acc. Standard is introduced or when the application of a more appropriate accounting policy becomes necessary,the current accounting policy should be changed. 1.2. VERIFIABILITY : 1.2.1. MEANS it is necessary to disclose underlying assumptions & methods of compiling info & other factors that support the info, so users can verify it themselves. 1.2.2. Means different knowledgable & independent observers could reach consensus on the same issue. 1.3. TIMELINESS : 1.3.1.In time to influencetheusers decisionsnot 10 years later. 1.4. UNDERSTANDABILITY . 1.4.1.Definition : Understandable to the average user who has a reasonable knowledge of business and a willingness to study the info. with the necessary diligence, but this does not mean any info. should be excluded because it may be too complex for readers to understand- they may at times have to consult as part of their diligence..
1.4.2.Clearly and Concisely makes it understandable.
1.5. THIS ONE HAS BEEN SCRAPPED AS FROM 2012 : no more prudent or complete RELIABILITY . 1.5.1. Definition : Info is reliable when it does not contain material errors and is free from bias. 1.5.2. Refers less to -absolute accuracy and more to : info. a user can trust. 1.5.3. There are 5 components of reliability: 1.5.3.1.Substance rather than Legal Form of events. *Eg where the formalities of a sale have been completed at reporting date it will be shown in the books even if legal title has not yet passed to buyer. OR conversely legalities have taken place but seller still substantially enjoys benefits of ownership- sale is not recognized. 1.5.3.2.Prudent (in instances of uncertainty) : *where uncertainty exists, the outcome selected will result in the least favourable outcome being reflected eg: 1-if recovery of a debt is doubtful it should be recorded as a bad debt. (can be changed later) , also 2- assets should not be overstated nor liabilities understated. *prudence is a function of uncertainty and in any other circumstances its use is unwarranted and contrary to reliability concept. 1.5.3.3.Complete *Complete within the bounds of materiality and cost. *Material omissions can render info. false and misleading- tantamount to providing misleading info.
THE UNDERLYING ASSUMPTION OF FINANCIAL STATEMENTS. 4. There is only 1 underlying assumption of Fin Stats I think, not 2: (or are there 2 or 1 or 8 as in ias1 presentation, the 8 General Features of a finn stats- ie is Accrual Basis a underlying assumption or not?) 4.1. GOING CONCERN BASIS: Intentions + Need : Definition : It is assumed that the entity has neither the Intention nor the Need to liquidate or curtail its operations materially,or else Fin Stats may need to be prepared on another basis. 4.2. Note: Should this assumption not be valid then values should be recorded at their liquidation values and provision made for liquidation costs. 4.3. ACCRUAL BASIS: Definition : Transactions are recorded when they occour, not only when cash actually changes hands., in the fin stats. of the accounting Period to which they apply. THE 5 ELEMENTS OF FINANCIAL STATEMENTS 1. There are 5 elements. The decision as to which element something falls under depends on the rule : Substance Over Form .(mentioned in framework in theses definitions section )eg: finance leases ; although they are legally construed as leases, their substance is such that they are capitalized and treated as assets and liabilities acquired from borrowing proceeds. 2. They fall in 2 groups: Financial Position : Assets + Liabilities + Equity , and Financial Performance : Income + Expenses : 3. FINANCIAL POSITION : Assets + Liabilities + Equity
3.1. ASSETS:
3.1.1. Definition : An Asset of an Entity is : 3.1.1.1.A resource 3.1.1.2.Controlled by the entity 3.1.1.3.as a result of past events. 3.1.1.4.And from which future economic benefi s are expected to flow to the entity 3.1.2. CONTROL MEANS 3.1.2.1. Can be due to various things eg does not have to be legally owned eg lease, mostly due to legal ownership , or can be eg. a secret (even unpatented) formula or process.-even if control benefits associated with a leased asset = control. 3.1.2.2.Ability to control future economic benefits from it to extent that it may obtain them. 3.1.2.3.Ability to restrict access to it by others 3.1.2.3.1.Restrict access part normally comes from legal righ : eg legal duty employees maintain confidentiality, restraint of trade contract, copyrights. 3.1.2.4.Legal enforcability of a right is not a necessary condition for control. 3.1.2.5. Also , Does not have to have legal ownership, eg a lease 3.1.3.Future economic benefits : 3.1.3.1. Probability of assessed by REASONABLE +SUPPORATBLE assumptions by mngmnt based on best estimate of economic conditions to exist over useful lifetime of asset, based on evidence at initial recognition, giving greater weight to external evidence.from old 2011 framework before revision of it. May still be in basis for conclusions 3.1.3.2.Can be to lower costs of a production method, as much as to cause a cash flow in. 3.1.4. They may be (vertabim as per framework): Used singly or in combination with other assets in the production of goods or services to be sold by the entity. Exchanged for other assets Used to settle a liability Distributed to owners of the entity
3.2. LIABILITIES: 3.2.1. Definition : A liability of an entity is: 3.2.1.1.A present obligation of the entity 3.2.1.2.Arising from past events 3.2.1.3.The settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. 3.2.2. The sacrifice of resources with economic benefits can take place in a number of ways, for instance through ( per eg in framework) 3.2.2.1.The payment of cash 3.2.2.2.Transfer of other assets 3.2.2.3.Provision of services 3.2.2.4.Replacement of one obligation with another 3.2.2.5.Conversion of an obligation into equity. 3.2.3. If company decides as a matter of policy to fix products evn after warranty has expired (as good business practices) this IS RECORDED as a LIABILITY as well. 3.2.4. If a liability must be paid or else penalty or economic consequence happens, that helps make it be seen as a liability.
3.2.5. Framework says :normally an obligation only arises when an asset is delivered or an irrevocable agreement has been entered into : a distinction should be made between present obligation and future commitment a decision/commitment to purchase is not a liability. Also , an estimate of a provision could qualify as a liability( maintenance contract etc) 3.3. EQUITY; 3.3.1.Definition: The residual interest in the assets of the entity after deducting all its liabilities. 3.3.2.It is not the market value of its shares ever at all. 4. FINANCIAL PERFORMANCE : Income + Expenses : 4.1. INCOME: 4.1.1. Definition :Income is described as 4.1.1.1.Increases in economic benefits during the accounting period 4.1.1.2.In the form of inflows or enhancements of assets or decreases of liabilities 4.1.1.3.That result in increases in equity other than those relating to contribution from equity participants. 4.1.2. Note: unrealized gains eg from revaluation of marketable securities(shares) or fixed property like buildings, is also income but the approach to their inclusion whether directly in equity in OCI or in SCI ,depends on the approach adpted towards capital maintenance by the entity.Gains are usually disclosed separately to facilitate making of economic decisions. 4.2. EXPENSES: 4.2.1. Definition : expenses are defined as 4.2.1.1.Decreases in economic benefits during the accounting period, 4.2.1.2.In the form of outflows or depletion of assets or incurrance of liabilities 4.2.1.3.That result in decreases in equity other than those relating to distributions to equity participants. 4.2.2. Note: some expenses which could also be unrealised like unrealized losses due to foreign exchange rate changes where you borrowed in a foreign currency.Also, losses eg: due to fire or theft, are usually disclosed separately in the income stat in order to facilitate the making of economic decisions.They are often reported net of related income.( related income&expenses offset in one figure) RECOGNITION CRITERIA OF ALL ALL ALL ALL ALL ELEMENTS OF FINANCIAL STATEMENTS 1. In order to be recognised as an element of the balance sheet or income stat, an item must: 2. FIRST meet the definition of one of the elements of financial statements : either assets/liabilities/equities/expenses/ or income. 3. SECONDLY satisfy the following 2 criteria for recognition : 3.1. PROBABILITY OF FUTURE ECONOMIC BENEFIT: it should be probable that future benefits associated with the item will flow to or from the entity. 3.1.1. Para. 85 of the framework to be based on evidence available at date of fin stats. eg debtor= probable asset but not completely probable so there must be a probable liability = bad debt provision 3.2. RELIABILITY OF MEASUREMENT: the item must have a cost or value that can be measured reliably . 3.2.1. Reasonable estimation : is allowed .But if an item cannot be reasonable estimated it should not be disclosed in the SCI but in the notes instead eg: if one cannot possibly manage to estimate the amount of a legal claim which will probably be won.( the eg is from framework) 3.2.2. Recognition of elements of fin stats : (some notes)
3.2.2.1.Recognition of Assets : eg if it is not probable that economic benefits will flow in following economic periods then item should not be recorded as an asset , but the amount paid to get it was then an expense instead. 3.2.2.2.Liabilities : 3.2.2.3.Income : 3.2.2.4.Expenses : basicly when a liability is created without recognition of any asset (in return) eg warranty liability arises. ASSETS: Recognition: When it is probable that economic benefits will flow to the entity and the cost/value can be measured reliably. LIABILITIES: Recognition: When it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount can be measured reliably. EQUITY: INCOME: Recognition: When an increase in future economic benefits related to an increase in an asset or decrease of a liability has arisen that can be measured reliably EXPENSES: Recognition: When a decrease in future economic benefits related to a decrease in an asset or increase of a liability has arisen that can be measured reliably. MEASUREMENT BASES TO MEASURE THE ELEMENTS : THE FOUR DIFFERENT TYPES. 1.1.1. The following measurement bases are identified in Para.100 of Framework.:( cash always means cash or cash equivalents) 1.1.1.1.HISTORICAL COST: assets: at amount paid/value exchanged for it / liabilities : valued at the amount of proceeds received in exchange for the obligation(????? What about if you overpaid - SOME HIGH PRICE SHOP, BUT CANNOT RETURN IT & owe this now ??) or in some circumstances eg income taxes at amounts of cash /cash equivalents expected to be paid to satisfy the liability in the normal course of business. 1.1.1.2.CURRENT COST : assets: cash that would have to be paid if same or equivalent asset were acquired currently. Liabilities : Undiscounted cash that would be required to settle it currently. 1.1.1.3.REALISABLE VALUE (SETTLEMENT VALUE) ; liabilities :undiscounted cash payable in normal course of business. Assets : at an orderly disposal. Basicly the amount for which an asset can be exchanged between willing parties in an arms length transaction (not NRV but RV) 3.2.2.5.PRESENT VALUE : assets carried at present discounted values of net cash inflows that item is expected to generate in normal course of business Liabilities are carried at the present discounted value of future net cash outflows that are expected to be required to settle the liabilities in the normal course of business. (framework para 100) 3.2.3. Notes present value is often used for bonds, where all future cash flows from the bond (interest) is used to discount it to present value. Or if you use historical cost but get something for free (donation), then it should be included at current cost, not historical value., securities at market value realisable val;ue, pension liabilities at Present Value. 3.2.4. Fair Value : Definition : by the IFRS as: the amount for which an asset can be exchanged between willing parties in an arms length transaction this is the same definition as for realisable value above. 3.2.5. There are some common questions : often asked which framework currently fails to address : what level of aggregation or disaggregation should be applied during measurement process, also how to choose between different bases, also addressing subsequent measurement regarding revaluations & impairment & depreciation.also could recognition & derecognition criteria differ in certain circumstances. CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE
5. Two different concepts of capital are identified in the framework: 5.1. FINANCIAL CONCEPT: 5.1.1.CAPITAL IS EQUAL TO THE NET ASSETS OF A COMPANY: in money amount value of. 5.1.2.Used by most companies. 5.1.3. In terms of this, capital is maintained if net assets at the beginning of the period is equal to net assets at end of period, after excluding any distributions to or contributions from owners of the equity 5.1.4.. So profit = an increase in money amount of assets , excl. owners contributions/withdrawal. 5.1.5..Measurement: There are 2 methods of measuring the value: 5.1.5.1.Incl. inflation :Nominal Monetary Units : ie: inflation 5.1.5.2.Excl. inflation :Units of constant Purchasing Power : any inflation is deducted as capital maintenance adjustments that form part of equity,not profits
5.2. PHYSICAL CONCEPT: 5.2.1. CAPITAL IS EQUAL TO THE PRODUCTION CAPACITY OF A COMPANY eg: number of units produced per day. 5.2.2. This means profit is only made if physical production capacity at end of period is more than at the beginning of period, excl. any owners equity transactions to do with this 5.2.3. Current cost basis measurement : Measurement MUST take place on a current cost basis But for finance basis measurement can take place on any basis.. Any changes in the price of assets or liabilities are not included in the calculation and are accounted for as capital maintenance adjustments against equity- like a fair value devaluation done in OCI as a Revaluation 6. The choice between the 2 is based on needs of users, framework gives scant further guidance on this. In SA most users choose Financial., but if main consideration of users is maintaining production capacity, Physical is used. 7. These concepts are a point of departure for measuring profits and related to the capital an entity strives to maintain.
LEGAL BACKING FOR COMPLIANCE. Companies act 2007 says all fin stats should comply with IFRS /GAAP what is generally understood as a true and fair view of, or as presenting fairly such information. DESCRIBE THE PROCESSES INVOLVED IN DRAFTING AND SETTING STANDARDS OF GENERALLY ACCEPTED ACCOUNTING PRACTICE. IASB formulates new policies according in consultation with relevant parties, releases exposure draft (ED) for pubic opinion, then if approved releases new IAS or updates. In SA then SAICA has APB , now changing FRSC financial reporting standards council ,which releases these to the accounting profession and participates in the evalution and gives opinions on EDs. . MATCHING CONCEPT MATCHING CONCEPT. 1.1. The asset & liability view : where expenses are not matched in the same period with related revenue ,then income/expense is seen as the general increase in assets over liabilities in the period. eg depreciation is simply systematicly allocated in the period it occours.
1.2. Revenue&expense view: where expenses and income from similar business activities are matched eg separate a normal from a once off operation.
.QUESTIONS GIVEN BY SAICA ABOUT FRAMEWORK 2011 . THE SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS INCLUDES THE FOLLOWING STUDY OBJECTIVES, FOR EXTERNAL FINANCIAL REPORTING, THAT STUDENTS MUST LEARN IN THEIR CURRICULUM: 1. Identify the objectives of financial statements, the specific information needs of equity investors, the general information needs of other users and know of, understand and explain the meaning of fair presentation. 2. Explain the need for and the application of a conceptual framework and standards for financial reporting. 3. Select, measure, understand, record and classify accounting data as well as understand, select and record nonfinancial information. 4. Identify and apply the reporting requirements as they relate to the statutory reporting requirements and the reporting requirements of Generally Accepted Accounting Practice. 5. Explain and apply the underlying assumptions according to which financial statements are prepared. 6. Define and apply the qualitative characteristics of financial statements and apply them to fair presentation and measurement issues to enhance the decision-usefulness of financial reporting. 7. Identify the appropriate elements of financial statements and apply them to the presentation of financial statements. 8. Identify recognition criteria and apply them to the incorporation of items in primary financial statements. 9. Identify measurement criteria and models and apply them to the incorporation of items in primary financial statements. 10. Understand the concepts of capital maintenance and the determination of profit. 11. Describe the processes involved in drafting and setting standards of Generally Accepted Accounting Practice. 12. Analyse financial statements to assess the financial position and performance. KEY QUESTIONS TO BE ABLE TO ANSWER : AS PER SAICA, AND UNISA KEY QUESTIONS FOR THIS CHAPTER: 1. Identify the 1-purpose and 2-status of the framework. 2. Specify the users and their need for information , the specific information needs of equity investors, the general information needs of other users. 3. Define the objective of financial statements. 4. Define the underlying assumptions of financial statements. 5. Define and discuss the qualitative characteristics of financial statements, apply them to fair presentation and measurement issues to enhance the decision-usefulness of financial reporting. 6. Discuss + definition : of the characteristics of the elements of financial statements. 7. Identify items as elements of financial statements and explain why the element complys with the characteristics. 8. Describe the recognition criteria of an element, 9. Determine whether an item could be recognised in the financial statements - according to these recognition criteria. 10. Specify the four different measurement bases to measure the elements. 11. Determine in accordance with the measurement bases the value at which an element should be included in the financial statements. 12. Describe the capital maintenance concepts and determination of profit concepts. 13. Compliance with International Financial Reporting Standards (IFRS). 14. Legal backing for compliance. 15. know of, understand and explain the meaning of fair presentation. 16.Explain the (a)need for and the (b)application of a 1-conceptual framework and 2-standards for financial reporting. 17.Describe the processes involved in drafting and setting standards of Generally Accepted Accounting Practice.
THE IASB FRAMEWORK GENERAL POINTS, ARRRANGED ACCORDING TO QUESTIONS THAT ARE REQUIRED TO BE ABLE TO BE ANSWERED , GIVEN NEARLY VERTABIM BY SAICA AND UNISA, FOR STUDENTS TO BE ABLE TO ANSWER(syllabus key points):
1-BACKGROUND : Explain the (a) need for and the (b) application of a 1-conceptual framework and 2-standards for financial reporting. WHAT IS A FRAMEWORK / CONCEPTUAL FRAMEWORK: A GENERAL FRAME OF REFERENCE FOR A SPECIFIC AREA OF ENQUIRY. SET OF acc. Principles which serve as basis for evaluate current practices & develop new acc. practices. Part of normative theory of accounting- ie: based on what info people need , Not want. Accounting is a means of communication. The old IASB called the IASC only issued the FPPFS The framework for the preparation and presentation of financial statements, in 1989., this has been and is still being replaced by the newconceptual framework, where only 2chapters out of the 4 are properly finished already. It does not have the same authority as IFRS (& ISAs I think) , if there is conflict IFRs prevails. Trend is toward developing Principles based frameworks , not rules based- it is more difficult to bypass a principle than a rule.(for every circumstance)
APPLICATION of framework :Just say : what is a framework , and the purpose of it : ie to provide a basis / frame of reference on which the IAS s are built , defining qualitative + assumptions + definitions of elements etc so people can use it to understand what is in the IASs and other statements and users understand fin stats. 1-THE SCOPE OF THE FRAMEWORK: 3. The SCOPE is:(per 2012 new framework) 3.1. OBJECTIVE of fin reporting : ie namely defining it as defined below. 3.2. ELEMENTS : definition + recognition + measurement (ie assets, liabilites, income, expense, revenue definition) 3.3. QUALITATIVE CHARACTERISTICS 3.4. CAPITAL & CAPITAL MAINTENANCE 4. APPLICABLE TO GENERAL PURPOSE FINANCIAL STATEMENTS OF ALL COMMERCIAL, STATE, reporting entities in order to satisfy the needs of FROM 2012ONLY INVESTORS,LENDERS AND CREDITORS , NOBODY ELSE !!!! , and not for THE PUBLIC OR FOR REGULATORS, or directors/management etc who have other sources of info available, Also not for tax or prospectuses. although these other parties may also , use this info.
PURPOSE AND STATUS OF THE FRAMEWORK A) PURPOSE OF THE FRAMEWORK The purpose of the Framework is to: (a) assist the Board of IASC in the development of future International Accounting Standards and in its review of existing International Accounting Standards; (b) assist the Board of IASC in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by International Accounting Standards; (c) assist national standard-setting bodies in developing national standards; (d) assist preparers of financial statements in applying International Accounting Standards and in dealing with topics that have yet to form the subject of an International Accounting Standard; (e) assist auditors in forming an opinion as to whether financial statements conform with International Accounting Standards; (f) assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with International Accounting Standards; and (g) provide those who are interested in the work of IASC with information about its approach to the formulation of International Accounting Standards. B) STATUS OF THE FRAMEWORK 2. The Status of the framework is that : a. It is not an IFRS and thus does not DEFINE any standards for any measurement or disclosure issue. Nothing in it overrides any IFRS (vertabim per IAS1 itself) b. If there is a dispute between the framework and an IAS, then the IAS is the one that must be followed.
USERS OF FINANCIAL STATEMENTS : THE SPECIFIC INFORMATION NEEDS OF EQUITY INVESTORS AND THE GENERAL INFORMATION NEEDS OF OTHER USERS , SPECIFY THE USERS AND THEIR NEED FOR INFORMATION .
Most important users = 1-Providers of finance eg banks 2- Equity investors, namely shareholders. 3-creditors (b) GENERAL INFO NEEDS OF OTHER USERS The framework mentions that if the fin stats provide sufficiently for needs of equity investors, that it should be good enough for all other users as well. (a) EQUITY INVESTORS. : Ability of the entity to pay 1-Dividends & 2-Buy, Hold or Sell : The providers of risk capital and their advisers are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends. (b) Lenders. Paid when due. (c) Suppliers and other trade creditors.: Paid when due (d) Customers. continuance of an entity , some are quite dependent on entity. (e) Governments and their agencies. regulate the activities of entities, determine taxation statistics allocation of resources. (f) Public. Local economy , people they employ , and their patronage of local suppliers (g) Employees. Stability and profitability remuneration, retirement benefits and employment opportunities. DEFINE THE OBJECTIVE OF FINANCIAL STATEMENTS 5. Conceptual Framework : OB 1 : The Objective of the Fin Stats is: (NB changed from last year 2010/ 2011, this is vertabim from NEW CHANGED 2011/2012 VERSION OF FRAMEWORK itself) 5.1. To provide financial info about the reporting entity 5.2. That is useful to a existing and potential investors, lenders, and other creditors 5.3. in making decisions about providing resources to the entity. 5.4. These decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit. 6. Although IFRS states users should not rely only on Fin stats for making economic decision because it is past info- not present or future info- the trend today is toward IFRS stating that more future & nonfinancial info is disclosed in Fin Stats.Also users must study, company and political outlooks and economic conditions separately as well, not just rely on Fin Stats. 7. This Appears in Qualitative Characteristics under Understanding: And furthermore ,it should contain info that is 1- understandable to those with a reasonable understanding of business and a willingness to study the info. with the necessary diligence 2- on how management performed its stewardship function 3-useful to directors & mngmnt in making decisions that affect the owners of the company.
THE QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS: define and discuss, and apply them to fair presentation and measurement issues to enhance the decision-usefulness of financial reporting. 2. Constraints on relevant and reliable information 2.1. Timeliness 2.2. Balance between benefit and cost : Cost vs Benefits : where the cost exceeds the benefits, the info will not (could not) be reported even though it may meet all the characteristics of usefull information. 2.3. Balance between qualitative characteristics
2.3.1. Interaction between the qualitative characteristics : 2.3.1.1. para. 32 of Framework states : information may be relevant but so unreliable in nature or representation that its recognition may be potentially misleading.(eg not showing a disputed claim in balance sheet as a provision,only in the the notes) 2.3.1.2. There is also the tradeoff problem between relevance and reliability concering historical VS fair value amounts to be shown in Fin Stats. Historical is seen as more reliable while fair value is seen as more relevant. 2.3.1.3.It is sometimes also necessary to report on a transaction before all aspects of it are known : reliability vs fair presentation as a whole. You should report it, or at least achieve a balancing act. . The 2 FUNDAMENTAL QUALITATIVE CHARACTERISTICS: are These are the main 2 to use to determine if info is to be included or not. The others only enhance these 2 later on, and are skipped when actually choosing what major economic data to include or exclude from the fin stats.-see Cons.Framework QC18. 3. RELEVANCE . 3.1. Definition : Affect Decisions : Relevant info. is useful and can therefore affect the economic decision making of users. 3.2. Materiality : is the one characteristic of relevance. 3.2.1. Definition : following 3 points are to be considered in assessing the materiality of an item. 3.2.1.1.1- Omission Or 2- Misstatement affect Decisions : Material is considered to be material if its omission or misstatement could affect users decisions made regarding the Financial Statements. 3.2.1.2.In terms of Nature or Magnitude or Both : 3.2.1.3.Entity Specific aspect , in terms of Fin Stats as a whole : The materiality of an item is to be assessed in terms of the Financial Statements as a whole., and depends on individual entity, so IFRS cannot give specific numerical guidelines for all entities. 3.2.2. Increase usefulness : The disclosure of material items increases the usefulness of the Financial Statements 3.2.3. Materiality refers to individual items, not groups of items. 3.2.4. Two or more similar and material items may not be offset against each other , with the net result that they become a non-material item. 3.3. Constraints on relevant and reliable information 3.3.1. Timeliness 3.3.2. Balance between benefit and cost 3.3.3. Balance between qualitative characteristics 4. FAITHFUL REPRESENTATION : 4.1. Must have following 3 to be perfectly Faithful, but seldom if ever achievableper QC11 of Conceptual Framework 4.1.1. COMPLETE : to be complete it must incl. all info necessary for user to understand, namely : to incl. 1-NUMBERS(eg: value of asset) & 2-DESCRIPTIONS (eg type of asset) & 3-EXPLANATIONS (eg: process used to estimate numbers) 4.1.2. NEUTRAL : without BIAS : not slanted, weighted, emphasized, de-emphasised, to incr probability info will be received favourably or unfavourably. DOES NOT mean with no purpose or influence on behavior. cause it must still be relevant.
4.1.3. FREE FROM ERROR .: does NOT mean perfectly free from error, BUT descr.& process used must be accurate eg an estimation: disclose that it is an estimate + process must be accurateeven if it is proved a bit wrong later by actual figures it was still FREE FROM ERROR. The 4 ENHANCING QUALITATIVE CHARATERISTICS : are These Enhancing Characteristics can help choose which of 2 ways to choose if both are equally relevant & faithfully represented. Per IFRS 1.6. COMPARABILITY . 1.6.1. Definition :The accounting treatment should be the same for : 1.6.1.1.The same items over time 1.6.1.2.Same items in the same period and 1.6.1.3.Similar items of different but similar companies over time and in the same period. 1.6.2. Main reason is to assist users to compare Fin stats. of different companies, and also compare different periods in one entity. 1.6.3. It is not however desirable to pursue comparability at all costs, where a new Acc. Standard is introduced or when the application of a more appropriate accounting policy becomes necessary,the current accounting policy should be changed. 1.7. VERIFIABILITY : 1.7.1. MEANS it is necessary to disclose underlying assumptions & methods of compiling info & other factors that support the info, so users can verify it themselves. 1.7.2. Means different knowledgable & independent observers could reach consensus on the same issue. 1.8. TIMELINESS : 1.8.1.In time to influencetheusers decisionsnot 10 years later. 1.9. UNDERSTANDABILITY . 1.9.1.Definition : Understandable to the average user who has a reasonable knowledge of business and a willingness to study the info. with the necessary diligence, but this does not mean any info. should be excluded because it may be too complex for readers to understand- they may at times have to consult as part of their diligence.. 1.9.2.Clearly and Concisely makes it understandable.
1.10.THIS ONE HAS BEEN SCRAPPED AS FROM 2012 : no more prudent or complete RELIABILITY . 1.10.1. Definition : Info is reliable when it does not contain material errors and is free from bias. 1.10.2. Refers less to -absolute accuracy and more to : info. a user can trust. 1.10.3. There are 5 components of reliability: 1.10.3.1.Substance rather than Legal Form of events. *Eg where the formalities of a sale have been completed at reporting date it will be shown in the books even if legal title has not yet passed to buyer. OR conversely legalities have taken place but seller still substantially enjoys benefits of ownership- sale is not recognized. 1.10.3.2.Prudent (in instances of uncertainty) : *where uncertainty exists, the outcome selected will result in the least favourable outcome being reflected eg: 1-if recovery of a debt is doubtful it should be recorded as a bad debt. (can be changed later) , also 2- assets should not be overstated nor liabilities understated.
*prudence is a function of uncertainty and in any other circumstances its use is unwarranted and contrary to reliability concept. 1.10.3.3.Complete *Complete within the bounds of materiality and cost. *Material omissions can render info. false and misleading- tantamount to providing misleading info.
THE UNDERLYING ASSUMPTION OF FINANCIAL STATEMENTS. 8. There is only 1 underlying assumption of Fin Stats I think, not 2: (or are there 2 or 1 or 8 as in ias1 presentation, the 8 General Features of a finn stats- ie is Accrual Basis a underlying assumption or not?) 8.1. GOING CONCERN BASIS: Intentions + Need : Definition : It is assumed that the entity has neither the Intention nor the Need to liquidate or curtail its operations materially,or else Fin Stats may need to be prepared on another basis. 8.2. Note: Should this assumption not be valid then values should be recorded at their liquidation values and provision made for liquidation costs. 8.3. ACCRUAL BASIS: Definition : Transactions are recorded when they occour, not only when cash actually changes hands., in the fin stats. of the accounting Period to which they apply. THE 5 ELEMENTS OF FINANCIAL STATEMENTS 8. There are 5 elements. The decision as to which element something falls under depends on the rule : Substance Over Form .(mentioned in framework in theses definitions section )eg: finance leases ; although they are legally construed as leases, their substance is such that they are capitalized and treated as assets and liabilities acquired from borrowing proceeds. 9. They fall in 2 groups: Financial Position : Assets + Liabilities + Equity , and Financial Performance : Income + Expenses : 10. FINANCIAL POSITION : Assets + Liabilities + Equity
10.1.ASSETS: 10.1.1. Definition : An Asset of an Entity is : 10.1.1.1.A resource 10.1.1.2.Controlled by the entity 10.1.1.3.as a result of past events. 10.1.1.4.And from which future economic benefi s are expected to flow to the entity 10.1.2. CONTROL MEANS 10.1.2.1. Can be due to various things eg does not have to be legally owned eg lease, mostly due to legal ownership , or can be eg. a secret (even unpatented) formula or process.-even if control benefits associated with a leased asset = control. 10.1.2.2.Ability to control future economic benefits from it to extent that it may obtain them. 10.1.2.3.Ability to restrict access to it by others 10.1.2.3.1.Restrict access part normally comes from legal righ : eg legal duty employees maintain confidentiality, restraint of trade contract, copyrights. 10.1.2.4.Legal enforcability of a right is not a necessary condition for control.
10.1.2.5. Also , Does not have to have legal ownership, eg a lease 10.1.3.Future economic benefits : 10.1.3.1. Probability of assessed by REASONABLE +SUPPORATBLE assumptions by mngmnt based on best estimate of economic conditions to exist over useful lifetime of asset, based on evidence at initial recognition, giving greater weight to external evidence.from old 2011 framework before revision of it. May still be in basis for conclusions 10.1.3.2.Can be to lower costs of a production method, as much as to cause a cash flow in. 10.1.4. They may be (vertabim as per framework): Used singly or in combination with other assets in the production of goods or services to be sold by the entity. Exchanged for other assets Used to settle a liability Distributed to owners of the entity
10.2.LIABILITIES: 10.2.1. Definition : A liability of an entity is: 10.2.1.1.A present obligation of the entity 10.2.1.2.Arising from past events 10.2.1.3.The settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. 10.2.2. The sacrifice of resources with economic benefits can take place in a number of ways, for instance through ( per eg in framework) 10.2.2.1.The payment of cash 10.2.2.2.Transfer of other assets 10.2.2.3.Provision of services 10.2.2.4.Replacement of one obligation with another 10.2.2.5.Conversion of an obligation into equity. 10.2.3. If company decides as a matter of policy to fix products evn after warranty has expired (as good business practices) this IS RECORDED as a LIABILITY as well. 10.2.4. If a liability must be paid or else penalty or economic consequence happens, that helps make it be seen as a liability. 10.2.5. Framework says :normally an obligation only arises when an asset is delivered or an irrevocable agreement has been entered into : a distinction should be made between present obligation and future commitment a decision/commitment to purchase is not a liability. Also , an estimate of a provision could qualify as a liability( maintenance contract etc) 10.3.EQUITY; 10.3.1.Definition: The residual interest in the assets of the entity after deducting all its liabilities. 10.3.2.It is not the market value of its shares ever at all. 11. FINANCIAL PERFORMANCE : Income + Expenses : 11.1.INCOME: 11.1.1. Definition :Income is described as 11.1.1.1.Increases in economic benefits during the accounting period 11.1.1.2.In the form of inflows or enhancements of assets or decreases of liabilities
11.1.1.3.That result in increases in equity other than those relating to contribution from equity participants. 11.1.2. Note: unrealized gains eg from revaluation of marketable securities(shares) or fixed property like buildings, is also income but the approach to their inclusion whether directly in equity in OCI or in SCI ,depends on the approach adpted towards capital maintenance by the entity.Gains are usually disclosed separately to facilitate making of economic decisions. 11.2.EXPENSES: 11.2.1. Definition : expenses are defined as 11.2.1.1.Decreases in economic benefits during the accounting period, 11.2.1.2.In the form of outflows or depletion of assets or incurrance of liabilities 11.2.1.3.That result in decreases in equity other than those relating to distributions to equity participants. 11.2.2. Note: some expenses which could also be unrealised like unrealized losses due to foreign exchange rate changes where you borrowed in a foreign currency.Also, losses eg: due to fire or theft, are usually disclosed separately in the income stat in order to facilitate the making of economic decisions.They are often reported net of related income.( related income&expenses offset in one figure) RECOGNITION CRITERIA OF ALL ALL ALL ALL ALL ELEMENTS OF FINANCIAL STATEMENTS 4. In order to be recognised as an element of the balance sheet or income stat, an item must: 5. FIRST meet the definition of one of the elements of financial statements : either assets/liabilities/equities/expenses/ or income. 6. SECONDLY satisfy the following 2 criteria for recognition : 6.1. PROBABILITY OF FUTURE ECONOMIC BENEFIT: it should be probable that future benefits associated with the item will flow to or from the entity. 6.1.1. Para. 85 of the framework to be based on evidence available at date of fin stats. eg debtor= probable asset but not completely probable so there must be a probable liability = bad debt provision 6.2. RELIABILITY OF MEASUREMENT: the item must have a cost or value that can be measured reliably . 6.2.1. Reasonable estimation : is allowed .But if an item cannot be reasonable estimated it should not be disclosed in the SCI but in the notes instead eg: if one cannot possibly manage to estimate the amount of a legal claim which will probably be won.( the eg is from framework) 6.2.2. Recognition of elements of fin stats : (some notes) 6.2.2.1.Recognition of Assets : eg if it is not probable that economic benefits will flow in following economic periods then item should not be recorded as an asset , but the amount paid to get it was then an expense instead. 6.2.2.2.Liabilities : 6.2.2.3.Income : 6.2.2.4.Expenses : basicly when a liability is created without recognition of any asset (in return) eg warranty liability arises.
MEASUREMENT BASES TO MEASURE THE ELEMENTS : THE FOUR DIFFERENT TYPES. 1.1.2. The following measurement bases are identified in Para.100 of Framework.:( cash always means cash or cash equivalents) 1.1.2.1.HISTORICAL COST: assets: at amount paid/value exchanged for it / liabilities : valued at the amount of proceeds received in exchange for the obligation(????? What about if you overpaid - SOME HIGH PRICE SHOP, BUT CANNOT RETURN IT & owe this now ??) or in some circumstances eg income taxes at amounts of cash /cash equivalents expected to be paid to satisfy the liability in the normal course of business.
1.1.2.2.CURRENT COST : assets: cash that would have to be paid if same or equivalent asset were acquired currently. Liabilities : Undiscounted cash that would be required to settle it currently. 1.1.2.3.REALISABLE VALUE (SETTLEMENT VALUE) ; liabilities :undiscounted cash payable in normal course of business. Assets : at an orderly disposal. Basicly the amount for which an asset can be exchanged between willing parties in an arms length transaction (not NRV but RV) 6.2.2.5.PRESENT VALUE : assets carried at present discounted values of net cash inflows that item is expected to generate in normal course of business Liabilities are carried at the present discounted value of future net cash outflows that are expected to be required to settle the liabilities in the normal course of business. (framework para 100) 6.2.3. Notes present value is often used for bonds, where all future cash flows from the bond (interest) is used to discount it to present value. Or if you use historical cost but get something for free (donation), then it should be included at current cost, not historical value., securities at market value realisable val;ue, pension liabilities at Present Value. 6.2.4. Fair Value : Definition : by the IFRS as: the amount for which an asset can be exchanged between willing parties in an arms length transaction this is the same definition as for realisable value above. 6.2.5. There are some common questions : often asked which framework currently fails to address : what level of aggregation or disaggregation should be applied during measurement process, also how to choose between different bases, also addressing subsequent measurement regarding revaluations & impairment & depreciation.also could recognition & derecognition criteria differ in certain circumstances. CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE 12. Two different concepts of capital are identified in the framework: 12.1.FINANCIAL CONCEPT: 12.1.1.CAPITAL IS EQUAL TO THE NET ASSETS OF A COMPANY: in money amount value of. 12.1.2. In terms of this, capital is maintained if net assets at the beginning of the period is equal to net assets at end of period, after excluding any distributions to or contributions from owners of the equity 12.1.3.. So profit = an increase in money amount of assets , excl. owners contributions/withdrawal. 12.1.4..Measurement: There are 2 methods of measuring the value: 12.1.4.1.Incl. inflation :Nominal Monetary Units : ie: inflation 12.1.4.2.Excl. inflation :Units of constant Purchasing Power : any inflation is deducted as capital maintenance adjustments that form part of equity,not profits
12.2.PHYSICAL CONCEPT: 12.2.1. CAPITAL IS EQUAL TO THE PRODUCTION CAPACITY OF A COMPANY eg: number of units produced per day. 12.2.2. This means profit is only made if physical production capacity at end of period is more than at the beginning of period, excl. any owners equity transactions to do with this 12.2.3. Current cost basis measurement : Measurement takes place on a current cost basis. Any changes in the price of assets or liabilities are not included in the calculation and are accounted for as capital maintenance adjustments against equity, ie any inflation effects are eliminated. 13. The choice between the 2 is based on needs of users, framework gives scant further guidance on this. In SA most users choose Financial., but if main consideration of users is maintaining production capacity, Physical is used. 14. These concepts are a point of departure for measuring profits and related to the capital an entity strives to maintain.
15. Framework : 81 : The revaluation or restatement of assets and liabilities gives rise to increases or decreases in equity. While these increases or decreases meet the definition of income and expenses, they are not included in the income statement under certain concepts of capital maintenance. Instead these items are included in equity as capital maintenance adjustments or revaluation reserves. These concepts of capital maintenance are discussed in paragraphs 102 to 110 of this Framework. 9. outlooks and economic conditions separately as well, not just rely on Fin Stats. CURRENT OR NON-CURRENT DISTINCTION ,ASSETS & LIABILITES 1. There are 2 Methods of Presenting Current & Non- Current : a. Method 1 : using Current Assets/Liabilities And Non-Current Assets/Liabilities as headings. b. Method 2: Liquidity Approach : Assets&liabilities are presented broadly in order of liquidity. However there is a rule that if any 1 amount/item covers less < 1 year and > more than 1 year at the same time, then anything over 1 year must be specially disclosed separately as well for that one amount/item. c. Method 1 is for entities with a clearly defined operating cycle and Method 2 is where the operating cycle is not that clear, like financial institutions. Note : IT IS ALSO ALLOWED TO PUT SOME ITEMS USING METHOD 1 AND OTHER ITEMS USING METHOD 2 IF THAT IS MORE RELEVANT.ie mixed mixture of the 2 methods 2. Method 1: Current and Non Current assets / liabilities headings: a. A CURRENT ASSET IS : i. Is expected to be realized in, or is held for sale or consumption in the normal course of the entities operating cycle eg inventories. ii. Is held primarily for trading purposes ( eg some financial assets held for trading) iii. Is expected to be realized within 12 mnths (eg non-current assets held for sale.) iv. Is cash or a cash equivalent that is not restricted from being exchanged or used to settle a liability for the whole of at least 12 mnths from reporting date.,( eg call account b. A NON-CURRENT ASSET IS : all other assets are classified as non-current. c. Definition: operating cycle is the time of acquisition of raw materials and their realization as cash . Thus if the operating cycle is longer than 12 mnths the current assets may include items that are not expected to be realized within 12 mnths. If operating cycle is not clearly identifiable it should be assumed to be 12 mnths. d. A CURRENT LIABILITY IS : i. Is expected to be settled in the normal course of the entities operating cycle.( eg trade payables) ii. Is held primarily for trading purposes(eg some financial liabilities held for trading) iii. Is due to be settled in 12 mnths from reporting date (eg dividends payable, income tax payable) iv. The entity does NOT have the unconditional right to defer payment to after 12 mnths from reporting date.( eg bank overdraft) (if terms say convertible to share settlement at option of counterparty, the share settlement should not affect the classification as current or non-c. here classification should be based on expected transfer of cash OR other assets,) e. NON CURRENT LIABILITY: all other liabilities are Non-Current. i. Note: if non-adjusting event after reporting period says agreement to refinance a current , it stays current in old period , do not change. ii. Any refinancing/periods of grace etc all get classified into the period they fall into.
LEGAL BACKING FOR COMPLIANCE. Companies act 2007 says all fin stats should comply with IFRS /GAAP KNOW OF, UNDERSTAND AND EXPLAIN THE MEANING OF FAIR PRESENTATION. By: 1- Application of the principal qualitative characteristics 2- And of appropriate accounting standards Framework : 46 (vertabim) Financial statements are frequently described as showing a true and fair view of, or as presenting fairly, the financial position, performance and changes in financial position of an entity. Although this Framework does not deal directly with such concepts, the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements that convey what is generally understood as a true and fair view of, or as presenting fairly such information. DESCRIBE THE PROCESSES INVOLVED IN DRAFTING AND SETTING STANDARDS OF GENERALLY ACCEPTED ACCOUNTING PRACTICE. IASB formulates new policies according in consultation with relevant parties, releases exposure draft (ED) for pubic opinion, then if approved releases new IAS or updates. In SA then SAICA has APB , now changing FRSC financial reporting standards council ,which releases these to the accounting profession and participates in the evalution and gives opinions on EDs. . MATCHING CONCEPT MATCHING CONCEPT. 1.3. The asset & liability view : where expenses are not matched in the same period with related revenue ,then income/expense is seen as the general increase in assets over liabilities in the period. eg depreciation is simply systematicly allocated in the period it occours. 1.4. Revenue&expense view: where expenses and income from similar business activities are matched eg separate a normal from a once off operation. DEFINITION OF ACCOUNTING&BOOKKEEPING: DEFINITION OF ACCOUNTING: ACCOUNTANCY can be defined as : The Orderly and Systematic IDENTIFICATION AND RECORDING of the MONETARY VALUES of FINANCIAL TRANSACTIONS of an (or economic transactions) INDIVIDUAL OR INSTITUTION and the REPORTING on the RESULTS of these TRANSACTIONS and the PROVISION of the INFORMATION in FINANCIAL STATEMENTS which INFORMATION is used in DECISION MAKING . DEFINITION OF BOOKKEEPING: BOOKKEEPING can be defined as : The Orderly and Systematic IDENTIFICATION AND RECORDING of the ( or here just ECONOMIC EVENTS. Finished) MONETARY VALUES of FINANCIAL TRANSACTIONS of an (or economic transactions) INDIVIDUAL OR INSTITUTION.
Identity is important also orderly and systematic AND recording implies Chronological diary of measured events Also Classified and Summarized
THE APPLICATION OF STATEMENTS OF GAAP THIS WHOLE THING HAS CHANGED WITH NEW 2012 VERSION OF FRAMEWORKCHECK FOR CHANGES to this below. Spirit not Letter if problems. AC100.10 :The application of statements of gaap:APB says 1. Spirit not letter of Fin. Statements if problems with application 2. To remember fair presentation Substance-form/&Materiality. AC100.11 :Two considerations affect Application 1. Substance over form facts over GAAP form 2. Materiality-all matters in financial transactions which can affect the understanding and decisions of users must be recorded. AC100.07 Fair Presentation 1. Most important part of Companies Act is FAIR PRESENTATION. 2. Compliance with Gaap does not auto. guarantee fair Presentation in Fin.Stat. 3. Standards achieve:1-Comparability 2-help fair presentation 4. Departures must be disclosed in Explanatory Notes. 5. AC100.08 Compliance with Gaap may be misleading 6. AC100.09 not necessarily cater for Specialized Activities (more a general standard) Ac100.09 1-Specialized +2_unusual transactions add in Notes to Clarify if any deviation in standards. Implies only in exceptional cases are deviations permitted UNIVERSAL ACCOUNTING DENOMINATOR THE COMMON UNIT OF MEASUREMENT IN ACC. IS MONEY. 1. In RSA is the Rand and Cents. 2. All transactions are converted to monetary values before being processed. 3. LIMITATIONS: 3.1. Not all events can be converted to monetary terms. Value of money unstable-influenced by many economic factors:eg-inflation. The Components of Fin stats( some dof addition from old 2010 framework now removed in 2012 framwork )s 9.1.1. SOFP: 9.1.1.1.Info. on Financial Position. 9.1.1.2. Info. on resources, equity and claims aginst these resources. 9.1.1.3.Useful for estimation of liquidity & solvency , and prediction of ability & likelihood of entity having success in raising finance in the future. 9.1.2. SOCI 9.1.2.1.Info on Financial Performance. 9.1.2.2.Different componete of Income 9.1.2.3.See all Fin. Ratios that can be got from SOCI (that is basicly your answer for any )
9.1.3. CASH FLOW STAT. 9.1.3.1.Changes in Fin Position 9.1.3.2.Ability to generate cash & cash equivalents, needs to utilize cash flows, how it aquires & distributes cash flows 9.1.3.3.Info on the entitys investing, financing and operating activities. 9.1.4. STAT. OF CH. IN EQUITY. 9.1.4.1.Changes in structure of entitys equity, incl. dividends & capital transactions 9.1.5. NOTES & SUPPLEMENTARY SCHEDULES. 9.1.6. INTERRELATION OF COMPONENTS. 9.1.6.1.Each component reflects different aspects of the same transaction& events, no single statement will provide all the necessary info to users.
2..PRESENTATION : IAS1 1) BACKGROUND SCOPE AND OBJECTIVES OF FIN. STATS. 1. IAS1 , AC101 SETS OUT THE REQUIREMENTS OF STRUCTURE , CONTENT, AND OVERALL REQUIREMENTS FOR PRESENTATION OF FINANCIAL STATEMENTS, specifically for general purpose fin.stats. which is ie not special types like management accounts but meant for general users , eg shareholders. It does not apply to interim fin.stats, but to all others. 2. It must be applied for ALL GENERAL PUROSE FINANCIAL STATEMENTS ie: all fin stats AT ALL that wish to say they conform to GAAP/IFRS. 3. Special institutions eg banks must fulfil IAS1 as well as secondary requirements laid down for them elsewhere. 4. EXCEPTIONS: only certain not-profit entities may have to adapt certain line items, as well as certain entities without share capital, like some co-ops and mutual funds. 5. OBJECTIVE OF FIN.STATS : Definition: is 1- to provide info about the fin. Perf. Fin pos. and cash flows of an entity , 2that is useful to a wide range of users , 3- in making economic decisions 2)GENERAL FEATURES FOR THE PRESENTATION OF FIN STATS. 1. The following general features are identified in IAS 1 (AC 101).15 to .46 FAIR PRESENTATION AND COMPLIANCE WITH IFRSs : 1.1.1. FAIR PRESENTATION: 1.1.1.1.If the following are correctly applied it is accepted as resulting in fair presentation. 1.1.1.1.1.Correct application of statements of GAAP / IFRS 1.1.1.1.2.Qualitative characterustcs correctly applied 1.1.1.1.3.element definitions 1.1.1.1.4.recognition criteria(measurement & A flow of economic benefit) 1.1.1.2. In a exam question your answer must :ask&answer 1-which elements involved criteria+ 2-are recognition criteria of these elements met = Full Answer 1.1.1.3.Fin stats should contain an explicit & unreserved statement in them that say they comply with IFRS. 1.1.2. DEPARTURE FROM IFRSs : 1.1.2.1.If Framework Does Not Prohibit Such A Departure In That Instance : 1.1.2.1.1. One may depart from it if framework requires or does not prohibit such a departure , very rare if compliance with IFRS will result in NOT fair presentation.- only in rare cases if needed 1.1.2.1.2.2 criteria are 1-why must departure happen 2-what about comparability with other similar entities that do not depart 1.1.2.1.3. Any such departure must be disclosed and 7 additional points to be disclosed as well see IAS 1.20: 1.1.2.1.4.IAS 1.20 When an entity departs from a requirement of an IFRS in accordance with paragraph 19, it shall disclose: (a) that management has concluded that the financial statements present fairly the entitys financial position, financial performance and cash flows; (b) that it has complied with applicable IFRSs, except that it has departed from a particular requirement to achieve a fair presentation; (c) the title of the IFRS from which the entity has departed, the nature of the departure, including the treatment that the IFRS would require, the reason why that treatment would be so misleading in the circumstances that it would conflict with the objective of financial statements set out in the Framework, and the treatment adopted; and (d) for each period presented, the financial effect of the departure on each item in the financial statements that would have been reported in complying with the requirement.
21 When an entity has departed from a requirement of an IFRS in a prior period, and that departure affects the amounts recognised in the financial statements for the current period, it shall make the disclosures set out in paragraph 20(c) and (d). 1.1.2.2.IF FRAMEWORK PROHIBITS SUCH DEPARTURE: 1.1.2.2.1.IAS 23 In the extremely rare circumstances in which management concludes that compliance with a requirement in an IFRS would be so misleading that it would conflict with the objective of financial statements set out in the Framework, but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing: (a) the title of the IFRS in question, the nature of the requirement, and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework; and (b) for each period presented, the adjustments to each item in the financial statements that management has concluded would be necessary to achieve a fair presentation.
GOING CONCERN : for 12 mnths from fin. Stat. date : or 1.1.1. IF There Is Just Of Material Uncertainties That May Cast Significant Doubt 1-disclose this in notes 1.1.2. IF IT IS Really NOT A Going Concern : Disclose That It Is Not Prepared On A Going Concern Basis, And Then On What Basis It Is Prepared.(what other types of basiss do you get?)+2-provision for liquidation costs+possible LIQUIDATION VALUATION METHOD ACCRUAL BASIS: 1.1.3. 2 parts = 1 transcations accounted for when they occour,not when cash is received 2- expenses only recognized in profit calc. in period they incurred,not if incurred in another period. (except cash flow stat is of course NOT prepared on a accrual basis) MATERIALITY AND AGGREGATION : 1.2. Material to a user means if its non disclosure may influence economic decision. 1.2.1. per IAS 1.29 each material class of separate items should be presented separately in fin stats. 1.2.2. items of dissimilar nature/function to be presented separately when material, but may be aggregated with other material items where immaterial. ( eg a single event leads to 85% inventory writeoff to be shown separate to the other routine inventory write-offs Vertabim- ) certain line items may not be material enough for SCi but still are material enough for Notes. OFFSETTING 1.2.3. : IAS 1.32 says neither assets&liabilities nor income&expenses may be offset against each other unless specifically required or permitted by a standard or interpretation .- it is basicly not permitted because it detracts from ability of users of fin stats to understatnd fin pos & future cash flows & transactions. 1.2.4. Offsetting like this can happen with non revenue Equipment sales or foreign currency exchange differences where only net loss/profit is shown in SCI. , unless certain of these transactions happen to be material and need to be disclosed separately in the notes or otherwise. 1.2.5. Offsetting could be disclosed in Notes (study IFRS for circumstance). 1.2.6. Allowances eg bad debts/obsolescence , are not seen as being offsetting .Also assets VS acc. deprec. account are not called offsetting . 1.2.7. But Provisions/warranty/suppier/reimbursement and gain/loss on NC assets are allowable offsetting. FREQUENCY OF REPORTING : 1.2.8. yearly but if longer/shorter due to change in entity reporting date must disclose 1-reason why not 1 year 2- The fact that comparatives between years are not comparable due to longer/shorter period (see IFRS)
COMPARATIVE INFORMATION: 1.2.9. Special rules for change in Policy/Reclassification/Error/Restatement : 2 Yrs each of all Fin Stats Except Fin Pos Stat must have 3 yrs : 1.2.9.1.At end current period(all) 1.2.9.2.End of last period ..which is the Same as Begin current period (all) 1.2.9.3.Begin of earliest comparative period. (only Fin Pos, not others) 1.2.10. AC101.38 ; allnumerical info. in fin stats. should be accompanied by comparative info for previous period unless a standard or interpretation permits otherwise.Even narrative& descriptive info should be accompanied by comparative info. if necessary for understanding of current periods fin. Stats. ..Vital importance is Fin Stats users discern trends-thus comparatives must be structured in such a way. Also , if Accounting policy is changed the comparatives must be recalculated & shown again as well + disclose 1nature of reclassification 2-amount of each item or class of item reclassified 3-reason for reclassification. See changes in accounting estimates and errors chapter. , or IAS 1 .38. Note: IAS 1.42 introduces notion of IMPRACTICALITY : where it is impractical to calc. comparatives eg if no proper measurements were made- then need not do it.But there are certain rules- see IFRS.+ then must disclose 1- reasons why not disclosed+ 2- nature of changes had comparatives been done.
CONSISTENCY OF PRESENTATION: 1.2.11. IAS 1.43 consistency within same period and between periods. It has 2 aspects = 1-consistency between similar items & 2 consistency over time. This consistency may only be broken if : 1.2.11.1.Required by GAAP 1.2.11.2.Results in more fair presentation 1.2.11.3.Change in entities operations. 1.2.12. If acc.policy changes comparatives must be recalculated and special disclosures made- see relevant chapter & IAS1.42. 5)JSE LISTING REQUIREMENTS: 1. In addition to Companies act & IFRS , the JSE has extra rules to be met for Fin Stats of any listed company as follows. 1.1. AFS must be drawn up in accordance with the national law of the country applicable to the listed company. 1.2. In accordance with with SA GAAP or IFRS , or with foreign national auditing standards acceptable to the JSE or to International Standards on Auditing. 1.3. Be in consolidated form if it has subsidiaries, (unless JSE otherwise agrees) ,PLUS the listed companies own separate Fin Stats must aso be published in non-consolidated form if they contain significant additional information. 1.4. Fairly present the Fin Pos , results of operations (Pin Perf), Cash Flows , Ch in Equity of the company. 1.5. Comply Companies Act 1.6. Comply requirements King report on Corporate Governance 1.7. The JSE requires that the Annual Reports (not the AFS) should disclose at LEAST the following. 1.7.1. Narrative Statement of how King Report was applied providing explanations othat enable its shareholders to evaluate how the principles have been applied. 1.7.2. Statement of EXTENT of compliance and EXTENT of Non- Compliance with King Report, and for what part of year there was non compliance & for what part there was compliance. 1.8. The JSE requires that the AFS of listed companies should disclose at least the following: 1.8.1. 1Any Increase in Borrowings 1.8.1.1.Nature of any Increase in Borrowings 1.8.1.2.+ Purpose of it
1.8.1.3.+ Amount of borrowings authorized by Memorandum of Incorporation/ Articles of Assosiation of it or the relevant subsidiary. 1.8.2. Headline Earnings Per share : 1.8.2.1.For current period & comparatives for the immediately preceeding year. 1.8.2.2.+ Itemised Recon between Headline EPS and the earnings used in the calc. of EPS. 1.8.2.3.Headline EPS to be calc. per method in SAICA Circular 7/2002. 1.8.3. Aggregate of Direct & Indirect Interests of the directors in + each directors holding (their companies) in the share capital of the company 1.8.3.1.distinguishing between beneficial & non-beneficial interests. 1.8.3.2. + any Change or any No-Change in same interests between Fin stats. date & a Date not more than 1 mnth prior to date of AGM should be disclosed. 1.8.4. No.of public shareholders for each class of listed securities. 1.8.4.1.Also the % of each class of listed securities held by public OR non-public shareholders should be disclosed 1.8.4.2.In the case of non-public shareholders it should be analysed inaccordance with following categories. (listing requirements para 4.25) 1.8.4.2.1.Directors or directors any of its subsidiaries 1.8.4.2.2. Associates of directors or directors any of its subsidiaries 1.8.4.2.3.+ Another 4 types see JSE listing requirements( no time to write it here) 1.8.5. Any shareholders interest over 5% of capital or negative statement if there are no such shareholders. 1.8.6. Details of Share Incentive schemes.( see JSE listing requirements for exact details to be shown here) 1.8.7. Explanation of any difference of >10% from any published forecast/estimate. 1.8.8. No. & status of any unlisted securities. 1.8.9. Details of special resolutions passed by companies subsidiaries ( see JSE listing requirements for exact details to be shown here) 1.8.10.Details of issues of securies for cash during period -( see JSE listing requirements for exact details to be shown here) 1.8.11.Directors emoluments certain details ( see JSE listing requirements for exact details to be shown here)
CURRENT OR NON-CURRENT DISTINCTION ,ASSETS & LIABILITES 3. There are 2 Methods of Presenting Current & Non- Current : a. Method 1 : using Current Assets/Liabilities And Non-Current Assets/Liabilities as headings. b. Method 2: Liquidity Approach : Assets&liabilities are presented broadly in order of liquidity. However there is a rule that if any 1 amount/item covers less < 1 year and > more than 1 year at the same time, then anything over 1 year must be specially disclosed separately as well for that one amount/item. c. Method 1 is for entities with a clearly defined operating cycle and Method 2 is where the operating cycle is not that clear, like financial institutions. Note : IT IS ALSO ALLOWED TO PUT SOME ITEMS USING METHOD 1 AND OTHER ITEMS USING METHOD 2 IF THAT IS MORE RELEVANT.ie mixed mixture of the 2 methods 4. Method 1: Current and Non Current assets / liabilities headings: a. A CURRENT ASSET IS : i. Is expected to be realized in, or is held for sale or consumption in the normal course of the entities operating cycle eg inventories. ii. Is held primarily for trading purposes ( eg some financial assets held for trading) iii. Is expected to be realized within 12 mnths (eg non-current assets held for sale.) iv. Is cash or a cash equivalent that is not restricted from being exchanged or used to settle a liability
for the whole of at least 12 mnths from reporting date.,( eg call account b. A NON-CURRENT ASSET IS : all other assets are classified as non-current. c. Definition: operating cycle is the time of acquisition of raw materials and their realization as cash . Thus if the operating cycle is longer than 12 mnths the current assets may include items that are not expected to be realized within 12 mnths. If operating cycle is not clearly identifiable it should be assumed to be 12 mnths. d. A CURRENT LIABILITY IS : i. Is expected to be settled in the normal course of the entities operating cycle.( eg trade payables) ii. Is held primarily for trading purposes(eg some financial liabilities held for trading) iii. Is due to be settled in 12 mnths from reporting date (eg dividends payable, income tax payable) iv. The entity does NOT have the unconditional right to defer payment to after 12 mnths from reporting date.( eg bank overdraft) (if terms say convertible to share settlement at option of counterparty, the share settlement should not affect the classification as current or non-c. here classification should be based on expected transfer of cash OR other assets,) e. NON CURRENT LIABILITY: all other liabilities are Non-Current. i. Note: if non-adjusting event after reporting period says agreement to refinance a current , it stays current in old period , do not change. ii. Any refinancing/periods of grace etc all get classified into the period they fall into.
ACTUAL financial statements : Structure And Content Of Financial Statements
GENERAL ACCOUNTING POLICY IN THE NOTES: Generally accepted accounting practice 1.1 Generally accepted accounting practice The annual financial statements are prepared according to the statements of generally accepted accounting . .. . .... practice. Accounting Policy The accounting policy of the company is consistent with that of the previous years, and is as follows: 2.1 Measurement basis The annual financial statements are based on historic cost unless stated otherwise. 2.2 Property, plant and equipment Depreciation is not written off on land. Depreciation on a plant, buildings, machinery and vehicles . is written off .. at rates deemed appropriate to reduce the carrying amount of the assets over their . expected useful lives to their .. estimated residual values. The rates and methods are as follows: Buildings 2% per year on the straight-line method Plant 10% per year on the straight-line method Machinery 15% per year on the straight-line method Vehicles 20% per year on the straight-line method. 1. The accounting policy on each class of assets must be disclosed., a. The basis of depreciation must be disclosed. b. 2- cost of asset basis or by revaluation must also be disclosed .
Also , if held on a revalued basis, whether it is calculated using the Net method or the Gross method.. (look for examples of some wording here for the cmplex stuff- what do you call net&gross basis). d. When If you specially decide to roll back a revaluation by using depreciation(subtract new depreciation for year from revaluation at end of year), to the beginning of year, for a revaluation which was done at end of tear ,so amounts can be depreciated & used from that beginning of year date, it must be disclosed in the notes under accounting policy for revaluatuons for that asset class/etc , that this is your method. e. If the realization of surplus revaluation account amounts is done at time of sale basis or at ime of depreciation basis(wording) 2.3 Other financial assets Other financial assets are valued at fair value. Listed shares ae .aiued at market value. Unlisted .. investments .. .. are revalued every year at net realisable value to establish the directors valuation. 2.4 Inventories Inventories are valued at the lower of cost, on a first-in-first-out basis, and net realisable value. . .. An appropriate ....part of the fixed and variable fac:ory overheads are included in determining the . .. cost of work in progress and ....finished goods. 2.5 Revenue recognition Sales are recognised upon delivery of products or performance of services. (must show measurement bases used and each specific policy used in fin stats.needed to understand)
c.
PROFIT BEFORE TAX NOTE : 1. COMPENSATION/insurance payout FOR IMPAIRMENT: a. If you get compensation for impairment or a insurance payout, it must be : i. Recognized when : it becomes payable to you (date creditor could be raised / claim confirmed). ii. Compensation received/payout JOURNALS /fin stats : The compensation should be accounted for in profit/loss for the year. (I dont know if it goes to asset realsiation account or if it goes separately by itself ?) iii. Compensation received/payout for insurance or other claims/impairment paybacks etc Fin Stats : 1. Notes to fin stats : a. PPE table : just derecognition of asset destroyed recognized as if sold/disposed of in Disposals, or in own separate heading called PPE destroyed in hail storm any new ssset bough to replace it goes as per normal in Additions b. Profit Before Tax note: in the normal note called profit before tax : disclose i. 1: Amount of loss to item in hailstorm or whatever it was in own line ii. 2: Amount of compensation received from insurance or wherever in own line 2. IMPAIRMENT recognized in P&L (after portion of reval.surpl. used up) 3. REVERSAL OF IMPAIRMENT. 4. 1) IDENTIFICATION OF FINANCIAL STATEMENTS: 1. IAS 1.51 Fin Stats. to be clearly distinguished & identified as being APART from other info eg value added reports, or sustainability reports etc ,in annual reports. This is because IFRS DOES NOT apply to these other reports at all.
2. The following info to be indicated prominently, preferably on every page of the reports.: , but allowed to be only once on top of eg electric format fin stats, where there is effectively only 1 page. The following requirements are met by incl. in HEADINGS only, in columns , notes etc. 2.1. 1-Nameof Entity 2-if any change in Name of Entity from last reporting date then disclose that(??on every page in heading , or hidden in notes?). 2.2. Whether they cover a Group Consolidated or Single entity 2.3. Date/period 2.4. Type eg SCI or SFP 2.5. Currency 2.6. Level of precision rounded off to eg 000 or 000 000 etc.
) COMPONENTS OF FIN STATS. 1. COMPONENTS OF FIN.STATS.: 1.1. SOFP 1.2. SOCI 1.3. Statement of changes in equity 1.4. STATEMENT of Cash Flows 1.5. Notes to the fin stats. incl. summary of significant accounting policies 1.6. A SoFP as at begin of earlies comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its fin.stats. or when items in its fin stats were reclassified. 2. FURTHER NOTES ON THE COMPONENTS OF THE FIN.STATS. 2.1. The other comprehensive income may be presented separately in a separateincome stat or as part of the SCI. If done as a separate income stat. then it should be displayed immediately before the SCL. 2.2. IAS 1 encourages preparers to provide additional info. eg environmental report, statement of added value. A financial overview of the entity can also be added to include the following info.: 2.2.1. Main factors influenced performance in current period and will continue to do so in future periods 2.2.2. Policy in respect of maintenance & enhancement of performance 2.2.3. Policy in respect of dividends 2.2.4. Sources of funding & policy on gearing & risk management 2.2.5. Strengths & resources of entity not reflected in the stat. of fin pos. 2.2.6. Changes in environment within which entity functions , how it reacts to the changes and the effect thereof on performance. 2.2.7. The content & format of these reports however fall outside the scope of this standard. SCI Remember the other comprehensive income is always disclosed with tax already taken out of it ie net of tax. So whether tax expense includes the tax of other comprehensive income or not, I do not know? Ask . (or is the tax for other comprehensive income not disclosed maybe only in the notes? if tax expense does include it -it would be a bit wrong so profit before other comprehensive income would have a problem with the matching principle??? SCI : check the questions and answers handout from acca 301 from lecturer for all the weird things where the stuff goes into the sci eg what goes in distribution costs / admin expenses goodwill written off/ capital gains etc etc- it is very good esp question. 1 1. Rem : distribution costs : include marketing directors salary or depreciation on the delivery vehicle. 2. Admin costs incl: lease costs, loss on sale of asset costs (exept capital gains) depreciation, all salaries incl. auditor , directors etc, bad debts+(I think , not sure water & lights, telephone, etc)
3. Other expenses? SFP GENERAL RULES 1. NOTE : PER : IAS 1.57 ; the descriptions used and the ordering of items or aggregation of similar items, below are very broad and may be changed to meet the needs of specific entities eg financial institution. Additional line items, headings and subtotals must be added when it is needed to understand the SFP- based on liquidity,nature,function of assets & amounts,nature,timing of liabilities. Quote IAS1 : the descriptions used and the ordering of items or aggregation of similar items may be amended according to the nature of the entity and its transactions, to provide information that is relevant to an understanding of the entitys financial position. 2. If different measurement bases are used for the same category of assets or liabilities, then DIFFERENT line items should be shown for each , eg PPE valued at revalued amounts and PPE at historic cost. 3. DEFERRED TAX must not be classified as current or non- current assets/liabilites. CURRENT OR NON-CURRENT DISTINCTION ,ASSETS & LIABILITES 1. There are 2 Methods of Presenting Current & Non- Current ( see framework chapter before for details of rules for methods below) a. Method 1 : using Current Assets/Liabilities And Non-Current Assets/Liabilities as headings. b. Method 2: Liquidity Approach : Assets&liabilities are presented broadly in order of liquidity on face of SFP instead of current&non-current headings.(??example??) However there is a rule that if any 1 amount/item covers less < 1 year and > more than 1 year at the same time, then anything over 1 year must be specially disclosed separately as well for that one amount/item. c. Method 1 is for entities with a clearly defined operating cycle and Method 2 is where the operating cycle is not that clear, like financial institutions. ,Note : IT IS ALSO ALLOWED TO PUT SOME ITEMS USING METHOD 1 AND OTHER ITEMS USING METHOD 2 IF THAT IS MORE RELEVANT.ie mixed mixture of the 2 methods. IAS 1.54 AT A MINIMUM TO BE SHOWN ON FACE OF SFP 1. Property, Plant And Equipment; 2. Investment Property; 3. Intangible Assets; 4. Financial Assets (Excluding Amounts Shown Under (E), (H) And (I)); 5. Investments Accounted For Using The Equity Method; 6. Biological Assets; 7. Inventories; 8. Trade And Other Receivables; 9. Cash And Cash Equivalents; 10. The Total Of Assets Classified As Held For Sale And Assets Included In Disposal Groups Classified As Held For Sale In Accordance With Ifrs 5 Non-Current Assets Held For Sale And Discontinued Operations; 11. Issued Capital And Reserves Attributable To Owners Of The Parent. 12. Non-Controlling Interests, Presented Within Equity; 13. Trade And Other Payables; 14. Provisions; 15. Financial Liabilities (Excluding Amounts Shown Under (K) And (L)); 16. Liabilities And Assets For Current Tax, As Defined In Ias 12 Income Taxes;
17. Deferred Tax Liabilities And Deferred Tax Assets, As Defined In Ias 12; 18. Liabilities Included In Disposal Groups Classified As Held For Sale In Accordance With Ifrs 5;
EQUITY
1. EQUITY is split up into ORDINARY SHAREHOLDERS EQUITY and PREFERENCE SHARES . a. ORDINARY SHAREHOLDERS EQUITY consists of : i. DISTRIBUTABLE & NON-DISTRIBUTABLE RESERVES. ii. ORDINARY SHARE CAPITAL iii. SHARE PREMIUM b. PREFERENCE SHARES : is a single line item below Ordinary shareholders equity.It is separate because it does not form part of ordinary shareholders equity at all. c. The TOTAL line for all equity is called: TOTAL SHARE CAPITAL AND RESERVES. 2. It is also splitinto Parent &Non-Controlling Interest.
SFP COMPREHENSIVE SAMPLE : FRAMEWORK LIMITED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20.8 Notes ASSETS Non-Current Assets 1-Property, plant and equipment Rand 000
Table +Notes
IAS:
2-Investment property (This is :Property for leasing out (not financial leases though),property held for long term capital appreciation, etc it is NOT Owner occupied, used for production admin IAS: / expressly held for sale/under construction,NOT 3-Intangible Assets ( eg goodwill or could be separate if good reason) Component IAS: -Other intangible assets (if above was separate) s of 4-Financial Assets ( eg finance lease receivables or Available-for-sale financial assets ? /investments , loan - also each could be separate if good reason.) -Other Financial Assets (eg if above one is separate) (An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits,mutual funds ,& cash but not tangible assets such as real estate or gold) 5-Investments Accounted for Using the Equity Method (eg: Investment in Associates ) ? 6-Deferred tax assets ? 7- Held For Sale , and assets included in disposal groups classified as held for sale per IFRIC5 only ? n-c portion of these 5 (could also go in current assets ?not sure) 8- Any other deemed necessary per conditions IAS [1.58] ?
. Current Assets 1- Inventories 2- Trade and other Receivables 3- Cash and Cash Equivalents 4- Other Current Assets 5- Any heading from non current assets above that is within 12 months. ( eg Financial Assets (eg finance lease receivables ) 5- Current tax assets 6- Biological Assets (maybe also non-current not sure!) Total Assets . EQUITY AND LIABILITIES
1- Issued Capital & Reserves attributable to Owners of the parent (A) Ordinary Share Capital Share capital Reserves( not sure if Ret. Earn. is separate or part of reserves, Distributable & Non-Distributable Reserves) (B) Preference Shares Other components of equity 2- Non-controlling interest
components IAS 2 Specified IAS IAS 1 1.78b ? ? ? ? ?
Specified IAS1 IAS1.79
Total Equity f . Non-Current Liabilities (??? I think in increasing order of liquidity remember : payable last first) see page 291 t :chapter 14 : "current liabilities???" 2- Provisions (eg Retirement benefit obligation Long-term provisions) Specified IAS1.78 IAS1 b 3- Financial liabilities (eg Long-term borrowings, could be separate if good reason )(excl. ? provisions + trade & other payables) ? Other Financial liabilities ( if above eg loans was done separate ) 4 -Deferred tax liabilities ? ? 5 -Liabilities included in Disposal Groups classified as held for sale per IFRIC 5 (not sure if current ? ? or non current or both?) . Current Liabilities (??? I think in increasing order of liquidity remember : payable last first) see page 291 t :chapter 14 : "current liabilities???" 1- Trade and other payables ? 2- Financial liabilities (eg Short-term borrowings, AND Current portion of long-term borrowings but could be separate if good reason )(not provisions + trade & other payables) ? Other Financial liabilities ( if above eg Short term Borrowings AND Current portion of longterm borrowings was done separate ) 3- Current tax liabilites payable ? 4- Short-term provisions ? Total Liabilities . Total Equity and Liabilities Example of a different method , not sure if allowed or not, ???+ how does it balance with current Liabilities put in Assets side???
i SFP NOTES TO THE FINANCIAL STATEMENTS : further sub-classification of SFP info. required in the notes OR on face of SFP. 1. The detail provided in sub-classifications depends on the requirements of the IASs that apply to each Line Item Presented and on the size, nature and function of the amounts involved namely using the general factors set out in IAS 1.58 to decide what to show: a. the nature and liquidity of assets b. the function of assets within the entity; and c. the amounts, nature and timing of liabilities 1. Basically EVERY line item on SFP must have a breakdown of its parts/ sub-classifications shown in the Notes , : EXCEPT none- since IAS1 says ALL line items must have a breakdown of parts . :(not sure yet see SFP full table above in Notes column.) a. Per IAS 1.78 : The disclosures vary for each item, depends on the requirements of the IASs that apply to each Line Item presented and on the size, nature and function: for example per IAs 1.78 b. PROPERTY, PLANT AND EQUIPMENT are disaggregated into classes in accordance with IAS 16 eg : i. Land & Buildings ii. Plant & Machinery iii. Etc. c. RECEIVABLES are ( EXACTLY) disaggregated into (vertabim IAS1) i. Amounts receivable from trade customers, ii. Receivables from related parties, iii. Prepayments iv. And Other Amount d. INVENTORIES are disaggregated, in accordance with IAS 2 Inventories, into classifications such as eg: i. Merchandise ii. Production supplies, iii. Materials, iv. Work in progress v. Finished goods; e. PROVISIONS are disaggregated into : i. Provisions for employee benefits and ii. other items; f. EQUITY CAPITAL AND RESERVES Are Disaggregated Into : PER IAS 1.79 Either In The SOF Or The Statement Of Changes In Equity, Or In The Notes:
i. For Each Class Of Share Capital: 1. The number of shares authorised; 2. The number of shares issued and fully paid, and issued but not fully paid; 3. Par value per share, or that the shares have no par value; 4. A reconciliation of the number of shares outstanding at the beginning and at the end of the period; 5. The rights, preferences and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital; 6. Shares in the entity held by the entity or by its subsidiaries or associates 7. Shares reserved for issue under options and contracts for the sale of shares, including terms and amounts; ii. Reserves : and a description of the nature and purpose of each reserve within equity. g. An entity without share capital, such as a partnership or trust, shall disclose information equivalent to that required by paragraph 79(a), showing changes during the period in each category of equity interest, and the rights, preferences and restrictions attaching to each category of equity interest. h. If an entity has reclassified a puttable financial instrument classified as an equity instrument, or (b) an instrument that imposes on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and is classified as an equity instrument between financial liabilities and equity, it shall disclose the amount reclassified into and out of each category (financial liabilities or equity), and the timing and reason for that reclassification.
NOTES TO SFP : 100% COMPREHENSIVE EXAMPLE 1. PROPERTY PLANT & EQUIPMENT : 1) The PPE Note Consists of ONLY : i) A PPE table and sentence at bottom describing special CHARACTERISTICS NAMELY: land address etc. ii) At bottom of PPE Table : following EXTRA information must be written in sentences for PPE: (1) address of land (2) If it is security for any loans etc (3) name of any valuers and the date amount of any revaluations they did. (4) any additions to / disposals of this land and date thereof. 2) Note: method of working out cost from carrying amount: a) For straight line method: EG 20% over 5 years then after 2 years : 1- acc depr= 20+20% ,2-carrying amount = 100-(20+20)= 60%. 3- cost = 100/60 X carrying amount. b) For Reducing balance Method : same as above exept : for 20% on reducing balance method = 1-year 1= 20% 2- year 2 = 20% + (20% X 80%)= 36% 3-year 3 = 36% + (20%x 64 %) =36+12.8=48.8% 4-year 4 = 48% + (20% x 52%) = 48+10.4=58.4% and so on etc. etc. 3) METHODS: use either of: a) Use straight line ( scrap value+ years of use + same amount off each year to scrap value) or b) Reducing Balance Method : (20% off each year) c) Production units method( per no units produced/lifetime units produceable) 4) Selling an asset: Transfer & write out 1-asset 2-acc deprec. both to a Realization Of Assets account.Then put price received in same account Contra-bank. Then only calc. profit or loss and transfer it ( write-out-in) to a Profit/Loss On Sale Of Asset account. 5) Note: all depreciation or Acc. Depreciation must be in Brackets
Property Plant & Equipment: Land&Buildings Vehicles Machinary TOTAL 6) Note: Dont for get to Carrying amount: Beginning of the xxx xxxx xxx xx subtract depreciation year: ( cost acc.depreciation) for the current year as Cost well as all previous yrs Accumulated depreciation ------------------- (Brackets) (Brackets) (Brackets) depreciation from the disposals at carrying amount Additions (include all costs 7) NOTE: For the of : installation etc as COST price!) movement during year Disposals (Cost price --------------(Brackets) ------------ ----------: Accumulated depreciation ONLY ) a) Disposals of Assets: Revaluations. (Brackets) (Brackets) (Brackets) (Brackets) Put it at carrying Depreciation (One Year's including --------------(Brackets) (Brackets) (Brackets) amount(not sales amount) less [pro- Pro rata for Disposals +Additions) rata depreciation to Cost --------------that month+other Accumulated ------------------- (Brackets) (Brackets) (Brackets) years depreciation] Depreciation(remember to b) Depreciation: add/minus extra mnths to date include all : incl rata depreciation to sold and minus any disposals) that month for any Carrying Amount: End of year: ( cost acc.depreciation) disposals/sold assets + other unsold assets. 8) Note: for end of year balances: a) LEAVE out any depreciation from disposals -out of Acc. Depr. , and also leave out costs of disposals out of Cost. 9) Put : 1) address of land 2) If it is security for any loans etc 3) name of any valuers and the date amount of any revaluations they did. 4) any additions to / disposals of this land and date thereof.
2. INTANGIBLE ASSETS : Intangible assets Brand names Licences TOTAL
Carrying amount: Beginning of the year: acc.depreciation) Cost Accumulated amortisation
( cost
xxx
xxxx
xx
------------------- (Brackets)
(Brackets)
Additions (include all costs of : installation etc as COST price!) Disposals (Cost price Accumulated depreciation ONLY ) Amortisation (One Year's including Pro rata for Disposals +Additions) Cost Accumulated Amortisation(remember to add all up extra mnths to date sold Carrying Amount: End of year: ( cost acc.depreciation) 3. INVESTMENT PROPERTY :
a.
-----------------------------
(Brackets) (Brackets)
----------(Brackets)
--------------------------------- (Brackets)
(Brackets)
This is :Property for leasing out (not financial leases though),property held for long term capital appreciation, etc it is NOT Owner occupied, used for production admin / expressly held for sale/under construction,NOT
4. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD : a. All details 5. FINANCIAL ASSETS : 1) 3 types :1-Loans&receivables, 2-held to maturity 3-at fair value through profit & loss, 2) All financial assets which are not N-Current: eg, 1-Loans, 2-held to maturity 3-at fair value through profit & loss (buying costs not capitalized), 4- shares for short term trading a) The following information must be disclosed in respect of convertible instruments and debentures (non current and current ): i) the amount and classes issued ii) the conditions of conversion and the dates of redemption iii) particulars of convertible instruments and debentures which may be issued by the company again iv) that portion which is payable within 12 months of balance sheet date (to be classified as a current liability) b) The following must be disclosed in respect of loans: (non current and current ) i) the amount of the obligation ii) the interest rate applicable iii) the repayment conditions iv) that portion which is payable within 12 months of balance sheet date (to be classified as a current liability)
v) Whether it is a secured or unsecured loan and by what it is secured exactly , incl. address / erf no. etc. 3) ?Can you just have 1 heading for ALL Financial Assets , or just 1 for ALL loans or 1 for ALL debentures and then in that heading put the current AND non current in one heading,? Or does half have to go in financial assets current and the other half in financial assets n-c (Or in loans current and in loans n-c or all just under 1 heading and separated for n-c and cc in that heading???
4) Financial Assets : a. Non-Current Financial assets 1. Available- for- Sale Financial Asset /Investment ( does this go to INVESTMENTS or does it stay here ?, UNLISTED INVESTMENTS 1000 ordinary shares (cost price 2500) 5000,market value- (you can put at R20 each but this must be the cost , not the market value ?? confused so leave out) LISTED INVESTMENTS xxxxxxx a. Current Financial Assets 1. Financial Asset at Fair Value through Profit & Loss UNLISTED INVESTMENTS xxxxx LISTED INVESTMENTS 10000 Ordinary Shares in BCD(ltd) cost 20000 40000 (you seem to only put name for listed companies?) 3. Loans and Receivables: Loan to a director(loan interest free and repayable Following year) 50 Staff Loans ( loans interest free repayable following year) 100 5) INVENTORIES : Inventories: a. Finished goods b. WIP
10000 100
6) PRELIMINARY COSTS AND SHARE ISSUE COSTS UNDER WHAT DOES THIS GO? EQUITY SECTION OR WHICH HEADING IN ASSET SECTION? FINANCIAL ASSETS OR WHAT???
7) EQUITY : i) FOR EACH CLASS OF SHARE CAPITAL: (1) The number of shares authorised; (2) The number of shares issued and fully paid, and issued but not fully paid; (3) Par value per share, or that the shares have no par value; (4) A reconciliation of the number of shares outstanding at the beginning and at the end of the period; (5) The rights, preferences and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital; (6) Shares in the entity held by the entity or by its subsidiaries or associates (7) Shares reserved for issue under options and contracts for the sale of shares, including terms and amounts; ii) RESERVES : and a description of the nature and purpose of each reserve within equity. b) IF AN ENTITY HAS RECLASSIFIED : a puttable financial instrument classified as an equity instrument, or (b) an instrument that imposes on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and is classified as an equity instrument between financial liabilities and equity, it shall disclose the amount reclassified into and out of each category (financial liabilities or equity), and the timing and reason for that reclassification.
RESERVES Reserves should be classified under two main headings, namely: 1) non-distributable reserves 2) distributable reserves 3) The movement on each reserve during the current year must be disclosed in the statement of changes in equity. The nature and purpose of reserves need to be disclosed. 6-Other Reserves: Non-Distributable reserves CRRF Distributable Reserves Reserve on revaluation of property 10000 15000
SCI 1) PER IAS1.81 the SCI may be presented as one unit or 2 separate statements, one for Other comprehensive income and the other for the rest of the SCI. Profit attributable to Parent N-C interest and Other comprehensive income attributable to Parent Minority interest gets shown on each page separately one on one page , the other on the other page. 2) 85 An entity shall present additional line items, headings and subtotals in the statement of comprehensive income and the separate income statement (if presented), when such presentation is relevant to an understanding of the entitys financial performance. (the ordering and descriptions of line items may also be changed - if relevant to understanding - financial performance) The factors to consider are , amoungst others, esp. a) materiality b) nature c) Function 3) IAS 87 An entity shall not present any items of income or expense as EXTRAORDINARY ITEMS, in the statement of comprehensive income or the separate income statement (if presented), or in the notes. 4) RECLASSIFIACTION ADJUSTMENTS: these can be shown either on the face or in the notes. If shown on the face they are displayed in the Other Comprehensive Income section just below the line item they come from in the current or past year just shown as Less ..so and soeg Less :Reclassification adjustments for gains incl. in P/L below the adjustments for gains line item, and if shown in notes then the exact FULL other comprehensive income statement that would be shown on the face is shown in the notes, -EXCEPT it must start with Profit after tax for the year though AND on the face just the second less. Line is left out each time see full example below in examples section. 5) An entity shall disclose reclassification adjustments relating to components of a) other comprehensive income. COST OF SALES
1) VERY IMPORTANT : a) For calculating the cost of sales when given : Finished Goods and WIP at begin and end of year , AS WELL AS raw materials & consumables at begin & end Plus purchases : REMEMBER that you add for ALL OF THEM O/B begin C/B = amount of O/B sold after deducting C/B left in stock room at end of year. b) BUT : PURCHASES is ONLY ADDED FOR RAW MATERIALS & CONSUMABLES USED remember that WIP and finished goods 52 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
comes only from raw materials purchases, so WIP produced and Finsihed Goods produced during the year CANNOT be cost of sales their full cost comes from RAW MATERIALS purchases only c) :see example & solution from unisa : NOTE THE SALARIES & DEPRECIATION IS FROM FACTORY STAFF & MACHINES. d) Your problem is you go and work out raw materials used & consumables used , but leave out finished goods & WIP since it is not raw materials . That is wrong because you forget that you sold all the o/b of WIP & finished goods, and , less of course these 2 whats left in stock at Yr End, must be added to cost of sales as well. e) SO TO MAKE IT EASY YOU JUST SAY TOTAL o/b less TOTAL c/b , plus purchases(you can only purchase raw stuff) + salaries+depreciation. EASY .
f)
DIRECTORS REMUNERATION:
1) A secretary OR marketing manager OR an accountant are NOT a director. 2) The IFRS book has another style , they include more of the prescribed disclosures for directors , but Unisa uses a simpler method.UniLim does the unisa style one. 3) Only if a director is also a director of the company whos fin stats you are doing, then he is included in the directors remuneration breakdown for the company, and his fees for services to any subsidiaries is included in the calculations(and then deducted again ).BUT if he is NOT a director of the company, but only of a subsidiary he is left out completely.We just want to be able to show , for any of our directors, what they get from any subsidiaries. 4) A company that owns us is left out completely- even if our directors work there as directors as well, it is not shown at all in our books.Only for our subsidiaries is anything actually shown. 5) ONLY directors are included in the breakdown- NOT general managers, marketing managers, secretaries,accountants etc ,but if a director also holds a office eg a secretary, then what he gets for that is also included in the emoluments etc.and he is seen as an Executive director. 6) A chairman is a 1-chairman and automatically also a 2-director , so he gets fees for both , not just for being chairman. 7) Pension fund contributions by company (not by person himself) go to directors emoluments , not pensions, but direct pension payouts like a salary type payout-, go to the Pension Section of the directors remuneration part of Notes. 8) If a travel allowance is paid to each director of a company , and one guy is director of the subsidiary and also the parent, then he gets 2X the travel allowance!, one from each company. 9) A Chairman is a non-executive director. Unless indicated otherwise. 10) If he is a only a director of this company , and also a secretary or a managing director of another company, he is just a non-executive director.But if he is secretary AND a named director of this company, then he is a executive director.
11) IF A non executive director receives compensation for loss of office: it MUST ALSO be shown on breakdown in notes under that heading. 12) If half of a former directors pension is paid by a subsidiary because he used to be a director/work there too ,that half is also subtracted as less paid by subsidiary)
13) When calculating and disclosing directors emoluments, take note of the following: i) All remuneration paid to the chairman is directors emoluments. ii) If (for example) a director is given the use of a motor vehicle as a fringe benefit, only that portion utilised for private purposes will be included in directors emoluments. Thus, if the private usage is given as 4O% only that 40% will be included in directors remuneration. iii) Take careful note of whether or not the chairman and managing directors fees already include the normal directors fee. iv) Pensions/loss of office paid by third parties (not subsidiaries) to a director of the reporting entity will only be included in the disclosure of the reporting entity if they were paid by the third party in respect of directorship of the reporting entity or its subsidiaries. v) Should a director also be an officer, the remuneration for this office is included in other services.
Pensions
Furthermore, pensions paid for (a) services as director; and (b) other services must be listed separately. 2) It must also be stated whether the pensions were paid by i. the company; ii. a subsidiary of the company; or iii. a third party in respect of directorship in the reporting entity/its subsidiary to a director; a past director; or another person by nomination of a director or by virtue of that persons dependence on or connection to the director in respect of i. services as director of company/its subsidiary; or ii. carrying on of affairs of company/its subsidiary. j) Pensions received from an independent/bona fide pension fund are not disclosed. 1.
Compensation In respect of loss of office

a. Compensation paid to i. Non-executive directors; and ii. Executive directors must be identified separately. Furthermore, compensation paid for i. Services as director ii. Other services must be indicated separately. It must also be stated whether the compensation was paid by i. the company; ii. a subsidiary of the company; or iii. a third party, to a director; or past director in respect of official capacity as director; or as manager of operations (carrying on of the companys affairs).
b.
c.
Details of directors service contracts

The service contracts of iv. non-executive directors; and
v.
executive directors must also be identified separately.
Non-executive compensation loss of office must also be shown same as for executive above.
SCI: AT A MINIMUM ITEMS TO BE PRESENTED ON FACE OF SCI. 1) An Analysis of EXPENSES note , note not income, Classified based on either their NATURE or their FUNCTION , whichever info. is more reliable and more relevant , must be presented , and is encouraged by IFRS to be shown on the face of SCI , but it seems this could also be in the notes somehow. 2) As a minimum, either in the NATURE or FUNCTION of expenses format , the statement of comprehensive income shall include line items that present the following amounts for the period, so in the functions format the items that would be included in below headings for nature format would just have to be presented separately in the function format. i) REVENUE ii) FINANCE COSTS iii) ASSOCIATES & JOINT VENTURES : share of the profit or loss of associates and joint ventures accounted focusing the equity method; iv) TAX EXPENSE v) DISCONTINUED OPERATIONS : a single amount comprising the total of : (1) the post-tax profit or loss of discontinued operations
(2) and the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation ; vi) PROFIT OR LOSS ; vii) ASSOCIATES & JOINT VENTURES : share of the other comprehensive income of associates and joint ventures accounted for using the equity method; and viii) TOTAL COMPREHENSIVE INCOME : (1) each component of other comprehensive income classified by nature (excluding amounts in (h)); (2) An entity may present components of other comprehensive income either: (a) net of related tax effects, or (a) before related tax effects with one amount shown for the aggregate amount of income tax relating to those components. ix) TOTALS : income as allocations for the period: ( (a) &( b) below may be shown on separate statements if separate statements are used for both) (a) profit or loss for the period attributable to: (i) non-controlling interests, and (ii) owners of the parent. (b) total comprehensive income for the period attributable to: (i) non-controlling interests, and (ii) owners of the parent.
SCI COMPREHENSIVE SAMPLE in NATURE and FUNCTIONS formats :. 1) One Example is Nature in one statement format , the next is Nature in 2 statement format . THEN follows function in 1 statement format ,
ONE STATEMENT FORMAT : SCI in FUNCTION of EXPENSES (note not income) FORMAT : Function Format :STATEMENT OF COMPREHENSIVE INCOME for The YEAR ended 28 Feb 2007 (over a specific period) NOTES R REVENUE COMPLEX IAS 18 COST OF SALES :Rem: for WIP work in progress accounting type, REM to (xxxxxx) 1- Depreciation on FACTORY PLANT (not buildings or delivery vehicles) is included in cost of sales (added to costing of the product sold) , leave out of anywhere else in the SCI , not in admin expenses with all the other depreciation costs like cars etc!!! 2-Salaries of Factory Workers is Included here (not admin staff , or marketing staff). eg not in administration expenses with other salaries! Does this happen in NON- WIP type account as well.-no matter what type of entity, you always do this or not?? For both of these?ans: only those salaries that are directly part of price of item sold- ie where wages is a direct cost , not an indirect cost. GROSS PROFIT TOTAL OTHER INCOME xxxxx Interest Income : ( (per unisa it can get shown here or in its own heading.) Xxxxx Bad Debts Recovered Xxxxx Discount received Xxxxx Rent or(next line)Commission/etc. income / I think interest income Xxxxx Profit on Sale of Asset DISTRIBUTION EXPENSES. ( sales staff salaries , depreciation on delivery vehicles, (BRACKETS) Advertising costs!!!delivery costs etc.) 1- REM : salaries of all sales staff (eg: reps ) are ALLWAYS included here .( in the notes they go in normal place ie profit before tax note , but here they go in here, and not with other salaries in administration expenses!) 2-depreciation on delivery vehicles goes in here, but other depreciation goes in other headings, not here. 3-Advertising costs go in here!!!! 4-salaries of marketing staff marketing director and graphic designers 5-packaging of goods sold ADMINISTRATIVE All other depreciation that does not go elsewhere .and any other expense that does not specifically go elsewhere .Expenses what goes in here? OTHER EXPENSES (eg loss on sale of asset + [ RENTAL + MAINTENANCE EXPENSES on leased property , + INSURANCE EXPENSES on leased property that are not used for production so dont go to cost of sales].) GAINS /LOSSES ARISING FROM DERECOGNITION OF FINANCIAL ASSETS MEASURED AT AMORTISED COST. GAIN /LOSS ON RECLASSIFYING AN ASSET SO IT IS MEASURE AT FAIR VALUE FINANCE COSTS (BRACKETS)
Interest on Long term Loan: MUST apart Interest on Bank Overdraft: Must apart Interest on Debentures DISCONTINUED OPERATIONS : .(where does this go: ie it is supposed to be post tax!) SHARE OF P/L OF ASSOCIATES & JOINT VENTURES ACCOUNTED FOR USING THE EQUITY METHOD Share of P/L of Associates & Joint Ventures: (a separate line for other comprehensive income must also be shown , PROFIT BEFORE TAX INCOME TAX EXPENSE Profit (for the year) OTHER COMPREHENSIVE INCOME( the tax for this can be shown as a main total with 2 sub totals for tax that can be reclsssifed to P&L later and tax that cannot be reclassifed , - or not shown and just pre-deducted from each item shown below ) Reclassification adjustments this either goes under each item reclassifed blocked off as a subtotal which forms the total above, OR it goes separaelty in the notes under the OCI table of tax items tha go in OCI , as a sentence or a small table .(see IAS 1.93-97 for more) Gains on Property Valuation (Changes in revaluation surplus relating to PPE) Actuarial gains/losses on defined benefit plans (recognized outside P/L) Exchange differences on translating foreign operations Available for sale financial Assets (Gains/Losses on remeasuring available for sale financial instruments. ) Cash Flow Hedges : (Effective portion of gains/losses on cash flows ) Share of other Comprehensive Income of Associates INCOME TAX EXPENSE relating components of other Comprehensive Income.(or EACH item can also be shown net of tax and leave this heading out) -TAX THAT CAN SUBSEQUNTLY BE RECLASSIFIED TO P&L SECTION. -TAX THAT CANNOT SUBSEQUENTLY BE RECLASSIFIED TO P&L SECTION. TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Xxxxxxx Xxxxxxx Xxxx Xxxxxxx
xxxx TOTAL TOTAL TOTAL
TOTAL
Total Sub-total Sub-total
PROFIT ATTRIBUTABLE TO OWNERS OF THE PARENT NON-CONTROLLING INTEREST TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO OWNERS OF THE PARENT NON-CONTROLLING INTEREST EPS : for both years separately.
NATURE Format :STATEMENT OF COMPREHENSIVE INCOME

NOTE S REVENUE OTHER INCOME ( eg profit on sale of asset) Can have :PURCHASES / WAGES / TRANSPORT COSTS etc as headings per pextbook CHANGES IN INVENTORY OF FINISHED GOODS AND WIP.(another heading could be : . . . work
performed by entity and capitalised per textbook ) This is OPPOSITE (Not O/B Less C/B ) to cost of sales method in Function , or Raw materials Method Below : MEMORISE :Here it is C/B less O/B an increase in Inventories is an INCREASE in PROFITS, a decrease in inventories, is a DECREASE in profits.- so increase is + and decrease is in BRACKETS for minus.
R IAS 18 xxxxx Xxxxx
RAW MATERIALS AND CONSUMABLES USED (This is: only O/b + purchases c/b ) [you do NOT add depreciation on factory plant, or salaries of factory workers or similar like for cost of sales. AND you do not worry about the Changes in inventory above- any raw materials that were used for making inventory (shown above) as an increase/decrease simply act as a king of c/b for these raw materials used to make them, and as this amount to the right is an EXPENSE in brackets, but the amount above if inventory increased is an INCOME , they work against each other like that. EMPLOYEE BENEFITS EXPENSE ( ALL salaries are here, NONE go to cost of sales or distribution expenses) DEPRECIATION ( ALL depreciation is here, NONE goes to cost of sales or distribution expenses . One
could put amortisation & impairment separate below.)
(Xxxxx)
Xxxxx Xxxxx Xxxxx Xxxxx Xxxxx XXX
AMORTISATION EXPENSE ( ALL amortisation is here, NONE goes to cost of sales or distribution expenses . IMPAIRMENT EXPENSE ( ALL impairment is here, NONE goes to cost of sales or distribution expenses
.)
OTHER EXPENSES (NOT finance costs , but these yes: eg loss on sale of asset stationary DELIVERY, COSTS ,
ADVERTISING )
FINANCE COSTS: (go separate) SHARE OF P/L OF ASSOCIATES & JOINT VENTURES ACCOUNTED FOR USING EQUITY METHOD
Share of P/L of Associates & Joint Ventures: (a separate line for other comprehensive income must also be shown ,
TOTAL EXPENSES PROFIT BEFORE TAX From here on same as Functon Method :OCI and Parent/Non-Controlling Interest come after this same as other Method exactly.
Xxxxx Xxxxx
SCI : NOTES TO THE FINANCIAL STATEMENTS 1) CRITERIA WHEN TO DISCLOSE : IAS 1.97 When items of income or expense are material, an entity shall disclose their nature and amount separately either in the notes or on face a) IAS 1.98 Circumstances that would give rise to the separate disclosure of items of income and expense include: i) Write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs; ii) Restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring iii) Disposals of items of property, plant and equipment iv) Disposals of investments; v) Discontinued operations; vi) Litigation settlements; and
vii) Other reversals of provisions. 2) . 1- INCOME TAX NOTE: a) OCI Tax : All items in income tax that relate to OCI shall be displayed singly per item in the OCI or in the NOTES. So in the notes you put a table with the tax for all the items in OCI showing for each item . one can probably divide each tax item into deferred & current boxed under total for extra MARKS. i) The OCI table must be divded into 2 HEADINGS: (1) Those that CAN be reclassifed to P&L when the right conditioms are met. (2) Those that CANNOT be reclassifed to P&L when the right conditioms are met. b) DIRECT TO EQUITY tax : Income tax that relates DIRECTLY TO EQUITY, must also get a separare table , as for OCI above, in the same note. c) RECLASSIFICATION ADJUSTMENTS : this either goes under each item reclassifed blocked off as a subtotal which forms the total above, OR it goes separaelty in the notes under the OCI table of tax items tha go in OCI , as a sentence or a small table .(see IAS 1.93-97 for more)
3)
2-PROFIT BEFORE TAX NOTE: (seems to be only this one and the Income tax note above that are referred to for P&L) (Profit Before Tax Is Disclosed After Taking The Following Items Into Account) a) NOTE : in the NATURE format , all the items that you include on the face of the statement like employee benefits and depreciation and raw materials used etc DO NOT NEED TO BE INCLUDED IN THE NOTES- per unisa example. ( unless of course there is directors remuneration or similar) b) REDO: directors & other remuneration note, take notes from year 2 and put them in here c) Income: i) REVENUE CONSISTS OF : (1) CONTINUING OPERATIONS TURNOVER: ii) SIGNIFICANT ITEMS ( eg: insurance payout) iii) PROFIT ON FINANCIAL INSTRUMENTS : iv) PROFIT ON SALE OF PPE v) FAIR VALUE ADJUSTMENTS : FINANCIAL ASSET AT FAIR VALUE THROUGH PROFIT OR LOSS. vi) SUBSIDIARIES : (1) Dividends (2) Interest (3) Management Fees. (4) Other Specified Income vii) INCOME FROM OTHER FINANCIAL ASSETS: (1) LISTED INVESTMENTS (a) Dividends (b) Interest (c) Other Specified Income (2) UNLISTED INVESTMENTS (a) Dividends (b) Interest (c) Other Specified Income
d)
Expenses: i) SIGNIFICANT ITEMS : (eg: damage from a earthquake)
ii) iii) iv) v)
LOSS ON FINANCIAL INSTRUMENTS : LOSS ON SALE OF PPE FAIR VALUE ADJUSTMENTS : FINANCIAL ASSET AT FAIR VALUE THROUGH PROFIT OR LOSS. DEPRECIATION in P&L Statement : (1) DEPRECIATION TOTAL : (2) Less: Depreciation capitalised to Intangible assets (3) Less : Depreciation transferred to cost of sales (IMPORTANT)
vi) vii) REMUNERATION : (1) Management Services (2) Technical Services (3) Admimistrative Services (4) Secretarial Services viii) AUDITOR REMUNERATION (a) Audit services (b) Other services (c) Expenses ix) DIRECTORS REMUNERATION: (1) EXECUTIVE DIRECTORS (a) Emoluments ( incl. pension fund contribution, + paid by any subsidiary + all fringe benefits) (i) For Services As Director(blocked below) (ii) For Other Services (blocked below) (eg: as officer or accountant) (b) Pensions Paid to directors & Past Directos ( only actual salary type pensions, NOT pension fund contributions, also if paid by a subsidiary to get general idea of totals involved) (c) Compensation for Loss of Office : (d) LESS : Paid By Subsidiaries ( so everything paid by subsidiaries is included above , incl pension,fringe) (e) LESS : Paid By 3rd Parties (Not Subsidiaries) ( for services to this group company, not others) (f) TOTAL PAID BY COMPANY EXECUTIVE : (2) NON-EXECUTIVE DIRECTORS (a) Emoluments (i) For Services As Director (blocked below) (ii) For Other Services (blocked below) (eg: as officer or accountant) (b) Compensation for Loss of Office : (c) LESS : Paid By Subsidiaries ( so everything paid by subsidiaries, like their salary or fees for working there) (d) LESS : Paid By 3rd Parties (Not Subsidiaries) ( for services to this group company, not others) (e) TOTAL PAID BY COMPANY NON-EXECUTIVE : (f) TOTAL FOR executive & non-executive:
e) From ias 1 . 98 Diredtly i) WRITE-DOWNS & REVRSALS OF INVENTORY TO NRV ii) WRITE-DOWNS & REVERSALS OF PPE TO RECOVERABLE AMOUNT iii) RESTRUCTURINGS & REVERSALS OF PROVISIONS FOR RESTRUCTURING iv) PPE DISPOSALS v) INVESTMENT DISPOSALS vi) DISCONTINUED OPEARTIONS vii) LITIGATION SETTLEMENTS viii) REVERSALS OF PROVISIONS ix) HEADINGS FROM NATURE METHOD :(these must be incl. in the notes if the function method was used instead of the nature method per IAS1) (1) DEPRECIATION & AMORTISTION (2) RAW MATERIALS & CONSUMABLES (3) EMPLOYEE BENEFITS EXPENSE (4) CHANGES IN INVENTORIES OF FINISHED GOODS f)
STATEMENT OF CHANGES IN EQUITY : COMPREHENSIVE EXAMPLE:

STATEMENT OF CHANGES IN EQUITY.
AS PER IAS 1 :
a. The Statement of Changes in Equity must include the following: i. Total comprehensive income for the period, showing separately amounts attributable to parent & noncontrolling interest ii. For each component of equity : effects of retrospective application/restatement( errors& change in 63 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
accounting policies per IAS8) iii. For each item, a recon of amounts changes from beginning to end of period , showing separately amounts from P&L and OCI iv. Amounts of transactions with owners showing separateky contribuitions & distributions to owners and ownership interest changes in subsidiaries that did not result in a loss of control. b. Note: dividends per share may not be displayed on face of P&L or SFP at all. They go in StChEq or in the Notes.
PER IAS 1 : THE NOTES

a. For each reserve, a description of nature & purpose must be shown in the Notes. b. If any reserve combines more than 1 compnenet of equity, and analysis of OCI by item should be provided , either in statement of changes in equity or in the notes.
OWN NOTES:
Note:Rem: in exam watch out for the pref. shares given at date of current balance sheet, but the other shares at date of last balance sheet.So all this years share transactions on Pref. shares are to be subtracted from value given on balance sheet to get opening balance for this year on your Statement of changes in Equity. 1) A statement of changes in equity forms part of the financial statements. Essentially, what is required is a reconciliation of equity at the beginning of the reporting period with equity at the end of the reporting period. 2) The statement should include the following: a) Total comprehensive income for the period, showing the total amounts attributable to owners of the parent and to noncontrolling interests separately; b) The effect of changes in accounting policy and the correction of errors for each component of equity; c) The amounts of transactions with owners in their capacity as owners, showing contributions by and distributions to owners separately, and including issue of shares, buy back of shares, dividends paid and transfers between reserves d) For each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, and e) Dividends paid for the period and related dividend per share can be disclosed either in the statement of changes in equity or in the notes. 3) Notes: a) It seems dividends paid and related dividend per share can either appear in the notes ,or in the actual statement , depends which you want.???check what else??? b) It does not seem that you ever put numbers next to the lines to indicate where in notes to find each item like in Income stat or Bal sheet in this stat. chnge. equities 4) General Method: a) Only where balances are transferred internally between other columns eg: transfer retained earnings to CRRF, does it not affect the Total column on far right, the rest does. b) If you give comparative figures, then do year 1 first , then year 2 after it below(see example) c) Start with : Correction of Errors from previous year .(see example) then restate the balances in next line. d) Changes in accounting policy all go in one line,if changed at end last/beginning of this year then do a extra line below to restate ALL the balances.( if done in mid year etc??? dont know whether to restate below or not???) e) All Total Comprehensive Income (or profit) goes in 1 line next to each other, incl. Revaluation Reserve increases + Normal profit+ other.(IN EXAMS : do all on 1 line he specially indicated this,not separate) f) All redeeming pref shares +CRRF transfers go in 1 line(see example)(but put on separate lines for the exam) i) Note: For this retained earnings only ever goes to CRRF, it NEVER gets less otherwise from redemption! so if shares are issued to pay for redemption, the payment only relects in 1 column: Pref.Shares Column , not in retained earnings column at all!! ii) Note : all share premiums paid out of profits/ retained earnings, MUST get subtracted from Retained Earnings, it does NOT just go with other expenses for the years( ledger account gets written off/transferred too) iii) For REDEMPTION OF REDEEMABLE EQUITIES: the redemption or issue of any shares is NEVER shown in RETAINED EARNINGS in ANY WAY EXCEPT for the transfer to the CRRF from one of the DISTRIBUTABLE RESERVES, if needed.It seems odd, because if you must pay out of retained earnings for a redemption, then it seems one should show it 64 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
comes out of retained earnings in the statement, but you dont because it is a capital transaction and comes from bank, not retained earnings.So the capital and asset balance out , so you only show the capital side in this statement. g) ALL Dividends paid in one own line. (but for exams do each class of share on own line) h) You can mix up order of the lines, but not too much. i) . To Realize a Revaluation Reserve over a period :If some part of the Revalution Reserve/Surplass (a non-statutory reserve ie: if company does not want to decare a revaluation of assets as profit) is to be Realised over the remaining useful life of the asset ,it means each year you move a proportion(eg over 15 years = 1/15 per year) of the Revaluation Reserve to Retained Earnings/Accumulated Profit- but what about tax?. j) Writing off preliminary or other expenses gets its own line-all in 1 go- : total CONTRA share premium.You just subtract off share premium and also off total, nothing else leave retained earnings etc. alone. k) REM: check all to/from Loans % `s in expenses for left out bits, and any other similar calculations, examiner loves to make a mistake here disguised as already worked out for you. l) Other Income could also contain some Trade and other Receivables of an abnormal type. m) You seem to have to do a Revaluation Reserve column in statement of change in equities, for any asset revaluations done. (Must you or is it optional?) n) ISSUE OF SHARES: you never put anything in Retained Earnings for an issue of shares, it gets left out completely. Just share column and total column are affected! ( bank is contra to shares acc., not retained earn..) o) There are more items/things to be dealt with, but only this much done so far NDR(non DR(distribut DR DR
distributable reserve) able reserves)
DESCRIPTION
ORDINARY
SHARES
PREFERENC
E SHARES
SHARE PREMIUM
CRRF (CAPITAL
REDEMPTIO N RESERVE FUND)
REVALUATI
ON SURPLUS RESERVE
b/d Includes this in same line as per standards
MARK TO MARKET RESERVE
GENERAL RESERVE
RETAINED EARINGS /ACCUMUL

ATED PROFIT
TOTAL
Balance on 1 January 2005 Total Comprehensive Income
b/d
b/d
b/d
b/d
b/d
b/d
b/d Profit after tax , but before anything else
b/d
EXAMPLE 1 from textbook : Note: share capital is split between ordinary and preference, not both in one like example below this one.
EXAMPLE 2 from UNISA study guide 2009: Note: share capital is not split between ordinary + preference ,both are in one here(see 65 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
opening balance):
EXAMPLE 3 from IFRS textbook : Note: share capital is not split between ordinary + preference ,both are in one here:
3..REVENUE : IAS 18 (AC111) ; SIC31(AC431); ED204; CIRCULAR09/06; IFRIC12(AC445); IFRIC13(ac446); IFRIC 15 (AC448) EXAM QUESTIONS GUIDE: 1. Bad debts : Mention uncollectable amounts already recognized as revenue NOT deducted but seen as an EXPENSE for 1 Mark ( ! even if no bad debts happened in question! ) 2. Measurement at FAIR VALUE : for all questions mention this 1 mark. 3. Discount: a. Split into Possible discount / Revenue and only a portion is recognised as Revenue immediately , b. Discount only recognized permanently if Payment before final date to claim, or ELSE see c below c. Possible Discount is reversed back into Sales recognized as Revenue d. 4. Credit Terms: a. Installments or / and Later Payment means : Split into a financing transaction , (incl. a lower rate than market.) b. Discount rate determined by i. Market Rate ii. OR Rate Implicit in transaction c. Interest is Recognised AS IT IS EARNED & on a TIME-PRPORTION BASIS. 5. SALES : 3 X Probability of flow + 2 X Measurement = 5 Points. 2 MARKS per point : - 1-give the rule first ,2- then how rule works in question. a. REM : indication benefits will flow contractual installments to be paid term(legal weight) = 1 MARK, and Deposit already paid = 1 EXTRA MARK since incentive to not loose deposit. 6. SERVICE : 1 X Probability of flow + 3 X Measurement = 4 Points, 2MARKS per point : 1-give the rule first ,2- then how rule works in question 7. ROYALTIES/DIVIDENDS/INTEREST : just mention : Probability of Flow + Measurement at fair value , then: a. Interest = effective interest method. b. Royalties = per contract c. Dividends = approval by AGM after BOD .
OBJECTIVE 1. IAS18 deals with PRIMARILY 1st : 1-WHEN and Secondarily 2nd: at 2-WHAT value revenue must be recognized. SCOPE 2. IAS 18 DOES NOT INCLUDE OTHER INCOME . REVENUE IS NOT OTHER INCOME : see definition of revenue below : it says for normal operations and thus DOES NOT INCLUDE any income that is not from normal operations of entity. Other income like capital gains or interest from money lent out if it is not a part of the core business of the entity etc is not covered by IAS18. Book says income and revenue are 2 VERY different terms here. 3. What TYPES of REVENUE DOES & DOES NOT - IAS 18 deal with ? (any income that has actually been classified as revenue, even certain types of this revenue are covered by other IASs , and not IAS18 ; as follows) 3.1. It deals with the treatment of revenue arising from the following events : 3.1.1. Sale of goods 3.1.2. Rendering of services (except construction contracts eg surveyors, dealt with under IAS11.) 3.1.3. Use by others of assets of the entity,yielding interest,royalties,dividends
3.2. IAS 18 DOES NOT DEAL WITH REVENUE from : 3.2.1. Lease agreements 3.2.2. Dividends from investments that are equity accounted 3.2.3. Insurance contracts of insurance companies 3.2.4. Changes in the fair value of financial assets and liabilities, or the disposal thereof 3.2.5. Initial recognition and changes in the fair value of biological assets and agricultural produce related to agricultural activities 3.2.6. The extraction of mineral ores 3.2.7. Changes in the value of other current assets 3.2.8. initial recognititon of agricultural produce RECENT IMPORTANT CHANGES 1. The treatment of discounts rebates & extended settlement terms was treated differently in SA to the rest of the world. Thus circular 09/06 was re-issued in 2006 to further explain these matters. 2. CIRCULAR 09/06 STATES THAT : cash & settlement discounts must reduce revenue/purchase costs of inventory ,as is the case with trade discounts..It must NOT be shown under other income/expenses as an expense item or an income item discount granted NOR as discount received.Further more rebates need not necessarily be offset against revenue/purchase cost of inventory the treatment would depend on the applicable terms when these are granted.Deferred settlement terms would lead to the separate recognition of finance income or expenses (in addition to the revenue or purchase cost of of inventory recognized) where the settlement term is extended beyond the normal credit term for the specific operation or business. DEFINITION: Defiition :Revenue : is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity (note so other income is not covered) when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Definition :Fair value (IAS18.7)Changed to : price that would be received to sell an assets or paid to tranfser a liability In an orderly transaction Between market participants At the measurement date is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arms length transaction. 1. . MEASUREMENT AND RECOGNITION REQUIREMENTS OF REVENUE: PER IAS18 1. RECOGNITION: 1.1. Probability of Future Economic Benefit (flowing to the entity- there must be probability of) 1.2. Requirement of Reliable Measurement (must be able to be measured) 1.3. (each type of Revenue goods/royalities etc has a different set to fit in the above) 2. MEASUREMENT: 1. AT FAIR VALUE OF CONSIDERATION RECEIVED OR RECEIVABLE unless this cannot be determined, then the fair value of goods given up is used instead (only exception is barter of dis-similar advertising services)- note that PPE is measured at fair value of consideration PAID, while revenue is at fair value of consideration
receivable .(see definition of fair value)
1- MEASUREMENT OF REVENUE: 2. Note: for barter transactions , IAS 18 revenue says to use 1st Fair value of item received , But PPE IAS 16 says to use Fair Value of item given up! 3. If there is a conflict between IAS PPE & IAS Revenue, (if you exchange a machine for revenue goods) then one simply must choose one and consistemtly apply it, and state in notes your policy clearly.
3. MEASUREMENT OF REVENUE :as per IAS 18 4. MEASUREMENT: AT FAIR VALUE OF CONSIDERATION RECEIVED OR RECEIVABLE unless this cannot be determined, then the fair value of goods given up is used instead. ias18.12 for barter . note that PPE is measured uat fair value of consideration PAID, while revenue is at fair value of consideration receivable .(see definition of fair value) 1. 2. SUBSTANCE OVER FORM OF TRANSACTIONS OCCOURING SIMULTANEOUSLY 2.1. One must use substance over form to decide where all the following transaction get split or not. 2.2. Sales Commission : does it get offset against revenue NO , it is an expense, never part of revenue , never offset at all. 2.3. Sale & Leaseback : funny enough this is viewed as a single transaction not 2 separate. See Leases 2.4. Maintenance Plan included in Price of a Car : the single transaction must be split into 2 separate transactions. Then the maintenance part goes to an Accrued Maintenance Plan Income account and each year the maintenance value done that year is transferred to Maintenance Income from the accrued account and only then gets recognized as income/revenue for the year. Before that it is still unearned ! (Is the unearned part left in the account a liability or what yes it is a liability under what heading does it go in the Fin Stats- it is owed to buyer of car so a long term liability with a short term portion (the next 12 months portion coming) or how exactly does it get treated?) 2.5. Collections made on behalf of third party : eg VAT : This must be split as it is NOT part of revenue at all!!also any other collections made on behalf of a 3rd party gets treated the same way. 3. SWAPPING SIMILAR GOODS When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. Eg suppliers swap milk / oil in different regions to supply demand timeously. But if the goods are dissimilar it IS recognized.(how will you record this is in your books?- Sale invoice = sold = 1 truck of milk , price charged =1 truck of milk. , or do you issue no invoice- what will your General Journal entry be?)ans:use a separate book asa record, it does not go in accounting books at all. 4. DISCOUNT : Trade disc./Cash disc. /Rebates/& SETTLEMENT DISCOUNT : as per world standards SA had to start using new method of treating discount(+/_ 2005) IAS18.10 & Circular 09/06 5. SUMMARY : SUMMARY : SETTLEMENT DISCOUNT METHOD: 5.1.1. The full new rule is that estimated (you must estimate % , need not be 100% will take it) setllment discount that will be taken must be deducted from revenue immediately on sale to satisfy IAS 39 reqquiremnt of Fair Value of financial assets ei debtors.
5.1.2. Here the Settlement Discount Granted account is a REVENUE contra account for SFP, and the Allowance for Settlement Disocount granted account is a DEBTORS CONTRA ACCOUNT for SFP. 5.1.3. An alternative to using Settlement discount Granted & Forfeited accounts is to leave them out and just use the Allowance for settlement Disocunt and revenue accounts- so you deduct it from revenue on initial recognition and work direct in reveue account.either/or. 5.1.4. Thats it simple. Dont use the gross method that is the old SA method basicly just a stuff up.
SUMMARY : EXTENDED PAYMENT TERMS METHOD : 5.1.5. The Accrued Finance Income Account is a DEBTOR CONTRA ACCOUNT. It goes with it in the SFP. 5.1.6. Every month you transfer that months interest from Accrued Incterest to Interest Income. 5.1.7. REM: you cannot divide 5000 interest over 5 months by 5 and say 1000 per month! It gets less each month as one pays off cause it is a % of the total debt outstanding amount that one uses to get interest payament per month. If they give you the cash price, and a higher on credit 6mnths later price, the way to get the interest rate so you can work out the interest MONTHLY payments is: easy.
5.2. LONG FORM: HISTORY: (revamp this section completely stuffed) 5.2.1. Because of this, circular 09/06 was reissued in 2006 , which stated , amounst other things, that : cash & settlement discounts must reduce revenue/purchase costs of inventory ,as is the case with trade discounts. It must NOT be shown under other income/expenses as an expense item or an income item discount granted NOR as discount received. 5.2.2. The discount/interest must be accounted for in the normal profit/loss section of the Fin.Stats. as normal Finance Interest over the effective life/period of the transaction.(like a loan)(also as per IAS 39) 5.2.3. NOTE: There are 2 big types of discount specially dealt with by accounting standards, and there is a big difference between them: 1-Settlement discount granted and 2-Finance charges . It might seem as if they both deal with finance charges, and that any income from interest here should be recorded as finance charges, BUT NOTE: IT IS NOT done this way : Settlement discount is treated as part of (written back to) SALES(REVENUE) in SCI if the debtor does not pay in time,??? BUT Finance charges for the credit granted in a sale (??or is it a purchase??) are treated as Finance Charges (is it OTHER INCOME finance charges?in the SCI.??? 5.2.4. :The required accounting that it indicated typically gives rise to an adjustment to the amount of revenue recognised on a sale, or the cost of purchase of an item of inventory.(vertabim circular 09/06) 5.3. CASH DISCOUNT TRADE DISCOUNT & VOLUME REBATES : : previously cash discount was recognized in SA as a separate expense, But as per IFRS it should be ignored completely, and thus treated as a plain reduction in the price same likea trade discount-and not shown in the books at all. Also ,incorrect treatment of this in any previous years, if material , must also be corrected retrospectively in terms of IAS 8. Trade discounts & volume rebates are to reduce the amount of revenue (PRICE) directly ,and are not recognized as an expense , so they just reduce the price you charge and are NOT recorded separately anywhere in the books. 5.4. REBATES : 5.4.1. There are many different kinds of intricate rebates which companies may give. (like special arrangements) Generally ALL the rebates need to be estimated at the time of sale and be shown as a reduction in revenue. 5.4.2. Some rebates are only given once purchases for the year have gone over a certain level for that customer, then he is refunded the rebate of all purchases to date. It seems one must make a Possible rebate separate account and split revenue , same as with a possible settlement disclount method here. ??not sure??( per circular 09/06.21 reimbursments of selling expenses are not included in cost of sales/inventory per circular 09/06.21 ?) so if you give a rebate like this to someone not sure if you must
deduct from revenue or not-ANS: own idea is probably :reimburse agents selling expense then this is a selling expense on your part. 5.5. SETTLEMENT DISCOUNT RECEIVED : 5.5.1. This is not really part of revenue, but part of purchases ie cost of sales. But . 5.6. SETTLEMENT DISCOUNT GIVEN : 5.6.1. METHOD OF ESTIMATING : one is allowed to estimate that eg only 80% of settlement discounts wll be taken .Then you only defer as accrued interest income 80%of settlement discount you work out, not 100%. BUT : 5.6.1.1.BUT : if later more than 80% of people take it YOU MUST TREAT T AS A CHANGE IN ESTIMATE: and write it out of revenue and into early settlement allowance account , then again out of accrued interest income on same day CONTRA debtors. 5.6.2. THE ALLOWANCE ACCOUNT IS A SFP FIN STAT CONTRA ACCOUNT TO DEBTORS- so it reduces debtors in the SFP on FIN STAT date- as it is a discount that will probably be taken. It is not a SFP or SCI heading it is a SFP CONTRA account to debtors-so it reduces debtors in the SFP! Thats its fin stat account. 5.6.3. Q is the Allowance acc.for discount a debtor contra account for the SFP fin stats- just to be written off directly against debtors and only debtors nothing else at all (no end of year adjustments etc) when transferring from Trial Balance to SFP.? yes 5.6.4. For method 1 & 2 separately , how does it work with 5% for 30 days or 10 % for 10 days discount terms offered on the sale depending when you pay , and writing back if they take the 30 days after you made (prudence) provision for 10%. ans:?/you must choose the most likely one 5.6.5. BIG QUESTION : pg 336& 337 descr. Acc book : For method 1 & 2 separately, how does VAT get accounted for together with the other entries, esp. for the write back of both if the discount is not taken? REM you charge 100% VAT (without deducting the discount)on INVOICE and must pay sars this BEFORE the customer even decides whether is is going to take the discount or not ---??? Answ:think probably goes to full value to vat output on sale, then if any discount is taken just do revenue CONTRA vat input this time so sars can pay you back( vat output might be empty that day) 5.6.6. How does pastel accounting deal with this auto or manual how does one do manual for 100 000 transactions?what about other accounting packages? 5.6.7. Possible Settlement Discount must be deducted from revenue at initial recognition.(per circular 09/06) it must be estimated on the selling date and be presented as a reduction in revenue. There are several different ways to address the problem and how to jounalise it : 2 main methods are shown here , NET method is the one chosen by UNISA. net treatment is probably more correct (initial sale but can lead to VAT problems , but gross method more effective, from an accounting perspective. 5.6.8. HISTORY : SA never used to do this but per circ 09/06 now must. In order to comply with International Accounting Standards, South Africa must take the necessary corrective action when accounting for settlement discount. At very least, it should be ensured that instead of disclosing an expense discount allowed, or an income discount received, these amounts should be offset against revenue or the cost of the purchase respectively. At the reporting date the appropriate adjustment for settlement discount not yet claimed should be made. The way South African entities have interpreted these situations therefore represents an incorrect application of previous GAAP in the past and should be treated as a prior period error, if material . In terms of IAS 8 - Accounting policies, Errors and Changes in Accounting Policies, the error should be corrected retrospectively and prior period figures restated ie not a change in accounting policy but an error. . Where amounts are material, separate disclosure is required to highlight to the users of the financial statements the change in the measurement bases applied to revenue and the amounts of consequent adjustments to each financial statement line item affected.
1.1.1. VAT : note that vat is charged by you on the settlement discount in the original sale, and is charged on the possible discount at the normal rate14% and paid to SARS. But if the discount is then eventually taken and not forfeited, then the VAT is claimed back as a VAT input adjustment. The GROSS method below is probably better for Vat treatment , the NET may lead to problems with vat charged on sales. 1.1.2. 2 METHODS OF JOURNALISING : 1.1.2.1. NET METHOD : The allowance account for settlement discount method .(Preferred by UNISA). 1.1.2.1.1.See example below. For method 1.1.2.1.2.VAT: how does this get done here and write back ? REM 100% Vat charged on invoice.! 1.1.2.1.3.Allowance Account for Discount : this is a (SFP) liability account, goes with DEBTORS : Current liabilites(true or not?) 1.1.2.1.4.WRITEING BACK : If Discount is Not taken: simple :you write allowance account back into revenue/ salesONLY. No VAT adj. because Vat is Originally accounted at full 100% per SARS rules - and even paid already probably. 1.1.2.2.GROSS METHOD : (you cannot really use this method casue iot is the old SA method, use the net method above instead) 1.1.2.2.1. See Example below for method 1.1.2.2.2.VAT: how does this get done here and write back ? REM 100% Vat charged on invoice.! 1.1.2.2.3.Allowance Account for Discount : this is a (SFP) liability account, goes with Debtors Current liabilites as a revenue contra account (true or not?) 1.1.2.2.4.Settlement Discount Granted Account : this is either 1- a revenue contra account like acc depr is to assets and never shows in SCI , only in the books , or it is a 2- account that show in the SCI under admin expenses and 3- is it cleared each year end to trading account to get profit so it is zero at begin new year (BUT what happens to transactions where it has not been decided yet if customer takes discount or not at year end?) 1.1.2.2.5.WRITEING BACK : If Discount is Not taken: simple :you write Allowance for Settlement Discount account off against CONTRA Settlement Discount Granted account ONLY. No VAT adj. because Vat is Originally accounted at full 100% per SARS rules - and even paid already probably. 1.1.2.2.6.As per tutotial letter, this is another way of doing the gross method:(how does this work exactly, which is the right one and what does one do here??)
1.1.3. Matching Principle : The allowance is just written back against sales if the debtor does not pay in timeso it could cause an increase in sales in a future year if the period allowed extended into a future period. So if the write back to sales occours in a future period this is half logical because you now earned interest of sorts in a follow up period for the guy not paying in time so you cancelled his discount ,but half not logical because this discount cancelled which is more similar to interest now has to get written up into sales ???but it is not shown as interest but as sales so the matching principle seems to go a bit wrong here????. 1.1.4. See the 2 Methods : 1- GROSS and 2- NET method of journalizing in example below:
2. CREDIT TERMS GRANTED / TIME VALUE OF MONEY / DEFERRED PAYMENT: 2.1. IAS 39.43 as well as Circular 09/06 confirm that the time value of money must be taken into account when the fair value of money and an associated debtor is measured. Circular 09/06 also specifically refers to interest free credit terms eg 6 mnths interest free : here it refers us to : IAS 39(AC 133) Financial Instruments: Recognition and Measurement : it applies to the receivable in such circumstances, and the effect of the time value of money should be taken into account in these instances as well. Even if normal credit terms allow just 7 or even
30 days interest free credit, these 7 30 days must be taken into account as a finance charge and thus also a reduction in revenue The way South African entities have interpreted these situations therefore represents an incorrect application of previous GAAP in the past and should be treated as a prior period error, if material . In terms of IAS 8 - Accounting policies, Errors and Changes in Accounting Policies, the error should be corrected retrospectively and prior period figures restated ie not a change in accounting policy but an error. . Where amounts are material, separate disclosure is required to highlight to the users of the financial statements the change in the measurement bases applied to revenue and the amounts of consequent adjustments to each financial statement line item affected. ( (if it is a low interest rate is used then must you go and find out what the current standard rate for those transactions is and use only the difference(not all because you are going to charge him the low interest at the end of each month anyway??? Yes or no) as your (?extra?) financeing allowance accued finance income (?and &?) revenue? (????And the same for purchases you make do you also do this y or n????) DISCOUNT RATE USED is EITHER : 2.1.1. Current Interest Rate applicable to similar circumstances with a similar risk OR 2.1.2. OR Interest Rate Implicit in the transaction , in other words , the rate that discounts the transaction amount to the current cash price. (it seems if the implicit interest rate is 0 or lower than ruling interest rate then use the ruling similar type interest rate is this true?) 2.1.3. OR If neither the implicit NOR the current interest rate is known, then the selling price is recorded as the normal cash price and the difference between the ACTUAL price charged and the normal cash price is treated as interest. Edgars for example : sells for both cash or 6 mnths interest free credit at the same price. Here the implicit interest rate OR the ruling interest rate for similar transactions must be used to determine the fair value of revenue & the debtor, taking into account the time value of money.(WHAT DO THEY END UP USINGIMPLICIT=0 or RULING = 29% etc???-Ans : it seems it is a rule to use the ruling one) NB : CALCULATING THE INTEREST PORTION using time value of money formula !NB!
For example, Company A sells inventory with a cash selling price of R142 500 to Company B and agrees that Company B can settle at the end of six months with a payment of R150 000. The effective interest rate that discounts the future cash flow of R150 000 (future value) to the cash sales price of R142 500 (present value) is 5,1513% for six months, or an annual equivalent rate of 10,3%. Assuming that the 10,3% interest rate is market related and would apply to similar transactions and under similar credit risk exposure, the difference of R7 500 (R150 000 R142 500) represents the financing component and should be recognised over the period of the debt as interest income. REM : it is to be inputted as PV and +FV , or visa versa, or calculator wont work.. see 2011 tut letter 102 for this exercise- in revenue section still to copy exact input for calculator for this that was shown there,
1. Watch out , it is a Very tricky way to do this on calc. even though it looks easy!!! There are 3 different ways a question could be asked : a. IRR For Many Unequal INSTALLMENTS : rather use this easy method for everything, it will always work! but you can also use the other 2 mad methods below sometimes i. For this method you use the IRR and NPV method on calculator(not AMRT) ??? how to do it yet. b. PV For One INSTALLMENT : The full amount is paid on last minute of last day :
i. Easy : USE the calculator with sale price as FV , then PV = REVENUE (without any interest) and FV-PV= interest portion. there is only 1 PMT so treat it as a PV calc. c. PMT For Many equal INSTALLMENTS : If the amount is paid off in installments each period : so you MUST USE the PMT function on calculator ( annuity formula NOT PV or FV formula) to calculate the total interest paid off. THIS IS BECAUSE EACH INSTALLMENT REDUCES THE PRINCIPLE SO THE INTEREST RATE ONLY WORKS ON THAT LEFT, NOT THAT PAID OFF ALREADY!!!!!!!. Watch out , it is a Very tricky way to do this on calc. even though it looks easy i. For compounded MONTHLY =!!! WATCH OUT HERE---- : Only PMT & N & i = Calc PV works here, do not include the principle as PV or FV , it is even impossible to get the FV ie actual price charged from this PMT method ,because that is like saving up , you can only get PV. THIS IS A VERY UNIQUE calculation here that only works this one tricky way!!!! Watch out! ( REM for i it is eg: 12% / 12mnths= 1% per N if using months) ii. For compounded YEARLY = if you are working in years as period there is no problem , just use the method above , but if you are working in months : same as above in (i) EXCEPT you must first work out your APR interest rate from your EFF annual one they give you.(since it is compounded yearly then the yearly quoted rate is a eff not a apr , but it would be seen as a apr if compounding was mnthly ie: just visa versa.) So just enter 12(x,y) & 2ndFuncAPR. (I think, not sure!) Then above method after. Then you can divide this apr by 12 to get the monthly interest rate to use in (i) above method as usual from there on . 2. Note : if the question says the normal interest free credit term of the company is 30 days, but 6 months was given in this case, just ignore the 3o days thing it is a red herring, use the normal standard method over full 6 months still. 3. For interest sakes only: To get the TOTAL Interest in % OVER 2 YEARS IF ONLY GIVEN p/a interest , Calculating for 1 year is easy, but if it says 10% per year over 2 years, you must use FV formula or calculator to work it out. Just ALLWAYS use 100 (ie %) as the PV amount for FV formula : = PV x ( 1 + i)t = 100 .(for 10%pa over 2 yrs = 100x 1.012=121) Then your answer LESS 100 will be the interest charged in %. So the total interest was 121-100=21% .BUT to get the interest you say 21% / 121% x SalePrice = interest portion to go to Accrued Interest(not 21/100! ). REM for FV formula use 10% as 0.1 decimal ! JOURNALISATION method 2.1.4. NB : EVERY END OF MONTH MUST ?? the months finance charges are transferred from ACCRUED INTEREST INCOME to INTERESTS INCOME , not just all at end of term or when debtor pays , or only at end of term/or payment date??when/how? AND at end of Fin YEAR do you have to do any adjustments to account for interest actually earned to date or not? if it is not done monthly but at end of term? How does this work? 2.1.5. The amount you work out as being the interest income finance charges per circular 09/06 must deducted from REVENUE/ SALES and be separately transferred to an allowance account called Accrued Finance Income UNTIL the debtor pays, and not sure? Either at end of term OR each month end OR at Fin Yr end + Term End - that months portion of interest now definitely incurred then gets transferred again to Finance Income(interest) account??: The reason you use an allowance account is because you are not sure if the debtor will pay earlier than his 6 months, because if he DOES PAY EARLIER than the credit term granted , for the months he DID get credit, that % part of the allowance account must go to INTEREST INCOME, and for the months he did not take credit due to paying early, that part must go BACK to SALES/REVENUE from Accrued Finance Income.( it is just a temporary holding account)This only happens
till end of term granted, thereafter it would be a separate penalty interest that would be raised only !(WHERE DOES ACCRUED FINANCE INCOME LEFT AT FIN YEAR END , ACTUALLY GO TO????TRANSFERRED AS A adjustment to FINANCE INCOME or to SALES through the General Journal or just added to finance income WITHOUT JOURNALISING AN year end adjustment like some other stuff is done.?) 2.1.6. GOODS RETURNS: if goods are returned for a credit both revenue + interest + accrued interest must be written back! 2.1.7. Explained : IF THE DEBTOR PAYS EARLY :for the months he DID get credit, that % part of the allowance account must go to interest income, and for the months he did not take credit due to paying early, that part must go BACK to SALES/REVENUE?tru or not?.So if he pays early then the amount you deducted from SALES to treat as an interest charge in order to pretend it is interest to'satisfy circular09/06, would be wrong. So you send the wrong part back to SALES .Note: this does NEVER apply where you actually charge a customer interest as part of his credit terms. That would be treated as a normal loan and no accrued finance income would be raised you would just book the interest charges every month- this accrued finance income is only for no finance charges are actually openly charged and you have to pretend that they are for the sake of circular 09/06 and IAS 18 2.1.7.1. see example below for JOURNALISATION.
USE financial calculator above one and below one.
2- RECOGNITION OF REVENUE NOTESl
NOTES : 1. COMMISSION : any commission PAID to someone for selling an item, MUST be included in the full REVENUE as income , and then deducted as an expense when it is paid out. It is not removed from revenue before
revenue is recognized. 2. WARRANTY PROVISIONS: any amount that is estimated as possible warranty expense is NOT taken out of revenue. It is treated by making a PROVISION so it does not affect revenue at all. 3. SALE AND REPURCHASE AGREEMENT; this is mostly used as a financing arrangement, and revenue isusually not recognized.- nobody gains from a change in assets value AND risks & rewards of ownership do not pass to buyer usually either in these arrangments . Like Mubarak or something. 4.
THE BASIC REQUIREMENTS FOR RECOGNITION FOR ALL REVENUE , NO MATTER WHAT TYPE: IS REM definition of revenue :the probable future economic benefit part leads to below points(+ by incr. in asset or decr. In liability , etc etc.) The 2 requirements for the recognition of revenue as per IAS 18 are: 1. Recognition Criteria (for elements of fin stats, in order to be part on SCI or SFP) 1.1. Probability of Future Economic Benefit 1.2. Reliability of Measurement (2) SALE OF GOODS: 6 POINTS FOR BOTH 1. To decide for SALES specifically if the 2 Requirements for Recognition (1-Future Economic Benefit & 2-Reliably Measureable) are properly met, there are a number of items for each one that must be checked (these items are vertabim per IAS18) 2. There are 5 points exactly for probability & measurement combined for SALE OF GOODS . 1. REVENUE SHALL BE RECOGNISED WHEN THE FOLLOWING CONDITIONS MUST BE SATISFIED : (1) For there to be a Probability of Future Economic Benefit there are 3 main rules in IAS 18 , only: (a) WHEN SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP HAS PASSED :The entity has transferred to the buyer the SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP of the goods . (i) Insignificant Ownership can be Retained If entity retains only insignificant portion of ownership solely to protect collectability, eg legal title retained in installment sale , OR if refunds are allowed AND reliable estimate of future returns is available, (must have an estimate) it is still regarded as a sale substance over form applies. (ii) Legal rule on Time of Transfer of Ownership: Legally it is when either: 1. Receipt of goods & services by the buyer (but not if Rewards & Risks have not passed) 2. OR Transfer of Significant Risks & rewards of ownership to Buyer. 3. OR contractually it could be before the above 2 , but this is rare ignore. (b) Neither CONTINUING MANAGERIAL INVOLVEMENT nor NOR EFFECTIVE CONTROL OVER THE GOODS retained The entity retains neither of the 2 to the degree usually associated with ownership. (c) AMOUNT OF REVENUE CAN BE MEASURED RELIABLY (d) COSTS INCURRED OR TO BE INCURRED CAN BE MEASURED RELIABLY (e) IT IS PROBABLE ECONOMIC BENEFITS WILL FLOW TO ENTITY : if a foreign country does not allow foreign exchange payments then there can be no revenue recognized it is legally certain they will never get paid. (i) Note: IRRECOVERABLE AMOUNTS = BAD DEBTS not reduction in revenue: Should it be confirmed later.
2. SUBSTANCE OVER FORM : For example, an entity may sell goods and,at the same time, enter into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together WHERE can this happen so there is NO revenue recorded- (ans: sale & leaseback) HOW DO YOU JOURNALISE THIS SORT OF TRANSACTION? (1) EXAMPLES IN IAS 18 ITSELF of NO SALE RECORDED of situations in which the entity may retain the significant risks and rewards of ownership and thus there NO SALE is recorded. (a) When the ENTITY RETAINS AN OBLIGATION FOR UNSATISFACTORY PERFORMANCE NOT COVERED BY NORMAL WARRANTY PROVISIONS; (b) When the receipt of the REVENUE FROM A PARTICULAR SALE IS CONTINGENT on the derivation of revenue by the buyer from its sale of the goods(if it is stated that unless the customer sells the goods or gets a big contract to do something, he will return it) (c) When the goods are SHIPPED SUBJECT TO INSTALLATION and the installation is a significant part of the contract which has not yet been completed by the entity; (d) When the buyer has the RIGHT TO RESCIND THE PURCHASE FOR A REASON SPECIFIED in the sales contract and the entity is uncertain about the probability of return.( if you can reliably estimate the possible returns and make a provision for it then it is possible to recognize the sale less the provision of course) 3. REQUIREMENT OF RELIABLE MEASUREMENT : 1) THE REVENUE MUST BE CAPABLE OF BEING MEASURED RELIABLY 2) THE COSTS / EXPENSES INCURRED MUST BE MEASURABLE RELIABLY: Revenue and expenses that relate to the same transaction or other event are recognised simultaneously; this process is commonly referred to as the matching of revenues and expenses. Expenses, including warranties and other costs to be incurred after the shipment of the goods can normally be measured reliably when the other conditions for the recognition of revenue have been satisfied. However, revenue cannot be recognised when the expenses cannot be measured reliably; in such circumstances, any consideration already received for the sale of the goods is recognised as a liability ie: as Income Received in Advance.????????what is this as an example- if some stupid expense eg factory telephone bill, cannot be estimated, then how can you not recognize the sale????????PLEASE GIVE AN EXAMPLE OF JOURNALISATION OF A LIABILITY BEING CREATED FOR SUCH AN EVENT ABOVE-
1.
(3) RENDERING OF SERVICES:IAS 18.20-28 The rendering of services requires the performance by the entity of a contractually agreed upon task within an agreed upon task within an agreed period. And for any services ,you only ever at all , per ias18 : When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage of completion of the transaction at the end of the reporting period . The outcome of a transaction can be estimated reliably when all the following conditions are satisfied BAD DEBTS: If uncertainty arises as to collectability of amounts ALREADY included in revenue somehow before- they get treated as and expense ie: BAD DEBTS from here on. REQUIREMENTS FOR RECOGNITION: 1) THE PROBABILITY REQUIREMENT a) PROBABLE WILL FLOW : It is probable that the economic benefits associated with the transaction will flow to the entity
2) REQUIREMENT OF RELIABLE MEASUREMENT: (b) REVENUE AMOUNT MEASURE RELIABLY the amount of revenue can be measured reliably; (c) EXPENSES TO DATE & TOTAL EXPENSES TO BE INCURRED MEASUREABLE : the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.(if expenses cannot be reliably measured, then what?say you cannot estimate What the total costs will be ? how do you journalise any money received for work done so far?) (d) STAGE OF COMPLETION : the stage of completion of the transaction at the end of the reporting period can be measured reliably, and 1.1. Percentage of completion method: IAS 18 .24-28 1.1.1. Revenue is recognized evenly over the accounting periods in which the services are rendered. 1.1.2. The stage of completion is estimated by various methods eg 1.1.2.1.1-surveys of work performed 1.1.2.2.2- % of total services performed to date 1.1.2.3.3- % of costs incurred to estimated total costs. (it seems EXAMS mostly go for this one!) 1.1.2.4.4-% time used to % total time required if possible unless other method is better (it is thus needed that the entity have an effective internal budgeting process to estimate, revisions of budget are allowed by the way)(progress payments by customer often do not reflect work performed vertabim) 1.1.2.4.1. For method -4- above, If a specific act is more important than other acts, recognition of revenue in this way is postponed until this act is performed. 1.1.1. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable, no profit shall be recognized yet.vertabim (means if you cannot measure the stage of completion enough,or if unsure that it will be completed, eg contact is in very very early stages, then only the expenses incurred so far are recognized as revenue- as long as they are recoverable) 1.1.2. If per above 1.1.1 expenses could not be recoverable, but later this changes to are recoverable , then see IAS18.28 for special rule here. 1.2. Reliable measurement can usually take place once the following is established: 1.2.1. The enforceable rights of the parties to transaction 1.2.2. The price 1.2.3. The means of payment EXAMPLES:
INTEREST ,ROYALTIES & DIVIDENDS Definitions per IAS 18: INTERESTcharges for the use of cash or cash equivalents or amounts due to the entity; Preference Dividends : These can be seen as interest , but ONLY if they ARE classified as financial liabilities as per IAS 32 at the time. Eg cumulative redeemeable preference dividends which of course accrue on a time-proportion basis per textbook. ROYALTIEScharges for the use of long-term assets of the entity, for example,patents, trademarks, copyrights and computer software; and DIVIDENDSdistributions of profits to holders of equity investments in proportion to their holdings of a particular class of capital. Preference Dividends : These are also seen as dividends as long as they are NOT classified as financial liabilities as per IAS 32. REQUIREMENTS FOR RECOGNITION: Revenue arising from the use by others of entity assets yielding interest, royalties and dividends shall be recognised on the bases set out in paragraph 30 when the following 2 requirements are met 1) THE PROBABILITY REQUIREMENT (a) it is probable that the economic benefits associated with the transaction will flow to the entity; and 2) REQUIREMENT OF RELIABLE MEASUREMENT (b) the amount of the revenue can be measured reliably.
When these requirements are met then the following then applies : 30 Revenue shall be recognised on the following bases: (a) INTEREST : (MEASUREMENT) : measured using the effective interest method ONLY as set out in IAS 39, paragraphs 9 and AG5AG8; 1. THE EFFECTIVE INTEREST RATE METHOD WORKS LIKE THIS:
NOTE there is a TRAP HERE read this method well!!!!!
i) Remember on calculator to always put a MINUS sign on the PV side when comp. for i else it gives a
ERROR. (NOT ON FV SIDE, THIS GIVES A WRONG ANSWER FOR SOME REASON!!!! NOTE) ii) An effective rate ALLWAYS includes PER YEARLY compounded interest as if it was compounded each year, even if there was only 1 interest payment at the end of 10 years! b) ROYALTIES : (probability requirement) shall be recognised on an accrual basis in accordance with the substance of the relevant agreement; unless, having regard to the substance of the agreement, it is more appropriate to recognise revenue on some other systematic and rational basis. (eg :on a straight line basis over time of contract) (c) DIVIDENDS (probability requirement) shall be recognised when the shareholders right to receive payment is established.( WHEN AGM APPROVES THE DIVIDENDS APPROVED BY THE BOD)
1. General Notes : 2. Remember income already recognized is treated as an expense if it later becomes uncollectable. 3. EFFECTIVE INTEREST RATE: calculation method of :SEE IAS 39.9 VERY FUNNY METHOD _YOU MUST CHECK UP ON IT!!! 4. Dividends are recognized as soon as the last date to register has passed (per IAS18 when shareholders right to receive payment is established. Examples:
1 - Transaction for SALE OF GOODS AND RENDERING OF SERVICES AT SAME TIME 1. The Way to decide which method to use is if the transaction is predominantly a sale and less a service transaction then it should be treated as a sale , and visa versa. BUT where it is impossible to come to a conclusion about the substance of a transaction then it must be apportioned in its 2 components and the relevant revenue recognition principles applied. 2. Eg for a contract for a sale of a motor vehicle which includes a 5 years maintenance contact, the transaction must be divided in 2 and the revenue from the sale must be recognized at the point of sale and the revenue from the maintenance contract deferred and recognized over a period of 5 years.
2 - CUSTOMER LOYALTY PROGRAMS (IFRIC 13) 1. NOTE: 1.1. JOURNALISING DEFERRED REVENUE : 1.1.1. INITIAL SALE: When you do the sale, sale is split between revenue and deferred revenue on CR side and bank(or creditor) alone is on DR side.(see below scan) 1.1.2. REDEMTION OF CREDITS in a later SALE: DEFERRED REVENUE(for write-out redeemed credits) and BANK both on DR side , and REVENUE and NEW DEFERRED CREDITS GRANTED on the CR side . So the cash and credits redeemed are both payment for the item sold. same principle as giving a car (asset) plus cash as payment for something. 1.2. DEFERRED REVENUE goes to SFP , and only goes to P&L once the credit are redeemed or expire.
\ 1.3. ANOTHER EXAMPLE FROM UNISA TUT102

Steak Ltd operates a customer loyalty programme where customers earn one award credit for every R100 they spend (only amounts paid in cash qualify for award credits). Each award credit entitles the customer to a R20 discount on future meals. Its expected that all award credits will be redeemed and the fair value of each award credit granted is estimated at R20. Mr Hungry is a regular customer of Steak Ltd. On 31 March 20.11 he had a lunch bill of R2 000 which he settled in cash. On 30 April 20.11 he again had lunch at Steak Ltd. He redeemed all his available credits, and paid the remainder of the bill of R900 in cash. Dear Student, ( answer below is the journals for this question above)
Dt Bank 2000 (it was 2200 but i think thats an error) CT Revenue 1600 CT Deferred revenue 400 DT Bank 900 DT Deferred revenue 400 Ct Revenue 1120 Ct Deferred revenue 180
r. 86 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
1.4. AGENT:If you collect as an agent anything that must be paid to 3rd party is NEVER recognized as revenue, unless something can expire basicly causing you to get it. If you collect as an agent, the amount collected is a liability/creditor until paid over to agent.You never recognize it as revenue unless you collect it on your own behalf (and then only once your obligations for the credits are completely fulfilled). Any difference/commission is only recognized as revenue once customer claims his points- This can all happen on date of intitial transaction if it is unavoidable then already it seems not sure? See ifric 13.8a1, &2 1.5. COMISSION:if you only earn the commission once your obligations are completely fulfilled , eg when the customer claims his air miles, then the commission is also deferred until the credits are claimed.
2. IFRIC 13 addresses loyalty award credits.These are incentives to buy their products. It applies whether entity runs its own loyalty program or participates in one run by another entity as outsourced service. 3. RULE: one must apply IAS 18.13 and account for any and all award credits as a separately identifiable component of the transaction in which those credits are earned. The value received from initial sale shall be allocated between award credits and other components of the sale. 4. MEASUREMENT : 4.1. The value of the credits can ONLY BE MEASURED IN 1 WAY : 4.1.1.BY Fair Value of the Credits ( means the amount for which the award credits can be sold separately, or use another method of estimation some alternative examples given in IFRIC 13.) To be calc. or estimated per % of those issued , that usually actually redeemed in the past. If 4.1.1.1.Eg if agent is used, say cost per credit you must pay agent plus a small profit markup both dont get recognized until the credits are redeemed or expired- only then is the revenue recognized together with expense. (how does this work? Why not use the cost to you of these credits, ie cost price, why use cost plus a markup here- ?) This from AG3 end of IFRIC 13. 4.1.1.2.One can either just use the estimation of fair value of credits as the deferred amount, or you can also do a complex calc to attach a value to credits by saying a part of credits given is profit markup. So credits given in rands + selling price = true selling price . Then you only defer that portion % of the rand fair value of credit given that is the % of credits/true selling price * money selling price ---see example below scanned in. 4.1.1.3.A If customers can choose from a range of different awards, the fair value of the award credits will reflect the fair values of the range of available awards, weighted in proportion to the frequency with which each award is expected to be selected. 4.1.1.4.An entity may estimate the fair value of award credits by reference to the fair value of the awards for which they could be redeemed. The fair value of these awards would be reduced to take into account: 4.1.1.4.1.The fair value of awards that would be offered to customers who have not earned award credits from an initial sale; and 4.1.1.4.2.The proportion of award credits that are not expected to be redeemed by customers. 5. IF ESTIMATES OF AMOUNT TO BE REDEEMED CHANGES : Onerous Contracts : If at any time the unavoidable costs of meeting the obligations to supply the awards are expected to exceed the consideration received and receivable for them (ie the consideration allocated to the award credits at the time of the initial sale that has not yet been recognised as revenue plus any further consideration receivable when the customer redeems the award credits), the entity has onerous contracts. A liability shall be recognised for the excess in accordance with IAS 37. The need to recognise such a liability could arise if the expected costs of supplying awards increase, for example if the entity revises its expectations about the number of award credits that will be redeemed.THEN BOTH LIABILITY AND DEFERRED REVENUE TOGETHER GET WRITTEN ACROSS WHEN CREDIT ARE FINALLY REDEEMED. 6. RECOGNISING REVENUE 6.1. ENTITY SUPPLIES AWARDS ITSELF : If the entity supplies the awards itself, it shall recognise the consideration
allocated to award credits as revenue when award credits are redeemed and it fulfils its obligations to supply awards. The amount of revenue recognised shall be based on the number of award credits that have been redeemed in exchange for awards, relative to the total number expected to be redeemed so when the customer eventually redeems his credits in return for goods or whatever, that is the day you recognize those redeemed credits as REVENUE , not before- so the loyalty credits are a liability(like payment received in advance) and are taken as revenue/ payment received when the company supplies the actual award goods to the client when he redeems his credits. 6.2. AGENTS :If a third party supplies the awards, the entity shall assess whether it is collecting the consideration allocated to the award credits on its own account (ie as the principal in the transaction) or on behalf of the third party (ie as an agent for the third party). 6.2.1. If the entity is collecting the consideration on behalf of the third party, it shall: 6.2.1.1. measure its revenue as the net amount retained on its own account, ie the difference between the ??consideration?? allocated to the award credits and the amount payable to the third party for supplying the awards;(meaning any commission reciveived from the agent by entity for awarding credits is treated as a separate transaction completely and not included in any revenue relating to the original sale transaction : see example 13.14 below for how to work this out( VERY TRICKY) 6.2.1.2. recognise this net amount as revenue when the third party becomes obliged to supply the awards and entitled to receive consideration fordoing so. These events may occur as soon as the award credits are granted. Alternatively, if the customer can choose to claim awards from either the entity or a third party, these events may occur only when the customer chooses to claim awards from the third party. 6.2.2. If the entity is collecting the consideration on its own account,but still using an agent, it shall measure its revenue (not costs?) as the gross consideration allocated to the award credits and recognise the revenue (not costs?) when it fulfils its obligations in respect of the awards. 7. OTHER ESTIMATION TECHNIQUES : In some circumstances, other estimation techniques may be available. For example, if a third party will supply the awards and the entity pays the third party for each award credit it grants, it could estimate the fair value of the award credits by reference to the amount it pays the third party, adding a reasonable profit margin. Judgement is required to select and apply the estimation technique that satisfies the requirements of paragraph 6 of the consensus (IFRIC 13) and is most appropriate in the circumstances. Examples::
3 - SERVICE CONCESSION ARRANGEMENTS (IFRIC 12 AC445) 1. This applies where a government(only) has given an operator the right to charge for a service(eg a toll road) in return for maintaining & operating the service. 2. This Interpretation applies to public-to-private service concession arrangements if: 2.1. the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price and
3.
4.
5.
6.
2.2. the grantor controlsthrough ownership, beneficial entitlement or otherwiseany significant residual interest in the infrastructure at the end of the term of the arrangement. Infrastructure used in a public-to-private service concession arrangement for its entire useful life (whole of life assets) is within the scope of this Interpretation if the conditions in paragraph -2.1- above are met. Paragraphs AG1AG8 provide guidance on determining whether, and to what extent, public-to-private service concession arrangements are within the scope of this Interpretation. This Interpretation applies to both: (a) infrastructure that the operator constructs or acquires from a third party for the purpose of the service arrangement and (b) existing infrastructure to which the grantor gives the operator access for the purpose of the service arrangement. This Interpretation does not specify the accounting for infrastructure that was held and recognised as property, plant and equipment by the operator before entering the service arrangement. The derecognition requirements of IFRSs (set out in IAS 16) apply to such infrastructure. METHOD: 6.1. The operator may receive 1-financial asset[use IASs 32 and 39 and IFRS 7] (guarantee of full payment or shortfall payment by Gov.) or 2- intangible asset [4547 of IAS 38 ](right to charge eg toll fees) in return for his services. The fair value of these must be recognized as revenue, as per IAS11 (construction) and IAS 18. Costs are also accounted for per IAS18. 6.2. If there are more than 1 job done by operator eg construction & operating, , consideration received or receivable shall be allocated by reference to the relative fair values of the services delivered, 6.3. I think this means you must value the asset at fair value by using formula in mngmnt acc. For calc. value of an investment ie: per returns expected to come in over no. of years formula 6.4. IAS 37 must be used to account for any terms of contract requiring the facilities to be restored at end of contrct period ie: at the best estimate of the expenditure that would be required to settle the present obligation at the end of the reporting period. 6.5. Borrowing costs : In accordance with IAS 23, borrowing costs attributable to the arrangement shall be recognised as an expense in the period in which they are incurred unless the operator has a contractual right to receive an intangible asset (a right to charge users of the public service). In this case borrowing costs attributable to the arrangement shall be capitalised during the construction phase of the arrangement in accordance with that Standard. 6.6. Assets & Liabilies ; if operator gets assets from the gov. as part of deal, they may not be seen as a gov. grant, but must be accounted for at fair value at initial recognition., also any obligation to fulfil any contractual obligations must be accounted for as liabilities as far as they must be paid for one day.
4 - AGREEMENTS FOR THE CONSTRUCTION OF REAL ESTATE: IFRIC 15 1. Refer to IFRIC 15 for all the details 2. This applies to developers of real eastate where the customer buys off plan or pays a deposit to reserve a unit offplan. 3. There are 2 possibilities, Either it falls withing IAS11 contruction contracts OR it gets treated as IAS18 revenue , depending on type of contract & circumstances: 3.1. IAS 11 CONSTRUCTION CONTRACTS : 3.1.1.Applies when it meets the definition of a construction contract : being 3.1.1.1.The buyer is able to specify(need not exercise the ability) the major elements of the design of the real estate before construction commences.(not choose from a no. of specified designs , or just minor variations to a specified design) 3.1.1.2.The buyer may specify major structural changes once construction is in progress (not minor). 3.1.2.Method : entity recognizes revenue by reference to stage of completion. 3.2. IAS 18 REVENUE 3.2.1. Applies when : when the agreement for the construction of real estate provides only limited ability to influence the design of the real estate. Limited ability implies selecting a design from a range of
specified options or specifying minor variations to the basic design. 3.2.2. Method: 3.2.2.1.Entity must first determine if it is 1-for the sale of goods or 2- for the rendering of services 3.2.2.1.1.SALE OF GOODS : If entity is required to supply construction materials + also the services t (ie: BOTH ) to deliver the real estate to the buyer, then it is a sale of goods per IAS18.14 3.2.2.1.1.1. Revenue recognition : If the entity transfers control and significant risks and rewards of ownership of the work in progress to the buyer as construction progresses , the entity recognizes revenue by reference to the stage of completion , using the percentage of completion method . If however , the entity transfers control and significant risks and rewards of ownership real estate at a single time such as at completion , on delivery or after delivery, the entity recognizes revenue only once all of the3 criteria of IAS 18.14 are satisfied. 3.2.2.1.2.RENDER OF SERVICES : This applies when the entity is not required to aquire and supply construction materials, 3.2.2.1.2.1. It is then usually an agreement per IAS18.18 for the rendering of services. 3.2.2.1.2.2.Revenue recognition : is by reference to the stage of completion of transaction using the percentage of completion method.l 3.2.3.Further work on estate already delivered: buyer , a liability per IAS 37 and an expense per IAS 18.19 is recognized. This is a separate component of sale.(IFRIC 15.8&19). eg maintenance part of contract or some other matter maybe repairs to shoddy workmanship. 5 - EXCHANGE TRANSACTIONS : 1. As per IAS 18.12 , the following applies to any exchange transactions incl. services for services or services for goods etc etc.: IAS18.12 : When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. This is often the case with commodities like oil or milk where suppliers exchange or swap inventories in various locations to fulfil demand on a timely basis in a particular location. When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred. 2. Another example of similar goods exchanged is different colour cars exchanged by dealers. 3. METHOD TO BOOK SIMILAR GOODS exchanged transactions : ?????? how???? 4. METHOD TO BOOK DIFFERENT GOODS : exchange transactions : 4.1. REVENUE IS BOOKED AT COST OF ITEM(+any cash) RECEIVED UNLESS THAT IS NOT DETERMINABLE, THEN COST OF ITEM GIVEN UP IS USED. NOTE IAS16 PPE states that it must be done exactly the other way around for any assets swapped ie: at value of item given up. Per article in accounting SA one must choose your method as disclose carefully in the notes which one you choose, and be consistent in usage. 4.2. just book assets received same as you would book cash received to bank, except in the asset concerneds account. Remember if the goods you give are worth less than the (fair value) of goods you receive, then you just book the revenue you get as higher than the value of the goods you gave so if your tyre was worth R100 BUT the door you exchanged it for was worth R200, your revenue you book is R200, not R100(ie a profit) 5. lSee 2 examples below of how to account for these transactions:
1. 2.
3. 4.
5.
5.1 EXCHANGE TRANSACTIONS involving ADVERTISING SERVICES (SIC 31/AC431) The need for this refinement of the IAS18 came about from entities placing Adverts in each others websites, where problems arose on measurement of these exchanges causing overinflated revenues,thus SIC 31 was developed. This SIC 31 applies only to: 2.1. Dissimilar ad services being exchanged ( if they were similar they are auto. Revenue is not recognized as per IAS18) 2.2. The amount of revenue can be measured reliably This rule applies to all ads, incl radio etc Revenue from a barter transaction involving advertising cannot be measured reliably at the fair value of advertising services received. However, a Seller can reliably measure revenue at the fair value of the advertising services it provides in a barter transaction, by reference only to non-barter transactions that: Check Sic31for this below! (a) similar : involve advertising similar to the advertising in the barter transaction; (b) frequent: occur frequently; (c) predominant number compared : represent a predominant number of transactions and amount when compared to all transactions to provide advertising that is similar to the advertising in the barter transaction; (d) For any asset with reliably measurable fair value; involve cash and/or another form of consideration (eg marketable securities, non-monetary assets, and other services) that has a reliably measurable fair value; and (e) Not same counterparty : do not involve the same counterparty as in the barter transaction.
6. Per textbook : =/- vertabim :Experience has shown that revenue from exchange transactions involving ad services, cannot be measured reliably using the fair value of advertising services received.IAS 18.12 Due to this fact the rule from IAS 18 .12 ie that if the fair value of services received cannot be measured reliably then it must be measured at the fair value of services provided/forfeited must always be applied in the case of exchange of
advertising services. (where does it state this in the IAS or IFRIC or SIC whose rule is this now?)
7-DISCLOSURES PER IAS 18 VERTABIM: IAS18. 35 An entity shall disclose: (a) The Accounting Policies adopted for the recognition of revenue, including the methods adopted to determine the stage of completion of transactions involving the rendering of services; (b) The Amount Of Each Significant Category Of Revenue recognised during the period, including revenue arising from: (i) the sale of goods; (ii) the rendering of services; (iii) interest; ( see -IFRS 7. IG13- only if it is an investment company , otherwise it forms part of finance costs per book ??not other income???) (iv) royalties; (v) dividends; and (c) The Amount Of Revenue Arising From Exchanges of goods or services included in each significant category of revenue. (d)IAS18.36 An entity discloses any contingent liabilities and contingent assets in accordancewith IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Contingent liabilities and contingent assets may arise from items such as warranty costs,claims, penalties or possible losses. BUT [According to ED 204, this requirement is replaced(?already?) by requiring information about key estimation uncertanties related to revenue, being: a description of the uncertainty related to revenue, and an indication of the possible financial effects on the amounts recognised for revenue and the timing of those effects. For example, this requirement would apply where an entity only recognises revenue to the extent of costs incurred to date, since the outcome of the transaction cannot be estimated reliably. NOTES ON EXACT DISCLOSURES FOR REVENUE:
1) ACCOUNTING POLICIES FOR REVENUE 1. REVENUE : i) Net of Vat. ii) Intra-Group Revenue is eliminated in Group Statements 2. SALES : once all risks & rewards of ownership have passed. 3. SERVICES : i) Percentage of completion basis that its done on this basis (standard always says the same) ii) Method of determining stage of completion -eg % completion of total services OR % expenses of total expected expenses. 4. INTEREST INCOME : i) effective interest method ii) time-proportion basis ie: amount earned so far 5. ROYALTIES : per contractual conditions 2) REVENUE NOTE (ie: note number next to revenue on SCI, BUT CAN ALSO BE CALLED Profit Before Tax , and can have the number next to both Revenue and Profit before Tax on SCI ie both items use same note!) 1. EACH SIGNIFICANT CATEGORY : Just the amount of each significant category included in revenue, at minimum the following if present: 7.REVENUE or PROFIT BEFORE TAX 2005 Company R 000 Xxx Etc etc etc 2005GroupConsFinStats R000
SALES SERVICES INTEREST ROYALTIES DIVIDENDS total
3) ANY EXCHANGE OF GOODS : in a sentence just amount of revenue incl. PER EACH OF ABOVE CATEGORIES , of goods bartered received instead of cash for revenue. 4) CONTINGENT LIABILITIES&ASSETS per IAS37 changing to KEY ESTIMATION UNCERTAINTIES: changing from former to latter per ED204 this is eg: services revenue was only recognized value of expenses to date, since outcome of transaction cannot be estimated reliably.
CONSTRUCTION CONTRACTS : 1.1. When an entity recognises revenue using the percentage of completion method for agreements that meet all the criteria in paragraph 14 of IAS 18 continuously as construction progresses (see paragraph 17 of the Interpretation), it shall disclose: 1.1.1.how it determines which agreements meet all the criteria in paragraph 14 of IAS 18 continuously as construction progresses; 1.1.2.the amount of revenue arising from such agreements in the period; and 1.1.3.the methods used to determine the stage of completion of agreements in progress. 1.2. For the agreements described in paragraph 20 that are in progress at the reporting date, the entity shall also disclose: 1.2.1. the aggregate amount of costs incurred and recognised profits (lessrecognised losses) to date; and 1.2.2. the amount of advances received.
INCOME TAXES IAS 12 , SIC 21, SIC 25 , AC501 , AC502 & circular 1/20 06
Special OWN Notes 1. IAS 1 requires all Deferred Tax to be in CURRENT assets/liabilities , not Non-Current. 2. THE TAX EXPENSE IN THE SCI: is NOT the amount SARS is charging you. It is the aggregate of Current tax + Deferred Tax added together- it is for your records, the real tax you must pay SARS could be more or even less.- vertabim per text.
3. Special Notes: 3.1. Please note that a tax loss that has been assessed by the SARS for the prior year, is referred to as an assessed tax loss. The calculated tax loss that has not yet been assessed by the SARS will be referred to as a tax loss. 3.2. Note that a deductable temp diff of 5 will DECREASE a loss, not INCREASE it, since it would make a 1 profit up to 6, therefore it will make a 10 loss down to 5. 3.3. In exam , at a tax rate of 29% ,a tax effect of 29000 due to an previous unused loss would = a loss of 100000 ( 29000 x 100/29)
3.4. Note : if you get a movement for the year of liability 2000 in defrred tax, it does not mean that 2000 goes to the Income Tax Expense, IT COULD ALSO MEAN THAT 3000 asset goes to Income Tax Expense, and 1000 liability goes to OCI eg: Revaluation Surplus which is 3000- 1000=2000!
3.5. Allways remember to carry a loss from last year forward to this year and include it in the Yearly Accounting Profit calculation when working out your profit for the year to calc. tax from.. (so add movement in temp diff, to last years loss, to this years accounting profit. 3.6. The carrying amount of depreciable property, plant and equipment that is measured using the revaluation model in IAS 16 is recovered through sale and use. 3.7. WHICH DEFERRED TAX GOES TO: NOTE ON MAJOR COMPONENTS OF TAX, AND TO THE INCOME TAX EXPENSE ITEM IN THE P&L STATEMENT ? DEFERRED TAX relating to origination&reversal of temporary differences : ONLY OF P&L, THOSE THAT GO TO OCI (EG revaluation reserve) OR DIRECTLY TO EQUITY DO NOT GO HERE AT ALL- THEY ARE JUST LEFT OUT!!!! note this! They are not incl;uded in the Note NOR in the P&L Statement. 3.8. VERY IMPORTANT PRINCIPLE : READ THIS! : Comparing : TEMPORARY DIFFERENCE vs MOVEMENT IN TEMP DIFF vs SARS LIABILITY ACCOUNT vs PROFIT BEFORE TAX: 3.8.1. MANAGEMENT EXPECTS SUFFICIENT PROFITS 28% of Profit :: remember that if there is a deferred tax asset of 100, and management expects profits of 200, that one cannot deduct 100 from 200 and say yes : RATHER it is 28% * 200 = 56 that can be used, since the deferred tax gets deductedfrom TAX on profit, not from PROFIT ITSELF. 3.8.1.1. BUT YOU CAN COMPARE A TEMPORARY DIFFERENCE(BEFORE % ING IT) TO PROFIT BEFORE TAX DIRECTLY, and even minus total temp diff from profit before tax to see if there will be a tax profit/loss : This is because : see Decriptive pg 171 Ex9.16. 3.8.1.1.1.The TempDiff is caused by the way SARS allows a deduction . So if there is a TAXABLE deferred temp. diff. of 500 (before X the temp. diff. by 28%) and profit of 600, it means there will only be tax that year of 100. This is becasue WHAT CREATED THE TAXABLE DEFERRED TEMP.DIFF. IN THE FIRST PLACE WAS SARS ALLOWING MORE DEDUCTIONS THAN ACCOUNTING DEPRECIATION IN THE BOOKS DID. 3.8.1.1.2.It allways works OPPOSITE here: if you have a Taxable Deferred Temp. Diff. of 600, an profit of 500, it means:: 3.8.1.1.3.IF it s a TAX ASSET you add it, if its a TAX LIABILITY you minus it simple. 3.8.1.1.4. TAXABLE : =Profit TAX LIABILITY = True Profit after SARS Tax 3.8.1.1.4.1. Taxable in future means this year SARS gave this much EXTRA DEDUCTIONS off your profit 3.8.1.1.5.DEDUCTABLE : =Profit + TAX ASSET = True Profit after SARS Tax 3.8.1.1.5.1. Deductable in future means this year SARS gave LESS DEDUCTIONS than your profit shows, so you made more accounting deductions for depreciation etc, so you must add this back to profit to get an estimate of Profit after Tax for the year. 3.8.1.1.6.Accounting Profit 500 3.8.1.1.7.MINUS Temp Diff 600 97 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
3.8.1.1.8.= Profit/Loss for the year. 100 LOSS after tax will happen, cause SARS is allowing more this yr than you
3.9.
3.10.There are ALLWAYS 3 items that go in ACCOUNTING PROFIT for the year , to work it out for tax purposes. Add 3.10.1. This Years Accounting Profit. 3.10.2. +Movement in temp diff, 3.10.3. +Last years Loss,
3.11. From this principle : a mix up is : If unisa puts a sum: profit 100 less (50) Mov.Temp.Diff = 50., without saying if Mov.Temp.Diff was a Tax asset or liability, it means it was a liability- the brackets are for the sum , not to indicate that it is a tax ASSET as it would mean if it were in a Schedule Of TempDiffs calculation.-there brackets mean ASSET here they mean Liability.
3.12. VERY IMPORTANT !! : How to work out the CURRENT INCOME TAX EXPENSE sars will charge you for year from TEMPORARY DIFFERENCES for the year: 3.12.1. If a question gives you the temporary differences for the year and the accounting profit , but does not give you the INCOME TAX EXPENSE sars will charge you, then you work it out by : 3.12.1.1.Read (3.6 comparing temp diffs ) important principle above first. 3.12.1.2.Now, take accounting profit + temp diffs (+deductable or taxable ) and the result gives you (almost) your TAXABLE INCOME or LOSS for the year. 3.12.1.3.Now add previous years unused losses/credits 3.12.1.4.Now add previous years changes to defrred tax account : tax rate (I think) 3.12.1.5.= TAXABLE PROFIT or LOSS for the year 3.12.1.6.X multiply by the tax rate to give tax expense for the year.(watch out for CGT or foreign taxes at different tax rates though in part of it) 3.12.1.7.= TAX EXPENSE
4. Please note that a tax loss that has been assessed by the SARS for the prior year, is referred to as an assessed tax loss.
The calculated tax loss that has not yet been assessed by the SARS will be referred to as a tax loss.
5. You never put deferred tax in sars liability account you put it in deferred tax CONTRA tax expense acc., so it will never show as a liability to sars itself, it only shows as a liability to /in deferred tax- BUT in SCI you do add deferred tax to the INCOME TAX EXPENSE after profit before tax, and deduct it to get profit after tax But this is just a theoretical calc. , it is not real life. The real life is that sars liability account will have a DIFFERENT ENTRY + AMOUNT to SCI tax expense amount , they are 2 completely different things, because of the deferred tax PROVISION that is made.( it is a PROVISION LIABILITY, not a TRUE LIABILITY) 6. Note: recovery of economic benefits means eg when you use the asset to produce goods for profit ,then you recovered economic benefits from the carrying amount of the asset, and you can deduct depreciation as an expense incurred in this production.( or asset is sold and profit (after acc.depr.) from recovery is taxed.) 7. Note: this standard IAS12 says the tax must be shown separately in the section of the Fin Stats in which it happened(...in the same way ie section , the event was accounted for) : so 7.1. Profit shows its own tax, and 7.2. Other Comprehensive Income shows its own tax in own section of the SoCI, and 7.3. Pure Equity Transactions show their own Tax in their own section of the Fin Stats. 8. NOTES: If it says : The related expense will be deducted for tax purposes on a cash basis, it means it will be deducted when it is paid in cash ie: when money actually changes hands 8.1. 1- Deferred Tax Liability = per lecturer :ACCOUNTANTS BELIEF THAT TAX HAS BEEN INCURRED BUT WHICH HAS NOT YET BEEN CHARGED BY THE TAX AUTHORITY. IT THEREFORE SHOWS THE AMOUNT THAT WILL BE CHARGED BY THE TAX AUTHORITY IN THE FUTURE ie (PAYABLE EXPENSE) 8.2. 2- Deferred Tax Asset = per lecturer : ACCOUNTANTS BELIEF THAT TAX HAS BEEN CHARGED TO YOURACCOUNT BY SARS, BUT WHICH HAS NOT YET BEEN INCURRED.THIS PREMATURE TAX CHARGE MUST BE DEFERRED (POSTPONED) (ie PREPAID EXPENSE) 9. UNUSED TAX CREDITS & TAX LOSSES : redo a bit here- very basic copy paste 9.1. There a re only 2 types of this stuff:
9.1.1.1.Unused tax losses: where you had a loss this year it can become a tax credit next year, so ONLY this year it appears as Deferred Tax (not next year cause it should get used up next year).(P.S. so effectively a loss is you only loose 71%, the other 29% you can claim from tax next year !) 9.1.1.2.Tax Credits: if SARS gives you a tax credit for some or other odd reason. 9.2. Both UNUSED TAX LOSSES and CREDITS never appear in Carrying Amount Column : only in the Tax Base column, because they are not accounting positives (you dont show last years loss as an account in your booksit disappears mos in the trading acc/profit loss acc/closing of expense/income accs. Same with tax credits!There is no tax credit account in your books only in SARS books It only shows as deferred tax! ) 9.3. UNUSED TAX LOSSES and CREDITS are ONLY EVER DEFERRED TAX ASSETS, they are never deferred tax liabilities. They only refer to types of credits from the taxman, nothing else at all. Background 1. Any tax that does not fall in the scope of this IAS should be accounted for using IAS 37(which are those?) 2. IAS 12 Income taxes is applicable to : 2.1. SA taxes levied on profits (In SA. CGT is also included in normal tax .) 2.2. Foreign taxes levied on foreign profits 2.3. Con Fin Stats Taxes ie: Like withholding taxes on distributions to reporting entity from subsidiaries , but Note: that means it applies to normal tax the group company must pay since it is a group. If the withholding taxes are for dividends paid to another company/person altogether, then it is NOT covered by this IAS, since it just amounts to a mere collection on behalf of SARS . (an agency type of). 3. Secondary tax on companies: is discussed in AC501 , a SA interpretation bases on IAS 12- NOW changed to plain withholding tax on dividends 4. There are 3 +/- methods of working out tax in: accounting see IAS 12 for details but only the one has been chosen as the method to use for IFRS. That is this complicated Tax Base method thing.The other methods seem much more understandable. 4.1. IAS12 says: IN2 : The original IAS 12 required an entity to account for deferred tax using either the deferral method or the income statement liability method which is a liability method. IAS 12 (revised) prohibits the deferral method and requires another liability method which is sometimes known as the balance sheet liability method. The income statement liability method focuses on timing differences, whereas the balance sheet liability method focuses on temporary differences. Timing differences are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods. Temporary differences are differences between the tax base of an asset or liability and its carrying amount in the statement of financial position. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. 4.2. Also : Now this :All timing differences are temporary differences. Temporary differences also arise in the following circumstances, which do not give rise to timing differences, although the original IAS 12 treated them in the same way as transactions that do give rise to timing differences: 4.2.1. (a) subsidiaries, associates or joint ventures have not distributed their entire profits to the parent or investor; 4.2.2. (b) assets are revalued and no equivalent adjustment is made for tax purposes;and 4.2.3. (c) the identifiable assets acquired and liabilities assumed in a business combination are generally recognised at their fair values in accordance with IFRS 3 Business Comb. CURRENT TAX 1. Defined as : amnt tax payable OR recoverable in current tax period for profit/loss of period.
2. THE TAX EXPENSE IN THE SCI: is NOT the amount SARS is charging you. It is the aggregate of Current tax + Deferred Tax added together- it is for your records, the real tax you must pay SARS could be more or even less.vertabim per text. 3. You never put deferred tax in sars liability account you put it in deferred tax CONTRA tax expense acc., so it will never show as a liability to sars itself, it only shows as a liability to /in deferred tax- BUT in SCI you do add deferred tax to the CURRENT TAX EXPENSE after profit before tax, and deduct it to get profit after tax But this is just a theoretical calc. , it is not real life. The real life is that sars liability account will have a DIFFERENT ENTRY + AMOUNT to SCI tax expense amount , they are 2 completely different things, because of the deferred tax PROVISION that is made.( it is a PROVISION LIABILITY, not a TRUE LIABILITY) 4. SA has a dual tax system. 1- CGT is raised on Capital gains and Current tax is raised on taxable income AND 2Dividends Withholding Tax is raised on Distributed Income (the old Secondary Tax STC that was phased out changed to this) DISCLOSURE OF CURRENT TAX IN FINANCIAL STATEMENTS 1. CURRENT TAX IS RECOGNIZED IN : either P&L or OCI or directly in EQUITY , depending on where it originated. 2. The Tax Shown As Tax For The Year In The Income Statement -Sci Is The Aggregate Of Current And Deferred Tax , Simply Added Together. 3. Current tax is recognized as an expense and included in Profit or Loss EXCEPT to the extent that it arises from an event outsideP&L EITHER in Other Comprehensive Income or Directly in Equity. 4. SO CURRENT TAX IS INCLUDED IN EITHER OF ONE of the following in the Fin stats, depending where it arises (NOT mixed up) a. PROFIT OR LOSS b. OTHER COMPREHENISIVE INCOME c. DIRECTLY IN EQUITY.
PENALTIES & INTEREST

1. Any penalties & interest should not be included in Tax for the Year in Fin Stats as they do not meet definition of income tax in IAS2, but should be accounted for separately. ALSO the best estimate of interest &penalties payable for past periods should be disclosed as a PROVISION in accordance with IAS37 Provisons etc 2. INTEREST & PENALTIES: may NOT be incl. with tax, must be raised separately. 2.1. Interest: this just goes in FINANCE COSTS. 2.2. Penalties : goes in OTHER EXPENSES . 2.3. Provisions IAS37 : a provision per IAS 37 must be raised for best estimate of any penalties& interest due for previous tax periods ( ?& current one? Probably raise it as soon as you know?) GOV. GRANT : IF SARS GRANTS EXTENDED PAYMENT TERMS SPECIALLY TO A SPECIFIC COMPANY. 1. GOV. GRANT: PAYMENT EXTENSION GIVEN BY SARS : any extension of payment of your taxes allowed by SARS taxation authority must be DISCOUNTED when the effects of discounting are material ,and the free interest treated as a Gov. Grant IAS 20 CURRENT INCOME TAX ON COMPANIES: 1. Tax on profit. 2. The amount of current tax(incl. deferred tax) remains an accounting estimate, which may change once the tax return is finally received. 3. The correction of the accounting estimate takes place in the period in which the Tax Return is received, and is shown as : an Over or Under Provision of Current Tax in the Tax Expense of the Current Year , but for the correction of a preceding year must be disclosed separately as per IAS 12.80.b.
4. Deferred as well as normal tax is treated&displayed in the same manner as the underlying transaction it relates to.( ie in SoCI or StChEq or in OtherComprehensiveIncome of SoCI.) CAPITAL GAINS ON COMPANIES 1. 2. 3. 4. 5. Forms part of current tax After 1 oct 2001 it applies & started in SA. The item may be partly taxable and partly exempt if acquired prior to 1 oct 2001. Any portion that is a loss after 1 oct2001 may be offset agaist other capital gains in that current relevant year. 50% of capital gains must be included in income and is taxed at 28% : this results in an EFFECTIVE TAX RATE OF 14%. 6. If the capital gains for that year is a loss, it must be carried forward to the following year of assessment (unused tax loss)- just for 1 yr ?? only for capital gains or against all tax next year?? Carried forward As tax or capital gains?? Ans: simply incl. in total deferred tax amount , if probable that there will be capital gains to reverse it against in following year(s) WITHHOLDING TAX ON COMPANIES: 1. 2. 3. 4. 5. 6. 7. 8. Changed to Withholdimg tax on dividiends FROM old STC. EXEMPT: any scrip dividends? Yes or no? STC is 10 % of [dividends payable less any dividends received by company].(so you dont pay twice) If dividends received exceeds dividends paid then an unutilized STC credit arises which may be carried forward to subsequent tax years. No TEMPORARY DIFFERENCES: since a dividend MUST first accrue before a liability arises for STC, no temporary differences can happen. STC is treated as part of normal income tax in the SCI so it must also form part of the reconciliation of TAX in the TAX RATE RECONCILLIATION in the NOTES. DIVIDENDS declared or proposed after the reporting date do not meet the definition of a liability and are therefore not recognized in the SFP.(IAS 10.12) If the TAXMAN of the country has different tax rates for when all the profit/ret earnings are paid out and when it isnt, then you use the normal tax rate for undistributed profit to work out deferred tax.(make as if it will not be distributed for deferred tax purposes) Foreign Shareholders Withholding Tax: company may have to pay a portion of dividends owed to foreign shareholders, to taxman as withholding tax(in case they duck with it). Similar treatment to transactions, but saica says different ,.
9.
DEFERRED TAX:
INTRO:
I. The amount of tax that is payable by an entity in a specified accounting period is often out of proportion to the reported profit for the period.It could be more or less-due to SARS working out differences eg depreciation use by entity and that allowed by SARS. The reason for this difference is that the basis used for establishing the accounting profit often differs from the rules used to determine the taxable profits. II. SCI : Deferred tax is recalculated each year, and compared to last years one. The increase/decrease is presented in profit /loss in SCI as part of the income tax expense line item. III. NOTE: RECOVERY OF ECONOMIC BENEFITS means eg when you use the asset to produce goods for profit ,then you recovered economic benefits from the carrying amount of the asset, and you can deduct depreciation as an expense incurred in this production.( or asset is sold and profit from recovery (after acc.depr.) is taxed. IV. GOES IN CURRENT ASSETS/LIABILITIES : IAS 1 requires Deferred Tax to be in CURRENT assets/liabilities in entities which display both, not Non-Current. Deferred tax can be a liability or asset
V. DISCOUNTING: deferred tax should NOT be discounted. , for assets or liabilities. VI. You get 2 types of deferred tax VI.1. 1- for SoFP items: namely ASSETS and LIABILITIES, (only to do with weird expenses allowed by SARS kind of stuff really, like depreciation etc.) which you work out with the special method of tax base and accounting base columns , VI.2. 2-for SCI items like tax on profit & losses & normal expenses & income : you get 1- eg research costs,which are not seen as an asset/liability in the companies accounts but as an expense, but SARS grants eg a 25% per year deduction over 4 yrs. 2-a Carryforward of unused tax losses or 3- a Carryforward of unused tax credits for something or other. these last 2 do not go in the column method , they are simply added to the total from tax bases deferred tax afterwards in a sum type. REM to work out a full method in sequence for eveything when finished with all tax syllabus. VII. There are 2 types of differences: VII.1.Permanent differences : VII.1.1. Non-taxable VII.1.2. Non-deductable VII.2.Temporary differences VIII. These difference arise mainly from the following circumstances : VIII.1. the carrying amount of assets AND of liabilities in the accounting records that differs from the tax base of the assets / liabilities ; VIII.2. OR amounts for assets ,NOT LIABILITIES are expensed for accounting purposes in a particular period and deducted for income tax purposes in a different period; VIII.3. or income that is recognised for accounting purposes in a specific accounting period and taxed for income tax purposes in another; VIII.4. the carrying amount of assets and accounting expenses and liabilities that are not deductible for income tax purposes; VIII.5. income that is not taxable, VIII.6. tax losses that are set off against taxable income in later years, thereby disturbing the relationship between the accounting profit and the taxable income, and VIII.7. adjustments related to the correction of errors and/or changes in accounting policies that are either taken into account in different periods for income tax and accounting purposes or are excluded because they are neither taxable nor deductible. STEPS OF DOING DEFERRED TAX: 1. [Move this to here when you get there : IN GROUP STATEMENTS, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate bases. The tax bases are determined by referring to the tax returns of the individual companies in the group, with the necessary adjustments being made on consolidation IAS12 (AC 102). 11). Because the calculation is based on the consolidated financial statements, the tax bases of intergroup transactions are omitted automatically] 2. THERE ARE 5 STEPS TO DO TO WORK OUT DEFERRED TAX a. Calc. Temp. Difference. b. Exemptions : Consider Exemptions for recognition of deferred tax for certain Temp.Diffs. c. Limitations for recognition: Consider limitations for recognition of a deferred tax asset for : i. Deductable temp . diffs. ii. Unused tax losses OR credits. d. Tax rate& laws : Consider tax rate & tax laws to use
e. Recognition: of deferred tax income or expense. 3. The 5 steps are done in the following 5 sections: PERMANENT DIFFERENCES
1. PERMANENT DIFFERENCES are permanenetly non-deductable or non-taxable items for tax purposes reported in profit & loss.
STEP 1 : CALCULATING TEMPORARY DIFFERENCES

HOW TAX BASE WORKS 1. (lAS 12 (AC 102)05).The Tax Base of an asset or a liability is the amount attributed to that asset or liability for tax purposes .*here attributed does not mean it is what sars says the thing is worth , it means something very different , some complicated system see definitions of Tax base of Asset & Liability.]
1. Definition : TAX BASE OF ASSET : [this whole rule seems to aim basicly at only special things like depreciation etc] The tax base of an asset is the amount that will be deductible [ you will be allowed to deduct all of the tax base from your future taxable income eg: you can deduct : future SARS wear & tear from future income for tax purposes] for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset in future periods[ ie: from profits gained when asset is used in future, that are going to be taxed as profit]. If those economic benefits [you get in future from this asset eg : cash from debtors asset- next week or next year] will not be taxable [in future- next week or next year], the tax base of the asset is equal to its carrying amount. [Per IAS 12: the reason for the rule 2 at bottom of definition (equal to carrying amount)is in substance the all the future benefits will basicly be deductable because none of it will ever be taxable so it is all the tax base ie: will be deductable) 2. Definition : TAX BASE OF LIABILITY : The tax base of a liability is its carrying amount, less any amount that will be deductible [ future tax deduction : you can deduct it from your future taxable income eg for a future warranty costs liability , you can deduct any actually paid future warranty costs from future taxable income ] for tax purposes in respect of that liability in future periods when that liability is settled . Deductable for tax purposes in the future means if say leave pay accrual is only deductable as an expense when it is paid out in cash: so any leave pay accrual will not be deductable this year but only in a future period : that amount is then : deductable for tax purposes in the future and must be subtracted from carrying amount to get the tax base [ rem liabilities is : minus of a minus = + , so the definition must also be topsy turvy the other way around basicly] [also notice : for assets it is when future economic benefits are received but for liabiliities it is not when future economic benefits are received but when that liability is settled ie: when economic benefits are PAID OUT by the company, not received by it] Taxable Temporary Difference(you owe) hardly ever arises in liabilities or revenue rec. in advance exept in exceptional circumstances eg construction contracts. 1. Definition : TAX BASE OF REVENUE RECEIVED IN ADVANCE : In the case of revenue which is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that
will not be taxable in future periods. * this is also a liability , but here it is less revenue that will NOT BE taxable, where liabilities is less revenue that WILL BE deductable . [ rem liabilities is : minus of a minus = + , so the definition must also be topsy turvy the other way around basicly] HOW TEMPORARY DIFFERENCE WORKS: 1. General : All liabilities as well as all equity and all assets must all get a tax base and all get included in the deferred tax schedule for the year. Most liabilities like Deferred tax Liabilites , Accounts payable, or fines payable all have a tax base = carrying amount (sinceamnt deductable in future is 0 so Tax Base = carrying amount 0 = carrying amount , thus temp. diff comes out zero mostly.All equity like ret. Earnings and Shares all seem to have Tax Base allways = Carrying Amnt. since they are not taxable in future and as assets then the rule applies that tax base must be = carrying amount. So there is never any Temp Diff. for equities(not sure if that is true?)
2. 3. Note: LIABILITIES in both methods below includes REVENUE RECEIVED IN ADVANCE in the same heading they both work in the same heading as being Liabilities for all methods.. USING THE MEMORY METHOD : a. ASSETS : CA > TB = TAXABLE Temporary Difference. b. LIABILITIES : CA > TB = DEDUCTABLE Temporary Difference. (just visa-versa to assets) USING THE (-) SIGN METHIOD: a. In Assets both start off as a plus sign since they are ssets class to make the system work. b. In Liabilities both(carrying amnt & tax base) start off as a minus because they are liability accounts , the tax base too even if it seem illogical just to make the system work. c. ALLWAYS minus TAX BASE from CARRYING AMOUNT , i. CARRYING AMOUNT ii. (less) TAX BASE . iii. = TEMPORARY DIFFERENCE If the answer is POSITIVE : It means it is TAXABLE so you are working out tax, if the answer is + it means you OWE TAX , if - then you get a tax deduction If the answer is NEGATIVE : It means it is DEDUCTABLE so you are working out tax, if the answer is + it means you OWE TAX , if - then you get a TAX DEDUCTION.
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HOW THE DEFERRED TAX WORKS:

1. GENERAL : a. BALANCING OUT: i. Rememebr that in the tax Recon the missing deferred tax temporary differences that balance out the Acc Tax against the P&L Income Tax are included directly ito the P&L Income Tax amount at the bottom of recon. Thats why they do not appear in the Tax Recon they are already in the bottom amount since that amount is NOT what you actually owe SARS that year, it is a confabulation of current tax, + deferred tax movements over 2 years + prior years credits etc. b. CAPITAL GAINS: i. RECOUPMENT: the recoupment part in a capital gains does not go in the Tax Recon at all- it goes nowhere. ONLY the portion over cost price goes in recon as taxed at a different tax rate ie 18.65%. ii. Using 2012 capital gains tax rates: since capital gains is 28% of 66.6% of Gain, therefore ONLY the 28% of 33.4% of any capital gains OVER THE COST PRICE of the item goes into the tax reconcilliation- you add the 28% of 33.4% back in . iii. The capital loss will be carried forward to the next year to be set off against future capital gains. The capital loss will be carried forward as a deferred tax asset, if it is probable that future capital gains will be available against which the capital loss can be utilised. If future capital gains are not probable, no deferred tax asset will be raised.
iv. NB: if there is a capital loss this year, then you must add ONLY THE PART THAT WAS NOT ALLOWED THIS YEAR (33.4% * 28%) AS A DEDUCTION cause there was not enough Capital gains to use it on,, TO DEFERRED TAX,TO BE CARRIED FORWARD AS A DEFERRED TAX ASSET. v. The 33.4 % of a capital gain MUST BE DEDUCTED from accounting profit to get taxable profit when you do the Taxable Profit Calculation in important priciple below as a NON_TAXABLE item. c. REVALUATIONS : SPLITTING MOVEMENT FOR YR. BETWEEN REVAL. SURPLUS & DEFERRED TAX ACCOUNT : i. Allways Split up the Movement in Temp Diffs Between Reval. Surplus and Deferred Tax Account. ii. The part that goes to Reval. surpl. Must get minused from the Movement and transferred separately. Remember Income Tax (for year) is NOT the contra for a transfer of defered tax to reval. surpl. Rather the OCI Reval.Surpl. is the contra. So anything that goes to reval. surpl. Does NOT go to income tax expense for After Profit Income Tax Expense RATHER it goes to : iii. To minus a OCI deferred tax transfer from MOVEMENT FOR THE YEAR to get movement to P&L only : 1. When you subtract the OCI liability (it will allways be a liabilty) from : a. Another Liability : you say minus LESS minus = + , so -100 (-120) = (- 100) + 120 = (+20) b. Another Asset : you say Plus LESS minus = + , so just add them . iv. Major Companonts Note: any deferrd tax that went toOCI DOES NOT GO IN DEFERRED TAX SECTION OF this note. It does go in deferred tax note as part of the temp diff of the asset, but does not go to this note at all. This Note is ONLY for the LINE ITEM Income Tax in P&L , anything not in that line item that went to OCI instead is separate! v. P.S movements between reval.surpl.and ret.earn: 1. for depreciation DO NOT SHOW in the OCI. They only show in the StChEq- so the only thing about revaluations that shows in the OCI is a current years revaluation ,A disposal DOES not SHOW and a derecognition does not show(Reval. gets written to Ret Earn for those 2). 2. The transfer of depreciation must take place AFTER tax:, because the Reval Surpl. Account is AFTER TAX already : keep it simple : all you do is first work out depreciation to be transferred : ie [Reval.Surpl. OVER Carrying Amount] X depreciation for year , AFTER THAT just deduct tax from it at approriate rate before you transfer : ie 28% or 18.65% or a mixture of the 2. Eg : 50* 72% = answer.[where 72 % is 100-28%] 3. JOURNAL for Deferrd Tax to Revaluation Surplus : a. Revaluation Surplus Account <CONTRA> Deferred tax Account 4. Journal for DEFERRED Tax to P&L: a. Income Tax Account <CONTRA> Deferred Tax Account.
vi. Amount of Deferred Tax to Transfer to Reval Surpl. : simple : just the balance left in reval surpl. Of any items that have NEVER had any deferred tax done on them before - so for things revalued THAT SAME YEAR only, before any depreciation is ever done on the revaluation. The reason you will never first minus depreciation from the Reval. to send to Ret . Earn first is: YOU ARE SUPPOSED TO DO THE DEFERRED TAX ENTRY IN THE REVALUATION ACCOUNT IMMEDIATLY WHEN IT IS REVALUED . YOU DO NOT WAIT FOR END OF YEAR TO DO THIS REVALUATION CALCULATION! vii. (less their depreciation or not?) (or is it the balance without the depreciation that was moved to retained earings , or with that depreciation ?) viii. X Tax Rate = Deferred Tax to transfer to reval. Surpl. Account.- and minus from deferred tax that goes to P&L. This deferred tax must get minused from the MOVEMENT IN TEMPORARY DIFFERENCES to split it between the 2. Note:(it is a very easy calc. per unisa.) (see question asked lecturer very mixed up stuff) 1. TAX RATE : you can have 2 tax rates here : If residual value crowds into Reval. Surplus space it will be at 18.65%., otherwise at 28%. (look at if residual is above COST to see if it crowds into Reval. Surpl. Space not at above carrying amount or something else just if above cost . 2. (Rem if it got revalued down , the if it gets reval. up again it must first go to P&L up to cost level, before it goes to a new reval. surpl. again .- so you allways compare against plain old cost here to see if residual infringes on Reval. Surpl.) d. VERY IMPORTANT PRINCIPLE : READ THIS! : Comparing : TEMPORARY DIFFERENCE vs MOVEMENT IN TEMP DIFF vs 105 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
SARS LIABILITY ACCOUNT vs PROFIT BEFORE TAX: i. MANAGEMENT EXPECTS SUFFICIENT PROFITS 28% of Profit :: remember that if there is a deferred tax asset of 100, and management expects profits of 200, that one cannot deduct 100 from 200 and say yes : RATHER it is 28% * 200 = 56 that can be used, since the deferred tax gets deductedfrom TAX on profit, not from PROFIT ITSELF. ii. The 33.4 % of a capital gain MUST BE DEDUCTED from accounting profit to get taxable profit when you do the Taxable Profit Calculation in important priciple below as a NON_TAXABLE item. iii. BUT YOU CAN COMPARE A TEMPORARY DIFFERENCE(BEFORE % ING IT) TO PROFIT BEFORE TAX DIRECTLY, and even minus total temp diff from profit before tax to see if there will be a tax profit/loss : This is because : (see Decriptive pg 171 Ex9.16.) a. The TempDiff is caused by the way SARS allows a deduction . So if there is a TAXABLE deferred temp. diff. of 500 (before X the temp. diff. by 28%) and profit of 600, it means there will only be tax that year of 100. This is becasue WHAT CREATED THE TAXABLE DEFERRED TEMP.DIFF. IN THE FIRST PLACE WAS SARS ALLOWING MORE DEDUCTIONS THAN ACCOUNTING DEPRECIATION IN THE BOOKS DID. b. It allways works OPPOSITE here: if you have a Taxable Deferred Temp. Diff. of 600, an profit of 500, it means:: c. TAXABLE : =Profit TAX LIABILITY = True Profit after SARS Tax i. Taxable in future means this year SARS gave this much EXTRA DEDUCTIONS off your profit d. DEDUCTABLE :=Profit + TAX ASSET = True Profit after SARS Tax i. Deductable in future means this year SARS gave LESS DEDUCTIONS than your profit shows, so you made more accounting deductions for depreciation etc, so you must add this back to profit to get an estimate of Profit after Tax for the year. e. Accounting Profit 500 f. MINUS Temp Diff 600 g. = Profit/Loss for the year. 100 LOSS after tax will happen, cause SARS is allowing more this yr than you e. VERY IMPORTANT !! : How to work out the CURRENT INCOME TAX EXPENSE sars will charge you for year from TEMPORARY DIFFERENCES for the year: i. Note: Do not include movements in losses/unused losses etc in the Movements line item in the Taxablwe Profit Calculation Below! Losses etc are done separate at the bottom , not using temp diffs . ii. If a question gives you the temporary differences for the year and the accounting profit , but does not give you the INCOME TAX EXPENSE sars will charge you, then you work it out by : 1. Read (b) important principle above first. 2. Now, take accounting profit 3. + MOVEMENT in temp diffs for the year (EXCLUDE LOSSES/CREDITS MOVEMENTS COMPLETELY!) 4. (+deductable or non- taxable items ) : eg Capital gains 33.4% portion , Fines , Dividends. Impairment Loss in P&L (notimpairment part in OCI) 5. and the result gives you (almost) your TAXABLE INCOME or LOSS for the year. 6. Now add previous years unused losses/credits 7. (Now add previous years changes to defrred tax account : tax rate (I think)) 8. = TAXABLE PROFIT or LOSS for the year 9. X multiply by the tax rate to give tax expense for the year.(watch out for CGT or foreign taxes at different tax rates though in part of it) 10. = TAX EXPENSE f. PRINCIPLE : Defrred Tax SFP vs Deferred Tax P&L entry : these 2 are not opposite to each other : they cause the same thing : i. a tax expense(DR)in Income Tax Expense (P&L) caused by deferred tax this year becomes a tax liability(CR) in Deferred Tax (SFP) account they work in sync . > expense = liability ii. a tax incomee(CR)in Income Tax Expense (P&L) caused by deferred tax this year becomes a tax asset(DR) in
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the Deferred Tax (SFP) account they work in sync .> income = asset. MOVEMENT IN TEMPORARY DIFFERENCES: a. You compare ONLY 2 things to Get the TOTAL movement in temp diffs.: i. 1) TEMP DIFFS : Compare This Yrs Schedule of Temp Diffs (excl. losses etc) to last years ACTUAL Temp Diffs Recognised from Last yrs Schedule of Temp Diffs. ( if any part of last years schedule was not recognised then leave it out forget it completely you make NO adjustments or journals for this left out part except in Notes: (Both in Major Components & Reconcilliation in Notes only.) 1. So if last year only half were recognised due to a loss : you compare to that half recognised, and if DOUBLE was recognised due to a loss and you had to clear out the deferred tax account of an old asset then you compare to that DOUBLE that would effectively have had to had been your Total Of Schedule in order to have passed a Movement like you did to clear out the Deferred tax account. ii. 2) LOSSES : Compare This Yrs Losses that would go in Temp Diffs Schedule to last Yrs Losses that would go in Temp Diffs Schedule. 1. (if last yrs losses were not recognised ??: So if last year only half was recognised due to a loss : you compare to ONLY the part that was recognised last year : NOT to last years movement, but to the part that was recognised in order to get the movement last year. iii. Add these 2 together to get your movement for the year. iv. YOU DO NOT COMPARE THIS YEARS SCHEDULE TO LAST YEARS DEFERRED TAX ACCOUNT BALANCE. b. Last Yrs Unrecognised TempDiffs : the Deferered Tax Balance is controlled up and down as follows: 1. To move up last years deferred tax amount to what it should have been (if some Temp Diffs were not allowed to be recognised due to a loss) before you journalise this years movement ( or only part of it if there is another loss) you must DO NOTHING : this happens auto with the movement thing since you compare this yrs schedule to last yrs schedule THAT WAS RECOGNISED only. 2. if there is already too much in the deferred tax account (from last year still)and it must go down cause it may not be recognised due to a loss -? 3. f there is an unused loss as well as a temp diff in the deferred tax account: and you have to adjust just the temp diffs this year :? TAXABLE INCOME ON PROFIT FIGURE: (excl. deferrred tax,claimable losses,credits etc) a. Depreciation incl. in Profit before tax : if it says Profit before tax is 100 , incl depreciation of 20 , and sars allows depreciation of 30, then the actual Profit Before Tax figure you use for X 29% is : (100 +20 back in ) 30 SARS deduction. so working out the Temp Diffs here using SARS figures using devious methods from the accounts basicly, so add back the depr. before you do the SARS deduction. This is cause that is basicly doing a mini-defrred tax calc. here quickly .This will be overcome by just add/less the Movement in Total Temp.Diff. (between Schedules , not between the deferred tax account and this years schedule! Rem unrecognised temp diffs etc) for the year that should have taken all these finicky defrred tax items things into account already.
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CHANGE IN TAX RATE METHOD : a. As soon as a rate change occours, where future deferred tax would be measured at a new rate, like a correction of Prior Period Estimate, the first thing one must do at end of fin yr, is : i. 1st : to JOURNALISE to Deferred Tax Balance Account in the SFP , is the difference that the rate makes to last years old deferred tax balance, to bring it up to the new rate. Journal : Deferred Tax CONTRA Income Tax .Half may be at one rate, the other at another rate so one must be careful.(eg capital gains tax) and there may be revaluations which would not show in Old Deferred Tax account but Show in Revaluations Surplus account Deferred Tax. ii. 2nd calculate the tax rate change effect on the revaluation surplus(after all depreciation transfers to retained earnings) left from last year. REMEMBER that revaluations are NOT granted any tax allowance from SARS so their tax base is allways ZERO. So the Carrying Amount is the Reval. Surplus. And the Tax Base = 0 future deductions allowed. Only say 29%-28% = 1 % difference. So add 1% of Rev Surpl. To itself by a journal entry. Journal : Deferred tax CONTRA Revaluation Account (SFP) Note: IT DOES NOT GO TO INCOME TAX ACCOUNT IN P&L ! IT GOES TO Reval Surplus instaed , and at yr end you must manually find and get the
part that goes into OCI as the deferred tax for OCI for the year and manually put it in Notes or whereever. There is no account just for this one alone- it all just gets bunged in the deferred tax account. iii. Line In Reconcilliation : add effect of 1)Revaluation + 2)Old Deferred Tax Account to give you a 1 total. For all. iv. Line in Major Componenets of Income Tax: Journal is Deferred Tax CONTRA Income Tax so this Note must also a have a line. Then for this years Temp. Diffs. you work them out at the new rate. Since the Deferred Tax Account has been changed they are now compatable with the old rate so you can minus one from the other to get the Net Change in Temp Diffs for the year. Dont worry about getting/putting the rate change in as a movement in temp diffs , the rate change does not show there , rather it shows in the tax rate reconcilliation as a line item.( like a change in accounting estimate). The Temp Diffs will balance themselves automatically. UNUSED TAX CREDITS AND LOSSES : DEFERRED TAX : If there are any unused tax losses or credits available, that were not used up this year , they must be added to Deferred Tax Total at the BOTTOM OF THE LIST OF TEMPORARY DIFFERENCES . (if there will be likely profit or opposite temp diffs next yr available to use them). (there will be only 1 amount for tax losses since last yrs loss is included in your calc. to get this years loss. a. Deferred Tax Note :This item must also appear here in Schedule of Temporary Differences in the Deferred Tax Note to the Financial statement WORKING OUT THE DEFERRED TAX ASSET /LIABILITY: a. METHOD : Just multiply the temporary difference by the tax rate for that item (eg: 14% for capital gains)and that is your DEFERRED TAX for that item b. JOURNALS : This amount is the CHANGE FOR THE YEAR NEVER THE DEFRRED TAX FOR THE YEAR i. . JOURNALISATION AMOUNT : 1. You work out this years deferred tax from this years temporary differences schedule. 2. Then compare last years schedule to this years schedule , and get the difference beween the 2. 3. The difference is what gets journalised for each Deferred Tax Temporary Difference , eg Revenue Received in Advance , or PPE : Asset Building etc. a. So basicly last years balance does not fall away, it stays the same. Then this years CHANGES simply get added/subtracted to it to get the new balance for this year. REM: every account that was included in deferred tax last year must be included again this year (worked out again) until that account dissapears to keep your balances right. If there was no item last year and it appears for the first time this year then take last yrs balance as 0. 4. YOU DO NOT JOURNALISE THE TEMPORARY DIFFERENCE DEFERRED TAX FOR THIS YEAR AT ALL, only the change from last year to this year . ii. JOURNALISATION OF TEMP.DIFFS THAT MAY NOT BE RECOGNISED , OR MAY BE AFTER BEING DISALLOWED LAST YEAR DUE TO A LOSS: Own notes pg 89 : If not all of the temporary differencesmay be used due to there being a loss this year , and half the list will not be ableto be used , what do you do with 1)the half of 1 that may/may not be used, and2)the ones that may not be used- how do you journalise them after choosing which to use and not? : 1. For this year when that happens : lecturer says: a. They do not journalise each one individually eg vodacom. They work out the TempDiff Schedule and take the total amount and journalise like shown below in journals: b. if some part of the temp diffs may not be recognised , all you do is treat it as PART OF THE MOVEMENT IN TEMP. DIFFS. For the year. So you basicly work out what your Journalisation Amount is by determining what the deferred tax account balance must be first : eg if it must be 0 zero , then make a corresponding journal entry and just leave outor forget the temp diffs that may not be included. So c. Tax Losses & Credits : rem : that tax losses & credits must go in the Schedule of Temp. Diffs. when you work it out. So they are the last line item in it and get inclused automaticly in the same Movement in Temp. Diffs.for the Year journal entry at yr end all in one go. Rem that means you work out if there will be a tax loss this year BEFORE you finish the Temp Diffs Schedule completely, to add it in! So it forms part of the 1 figure you journalise all in 1 go , not separately . b.
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d. Fin Stats Notes : i. Major Componenets of Income Tax : Only Year 2 : If you left some out this year IT DOES NOT go in note, [only if you recognise a previously unrecognised amount then it goes to DEFERRED TAX heading in this note for temp diffs or Current Tax Heading for now recognised losses in current tax.( previously unrecognised temp. diffs. recognised in current tax this year goto deferred tax heading in this note.] ii. Tax Reconcilliation : Year 1 and Year2 : if you left out some this year it must go in tax recon, AND if you left some out last year but this year the previously unrecognised amount was recognised they must both go in Recon. 2. And 2, for next year when you want to journalise them back in again into your deferred tax because there is a likelyhood of now sufficient taxable profit.? a. You simply do the opposite of what you did last year. So last year you reduced you deferred asset /liability account to a certain level artificially by the very same movement in temp diffs journal entry that you used to journalise your temp diffs movement for the year. Now this year you have a eg very low deferred tax account balance that must be brought up to a new level so you work out your shcedule of temp diffs, and if you may recognise them all then get the change from last years low balance to this years higher balance and journalise it as a NORMAL Movement in Temp.Diffs. for the year all in one go. b. Tax Losses & Credits : note above for this year, it works the same. c. Fin Stats Notes : i. Major Componenets of Income Tax : You must also make a note of what the actual amount that was unrecognised last year but did get recognised this year : becuase that must go to Major Components of Income tax Note . If you recognise a previously unrecognised amount then it goes to DEFERRED TAX heading in this note for temp diffs or Current Tax Heading for now recognised losses in current tax.( previously unrecognised temp. diffs. recognised in current tax this year goto deferred tax heading in this note.+ ii. Tax Reconcilliation : 1. Tax Reconcilliation : Year 1 and Year2 : if you left out some this year it must go in tax recon, AND if you left some out last year but this year the previously unrecognised amount was recognised they must both go in Recon. iii. JOURNALISATION OF UNUSED TAX LOSSES :How do you journalise a unused loss into the deferred tax account? iv. JOURNALISATION: 1. Deferred Tax Asset : a. DR: Deferred Tax Account : (SFP : Non-Current Assets.) i. CR Income Tax Expense (P&L) OR ii. CR OCI eg: Revaluation Surplus Account (OCI) iii. CR EQUITY DIRECTLY eg : Retained Earnings (SFP) (eg for a Correction of past Error)) 2. Deferred Tax Liability : a. CR Income Tax Expense (P&L) OR b. CR OCI eg: Revaluation Surplus Account (OCI) c. CR EQUITY DIRECTLY eg : Retained Earnings (SFP) (eg for a Correction of past Error)) i. DR: Deferred Tax Account : (SFP : Non-Current Assets.) 7. INCOME TAX EXPENSE IN P&L Statement: this is made up of : (there can be some other extras see IAS12Disclosure or Last heading in own notes under disclosure for more) a. CURRENT TAX : i. Current Years ii. Past Years 1. Unused Tax Losses
8.
2. Unused Tax Credits 3. Past Years Changes b. DEFERRED TAX : i. Temp Diff Change : : Only the chang/ difference between last years temporary differences and this yrs temporary differnces the change up or down in each balance.. You can journalise them individually one by one or just use the whole TOTAL from the temporary differnces schedule Vs Last Yrs. ii. Change in Tax Rates : The effect that the chnages in tax rates will have on last years deferred tax balance. iii. Past Years Unused temp.Diffs &Losses & Credits that were not recognised (profit problem) but are recognisedthis year (profit problem fixed this year) c. FOREIGN TAX : CAN be same as above or just a simple calculation, depending on question. DEFERRED TAX ACCOUNT BALANCE in SFP Statement: a. Last Years Balance Left Over : in the Deferred Tax Account b. Change In Tax Rate: i. As soon as a rate change occours, where future deferred tax would be measured at a new rate, like a correction of Prior Period Estimate, the first thing one must do at end of fin yr, is to JOURNALISE to Deferred Tax Balance Account in the SFP , is the difference that the rate makes to last years old deferred tax balance, to bring it up to the new rate.Half may be at one rate, the other at another rate so one must be careful. ii. Then for this years Temp. Diffs. you work them out at the new rate. Since the Deferred Tax Account has been changed they are now compatable with the old rate so you can minus one from the other to get the Net Change in Temp Diffs for the year. Dont worry about getting/putting the rate change in income tax expense for the year as a movement the rate change does not show there , rather it shows in the tax rate reconcilliation as a line item.( like a change in accounting estimate) c. Final Temp.Diffs.Change This Yr : + change in balance of each item of deferred tax from last year to this year : ONLY the difference between the 2 is what goes to Income Tax Expense.
i. Note : if you get a movement for the year of liability 2000 in defrred tax, it does not mean that 2000 goes to the Income Tax Expense, IT COULD ALSO MEAN THAT 3000 asset goes to Income Tax Expense, and 1000 liability goes to OCI eg: Revaluation Surplus which is 3000- 1000=2000!
9. SARS LIABILITY ACCOUNT amount : a. + Tax by SARS Rules : + Specifically Worked out Tax by SARS rules: (not deferred tax, or tax from profit before tax this is a completely separate thing to deferred tax, it has nothing to do with it. b. (Provisional Tax Paid Already) : this year c. + Last Year : Amounts Due from SARS or Due To SARS from Last Year.
EXAMPLES OF EXPENSES caused: BASES (THERE IS NO EXPENSE TAX BASE, THEY ARE ODD CASES THAT FALL IN THE
OTHER 3)
1) ASSETS TAX BASES : RESEARCH COSTS (Assets Special Case 1 Of 5)

......company paid for research costs of 10000, and wrote it off immediately as an EXPENSE. But for SARS tax purposes these costs relate to a CAPITAL ASSET. SARS allows it to be deducted over 3 yrs.
CARRYING AMOUNT Less: TAX BASE = =Temp.Diff
Zero : (it was written off as period costs) 5000 : 10000 50% aleady deducted, leaves 5000 deductable in future. (5000) : negative - 5000, where if you had said carrying amount was 10000 and not 0, you would have had positive +5000 . ****ASSETS TAX BASES : of DEPRECIATION itself.

****ASSETS TAX BASES : of SHARE BASED PAYMENT OPTIONS WITH TAX INCENTIVES(SEE IAS 12 EXAMPLE). CARRYING AMOUNT Less: TAX BASE = =Temp.Diff
EXAMPLES OF INCOME caused : TAX BASES (THERE IS NO EXPENSE TAX BASE, THEY ARE ODD CASES THAT FALL IN THE
OTHER 3) 1. Cannot find any
TAX BASE OF AN ASSET 1. DEFINITION : TAX BASE OF ASSET: The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset in future periods. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount. 6 SPECIAL CASES OF ASSETS: 1. SPECIAL CASE : INITIAL RECOGNITION AFFECTS NEITHER ACCOUNTING PROFIT NOR TAXABLE PROFIT Eg: Land, & other Assets that SARS does not grant an Allowance For: : so the taxable profit after tax AND accounting NET PROFIT before tax will both not be affected. This can happen if you buy any asset (asset exchange money for asset no profit) AND SARS does not grant any deductions for this type of asset in ALL future periods (so taxable profit is never to be affected-no deductions allowed from taxable profit) Eg: Land. a. The Rule Here Is : Since future economic benefits are not taxable , tax base is = carrying amount per Definition, so temp diff= 0. You must ignore this entire thing for temp. diff. purposes ---not sure which , left or right---. No deferred tax may be raised. Also for any future depreciation of asset or revaluation /impairment , the change resulting from any of these may also NOT be recognized for Deferred tax purposes (write in the tax base but put a line in Temp.Diff space , with the words or something. ( even though the future economic benefits eg rent , OF THE ASSET will be taxable, this rule still applies because acc.profit is not affected by any depreciation for land ,and also not for SARS tax) b. For Use Or For Sale : (i think assets eg : land is zero for sars if its use is to be used , not sold- you must mos choose n recognition. but if it is to ber sold, then there is probably CGT to be raised as a deferred tax ie there is a tax base then and a temp. diff. SO this rule will NOT apply. etc.- ask lecturer put this in questions when you get here- hve not yet put it in there!) 2. SPECIAL CASE : GOODWILL : Goodwill falls under the exemption in IAS12.15- so one may not recognise deferred
tax on the INITIAL RECOGNITION of goodwill , NOR on any SUBSEQUENT RECOGNITION THAT IS DUE TO THE INITIAL RECOGNITION. BUT, one must recognise deferrred tax iif it is for another reason other than it was originally caused by INITIAL RECOGNITION- so if SARS grants a tax deduction for amortisation ( wear&tear ) of goodwill in subsequent years then deferred tax on this MUST BE RECOGNISED. This all per IAS12.21A&B- which is just IFRS way of saying- not for internal accounting reasons, but for SARS granting you deprecition on it you must recognise deferred tax : Note: if you must recognise it becasue SARS gives a deddcution that year, then use the current carrying amnt of goodwill as carrying amnt- not the original undepreciated book value- since SARS allowance immediatly switches the whole thing back to normal as if there was no rule saying subsequent goodwill moves may not be recognised. ( see exam-ple in IAS 12.21 B and opposite in IAS12.21A say company depeciation was 10% so caaaying amount was 90- what would the defrred tax be- do you still ignore the inhouse initial/subsequent recognition stuff and say 100-80= 20 or say 9080=10? What do they mean?) 111 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
SPECIAL CASE : WHERE TAX RATE DEPENDS FUTURE USE OF ASSET : An asset tax base must be determined , per ias 12, depending on what mngmnt indends the use of asset to be : ie either on a will be sold basis (14% CGT rates used) or on a will be used basis rented out or own use -(28% normal tax rates will apply) (see ias on held for sale basis)or on a held for sale basis (no depreciation) or to use (depreciation counts for somethings). 4. SPECIAL CASE : REVALUATIONS : any revaluation changes the carrying amount of asset , so the tax base must change as well(?yes or no?)! Rem: OCI and SCI parts get completely treated separately each gets its own tax . 5. SPECIAL CASE : DEPRECIATION : b because SARS views depreciation as a deemed CAPITAL ASSET , it falls in the definition of ASSETS for tax base definition. However the company treats it as an an expense. When you do these amounts , the tax base will be calc. as normal , but REM that the carrying amount of the item MUST BE TAKEN EXACTLY AS IT STANDS IN THE BOOKS ie so non-existant here , so zero -0- in this example. . Do not just deem it to be an asset if it was written off as an expense/income then it is gone the imaginary asset CARRYING AMOUNT in your calc. must be 0. So the Carrying amount is ????????
3.
6. SPECIAL CASE : ACCOUNTING INCOME/EXPENSE AMOUNTS written off by Company but Treated Under the ASSET definition because it is caused/deemed BY SARS policy TO BECOME ASSETS: eg: Research Costs Written Off In Books certain amounts that for accounting purposes go to income statement, are DEEMED by SARS to be ASSETS or LIABILITES for the purpose of TAX. : eg: RESEARCH COSTS WRITTEN OFF IN BOOKS by accountant AS PERIOD COST IN FIRST YEAR, WHERE SARS ALLOWS A 50/30/20 DEDUCTION and therefore SARS is treating this a a CAPITAL ASSET but company as an EXPENSE , thereofre it still falls in definition of an ASSET for Deferred tax purposes. this is treated as a Tax base asset since SARS treatment makes this an asset in your books,even though it is never written up as an asset at all- just kept as an expense. When you do these amounts , the tax base will be calc. as normal , but REM that the carrying amount of the item MUST BE TAKEN EXACTLY AS IT STANDS IN THE BOOKS ie so non-existant here , so zero -0- in this example. . Do not just deem it to be an asset if it was written off as an expense/income then it is gone the imaginary asset CARRYING AMOUNT in your calc. must be 0 .so Temp.Diff will be (negative) whereas one would imagine it to have been Positive.!!! a. EG RESEARCH COSTS WRITTEN OFF AS PERIOD COST IN FIRST YEAR, WHERE SARS ALLOWS A 50/30/20 DEDUCTION. Tax Base = 10000 50% aleady deducted, leaves 5000 deductable in future. Carrying Zero (imaginary asset since it was written off as expense ) Amount Less : Tax R5000 Base =Temp.Diff (5000) negative - 5000, where if you had said carrying amount was 10000 and not 0, you would have had positive +5000 . b. If it says : The related expense will be deducted for tax purposes on a cash basis, it means it will be deducted when it is paid in cash ie: when money actually changes hands EXAMPLES OF ASSET TAX BASES: 1. CAPITAL GAINS/LOSS TAX : capital gains /loss is not a AsSSET or LIABILITY or ANYTHING, it does not get any deferred tax at all, nor go in the deferred tax calculation: it ONLY goes in Tax Reconcilliation as a Profits Taxed At DiFferent Tax Rate same as a Foreign Income taxed at a different rate.
CAPITAL GAINS/LOSS TAX : capital gains /loss is not a AsSSET or LIABILITY or ANYTHING, it does not get any deferred tax at all, nor go in the deferred tax calculation: it ONLY goes in Tax Reconcilliation as a Profits Taxed At DiFferent Tax Rate same as a Foreign Income taxed at a different rate.
2. PREPAID EXPENSES: IT is carrying amount full amount asset, tax base = what sars allows still probably zero since it gets deducted in same year but could allow some, it is taxable so there is a temp diff. 3. ASSET TAX BASES : MEANT FOR SALE : BUILDING AND LAND WHERE BOTH ARE REVALUED ASSETS TAX BASES : BUILDING AND LAND WHERE BOTH ARE REVALUED .........Once land is revalued it immediately does not fall
into the Does not affect accounting or taxable profit rule at initial recognition becasue the revaluation affects accounting profit , so it must get defrred tax. : Building of value 60 Land of 40 Building was revalued at 90 and the land at 60.:The Building has Wear & Tear of 30 by SARS already . intended for SALE : When the land and building is sold Capital Gains Tax of 14 % will apply to Cost Price Selling Price , BUT 29% will apply to the Recoupment of the Depreciation.
LAND 60 (COST of 40 revalued to 60) 40 ( Only the 40 cost price is deductable on sale for SARS) 20 @ 14 % capital gains tax To OCI (into reval reserve) 2.8 = (20 @ 14 % capital gains tax)
DEFERRED TAX
BUILDING 90 (Cost of 60 revaued to 90) 30 (cost price deductable for a sale but already granted 30 wear & tear) 30 Recoupment + 30 Revaluation =60 8.4 = 30 Recoupment @ 28% +4.2 = 30 Revaluation @14% CGT =12.6
4. ASSETS TAX BASES: OFFICE BUILDING, WHERE INITIAL RECOGNITION DOES NOT AFFECT ACCOUNTING NOR TAXABLE PROFIT. ASSETS TAX BASES : OFFICE BUILDING, Where Initial Recognition Does Not Affect Accounting Nor Taxable Profit.
......company bought a BUILDING ,for 100 000 WHERE SARS DOES NOT ALLOW ANY RTAX ALLOWANCE ON THE BUILDING. (COULD ALSO BE ANY OTHER TYPE OF ASSET- SAME) . BUT : ANY transaction where SARS does not grant any future deductions iMOST PROBABLY falls under rule IAS12.15, since accounting profit is hardly ever affected on recognition, and then taxable profit will also not be affected. So here: Accounting Profit is NOT affected( Cr bank, Dr Asset) and Taxable Profit is also not affected ( no deductions allowed ever) , therefore following rule applies and DEFRRED TAX may NOT be recognised , even thougjh your calculation may show a temp. diff like it does in below example.(textbook GAAP 2012 pg 132 bottom) 1.1. IAS 12.15 & 24: A deferred tax asset/ liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) the initial recognition of goodwill, or (rem : this rule falls away if there is a deferred tax asset, because only SARS can cause that, not an initial recognition - see heading below on IAS12.15 &24 (b) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). However, for taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, A deferred tax asset/ liability shall be recognised in accordance with paragraph 39.
CARRYING AMOUNT Less: TAX BASE
100 000 : (it was written off as period costs) 0 : because sars does not allow any tax deductions due to that asset in the future for depreciation or any other reason. (BUT future economic benefits from building are l
= =
=Temp.Diff DEFERRED TAX
taxable, so it does not mean that sentence 2 of Asset rule applies here- where future earnings would not be taxable) 100 000 NONE- disallowed by IAS12.15
5. ASSETS TAX BASES: RESEARCH COSTS WRITTEN OFF AS PERIOD COST IN FIRST YEAR, WHERE SARS ALLOWS A 50/30/20 DEDUCTION. ASSETS TAX BASES : RESEARCH COSTS (Assets Special Case 1 Of 5)
......company paid for research costs of 10000, and wrote it off immediately as an EXPENSE. But for SARS tax purposes these costs relate to a CAPITAL ASSET. SARS allows it to be deducted over 3 yrs.
Zero : (it was written off as period costs) 5000 : 10000 50% aleady deducted, leaves 5000 deductable in future. (5000) : negative - 5000, where if you had said carrying amount was 10000 and not 0, you would have had positive +5000 .
Remember this is a SPECIAL CASE where : income/expense amounts are allowed as a eg 50/30/20 deduction by SARS and thus caused by sars to become assets/liabilities: they are never written up as assets -they go to income statement-,but are DEEMED by IAS 12 to be in TAX ASSETS category for the purpose of TAX since they are an asset now. When you do these amounts , the tax base will be calc. as normal , but REM that the carrying amount of the item MUST BE TAKEN EXACTLY AS IT STANDS IN THE BOOKS. Do not just deem it to be an asset if it was written off as an expense/income then it is gone the CARRYING AMOUNT in your calc. must be 0 .so Temp.Diff will be (negative) whereas one would imagine it to be Positive.!!!
6. TAX BASE of PPE : ASSETS TAX BASES : PPE MEANT FOR USE (normal assets method)
........at end of reporting period company has a plant at cost of 200 000 and acc depr of 40 000.So far, for tax purposes SARS has allowed wear of 50 000 on plant.
+160 000 : Book Value less Acc. Depreciation. = 200 000 less 40000Acc.Dep. =160 000 +150 000 : 200 000 less 50000 already deducted from tax before = 150 000 +10000 : : positive because plus minus plus = plus.
7. *********TAX BASE OF JUST DEPRECIATION ITSELF: ****ASSETS TAX BASES : of DEPRECIATION itself. CARRYING AMOUNT Less: TAX BASE = =Temp.Diff I think not sure :[Minus less Minus = Plus !] NOTE: depreciation is a NEGATIVE amount (it is an expense) opposed to PPE. So if the exam asks for the tax base of depreciation itself alone : you imagine it in brackets , then do as usual workings as above, EXCEPT rem negative minus negative = + so -300 - -100 = 300+100 = -200 NOT -500. But rather dont put brackets or minus sign in the exam but imagine it to be there to work out the answer. If howver the Temporary Difference is negative it must go in brackets though, just the other 2 columns dont put brackets in case the examiner gets funny about it. Allowance for bad debts works the same. 8. TAX BASE OF DIVIDENDS RECEIVABLE: = NOT FUTURE TAXABLE so Tax Base = Acc. CARRYING AMOUNT ASSETS TAX BASES : of DIVIDENDS RECEIVABLE itself : OR Share Of Profit Loss of Associates: works in same way.!
........treated same as debtors, ie in SA dividends tax is withheld by the entity paying the dividend, so for the receiver use the special rule of tax base = carry amnt, SAME as for debtors and tax on profit basilcally, so one will NEVER say any part of Dividnds rec. is deductable in the future,Onle must ALLWAYS use the full Dividends receivable AFTER tax as the carrying amount, and tax base will be = to this amount , so the temp diff will be ie ZERO.-- because the tax will allways be accounted for in current year same as for DEBTORS and TAX ON PROFIT story , so the dividends will NEVER be taxable in the future and therefore second sentence of Asset Rule will allways apply here .(do you put amount before tax or after tax as your carrying amount?: ANS: if you want to show before tax dividends in your books, then move divdends before tax and also then move the tax on dividends to the dividends receiveable account, so it shows in thee, then use this tax lessened amount for your carrying amount in Tax BASE calc. Not sure where Dividends tax could then be an item in your Income Tax Expense in P&L and in Major Components ofcurrent tax Note as an item like foreign tax.
1) If one recives share of profit/loss of associates it works in the same way as dividends. CARRYING AMOUNT 60 000 (RECEIVABLE FORM AN INVESTMENT IT MADE) Less: TAX BASE 60 000 (this is becasue future economicbenefitsfrom asset areNOT taxable in this examples country,so per rule: TAX BASE = carrying amount = =Temp.Diff ZERO must be zero due to rule applied above.
8.1. If Dividends receivable IS NOT taxable in That country : then the second part of Assets Rule applies so: Future Economic benefits from Asset NOT TAXABLE so Tax base will be made = to
Carrying amount of asset, per IAS12 definition.( eg in SA for Companies : Dividens are NOT taxable so this rule would apply) 8.2. If Dividends receivable IS taxable in that country : ( eg South Africa for individuals , NOT companies : new Withholding tax on Dividends does apply) BUT : treated same as debtors, ie use the special rule tax
base = carry amnt, becasue the withholding or similat tax will ALLWAYS be accounted for at recognition, SAME as for debtors and tax on profit basilcally, so one will NEVER say any part of Dividnds rec. is deductable in the future,Onle must ALLWAYS use the full Dividends receivable BEFORE tax as the carrying amount, and tax base will be = to this amount ,ONLY ever OR ELSE if company only uses the figure after tax as the dividends receivable, then that will be carrying amount AND also TAX BASE so the temp diff will be same in botjh cases ie ZERO.-- because the tax will allways be accounted for in current year same as for DEBTORS and TAX ON PROFIT story , so the dividends will NEVER be taxable in the future and therefore second sentence of Asset Rule will allways apply here . (1- is this true above?
2- if some country says: as a rule, if dividends are declared this year but only paid next year, then the company itself who received the dividends must only pay tax on it in the year it is received , but they can put it in as a DEBTOR in current year already: the what would the tax base and logic be?: if tax is 10%, do you say 90% is deductable in future, so tax base is = 90% of dividends receivable or what? CAN ONE HAVE an asset where you will be taxed on it at eg 3% in the following year for some reason- like an enviromental tax or something, for the rest of the assets life, and so you say the amount dedutable in the future is = ?? zero , so tax base = zero, so temp diff = carrying amount?) 8.3. In SA it is the new 2009 Taxation Laws Amendment Act that applies to Withholding Tax on Div. 9. ******Tax Base HELD FOR SALE : ****ASSETS TAX BASES : tax base of HELD FOR SALE
.........
CARRYING AMOUNT Less: TAX BASE = =Temp.Diff Any change in the classification of assets from their normal SFP heading & IAS statement into Non-Current Assets Held for Sale heading in IFRS 5 or visa-versa will result in a Possible change in the carrying amount /accounting valuation of the asset to or from : last carrying amount etc. VS fair value less costs of disposal . The TAX BASE will however remain the same, so any adjustment to the current carrying amount will result in a temporary difference necessitating provision for deferred tax. (see pg 732 gaap for example- [P.S : example pg 731 uses 30% not 14% for CGT watch out]) 9.1. Impairment losses /gains : are always accounted for in Profit & Loss for Non-Current Assets Held for Sale the related tax movement must also be in P&L. 9.2. Movement out of held for sale for asset accounted for using the revaluation model ( except for 1 case: unless it is a transfer back out of held for sale into normal SFP asset heading eg PPE or Intangible assets etc, and the asset in there is accounted for using the revaluation model- then any once-off change goes revaluations acc. so then the deferred tax must also be done in revaluations which is in OCI (Other Comprehensive Income). 9.3. CGT : capital gains tax: 9.3.1. VERY IMPORTANT : RECOUPMENT : when a machine is sold, any RECOUPMENT up to the level of the BASE COST , (not todays base cost, but Original base cost) will be recouped at 29% - the NORMAL TAX RATE. But any capital gains OVER this tax base amount will be taxed at 14.5 % (50% x value X 29%). Since deferred tax must reflect the consequences that will follow the manner in which entity expects to recover the carrying amount of the asset , it is suggested by txtbk that all assets NOT in held for sale must use NORMAL TAX (28% in SA) and all assets in Held for sale must use normal tax up to Original Tax Base Cost (when asset was acquired )
at normal tax rate 29% and capital gains tax CGT at 14.5% for any potential capital gains over the current TAX BASE. (50% of assets at 29% = 14.5%) . 9.3.2. Movement into/out of held for sale : (see CGT above) So when going INTO held for sale, the following 2 rules apply: , and when going OUT of you must first reverse any CGT at 14.5 % still left in Deferred Tax in Other Comprehensive Income ,then put in in Deferred Tax in P&L , and then only reduce/increase the Deferred Tax in P&L for any incr/decr. in the valuation of the asset actually resulting from the move OUT of held for sale. 9.3.2.1. Deferred Tax on CGT :any change in deferred tax from CGT is done in OCI : (Other Comprehensive Income). And NOT in P&L (why?) 9.3.2.2. Deferred tax on potential Recoupment :any deferred tax on the recoupment up to the level of todays Tax Base, must go to P&L -
10. TAX BASE OF TRADE RECEIVEABLES: =Acc. CARRYING AMOUNT since debtors is NOT TAXABLE in the future ASSETS TAX BASES : of DEBTORS (trade receivable)
.........Company has debtors of 86000 at year end:
=Temp.Diff
86000 ( you can first deduct provision for bad debts or do that separate- still done exacly same way below. 86000 ( this is since debtors has already been taxed when the sale was made ie on profit therefore the proceeds of this asset are not further taxablein the future so the TAX BASE = carrying amount as per rule in definition. ZERO : must allways be zero
10.1. Trade Receivables is not taxable(it was already taxed when recognized), stherfore the second sentence in the rule applies here: since item is not taxable in future, then the TAX BASE must be made EQUAL TO the CARRYING AMOUNT of asset in books . 10.2.Allowance for bad debts: rem that this is a liability so it does not come under Assets section, it gets treated as a liability same as other liabilities(see definition of liability Tax Base). However if you want to deduct it from trade receivables first like you do with depreciation, you probably can, then that will be your new starting point: Carrying Amount of trade receivables.
11. TAX BASE OF : TO BE TAXED ON A CASH BASIS : eg: here, interest receivable is used as an example , but normally interest receivable is taxed on a accrual and not a cash basis so this is just an example:(true or not) ASSETS TAX BASES : of TO BE TAXED ON A CASH BASIS 1.1. ......... here, Company loaned money to a debtor, now he owes the 22500 as interest this year already which will only be
taxed on a cash basis by SARS.interest receivable is used as an example , but normally interest receivable is taxed on a accrual and not a cash basis so this is just an example: If it says, item is to be taxed on a cash basis, it means that
even though there is a debtor this year already, the debtor is not taxed on an ACCRUAL basis but on a CASH basis so , the debtor will only be taxed when he pays. Therefore the future economic benefits ARE TAXABLE not like debtors normally where future economic benefits are NOT taxable becasue it is normally taxed on an accrual basis.But this is a bad example becasue in SA interest is normall taxed on an accrual basis, not a cash basis
=Temp.Diff
22500 ( owed to company by a debtor as interest on a loan granted to debtor) 0 ( becuase none of it will be deductable in the future- it is all taxable in the future when the cash is actuall paid across - at whatever tax %- (of course no tax deductions are granted for interest since it is an income , not an expenditure.) 22500
11.1. If it says, item is to be taxed on a cash basis, it means that even though there is a debtor this year already, the debtor is not taxed on an ACCRUAL basis but on a CASH basis so , the debtor will only be taxed when he pays. Therefore the future economic benefits ARE TAXABLE not like debtors normally where future economic benefits are NOT taxable becasue it is normally taxed on an accrual basis.
12. TAX BASE OF INVENTORY WHERE SARS ONLY ALLOWS A DEDUCTION WHEN CASH IS RECEIVED FROM DEBTORS (NEXT YEAR) BUT FOR ACCOUNTING PURPOSES IT IS DEDUCTED ON DELIVERY OF SALE. 13. ASSETS TAX BASES : of INVENTORY WHERE SARS ONLY ALLOWS A DEDUCTION WHEN CASH IS RECEIVED FROM DEBTORS (NEXT YEAR) BUT FOR ACCOUNTING PURPOSES IT IS DEDUCTED ON DELIVERY OF SALE.
.........Company had 150 000 inventory , but SOLD 100 000 inventory, expensed it immediatly on sale, but sars allows deduction only when debtor pays later..
CARRYING AMOUNT Less: TAX BASE = =
50 000 150 000 (sars will allow the 10 0000 when received and the 50 000 when that inventory is sold and paid) =Temp.Diff - 100 000 DEFERRED TAX Defererd tax asset. Since it is negative Note : for normal inventory where sars allows deductiimmediately on delivery, not only on a cash basis, one must still do deferred tax on it, and the carr ammnt will be inventory in stock, and tax base will allways be the same as carrying amount becasue it is allways all SARS deductable when it is sold later, so temp diff will ALLWAYS be zero for that type. 14. TAX BASE OF CAPITALISED DEVELOPMENT COSTS: ASSETS TAX BASES : of CAPITALISED DEVELOPMENT COSTS: where sars does allow wear & tear
.........Company capitalised development costs of 320000 this year, 50 000 was recognised as an amortisation expense.SARS allows 25 % per year over 4 yrs on these capital expenses.
CARRYING AMOUNT Less: TAX BASE = =
=Temp.Diff DEFERRED TAX Note: if the SARS does NOT allow a deduction for the amortisation of development costs but only allows it as a expense in the year it is incurred, it must still get deferred tax , and does not fall under Rule IAS12.15/24 because it does affect taxable profit at initial recognition by having the full expense deductable immediately. So it does affect taxable profit ( Tax Base = 0 cause no future deductions allowed, income is taxable from the capitalised assets future income, and the carryimng amnt = unamortised development costs.
270000 ( 320 000- 50 000 amortised) 240 000 (this is 320 000 25% allowed by SARS already- so in following years other 240000 will still be deductable 30 000
Exactly the same thing as depreciation method ???? ( what happend if SARS only allows 25% in first year otjher 75 % is not deeductable? The tax base is = zero? So temp diff = full carrying amount for rest of life of asset?) 15. TAX BASE OF : A BUILDING ON WHICH BORROWING COSTS WERE CAPITALISED. ASSETS TAX BASES : A BUILDING ON WHICH BORROWING COSTS WERE CAPITALISED.
.........Company capitalised BORROWING COSTS costs of 7000 TO A BUILDING completed and brought into use 1 oct this year ,Also SARS allows 5% P/A (2 000 000) over 20 yrs on buildings. AND company acc. depreciation for buiding is now 587 500.BUT interest is only 100% deductable in current year for SARS .
CARRYING AMOUNT Less: TAX BASE = = =Temp.Diff DEFERRED TAX
46 412 500 = 47 000 000 587 000(acc depr.) 38 000 000 = 47 000 000 7 000 000(interest all already deducted this yr by SARS) - 2000 000 (SARS 5% this yr) 8 412 500
16. TAX BASE OF : INITIAL RECOGNITION AFFECTS NEITHER ACCOUNTING PROFIT NOR TAXABLE PROFIT Eg: Land and ANY initial recognition of ANY asset or liability or income received in advance where SARS grants no future deductions at all .(and in Liabilities section also : Goverment Grants.) ASSETS TAX BASES : LAND : Meant For Use , Not Sale .: Ias12.15 :Initial Recognition Affects Neither Accounting Profit Nor Taxable Profit Eg: : Land and ANY initial recognition of ANY asset or liability or income received in advance where SARS grants no future deductions at all .(and in Liabilities section also : Goverment Grants.): because if SARS grants no deductions it does not affect taxable profit, and accountng profit is hardly ever(basicly never per lecturer) affected ever on initial recognition.
.........LAND : CARRYING VALUE RECOVERED THROUGH USE : Land of 500 000 is bought : intended for USE : example: When PPEis aquired it must be decided whether the carrying value will be recovered through use or sale BUT for non-depreciable asset IAS 12 Auto deems it to be for SALE everytime. IAS12.15 applies since Initial Recognition oftheland does not affect 1-TAXABLE PROFIT or 2-ACCOUNTING PROFIT so per IAS 12.15 & 24 this one is EXEMPT. Fill in all details but for deferred tax space write in EXEMPT like below.
CARRYING AMOUNT Less: TAX BASE = =Temp.Diff = DEFERRED TAX
500 000 (in books) 500 000 (auto deemed to be for SALE by IAS 12 so cost price of 500 000 is deductable) 500 000 : BUT Exempt : Rule IAS12.15 exempts this transaction from deferred tax.
1.2. Here: 1.2.1. Taxable Profit NOR ACCOUNTING PROFIT will be affected: so there can be no deductions allowed by SARS so TAXABLE PROFIT is never affected, and the asset must not be depreciated by company so Accounting
Profit is never affected.Because initial recognition DOES NOT affect any Taxable Profit at all , it means no deductions are allowed in the future for this asset otherwise this condition would not able to be true 1.2.2. .but future economic benefits to be derived from the asset will definitely be Taxable. 1.3. IAS 12.15 & 24 : states a deferred tax liability is NOT RECOGNISED in certain exceptions. ie: 1.4. IAS 12.15 & 24: A deferred tax asset/ liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) the initial recognition of goodwill, or (rem : this rule falls away if there is a deferred tax asset, because only SARS can cause that, not an initial recognition - see heading below on IAS12.15 &24 (b) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). However, for taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, A deferred tax asset/ liability shall be recognised in accordance with paragraph 39. 1.1. Land & Administration Building in example below.
11. TAX BASE OF : LAND : MEANT FOR SALE. ASSETS TAX BASES : LAND : meant for SALE not USE .: where IAS12.15 still applies until revalued. 3.1. .........LAND : CARRYING VALUE RECOVERED THROUGH SALE : Land of 500 000 is bought : CARRYING AMOUNT 500 000 (in books) Less: TAX BASE 500 000 (The tax base will be the full 500000 cost value of the land , since the full cost price is
deductable from the selling price when the item is sold and captal gains tax is calculated in the future.
=Temp.Diff
DEFERRED TAX
ZERO : 0 : The temp diff will remain zero in this case, so land at initial recognition allways ends up the same ( if in that country the full cost price is deducted from sale price and not only part) Exempt: does not affect acc. or tax. Profit on initial reconition either.
12. TAX BASE OF : REVALUED PPE THAT FELL UNDER RULE IAS12.15/24 AT INITIAL RECOGNITION, BUT WAS NOW REVALUED ASSETS TAX BASES : LAND : meant for SALE not USE .: where IAS12.15 still applies until revalued. 1.1. .........LAND : CARRYING VALUE RECOVERED THROUGH use :Building of COST 100 000 and AccDepr. 10 000 is 1.2.
revalued to180 000. Before revaluing it fell under rule ias12.15/24, since SARS did not allow any more deductions when it was bought second hand. But after the revaluation the reval. Does affect accounting profit that year so ONLY the revalued part is recognised for deferred tax, and as it is depreciated as well. The other part stays under IAS12.15/24 and gets no deferred tax.
CARRYING AMOUNT
Less: TAX BASE
= =
180 000 total 100 000 cost 80 000 revaluation 0 0 0 Cost =Ias12.15/24 Revaluation =80 000 Cost =Ias12.15/24 Revaluation =22400 (80 000*28%)
NOTE:
ASSETS TAX BASES : Revalued PPE WITH a RESIDUAL VALUE ,: meant for USE or SALE compared against USE . 1.1. .........LAND : CARRYING VALUE RECOVERED THROUGH USE or SALE : Land of 7000 000 is bought :
The carrying amount of non-depreciable property, plant and equipment that is measured using the cost model in IAS 16 is recovered through sale (as explained below). The carrying amount of a non-depreciable property, plant and equipment that is measured using revaluation model in IAS 16, is recovered through sale (IAS 12.51B). The carrying amounts of depreciable property, plant and equipment that is measured using the cost model IAS 16, is recovered through use. If the asset has a residual value the manner of recovery will be through use and sale. The carrying amount of depreciable property, plant and equipment that is measured using the revaluation model in IAS 16 is recovered through sale and use.
CARRYING AMOUNT Cost=7000 000 Revalued =9000 000
No Residual Value this column below
USE Yes Residual Value

If residual is above tax base , do as at left. ignore it.
Say Residual is above tax base = 3000 000
SALE From Below Cost ABOVE COST up to RECOUPMENT
9000 000 (revalued up in books ) Less: TAX BASE 2800 000 (The tax
base will be what is left of SARS wear and tear allowance )
Carry Residual 9000 000 / 3000 000
9000 000 (revalued up in books) 2800 000 (The tax

base will be what is left of SARS wear and tear allowance )
2800 000
=Temp.Diff
6200 000
Carry
9-3=6000000 @ 28% (depr.)
Residual
above tax base = 1)recoupment + 2) sale profit. Below tax base not taxed at all.
7-2800 000@28% =4200 000@28%
(9-7) = 2 mil CGT [@ 66.6*28%]
200000@66.6%*28%
(From 3 - 2.8 )
DEFERRED TAX
6200 000@ 28%
1680 000
37296 Note: if it was revalued below cost then it is only done in one part(the below cost to recoupment part, at 28%
ASSET TAX BASES : GOVERNMENT GRANTS. TAXABLE GOVERNMENT GRANT : ASSET GRANT ACCOUNTED AS
DEDUCTED FROM ASSET : This type will not have any special Gov Grant Component like the other types it is just a simple normal PPE Deferred Tax Asset Calaculation- just the carrying amounts of asset is a different. So it merely creates a larger temp. diff finish and klaar.. This is becuse TAXABLE grants do not fall under IAS15/24 ruleand are thus not exempt- they do get deferred tax. 1.1. .........GOVERNMENT GRANT ::ABC gets a TAXABLE government grant of 40,000 , to subsidise buying an asset.The asset has a
useful life of 10yrs. This full ampount ios accounted for by deducting it from the asset carrying amount.
1.2. Becasue it is taxable- the full grant received is taxed by SARS in year of recipt, so it does affect taxable profit, thus does NOT fall under rule IAS12.15/24. CARRYING AMOUNT Done as normal PPE Less: TAX BASE = =Temp.Diff = DEFERRED TAX ASSET : GOVERNMENT GRANTS. NON- TAXABLE GOVERNMENT GRANT : ASSET GRANT ACCOUNTED AS deducted from asset: Deferred tax IS exempt: Only taxable grants do get deferred tax. Non-taxable grants of all types are allways exempt. Therefore Temp Diff of Part deducted from asset must be deducted from final temp diff becuase it is an exempt part of it.VERY TRICKY. (and every yr this deduction gets less as it is depreciated- so depreciate this part separately as well 1.1. .........GOVERNMENT GRANT ::ABC gets a NON- TAXABLE government grant of 140,000 , to subsidise buying an asset.The asset
has a useful life of 10yrs.so depreciation is 14000, but 40 000 gov grant is deducted from asset so asset = 100 000 and deprecitaion is 10 000 . Full amount is deducted from value of asset carrying amount.
1.2. It is non-taxable- so the full grant received does not affect taxable profit, thus it does fall under rule IAS12.15/24. So after temp diff is calculated, the part that got subtracted gov grant- from asset must first get depreciation deducted from it, then it must be deducted from temp diff to get the true temp diff. pg 333 textbook. CARRYING AMOUNT 90 000 (140 000-40 000 gov grant 10000 depreciation recognised this yr ) ADD BACK [Gov Grant less Depreciation]= 36000 : 40000 exempt gov. grant less 4000 depreciation this yr =126000 84000 (per SARS) (carrying amount less 40% deducted this yr already not deductable in future) 42000 the book deducts the gov grant temp diff here after working it out using income rec. in advance method - but dont do it that way, use your way using carrying amount. Their way is complex and riddled with inconsistencies. 12600 - not exempt. Tax Laibility
Less: TAX BASE = =Temp.Diff
DEFERRED TAX
13. ASSET TAX BASES : INITIAL RECOGNITION OF GOODWILL IN A BUSINESS COMBINATION. ASSETS TAX BASES : GOODWILL :Initial Recognition In A Business Combination.
1.1. .........GOODWILL : In a NEW business combination , internally generated goodwill of R1000 value was included in price when new subsidiary was bought. Since depreciation (amortisation) of Goodwill may not be claimed as a tax deduction in SA, a temp diff will arise as tax Base is zero since no future deductions are allowed.(note: the future economic benefits of goodwil ARE taxable, just no fuutre deductions for depreciation is allowed, so 2nd part of rule does not apply here) BUT as per rule 1.2. IAS 12.15 & 24: A deferred tax asset/ liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from:
(a) the initial recognition of goodwill, or (rem : this rule falls away if there is a deferred tax asset, because only SARS can cause that, not an initial recognition - see heading below on IAS12.15 &24 (b) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). However, for taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, A deferred tax asset/ liability shall be recognised in accordance with paragraph 39. --This is because what will happen is that the deferred tax created ends up reducing the Net asset Value of subsidiary, which then causes goodwill to have to increase in value again and this will result in a non-ending spiral like this . Any subsequent amortistaions of goodwill arising later after this initial recognition are also NOT RECOGNISED per IAS12.15, so depreciation will cause no later adjustment of deferred tax here either it stays the same.
1000 (in books) 0

The tax is zero since no deductions from future economic benefits are allowed in future in SA for goodwill.)
1000 NONE : reason is IAS12.15 disallows recognition of deferred tax for goodwill, nor on initial nor on subsequnt recognition.
14. Asset Tax Bases : INITIAL RECOGNITION OF ASSET & A BRAND IN A BUSINESS COMBINATION. ASSETS TAX BASES : An ASSET and a separate BRAND : Initial Recognition In A Business Combination.
1.3. .......BUSINESS COMBINATION : an ASSET,, and also a internally generated BRAND , is aquired in a Bus.Comb. the asset is 1000 and the brand value is 500. per IAS 12.15 & 24 , the initial recognition of a BUS COMB. Where it affects neitehr accounting nor taxable profit IS RECOGNISED, as opposed to other assets where it is NOT RECOGNISED. 1.4. IAS 12.15 & 24: A deferred tax asset/ liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) the initial recognition of goodwill, or (rem : this rule falls away if there is a deferred tax asset, because only SARS can cause that, not an initial recognition - see heading below on IAS12.15 &24 (b) the initial recognition of an asset or liability in a transaction which: (i) IS NOT A BUSINESS COMBINATION; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). However, for taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, A deferred tax asset/ liability shall be recognised in accordance with paragraph 39. --So in this case IAS12.15 rule does not apply,and the deferred tax fom the assets MUST be recognised. The Asset will have amounts that are deductable in the future, BUT the brand will not becasue SARS does not allow depreciation on brands. So they will have different tax bases. NOTE: that the deferred tax raised here will immediately cause GOODWILL to have to increase but only once-.it does not create a vicious cycle NOTE: if the brand was aquired separately , and SARS does not allow deductions on depreciation on brands THEN rule 12.15 will apply since this transaction will affect neither accounting (debit brand/credit bank) NOR taxable profit(no tax deduction) on initial recognition . So therefore there will be a temp. diff BUT the DEFRRED TAX may NOT be recognised due to this rule IAS12.15.
Asset: 1000 (in books)

Asset : 1000 (dedcutable in future as wear & tear
Brand:
Brand :
500 (in books)

0 (no W&T tax deductions for brands)
Asset: 0
Brand : 500
15. TAX BASE OF : ASSETS TAX BASES : 1.1. CARRYING AMOUNT

Less: TAX BASE = =Temp.Diff = DEFERRED TAX 16. TAX BASE OF : LAND : REVALUATION : IAS12.51B determines that land can only be recovered through SALE, so one must allways treat it as SALE , not use nor combination . ASSETS TAX BASES : LAND: REVALUATION: IAS12.51B determines that land can only be recovered through SALE, so one must allways treat it as SALE , not use nor combination 1.1. A piece of land is bought for business use at 305000 on 1 jan. It is then revalued at 380000 at Dec 31. 1.2. IAS12.51B determines that land can only be recovered through SALE, so one must allways treat it as SALE , not use nor combination Therefore the rate for Capital gains tax is used to work out the deferred tax. This deferred tax is then recognised in OCI, not in P&L , since the tax follows the asset CARRYING AMOUNT 380 000 TAX BASE 350 000 =Temp.Diff 30 000 (Taxable Liability per book) DEFERRED TAX 4350 = (30000 * 50% *28% ) OR (30000 * 14%.) Capital Gains Tax. Land 350000 BANK 350000 (initial recognition of the land) Land 30000 REVALUATION SURPLUS (OCI) 30000 (revaluation of the land at end of year) Revaluation Surpluss (OCI) 4350 Deferred tax (SFP) 4350 ( why do they say FP and not OCI pg 138) (Recognition of the deferred tax on the revaluation of the land. )
Less: = =
Notes: 1 Jan
31 Dec
TAX BASE OF LIABILITIES. 1. All liabilities as well as all equity and all assets must all get a tax base and all get included in the deferred tax schedule for the year. Most liabilities like Deferred tax Liabilites , Accounts payable, or fines payable all have a tax base = carrying amount (sinceamnt deductable in future is 0 so Tax Base = carrying amount 0 = carrying amount , thus temp. diff comes out zero mostly.All equity like ret. Earnings and Shares all seem to have Tax Base allways = Carrying Amnt. since they are not taxable in future and as assets then the rule applies that tax base must be = carrying amount. So there is never any Temp Diff. for equities(not sure if that is true?) Definition : TAX BASE OF LIABILITY : The tax base of a liability is its carrying amount, LESS any amount that will be deductible [ future tax deduction : you can deduct it from your future taxable income eg for a future warranty costs liability , you can deduct any actually paid future warranty costs from future taxable income ] for tax purposes in respect of that liability in future periods when that liability is settled . Deductable for tax purposes in the future means if say leave pay accrual is only deductable as an expense when it is paid out in cash: so any leave pay accrual will not be deductable this year but only in a future period : that amount is then : deductable for tax purposes in the future and must be subtracted from carrying amount to get the tax base [ rem liabilities is : minus of a minus = + , so the definition must also be topsy turvy the other way around basicly] [also notice : for assets it is when future economic benefits are received but for liabiliities it is
not when future economic benefits are received but when that liability is settled ie: when economic benefits are PAID OUT by the company, not received by it] Taxable Temporary Difference(you owe) hardly ever arises in liabilities or revenue rec. in advance exept in exceptional circumstances eg construction contracts. 1. TAX BASE OF WARRANTY COSTS: LIABILITIES TAX BASES: WARRANTY COSTS :FULLY DEDUCTABLE IN FUTURE
....... A provision for warranty costs account has a balance of 150 .(could also be a Product Guarantee Provision). Since the warranty costs will only be deductable for tax purposes when paid in future, the tax base becomes nil : ie. 150 Carrying.amnt less 150 futruew deductions.
-150 0 (150 -150 =0) -150
2. TAX BASE OF WATER & Llights AND LEAVE PAY ACCRUAL: LIABILITIES TAX BASES: OF WATER & Llights AND LEAVE PAY ACCRUAL
....... Water & :ights of 1250 and Leave pay of 4500 is accrued at year end.
=Temp.Diff
WATER AND LIGHTS ACCRUAL 1250 1250 ( Carrying amnt less what can be deducted in future : zero dedcutable since it was already dedcuted for tax when incurred this year) 0
LEAVE PAY ACCRUAL 4500 0 (4500 carr.amnt less what can be deduted in future of 4500 , since SARS only allows leave pay deducted when actually paid out in future.) 4500
3. TAX BASE OF A FINANCE LEASE ASSET + LIABILITIES TAX BASES: FINANCE LEASE : PARTIALLY DEDUCTABLE IN FUTURE You Must Do An Assest Part & Liability Part they go together, not just 1. So a lease is made of 2 line items in the Deferred Asset Schedule: Asset and Liabiliy Part.
A lessee enters into a lease where fair value of plant is 114. The PV of minimum lease paymenst is also 114.Tax authority allows 14% VAT=14 to be deducted immediately , and all other lease payments to be deducted as they are paid.No depreciation is allowed as a deduction by lessee. At end of year the books show:
.......
CARRYING AMOUNT
Less: TAX BASE
LIABILITY PART -114 (rem this liability carrying amnt will decrease with every lease payment made, so the amnt dedcutable in future will decrease every year as well, so the temp diff will allways = amnt of liability left minus its vat left on that day. -14 (114 100 deductable in future = 14 ) since 14 Vat was already deducted immediately. (ALLWAYS make tax base negative in Liabilities to get the LOGIC to worksince you start here with the carrying amount of (-) anyway , and just adjust it
ASSET PART 100 ( OR 114 INCL VAT? FAIR VALUE OF PLANT?)
0 (no depreciation is allowed by sars on a leased asset)
= =
per the rule, then use whats left of the (-) carrying amnount here). [Here it will allways be this since amnt. deductable in future = zero on capital repayment unless there are some or other gov. tax incentives for taking out loans.] -100 : -114 - -14 = -114 +14= -100 (tax 100 (tax liability) asset) If the payments made do not equal the depreciation on the asset, these 2 will not allways cancel each other out- only on day 1 it seems.
4. TAX BASE OF LONG TERM LOAN AND INTEREST ACCRUED LIABILITIES TAX BASES : LONG TERM LOAN NOT DEDUCTABLE IN FUTURE (AND INTEREST ACCRUED)
.......A LONG TERM LOAN of 800 000 is taken out from a bank. The interest on it each year is 12 % . This amounts to 96000 this year.
CARRYING AMOUNT TAX BASE
= =Temp.Diff = DEFERRED TAX
- 800 000 ( in books negative becasue you owe this , it is a negative) - 800 000 (ALLWAYS make tax base negative in Liabilities to get the LOGIC to worksince you start here with the carrying amount of (-) anyway , and just adjust it per the rule, then use whats left of the (-) carrying amnount here). [Here it will allways be this since amnt. deductable in future = zero on capital repayment unless there are some or other gov. tax incentives for taking out loans.] Zero ( - 800 000 minus 800 000 = - 8 + 8 = 0 (zero) Zero
Note: if given a loan and interest in one question, always separate the 2 and do them 1 by 1 .REM that if they say at end of reporting period no interest has been paid it probably means that interest was ALREADY deducted for tax purposes that year(interest is deductable as it is incurred), not that that item is still going to be deducted because you are doing the fin stats for that year. LIABILITIES TAX BASES : INTEREST ACCRUED from the LONG TERM LOAN.
.......A LONG TERM LOAN of 800 000 is taken out from a bank. The interest on it each year is 12 % . This amounts to 96000 this year.
CARRYING AMOUNT TAX BASE
= =Temp.Diff = DEFERRED TAX
(- 96000) ( in books) (- 96 000) ( since interest is deductable when accrued, not when paid , so it is already deducted from tax this year and none is left to be deducted in next years.- thus amnt. deductable in future = ZERO so negative -96 carrying amnt gets moved to here without changeing the figure first ) Zero (- minus - = + , so -96 + 96 = 0) Zero
5. TAX BASE OF ALLOWANCE FOR CREDIT LOSSES OF TRADE RECEIVABLES. LIABILITIES TAX BASES : ALLOWANCE FOR CREDIT LOSSES OF TRADE RECEIVABLES:
.......Provision For Doubtful Debts : Company has trade receivables of 86000 .The make allowance of 12000 for Prov.Bad debts. SO their carrying amnt in books is 86-12=74000 left over. Now SARS allows 25% of the Prov.Doubt.Debts. as a deduction only, = 12000*25%=3000..HERE ONE SHOULD DO PROV.BAD DEBTS SEPARATE, AND DEBTORS SEPARATE BUT USING THE using the not taxable in future rule = ZERO Temp Diff & ZERO Deferred Tax. AND prov bad debts separate using Liability Rules. Then your final toatl in Deferred tax total in fin stats will be correct. BUT you cannot do BOTH calculations AND INCLUDE PROV.BAD.DEBTS in both , one can only include it in 1 or the other , else you will get DOUBLE the answer in final deferred tax account in fin stats.
= =
-12 000 (it is a negative since it is a liability(provision) that is Dr Bad Debts, Cr Prov.Bad Debts.) -3000 (:NOTE : it is 12000 less what is deductable in future 9000 = 3000 answer. This is cause 3000 was already allowed as a deduction by SARS this year, so what is left is 9000 deductable in the future. So per rule: carr.amnt less deductable in future = 12-9=3. -9000 ( negative minus a negative = [+], so -12000 minus -3000 = -12000+3000=-9000
6. TAX BASE OF TRADE RECEIVABLES with a Prov. Bad. Debts Contra Account. ASSETS TAX BASES : TRADE RECEIVABLES with a Prov. Bad. Debts Contra Account .
.......Provision For Doubtful Debts : Company has trade receivables of 86000 .The make allowance of 12000 for Prov.Bad debts. SO their carrying amnt in books is 86-12=74000 left over. Now SARS allows 25% of the Prov.Doubt.Debts. as a deduction only, = 12000*25%=3000..HERE ONE SHOULD DO PROV.BAD DEBTS SEPARATE, AND DEBTORS SEPARATE BUT USING THE using the not taxable in future rule = ZERO Temp Diff & ZERO Deferred Tax. AND prov bad debts separate using Liability Rules. Then your final toatl in Deferred tax total in fin stats will be correct. BUT you cannot do BOTH calculations AND INCLUDE PROV.BAD.DEBTS in both , one can only include it in 1 or the other , else you will get DOUBLE the answer in final deferred tax account in fin stats.
=Temp.Diff
74000 (THIS IS AN ASSET : it is 86000 debtors LESS Prov.Bad.Debts of 12000 = 74000 Bal.Sheet Amount.) 83000 (NOTE : it is an asset, not a liability, so somehow the 2nd sentence rule of asset rule falls aways-eqaul to carr.amnt if not taxable in future rule) -??how does this work? What kind of logic/rule can one say applied here. When does one decide to leave out second sentence in asset rule? When there WILL be a deductable amount or WHEN) and one does it as per first part of sentence of asset rule: so amnt deductable in the future is the full debtors balance of 86000 (if bad debts) (how vcan one be sure they will all be bad debts- you are creatinga deferred tax asset here out of a theory that all debts go bad! So for any debtor one gets 30% extra in balance sheet as a deferred tax sort of?) Less what SARS already allowe d this year as a deduction(3000) so answer is 86-3=83. -9000 ( this is the same answer as you get if you would do the Prov.Bad.Debts. calculation by itself. So one could in theory do both calc. separate, and then do this one using the not taxable in future rule = ZERO Temp Diff & ZERO Deferred Tax. BUT you cannot do BOTH calculations while including Prov Bad Debts in them both ,separate , one can only do 1 or the other , else you will get DOUBLE the answer in final deferred
tax account in fin stats. = DEFERRED TAX
7. TAX BASE OF ACCRUED LIABILITIES (end of year adjustments): LIABILITIES TAX BASES: LIABILITIES:. SOME DEDUCTABLE, SOME NOT DEDUCTABLE IN FUTURE
.......LEAVE PAY ACCRUAL and WATER AND LIGHTS ACCRUAL : 1250 Whater & Lights and 4500 Leave Pay Accrual is adjusted at yr end. SARS only allows leave pay accrual when pauid out, but water & lights is allowed as a tax deduction.NOTE: in this example we say the leave pay accrual was created for the first time this year : BUT WHAT HAPPENS IF NEXT YEAR YOU MUST ADJUST IT UPWARDS , OR EVEN IF IT STAYS THE SAME NEXT YEAR EXACTLY- WILL ALL THE BELOW THINGS STAY THE SAME??
= =
Water & Lights : -1250 Leave Pay Accrual : -4500 Water & Lights : -1250 ( already deducted this yr, so no future deuctions allowed= carrying amnt less future deductions = 1250-0=1250 tax base. : SO JUST MOVE THE NEGATIVE CARRYING AMIOUNT TO HERE. Leave Pay Accrual : 0 -ZERO - (not allowed as a SARS deduction till actually paid out, so 4500 carrying amnt less future deductions of 4500 = 0 tax base Water & Lights : 0 ( negative minus negative = add : so -1250 +1250= 0 ZERO. Leave Pay Accrual : - 4500 ( - minus - = +, so - 4500 + 0 = -4500) Water & Lights : Leave Pay Accrual :
8. TAX BASE OF : INITIAL RECOGNITION AFFECTS NEITHER ACCOUNTING PROFIT NOR TAXABLE PROFIT Eg: Goverment Grants. Where a Deferred Income Account is used.
LIABILITIES TAX BASES : GOVERMENT GRANTS. Initial Recognition Affects Neither Accounting Profit Nor Taxable Profit Eg: Goverment Grants. NOTE: A GOV GRANT IS A LIABILITY, NOT AN ASSET,BECASUE YOU ARE ONLY EVER TALKING ABOUT THE DEFERRED PART OF IT , ANY PART ALREADY RECOGNISED IS GONE.AND ONE CANNOT GET ANY deductuions from A GOV GRANT ITS IS MOS AN INCOME. 1.3. Other types where this rule applies : ANY initial recognition of ANY asset or liability or income received in advance where SARS grants no future deductions at all .(and in Liabilities section also : Goverment Grants.): because if SARS grants no deductions it does not affect taxable profit, and accountng profit is hardly ever(basicly never per lecturer) affected ever on initial recognition.
1.4. .........GOVERNMENT GRANT : CARRYING VALUE RECOVERED THROUGH USE :ABC gets a NON-TAXABLE government grant of 300 000 , which is accounted for as deferred income(this is a LIABILITY!). 100 000 of thuis grant is recognised in P& L duringh the financial yr. The tax rate is 29%.BUT since on initial reciognition it does not affect accounting profit( income is deferred, the 100 000 is only recognised at end of year, not on initial recognirtion) AND also does not affect Taxable Income ( not taxable) , therfore per IAS 12.15 & 24 no deferred tax may be raised on this asset . 1.5. , IAS 12.15 & 24 takes precedence and the deferred tax may not be recognised at all. IAS 12.15 & 24: A deferred tax asset/ liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) the initial recognition of goodwill, or (rem : this rule falls away if there is a deferred tax asset, because only SARS can cause that, not an initial recognition - see heading below on IAS12.15 &24 (b) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). However, for taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, A deferred tax asset/ liability shall be recognised in accordance with paragraph 39.
CARRYING AMOUNT
Less: TAX BASE
= =Temp.Diff = DEFERRED TAX Note:
-200 000 :(this date is at end of yr in books, after the 100 000 recognised as income that yr has been deducted: if this entry was for the initial regnition it would be 300 000 here since none would have been transferred to P&L yet. But book chose to show at end of yr for this example) 0 : 200 000 -200 000=0. Carrying amnt less future deductable since all the unrecognised income is dedctable in the following yrs when it gets recognised since SARS does not tax this grant so you show an income and deduct it same time in theoretical tax return. -200 000 : (-200 000 0 )(correct per book vertabim) Exempt : Rule IAS12.15 exempts this transaction from deferred tax.
TAX BASE OF REVENUE RECEIVED IN ADVANCE Definition : TAX BASE OF REVENUE RECEIVED IN ADVANCE : In the case of revenue which is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods. * this is also a liability , but here it is less revenue that will NOT BE taxable, where liabilities is less revenue that WILL BE deductable . [ rem liabilities is : minus of a minus = + , so the definition must also be topsy turvy the other way around basicly] 1. TAX BASE of Subscription Revenue Received in Advance:
REVENUE RECEIVED IN ADVANCE TAX BASES: SUBSCRIPTIONS RECEIVED IN ADVANCE .

.......Subscriptions received in advance: at reporting date company created a current liability of 380 for subscriptions received in advance.The subscriptions are taxed IMMEDIATELY in same year becasue they have been received in cash by the company
-380 ( NEGATIVE BEACAUSE IT IS A LIABILITY) 0 ( 380 minus 308 since 380 of this amount it will not be taxable in the future since it was all taxed in the current year already since it was recived in cash) -380 (- minus - = + , so -380 minus 0 = -380)
Note : funny method here.( SARS taxes money as it comes in, but you only recognize it as revenue next year when you send out the magazine.)
2.
Tax Base of Deposit received in advance, where for eg Authority would only tax it in the future.
REVENUE RECEIVED IN ADVANCE TAX BASES: SUBSCRIPTIONS RECEIVED IN ADVANCE .

.......Deposit received in advance: for manufacturing some goods: and say as an example, it woulod only get taxed later when the product is actually delivered.
-500 ( NEGATIVE BEACAUSE IT IS A LIABILITY) -500 ( 500 minus 0 since 3all of this amount will be taxable in the future ) 0 (- minus - = + , so -500 plus 500 = 0)
17. INCOME RECEIVED IN ADVANCE TAX BASES TAX BASE OF : TAXABLE GOVERNMENT GRANT : Income Grant : Deferred tax is NOT exempt ( put here to compare with other asset type gov grants) INCOME RECEIVED IN ADVANCE TAX BASES : GOVERNMENT GRANTS. TAXABLE GOVERNMENT GRANT : Income Grant : Deferred tax is NOT exempt NOTE : This is a INCOME RECEIVED IN ADVANCE per textbook . NOTE: A GOV GRANT CAN BE AN
Income Received In Advance , OR AN ASSET, 1) FOR Deferred Income Account Method : BECASUE YOU ARE ONLY EVER TALKING ABOUT THE DEFERRED PART OF IT Which Is Technically A Income Received In Advance, ANY PART ALREADY RECOGNISED IS GONE.AND ONE CANNOT GET ANY Deductuions From A GOV GRANT ITS IS MOS AN INCOME AND IF Deduct From Asset Carrying Amount METHOD IS USED, THEN IT FALLS UNDER ASSET TYPE OF COURSE.
Only taxable grants do get deferred tax. Non-
taxable grants are allways exempt.

1).........GOVERNMENT GRANT ::ABC gets a TAXABLE government grant of 40,000 , to subsidise salaries over 4 years . Only 10 000 is recognised in P&L in Yr 1 (either as deduction from expense or as an income same for both below 2)Does NOT fall under IAS12.15/24 exemption becasue it is taxable , so it affects taxable profit on initial recognition.
3) CARRYING AMOUNT Less: TAX BASE 30 000 (40 000 10 000 recognised this year ) 0 (carrying amount lesS AMOUNT NOT taxable in future of 30000 since all was already taxed in year of receipt from Governmenet by SARS.)
= =
30 000 9000 @ 30% Tax Liability
18. INCOME RECEIVED IN ADVANCE TAX BASES TAX BASE OF : NON- TAXABLE GOVERNMENT GRANT : Income Grant : Deferred tax is NOT exempt ( put here to compare with other asset type gov grants) INCOME RECEIVED IN ADVANCE TAX BASES : GOVERNMENT GRANTS. NON_TAXABLE GOVERNMENT GRANT : Income Grant : Deferred tax is NOT exempt NOTE : This is a INCOME RECEIVED IN ADVANCE per textbook FALLS UNDER EXEMPTION IAS12.15/24 because it does not affect taxable or acc. profit.on initial recognition ALL NON TAXABLE GRANTS FALL UNDER RULE IAS 12.15/24 AND ARE THUS EXEMPT ALLWAYS EVER AT ALL. (if they are recognised immediately as income they cause no special temp. diff at all) Only taxable grants do get deferred tax.. 1.1. .........GOVERNMENT GRANT ::ABC gets a TAXABLE government grant of 40,000 , to subsidise salaries over 4 years .
Only 10 000 is recognised in P&L in Yr 1 (either as deduction from expense or as an income same for both below
1.2. Does fall under IAS12.15/24 exemption becasue it is non- taxable , so does not affect taxable profit on initial recognition. 1.3. If it is recognised as DEFERRED INCOME below it gives rise to the exemption , but if it is recognised as full amount as income immediately on receipt it is non-taxable so gives rise to no further defrred tax balances to make temporary differences out of. CARRYING AMOUNT 30 000 (40 000 10 000 recognised this year ) Less: TAX BASE 0 (carrying amount lesS AMOUNT NOT taxable in future of 30000 since all was already taxed in year of receipt from Governmenet by SARS.) = =Temp.Diff 30 000 = DEFERRED TAX Exaempt per IAS12.15/24
19. INCOME RECEIVED IN ADVANCE TAX BASES TAX BASE OF : TAXABLE GOVERNMENT GRANT : ASSET GRANT: Deferred tax is NOT exempt ( put here to compare with other asset type gov grants) INCOME RECEIVED IN ADVANCE TAX BASES : GOVERNMENT GRANTS. TAXABLE GOVERNMENT GRANT : ASSET GRANT ACCOUNTED AS DEFERRED INCOME : Deferred tax is NOT exempt NOTE Only taxable grants do get deferred tax. Nontaxable grants of all types are allways exempt. 1.4. .........GOVERNMENT GRANT ::ABC gets a TAXABLE government grant of 40,000 , to subsidise buying an asset.The asset
has a useful life of 10yrs. 4000 is thus recognised each yerar as income , transferred from deferred income.
1.5. Becasue it is taxable- the full grant received is taxed by SARS in year of recipt, so it does affect taxable profit, thus does NOT fall under rule IAS12.15/24. 1.6. The palnt that is bought gets a normal temp. diff. calculation done as well, separate from this one. CARRYING AMOUNT 36000 (40 000 4000 recognised this year ) Less: TAX BASE 0 (carrying amount less AMOUNT NOT taxable in future of 36000 since all was already taxed in year of receipt from Governmenet by SARS.) = =Temp.Diff 36 000 = DEFERRED TAX 10800 - not exempt. Tax Laibility
ASSET TAX BASES : GOVERNMENT GRANTS. TAXABLE GOVERNMENT GRANT : ASSET GRANT ACCOUNTED AS
DEDUCTED FROM ASSET : This type will not have any special Gov Grant Component like the other types it is just a simple normal PPE Deferred Tax Asset Calaculation- just the carrying amounts of asset is a different. So it merely creates a larger temp. diff finish and klaar.. 1.6. .........GOVERNMENT GRANT ::ABC gets a TAXABLE government grant of 40,000 , to subsidise buying an asset.The asset has a
useful life of 10yrs. This full ampount ios accounted for by deducting it from the asset carrying amount.
1.7. Becasue it is taxable- the full grant received is taxed by SARS in year of recipt, so it does affect taxable profit, thus does NOT fall under rule IAS12.15/24. CARRYING AMOUNT Done as normal PPE Less: TAX BASE = =Temp.Diff = DEFERRED TAX ASSET : GOVERNMENT GRANTS. NON- TAXABLE GOVERNMENT GRANT : ASSET GRANT ACCOUNTED AS deducted from asset: Deferred tax IS exempt: Only taxable grants do get deferred tax. Non-taxable grants of all types are allways exempt. Therefore Temp Diff of Part deducted from asset must be deducted from final temp diff becuase it is an exempt part of it.VERY TRICKY. (and every yr this deduction gets less as it is depreciated- so depreciate this part separately as well 1.3. .........GOVERNMENT GRANT ::ABC gets a NON- TAXABLE government grant of 140,000 , to subsidise buying an asset.The asset
has a useful life of 10yrs.so depreciation is 14000, but 40 000 gov grant is deducted from asset so asset = 100 000 and deprecitaion is 10 000 . Full amount is deducted from value of asset carrying amount.
1.4. It is non-taxable- so the full grant received does not affect taxable profit, thus it does fall under rule IAS12.15/24. So after temp diff is calculated, the part that got subtracted gov grant- from asset must first get depreciation deducted from it, then it must be deducted from temp diff to get the true temp diff. pg 333 textbook. CARRYING AMOUNT 90 000 (140 000-40 000 gov grant 10000 depreciation recognised this yr ) ADD BACK [Gov Grant less Depreciation]= 36000 : 40000 exempt gov. grant less 4000 depreciation this yr =126000 84000 (per SARS) (carrying amount less 40% deducted this yr already not deductable in future) 42000 the book deducts the gov grant temp diff here after working it out using income rec. in advance method - but dont do it that way, use your way using carrying amount. Their way is complex and riddled with inconsistencies. 12600 - not exempt. Tax Laibility
Less: TAX BASE = =Temp.Diff
DEFERRED TAX
INCOME RECEIVED IN ADVANCE TAX BASES : GOVERNMENT GRANTS. NON- TAXABLE GOVERNMENT GRANT : ASSET GRANT ACCOUNTED AS DEFERRED INCOME:.
NOTE: A GOV GRANT CAN BE AN income received in advance , OR AN ASSET, 1) FOR deferred income account method : BECASUE YOU ARE ONLY EVER TALKING ABOUT THE DEFERRED PART OF IT which is technically a income received in advance, ANY PART ALREADY RECOGNISED IS GONE.AND ONE CANNOT GET ANY deductuions from A GOV GRANT ITS IS MOS AN INCOME AND IF deduct from asset carrying amount METHOD IS USED, THEN IT FALLS UNDER ASSET TYPE OF COURSE.
1.8. .........GOVERNMENT GRANT ::ABC gets a NON-TAXABLE government grant of 40000 to buy PPE with a life of 10 yrs.
Which is accounted for AS A DEFERRED INCOME WHICH WOULD BE A INCOME RECEIVED IN ADVANCE. Since it is non taxable it does not affect taxable profit on recognition so it EXEMPT under IAS12.15/24
36 000 ( 40000 4000 recogniosed this year in P&L as gov grant income) 0 (36000 less amount not taxable in future of 36 000= 0 ) 36000 Exempt per rule IAS 12.15/24
STEP 2 : CHECK FOR EXEMPTIONS FROM RECOGNITION OF DEFERRED TAX FOR CERTAIN TEMP .DIFFERENCES
1.
2.
DEFERRED TAX ASSET rules: 1.1. A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that: 1.1.1. (a) is NOT a business combination; and 1.1.2. (b) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). 1.2. However, for deductible temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, a deferred tax asset shall be recognised in accordance with paragraph 44. DEFERRED TAX LIABILITY : rules 2.1. IAS 12.15 & 24: A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) the initial recognition of GOODWILL, or (rem : this rule falls away if there is a deferred tax asset, because only SARS can cause that, not an initial recognition - see heading below on IAS12.15 &24 (nor any subsequent impairments or devaluations of goodwill etc.) (b) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). However, for taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, A deferred tax asset/ liability shall be recognised in accordance with paragraph 39. Other types where this rule applies : ANY initial recognition of ANY Asset or Liability or Income received in advance where SARS grants no future deductions at all .(and in Liabilities section also : Goverment Grants.): because if SARS grants no deductions it does not affect taxable profit, and accountng profit is hardly ever(basicly never per lecturer) affected ever on initial recognition. ASSETS BOUGHT : (initial recognition) 4.1. If you buy an asset , eg 4.1.1. Whatever the use you put it to any asset that on INITIAL recognition does NOT affect accounting OR tax profit , is ignored for Deferred tax purposes. Some scenarios to see a bit : 4.1.1.1.YOU INTEND TO SELL IT: its tax base value is what you paid for it (cause of CapitalGainsTax cost of purchase is allowed as deduction against selling price for CGT ) so TempDiff= 0 , but still deferred tax is ignored (initial) 4.1.1.2.YOU WANT TO USE IT:, eg land : so economic benefits will flow, amount deductable for future tax purposes is nil (ie no depreciation for land) : Tax base = 0 , so Temp.Diff = price paid : BUT since its initial recognition does not affect accounting NOR tax profit, per IAS rule the Temp Diff is ignored no deferred tax on it.
3.
4.
4.1.1.3.REVALUATIONS : because it no longer relates to a initial recognition : any Temp.diff must have deferred tax taken into account. (see PPE chapter for how?? Not sure whatthe tax base is here!)
5.
REVALUATIONS : because it no longer relates to a initial recognition : any Temp.diff must have deferred tax taken into account. (see PPE chapter for how?? Not sure what the tax base is here!) (EXCEPT for goodwill (I think) impairments can not , but can revaluations create a tempo. Diff? when EVER is goodwill allowed to get a temp.diff????) GOODWILL : 6.1.1. Per IAS 12.15 : Goodwill may not berecognised for temp.diff or deferred tax . in SA goodwill may not be claimed as a deducton for tax purposes either . Thus : for goodwill the tax base will be 0 (no deductions allowable in SA) and TempDiff=full goodwill as a deferred tax liability(carrying-0=full carrying). But IAS 12.15 disallows the recognition of goodwill and also of any future impairment of this goodwill, as it would reduce the net asset value (through the deferred tax liability) of the entity- leading to a circle of this increasing the carrying amount of goodwill (to balance), round & round etc etc So you just ignore it completely when calc. deferred tax. 6.1.2. Any Future Impairment Of This Goodwill : is also not allowed to be recognized for deferred tax at all 6.1.3. BUT : IF SARS ALLOWS A DEDUCTION FOR GOODWILL: The IAS12.15 rule states that ONLY something that results from the Initial Recognition of Goodwill may not cause any deferred tax. This incl. amortisation of goodwill they say, BUT if SARS allows a deduction for goodwill, that MUST cause a deferred tax, becasue it is due to a special other reason , not duie to the initial recognition of goodwill So here you use the normal current carrying amount of goodwill together with the SARS deduction allowance to calc. deferred tax- so then amortistaion of goodwill will be taken into account from then on till the SARS deductions run out, then not any more of course. That is why recognition of goowill is only dissallowed by IAS 12.15 which deals with Tax Laibilities, not by IAS12.24 which deals with Tax Assets, because a Goodwill Tax Asset could only be created if SARS allows a deducution for Goodwill [Amortisation].(in SA SARS does NOT allow this.) EXAMPLE OF A Initial Recognition of an asset /liability: where accounting profit is not affected. We are not talking here about depreciation affecting the tax base with PPE, but that the Temp.Diff should be 0 from just buying an asset, but here it would be -20000 because of the IAS rules for accounting for a gov. grant. So the rule says you may not recognize this- just ignore.
6.
7.
ASSETS TAX BASES : GOODWILL :Initial Recognition In A Business Combination.

1.1. .........GOODWILL : In a NEW business combination , internally generated goodwill of R1000 value was included in price when new subsidiary was bought. Since depreciation (amortisation) of Goodwill may not be claimed as a tax deduction in SA, a temp diff will arise as tax Base is zero since no future deductions are allowed.(note: the future economic benefits of goodwil ARE taxable, just no fuutre deductions for depreciation is allowed, so 2nd part of rule does not apply here) BUT as per rule 1.2. This is because what will happen is that the deferred tax created ends up reducing the Net asset Value of subsidiary,
which then causes goodwill to have to increase in value again and this will result in a non-ending spiral like this . 1.3. Any subsequent amortistaions of goodwill arising later after this initial recognition are also NOT RECOGNISED per IAS12.15, so depreciation will cause no later adjustment of deferred tax here either --BUT if the SARS allows a tax deduction from it stays the same.
1000 (in books) 0
(The tax is zero since no deductions from future economic benefits are allowed in future in SA for
goodwill.)
1000 NONE : reason is IAS12.15 disallows recognition of deferred tax for goodwill, nor on initial nor on subsequnt recognition.
ASSETS TAX BASES : OFFICE BUILDING, Where Initial Recognition Does Not Affect Accounting Nor Taxable Profit.
......company bought a BUILDING ,for 100 000 WHERE SARS DOES NOT ALLOW ANY RTAX ALLOWANCE ON THE BUILDING. (COULD ALSO BE ANY OTHER TYPE OF ASSET- SAME) . BUT : ANY transaction where SARS does not grant any future deductions iMOST PROBABLY falls under rule IAS12.15, since accounting profit is hardly ever affected on recognition, and then taxable profit will also not be affected. So here: Accounting Profit is NOT affected( Cr bank, Dr Asset) and Taxable Profit is also not affected ( no deductions allowed ever) , therefore following rule applies and DEFRRED TAX may NOT be recognised , even thougjh your calculation may show a temp. diff like it does in below example.(textbook GAAP 2012 pg 132 bottom)
= =
100 000 : (it was written off as period costs) 0 : because sars does not allow any tax deductions due to that asset in the future for depreciation or any other reason. (BUT future economic benefits from building are l taxable, so it does not mean that sentence 2 of Asset rule applies here- where future earnings would not be taxable) 100 000 NONE- disallowed by IAS12.15
LIABILITIES TAX BASES : GOVERMENT GRANTS. Initial Recognition Affects Neither Accounting Profit Nor Taxable Profit Eg: Goverment Grants. (accounted for as aLiability) NOTE: A GOV GRANT CAN BE A LIABILITY, OR AN ASSET,LIABILITY FOR deferred income account method : BECASUE YOU ARE ONLY EVER TALKING ABOUT THE DEFERRED PART OF IT which is technically a liability, ANY PART ALREADY RECOGNISED IS GONE.AND ONE CANNOT GET ANY deductuions from A GOV GRANT ITS IS MOS AN INCOME AND IF deduct from asset carrying amount METHOD IS USED, THEN IT FALLS UNDER ASSET TYPE OF COURSE.
8.
.........GOVERNMENT GRANT : CARRYING VALUE RECOVERED THROUGH USE :ABC gets a NON-TAXABLE government grant of 300 000 , which is accounted for as deferred income(this is a LIABILITY!). 100 000 of thuis grant is recognised in P& L duringh the financial yr. The tax rate is 29%.BUT since on initial reciognition it does not affect accounting profit( income is deferred, the 100 000 is only recognised at end of year, not on initial recognirtion) AND also does not affect Taxable Income ( not taxable) , therfore per IAS 12.15 & 24 no deferred tax may be raised on this asset .
CARRYING AMOUNT
Less: TAX BASE
=Temp.Diff
-200 000 :(this date is at end of yr in books, after the 100 000 recognised as income that yr has been deducted: if this entry was for the initial regnition it would be 300 000 here since none would have been transferred to P&L yet. But book chose to show at end of yr for this example) 0 : 200 000 -200 000=0. Carrying amnt less future deductable since all the unrecognised income is dedctable in the following yrs when it gets recognised since SARS does not tax this grant so you show an income and deduct it same time in theoretical tax return. -200 000 : (-200 000 0 )(correct per book vertabim)
= DEFERRED TAX Note:
Exempt : Rule IAS12.15 exempts this transaction from deferred tax.
ASSET TAX BASES : GOVERMENT GRANTS. Initial Recognition Affects Neither Accounting Profit Nor Taxable Profit Eg: Goverment Grants. NOTE: A GOV GRANT CAN BE A LIABILITY, OR AN ASSET,LIABILITY FOR deferred income account method : BECASUE YOU ARE ONLY EVER TALKING ABOUT THE DEFERRED PART OF IT which is technically a liability, ANY PART ALREADY RECOGNISED IS GONE.AND ONE CANNOT GET ANY deductuions from A GOV GRANT ITS IS MOS AN INCOME AND IF deduct from asset carrying amount METHOD IS USED, THEN IT FALLS UNDER ASSET TYPE OF COURSE. 1.1. .........GOVERNMENT GRANT ::ABC gets a NON-TAXABLE government grant of 300 000 , which is accounted for as A
DEDCUTION FROM ASSET CARRYING AMOUNT ...NOT AS A DEFERRED INCOME WHICH WOULD BE A LIABILITY SEE LIABILITY SECTION BELOW FOR THAT GOV GRANT TYPE . SAY THE ASSET WAS originally at cost of 300000., and depreciation is 10% BUT the asset is in the books at zero and the tax base is 300 000 ( from IAS 12.33: how can it say the tax base is higher than the carrying amount when no deductions are allowed see last sentence in IAS 12.33)
0 300 000 (if.... SARS allows wear&tear on Gov Grant Assets) -300000 - is this right????? Book says it is wrong! Tax Asset
ASSETS TAX BASES : LAND : Meant For Use , Not Sale .: Ias12.15 :Initial Recognition Affects Neither Accounting Profit Nor Taxable Profit Eg: : Land
.........LAND : CARRYING VALUE RECOVERED THROUGH USE : Land of 500 000 is bought : intended for USE : example: When land is aquired it must be decided whether the carrying value will be recovered through use or sale.this example is for USE. Since !- SARS TAXABLE capital gains do not apply, and also SARS allows no deductions for wear & tear on land, and 2 ACCOUNTING POLICY does not depreciate land in the books : therefore IAS12.15 applies since Initial Recognition oftheland does not affect 1-TAXABLE PROFIT or 2-ACCOUNTING PROFIT so per IAS 12.15 & 24 this one is EXEMPT. Fill in all details but for deferred tax space write in EXEMPT like below.
500 000 (in books) Zero ( no part is deductable in future since SARS grants no land wear & tear) 500 000 : BUT Exempt : Rule IAS12.15 exempts this transaction from deferred tax.
----------------------------------------------------------------------------------------------------------------------------------------------------------------ASSETS TAX BASES : LAND : meant for SALE not USE .: where IAS12.15 does NOT apply 1. .........LAND : CARRYING VALUE RECOVERED THROUGH SALE : Land of 500 000 is bought : intended for SALE not USE : example:
When land is aquired it must be decided whether the carrying value will be recovered through use or sale.this example is for SALE. Since !- SARS TAXABLE capital gains DO apply, therefore IAS12.15 DOES NOT apply since Initial Recognition oftheland DOES affect 1TAXABLE PROFIT or 2-ACCOUNTING PROFIT . Capital Gains Tax is 50% of Value at 28% = 14% so a different tax rate applies here.The tax base will be the full 500000 cost value of the land , since the full cost price is deductable from the selling price when the item is sold and captal gains tax is calculated.
500 000 (in books)

from the selling price when the item is sold and captal gains tax is calculated in the future.
500 000 (The tax base will be the full 500000 cost value of the land , since the full cost price is deductable ZERO : 0 : The temp diff will remain zero in this case, so land at initial recognition allways ends up the same ( if in that country the full cost price is deducted from sale price and not only part)
DEFERRED TAX
17. Asset Tax Bases : INITIAL RECOGNITION OF ASSET & A BRAND IN A BUSINESS COMBINATION. ASSETS TAX BASES : An ASSET and a separate BRAND : Initial Recognition In A Business Combination.
1.4. .......BUSINESS COMBINATION : an ASSET,, and also a internally generated BRAND , is aquired in a Bus.Comb. the asset is 1000 and the brand value is 500. per IAS 12.15 & 24 , the initial recognition of a BUS COMB. Where it affects neitehr accounting nor taxable profit IS RECOGNISED, as opposed to other assets where it is NOT RECOGNISED. 1.5. IAS 12.15 & 24: A deferred tax asset/ liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) the initial recognition of goodwill, or (rem : this rule falls away if there is a deferred tax asset, because only SARS can cause that, not an initial recognition - see heading below on IAS12.15 &24 (b) the initial recognition of an asset or liability in a transaction which: -----------------------(i) IS NOT A BUSINESS COMBINATION; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). --So in this case IAS12.15 rule does not apply,and the deferred tax fom the assets MUST be recognised. The Asset will have amounts that are deductable in the future, BUT the brand will not becasue SARS does not allow depreciation on brands. So they will have different tax bases. NOTE: that the deferred tax raised here will immediately cause GOODWILL to have to increase but only once-.it does not create a vicious cycle NOTE: if the brand was aquired separately , and SARS does not allow deductions on depreciation on brands THEN rule 12.15 will apply since this transaction will affect neither accounting (debit brand/credit bank) NOR taxable profit(no tax deduction) on initial recognition . So therefore there will be a temp. diff BUT the DEFRRED TAX may NOT be recognised due to this rule IAS12.15.
Asset: 1000 (in books)

Asset : 1000 (dedcutable in future as wear & tear
Brand:
Brand :
500 (in books)

0 (no W&T tax deductions for brands)
Asset: 0
Brand : 500
STEP 3 :CONSIDER LIMITATIONS FOR DEFERRED TAX ASSET FOR DEDUCTABLE TEMPORARY DIFFERENCES AND UNUSED TAX LOSSES OR CREDITS 1. A deferred tax asset is only recognizable to the extent that it is PROBABLE that taxable income will be available against which it , OR unused tax losses or credits , can be utilized. 2. Note: Special part of Rule: IAS12.27-29 allows one to PRESUME THAT THERE WILL BE SUFFICIENT PROFITS in the next year if there is are SUFFICIENT TAXABLE TEMPORARY DIFFERENCES relating to the same taxation authority and the same taxable entity which are expected to reverse: i. (a) in the [same period] as the expected reversal of the deductible temporary difference; or ii. (b) [in other periods] into which a tax loss arising from the deferred tax asset can be carried back or forward. 3. IAS 12.27-29 says: (superfluous pieces have been erased to make it summarized here) basicly: 27 : An entity recognises deferred tax assets only when it is probable that taxable profits will be available against which the deductible temporary differences can be utilized : (this can happen is 2 cases , either 1 of the following:) SUFFICIENT TAXABLE TEMPORARY DIFFERENCES 28: It is probable that taxable profit will be available against which a deductible temporary difference can be utilised when there are SUFFICIENT TAXABLE TEMPORARY DIFFERENCES relating to the same taxation authority and the same taxable entity which are expected to reverse: i. (a) in the [same period] as the expected reversal of the deductible temporary difference; or
ii. (b) [in other periods] into which a tax loss arising from the deferred tax asset can be carried back or forward. SUFFICIENT TAXABLE PROFIT 29 : When there are insufficient taxable temporary the deferred tax asset is recognised to the extent that: (a) it is probable that the entity will have SUFFICIENT TAXABLE PROFIT relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible temporary difference (or in the periods into which a tax loss arising from the deferred tax asset can be carried back or forward . or (b) tax planning opportunities are available to the entity that will create taxable profit in appropriate periods. 4. the first step is to check if TAXABLE temp. diff. which creates an income OR TAXABLE INCOME itself will be available in the next year/s against which the unused tax losses/credits can be set off. 5. the second step is : to check the timing: if the tax loss/credit cannot be used in the same years in the future as the future Taxable temp. diff. or Taxable Income then it can not be recognized of course 6. CHANGE IN ACCOUNTING ESTIMATE: the re- measurement and adjustment of the deferred tax asset is not an adjustment of the previous years results, but rather a Change in Accounting Estimate. 3.1). UNUSED TAX CREDITS AND UNUSED TAX LOSSES.
1. PUTTING UNUSED TAX LOSSSES INTO DEFERRED TAX : If there are any unused tax losses or credits available, that were not used up this year , they must be added to Deferred Tax Total at the BOTTOM OF THE LIST OF TEMPORARY DIFFERENCES . (if there will be likely profit or opposite temp diffs next yr available to use them). 1.1. Deferred Tax Note :This item must also appear here in Schedule of Temporary Differences the Deferred Tax Note to the Financial statement
2. Both UNUSED TAX LOSSES and CREDITS never appear in Carrying Amount Column : only in the Tax Base column, because they are not accounting positives (you dont show last years loss as an account in your booksit disappears mos in the trading acc/profit loss acc/closing of expense/income accs. Same with tax credits!There is no tax credit account in your books only in SARS books It only shows as deferred tax! )
3. DISALLOWED AND REALLOWED RECOGNITION OF DEFERRED TAX ASSETS: 3.1. THIS YEAR if some tax assets (incl. temp.diffs& unused losses etc)may not be recognised as deferred tax this year due to a loss in the company and insufficient temp.liability.diffs. to balance them out, then they are simply not recognised and any left in last years Deferred Tax Balance are journalised out of it. (see journals in STEP 1) The extent to which they are not recognised must be disclosed in a Note to the fin stats. 3.2. PAST YEARS : if tax assets like above were not aloowe to be recognised last year , but may be recognised as deferred tax assets this year, this is seen as an accounting estimate change. 3.3. Comparing : TEMPORARY DIFFERENCE vs MOVEMENT IN TEMP DIFF vs SARS LIABILITY ACCOUNT vs PROFIT BEFORE TAX: 3.3.1.MANAGEMENT EXPECTS SUFFICIENT PROFITS 28% of Profit :: remember that if there is a deferred tax asset of 100, and management expects profits of 200, that one cannot deduct 100 from 200 and say yes : RATHER it is 28% * 200 = 56 that can be used, since the deferred tax gets deductedfrom TAX on profit, not from PROFIT ITSELF. 3.3.1.1.BUT YOU CAN COMPARE A TEMPORARY DIFFERENCE(BEFORE % ING IT) TO PROFIT BEFORE TAX DIRECTLY, and even minus total temp diff from profit before tax to see if there will be a tax profit/loss : This is because : see Decriptive pg 171 Ex9.16. 3.3.1.1.1. The TempDiff is caused by the way SARS allows a deduction . So if there is a TAXABLE deferred temp. diff. of 500 (before X the temp. diff. by 28%) and profit of 600, it means there will only be tax that year of 100. This is becasue WHAT CREATED THE TAXABLE DEFERRED TEMP.DIFF. IN THE FIRST PLACE WAS SARS ALLOWING MORE DEDUCTIONS THAN ACCOUNTING DEPRECIATION IN THE BOOKS DID. 3.3.1.1.2. It allways works OPPOSITE here: if you have a Taxable Deferred Temp. Diff. of 600, an profit of 500, it means:: 3.3.1.1.3. TAXABLE : =Profit TAXABLE = True Profit after SARS Tax 139 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
3.3.1.1.3.1.Taxable in future means this year SARS gave this much EXTRA DEDUCTIONS off your profit 3.3.1.1.4. DEDUCTABLE :=Profit + DEDUCTABLE = True Profit after SARS Tax 3.3.1.1.4.1.Deductable in future means this year SARS gave LESS DEDUCTIONS than your profit shows, so you made more accounting deductions for depreciation etc, so you must add this back to profit to get an estimate of Profit after Tax for the year. 3.3.1.1.5. Accounting Profit 500 3.3.1.1.6. MINUS Temp Diff 600 3.3.1.1.7. = Profit/Loss for the year. 100 LOSS after tax will happen, cause SARS is allowing more this yr than you 4. SUFFICIENT TAXABLE PROFITS AVAILABLE : An entity may only recognise unused tax losses and credits as part of deferred tax to the extent that there will be taxable profits in the next year/s from which to dedduct it. Exactlty the same rules apply as for temporary difference above. 4.1. Deferred tax ASSETS and deferred tax LIABILITIES are calculated separately. ALL DEFERRED TAX LIABILITES ARE USED, but defrred tax ASSETS are only used if following reasons hold: 4.2. If entity has sufficient taxable temporary differences against which tax credit may be used, one may AUTOMATICALLY ASSUME there will be enough profits in next year. 4.3. Whether there will be tax profits avalable before tax credits expire , and 4.4. whether causes of loss are likely to re-occour. 4.5. If there is a history of recent losses :CONVINCING eveidence of the contrary is required. 4.6. If tax planning opportunities are available.
3.2). RE- ASSEMENT EACH YEAR : at each reporting date, the following musty be re-assesed a. Previously Unrecognized deferred tax assets : to see if maybe there is going to be enough profit etc. in the future , so that they may again be recognized perhaps. b. Previously Recognised deferred tax assets : to see if there will still be enough profit etc. in future to support them.
STEP 4 : APPROPRIATE TAX RATES & LAWS 1 of 2 :Enacted or Substantively Enacted Tax Laws and Tax Rates 1. There are 2 standards which apply to this : 1.1. IAS 12. 47-48 : says any deferred tax must be measured at the rates that are expected to apply at the time the deferred tax is going to be realized- so if the deferred tax can only apply in 2 years time, any pre-announced rate by SARS for that year in the future must be used this year already to value the specific deferred tax in the books this year the only condition is , the rate must be enacted already or substantively enacted which means it can be regarded as enacted, not just on rumours or talk of a possible change in tax rates. 1.1.1. AC502: SUBSTANTIVELY ENACTED TAX RATES AND TAX LAWS: saica ISSUED THIS Ac TO CLARIFY WHEN a tax law is substantively enacted or not yet. 1.1.1.1.TAX RATES plain new rates without an attached new law-must be regarded as substantively enacted from when they are announced by the Minister Of Finances budget statement. UNLESS these rates happen to be inextrucatbly linked to the Law that goes with them eg Captial gains Tax introduced in 2001- then the RATE + the LAW must both only be recognized as substantively enacted once the Law is signed by President & passed, NOT when they are announced as above but rather same as for TAX LAWS below. 1.1.1.2.It distinguishes between 3 types of changes : 1.1.1.2.1.Change in tax rate not linked to changes in law ---Substantively Enacted By by announcement in minister of finance budget speech 1.1.1.2.2.Change in rate linked to change in laws --- Substantively Enacted By only when approved by parliament &signed by president (eg capital gains laws + new tax rate for it)
1.1.1.2.3.Other changes in laws --- Substantively Enacted By only when approved by parliament &signed by president 2. Non-Adjusting Events: IAS 10 :Any tax rates substantively enacted after the reporting date are considered as NONADJUSTING events by IAS10. Disclosure of the non-adjusting event must be provided (namely the change in tax rates) (will this still be a non-adjusting event if say yr end is 30 dec, and the years tax only gets paid in feb, but the new rate is only announced in end jan?) 3. Interim Fin Stats : Exactly same principles as above to be applied.
4. NOT SURE ABOUT BELOW STUFF YET MUST STILL GET THERE.
5. Disclosure: IAS 12.80c7d require disclosure of amount applicable to changes in tax rate or tax law 5.1. For a tax rate change there is a special way of disclosing it.This is just 2 lines in the notes to give the user a clear indication of the figures involved in the changeover. There are only 2 lines: 5.1.1. Line 1 :Transfer Line: the amount applies ONLY to the temp.diff that only the new tax rate ever applied to, never yet to old tax rate ie: any deferred tax just caused in the current year for the first time. 5.1.2. Line 2: Tax Rate Change Line: this amount is the amount to which ONLY THE DIFFERENCE in tax rates applies ie: new rate minus old rate(leave out negative signs though) . 5.1.2.1.THERE ARE 2 METHODS TO WORK IT OUT: 5.1.2.1.1.OPTION 1 :Adjust opening balance -which Year?: 5.1.2.1.1.1. Transfer Line: show in brackets these workings :(any newly created deferred tax from current year[show plus or minus sign] X New Rate next Year) = positive or negative answer . 5.1.2.1.1.2. Tax Rate Line: show in brackets these workings: (all deferred tax from last year X difference in tax rates ????????????????????? 5.1.2.1.2.OPTION 2: Adjust closing balance -which? Year: 5.1.2.1.2.1. Transfer Line: ???????????? 5.1.2.1.2.2. Tax Rate Line:???????????????
2 of 2 : EXPECTED MANNER OF RECOVERY: 1. MANNER OF SETTLEMENT OF LIABILITIES OR RECOVERY OF ASSETS AFFECTS THE MEASUREMENT: for instance if the asset is sold SARS says they tax you 50% OF 28% =14% (capital gains tax) but if depreciated then 28%. ANSWER: the entity must decide what they EXPECT to do with the asset eg sell it or use it- and according to this decision use the appropriate rate. 2. There are 3 ways in which an entity can recover economic benefits from an asset: a. USE : IFRS 5: an assets will be recovered from use if it has no residual value and is not classified as held for sale b. SALE: IFRS 5 : Note: per IFRS 5 the carrying amount of an asset, will be recovered through sale once it has been classified as a non-current asset held for sale. c. COMBINATION OF USE AND SALE: IFRS 5: an assets will be recovered from a combination of use and sale if it DOES HAVE A RESIDUAL VALUE AND is not classified as held for sale. 3. INVESTMENT PROPERTY: a. THERE is a rebuttable presumption that the carrying amount of INVESTMENT PROPERTY will only be recovered through SALE. b. This is only rebuttable if the item is depreciable and held in a business model where substantially all of the economic benefits will be recovered through use during its economic lifetime. For this it cn be use or a combination of use & sale 4. LAND IAS16 & SIC21: says the carrying amount of an asset can be recovered through use or sale, and says land is the only investment property that is non-depreciable. The future economic benefits of a non-depreciable asset can only be realised through sale, not through use.
i. Thus when land is revalued , the deferred tax to be raised on it may only be calc. using CGT (28% of 50%of the value= 14%), not normal tax. , EVEN if the land is used for renting purposes (use) . ALSO if land and buildings are on the same property, they must be dealt with separately. 5. FRAMEWORK says : There must be an expectation that future economic benefits will flow from asset., before eg deferred tax can be applied to it.- ie it must first meet the definition of an asset 6. DISCOUNTING: IAS 12.53 prohibits the discounting of deferred tax assets & liabilities.
STEP 5: RECOGNITION OF THE DEFERRED TAX INCOME OR EXPENDITURE

Deferred tax should be recognised in P&L except for when it is recognised in OTH or directly in Equity or in a Business combination.
1). TRANSACTION RECOGNISED OUTSIDE PROFIT & LOSS

1. There are only 2 other options avalable : 2. DIRECTLY IN EQUITY: 2.1. If the tax relates to an item recognised in equity then deferred tax also follows it: eg: 2.1.1.Opening Balance Of Retained Earnings Adjusted to reflect retrospective change in Acc Policy or correction of a prior period error. 2.1.2.Equity Component Of A Compound Financial Instrument: amounts arising on the initial recognitiion of one of these. 3. OTHER COMPREHENSIVE INCOME: (OTH) 3.1. If the tax relates to an item recognised in OTH then the deferred tax must be recognised in OTH as well. Following are examples: 3.1.1.Revaluation of PPE recognised in OTH 3.1.2.Exchange Differences resulting from translation of the Fin stats of a foreign operation. 3.1.3.Fair Value Adjustments On Financial Assets at fair value through OTH 3.1.4.Changes In Fair Valuie Of A Hedging ISTRUMENT used in a cash flow hedge . 4. EXAMPLES: (see journals) 4.1. Land Revaluation: ASSETS TAX BASES : LAND: REVALUATION: IAS12.51B determines that land can only be recovered through SALE, so one must allways treat it as SALE , not use nor combination 1.1. A piece of land is bought for business use at 305000 on 1 jan. It is then revalued at 380000 at Dec 31. 1.2. IAS12.51B determines that land can only be recovered through SALE, so one must allways treat it as SALE , not use nor combination Therefore the rate for Capital gains tax is used to work out the deferred tax. This deferred tax is then recognised in OCI, not in P&L , since the tax follows the asset CARRYING AMOUNT 380 000 TAX BASE 350 000 =Temp.Diff 30 000 (Taxable Liability per book) DEFERRED TAX 4350 = (30000 * 50% *28% ) OR (30000 * 14%.) Capital Gains Tax.
Less: = =
Notes: 1 Jan
Land 350000 BANK 350000 (initial recognition of the land) 31 Dec Land 30000 REVALUATION SURPLUS (OCI) 30000 (revaluation of the land at end of year) Revaluation Surpluss (OCI) 4350 Deferred tax (SFP) 4350 ( why do they say FP and not OCI pg 138) (Recognition of the deferred tax on the revaluation of the land. ) 143 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
2). BUSINESS COMBINATION

1. In a business combination per IFRS 3 an entirty recognises any resultingh deferred tax assets or laibiliteis as identifiable assets and liabilities at the aquisition date. 2. This recognition then affetc 3 accounts: 2.1. Goodwill 2.2. Gain on Bargain Purchase 2.3. Deferred Tax in SFP of purchaser.
3). CHANGES IN DEFERRED TAX BALANCES WITHOUT CHANGES IN TEMPORARY DIFFERENCES:

1. This can happen due to the following examples. It is recognised in P&L unless it relates to items previouisly recognised outside P&L. Eg: 1.1. Tax Rates & Laws : A change in tax rates or laws 1.2. Reassesments : A reassesment of the recoverability of deferred tax assets. 1.3. Expexted Manner Of Recovery : Chenge in expected manner of recovery of an asset. 2. See example pg 139 txtbk GAAP 2012.
SPECIFIC ISSUES 1]. CHANGES IN THE TAX STATUS OF AN ENTERPRISE or SHAREHOLDERS

1. SIC 25 says the change in a tax ststus of a company must be accounted for in P&L , not in equity etc, UNLESS it relates to items that are recognised in OCI or in equity. Tax status presumably means like micro business with T/O below 300000 at 0% to large business at normal tax rates.
ASSETS TAX BASES : CHANGE IN TAX STSTUS OF AN ENTITY WITH ONLY ASSETS, NO LIABILITES. 1.1. THE TAX RATE OF MEGAWATS INCREASED FROM 28% TO 29%. If megawats had assets of 1500 with a tax base of 1300 , where 50 of the carrying amount relates to revaluations recognised in OCI : then the deferred tax for OCI part of 50 must go separately to OCI, and the rest to P&L (1450). CARRYING AMOUNT 1500 ( of which 50 is due to revaluations recognised in OCI) TAX BASE 1250 (deductable in the future) =Temp.Diff 50 TO OCI 200 TO P&L (150 +50= 200) (Taxable Liability per book) DEFERRED TAX 14,5 to OCI (29% * 50) 58 to P&L (29%*200) 28 Feb Revaluation Surpluss (OCI) 14.5 Deferred tax (SFP) 14.5 ( why do they say FP and not OCI pg 138) (Recognition of the deferred tax on the revaluations. )
Less: = =
Notes
2]. CHANGES IN CARRYING AMOUNTS OF INVESTMENTS IN ASSOSIATES &SUBSIDIARIES &BRANCHES &JOINT VENTURES
1. WHEN DOES IT HAPPEN : Temporary differences when the Carrying amount of the investment in an Assosiate, Subsidiary,Branch or Joint Venture, differs from its tax base. This can happen for amoungst others, the following reasons: 1.1. Undistributed Dividends : of the Latter included in the consolidated fInancial statements . In SA, dividends received by COMPANIES are tax exempt, and are also not included in normal income tax, so it will never occour with a Latter in SA, but if a Latter is situated in foreign country, often a dividends tax is charged by the foreign country on all dividends given out. So if the dividend has not yet been distributed, the 144 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
2.
3.
4.
5.
undistributed dividends must be included in the carrying amount/tax base computation to get the temporary difference for this ASSET. ( Parent etc. will of course have a right to and own a % share of all new profits of Latter)(how do you know when to use dividends tax and when to use capital gains tax? If dividends are undeclared this year, then what says the same profit from this year will be given ouit as dividends in the future?If it is unsure whetehr these dividends will be distributed- or unlikely- then can one use capital gains tax instead?) 1.2. Changes In Exchange Rates: ( if based in differenct countries) 1.3. A Reduction In The Carrying Amount Of An Investment In The Latter : to its recoverable amount. EXCEPTION 1) : A DEFERRED TAX LIABILITY (not asset) SHOULD BE RECOGNISED EXCEPT WHEN: both following conditions satisfied: ( this is for subsidiary & branch, but for associate where there is no control it applies when there may be an AGREEMENT that prohibits distribution of profits , for joint venture if there is control then like subsidiary, if there is no control- then like associate)) 2.1. Parent is able to control the timing of the reversal AND 2.2. It is probable that the temporary difference will NOT reverse in the foreseeable future. EXCEPTION 2) : A DEFERRED TAX ASSET (not liability) SHOULD BE RECOGNISED EXCEPT WHEN: both of the following: 3.1. The temporary difference will reverse in the foreseeable future AND 3.2. Taxable income will be available against which the temporary difference can be utilised. CONS DIN STATS: it should be remembered that in the cons fin stats the investment is represented by the parents share in the net assets of the subsidiary. Therefore, even though there is no single line item in the cons fin stats relating to this investment, it is represented by several line items representing the assets & liabilites of the subsidiary. HELD FOR SALE: 5.1. ONCE investments in Latter are clasified as Held for Sale per IFRS5, then deferred tax must also be raised on Capital Gains Tax. 5.2. If deferred tax was previously raised for other reasons eg: Undistributed Dividends, this must now be recalculated to show the effect of Capital Gains Tax instead. (Not sure if previous exchange difference deferred tax must be kept or changed to capital gains tax or not?)
ASSETS TAX BASES : INVESTMENT IN ASSOCIATE : DEFERRED TAX CONSEQUENCES OF UNDISTRIBUTED DIVIDENDS. 1.1. ON 1 JAN company a form SA invests 800000 in a 30% share in foreign associated company in a foreign country , with no retained earnings or reserves.year end is 31 dec. At year end no dividends are distributed but the profit is 500 000. A 15% non-resident dividends tax is applicable to the foreign country. The exchange rate is 1-1. 1.2. CARRYING AMOUNT 950 000 (800000 + [30% * 500000 ]) ( includes share of proficts) Less: TAX BASE 800 000 ( only the cost of conpany is tax dedcutable) = =Temp.Diff 150 000 = DEFERRED TAX 22500 (150000*15% dividends tax) supposing this will be distributed one day as dividends. PRO-FORMA CONSOLIDATION JOURNAL ENTRIES Notes 31 dec Investment in Assosiate (SFP) 150000 Share of profit of Asosiate (P&L) 150000 (equity accounted profit from associate) Income tax Expense ( deferred tax) P&L 22500 Deferred tax (liability) SFP) 22500 (Recognition of the deferred tax on the investment in associate profit share undistributed. ) 3]. DEFERRED TAX ON FINANCE LEASES
1. The application of the IAS 12.15/24 initial recognition exemption to finance leases in the books of lessee presents a problem IF the tax authority allows a tax deduction for lease payments.-Because since the defintions of tax asset & liability for these 2 would leave a tax base of 0 , there will be a tempory difference. Per IFRIC they consider the IAS12 exemptions separately for each line item, and per them the exemption applies to both the asset & the liability, so NO 145 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
deferred tax should be accounted for for the lease on initial recognition OR SUBSEQUNTLY per IFRIC. But the authors of textbook contend that there should be since the Asset&Liability are inextricably linked, not separate. So the exemption applies, under duress. (Why do they write this here, then on pg 128 top they give an example where it WAS recognised at initial recognition?- so they do what IFRIC says they MUST NOT DO? why?)
LIABILITIES TAX BASES: FINANCE LEASE : Finance Lease Liability Part in the books ,PARTIALLY DEDUCTABLE IN FUTURE
A lessee enters into a lease where fair value of plant is 114. The PV of minimum lease paymenst is also 114.Tax authority allows 14% VAT=14 to be deducted immediately , and all other lease payments to be deducted as they are paid.No depreciation is allowed as a deduction by lessee. At end of year the books show:
.......
= =
-114 -14 (114 100 deductable in future = 14 ) since 14 Vat was already deducted immediately. (ALLWAYS make tax base negative in Liabilities to get the LOGIC to worksince you start here with the carrying amount of (-) anyway , and just adjust it per the rule, then use whats left of the (-) carrying amnount here). -100 : (-114 - -14 = -114 +14= -100) - 28 (-100 * 28%) (deferred tax tax asset- you owe a negative tax)
4].WITHFOLDING TAX ON DIVIDENDS

1. The old STC has been changed to a withholding tax where the entity PAYING the dividend out is REQUIRED to pay dividends tax over to SARS as an agent on behalf of the shareholders. 2. The entity is an agent, so the taX EXPENSE IS TO THE SHAREHOLDER, and not the company, who recognise the full dividend paid out in equity, and only subtract tax afterwards 3. Dividends paid to companies are exempt, so no tax will arise on dividends declared in a group context.
ASSETS TAX BASES : of DIVIDENDS RECEIVABLE itself.

........treated same as debtors, ie in SA dividends tax is withheld by the entity paying the dividend, so for the receiver use the special rule of tax base = carry amnt, SAME as for debtors and tax on profit basilcally, so one will NEVER say any part of Dividnds rec. is deductable in the future,Onle must ALLWAYS use the full Dividends receivable AFTER tax as the carrying amount, and tax base will be = to this amount , so the temp diff will be ie ZERO.-- because the tax will allways be accounted for in current year same as for DEBTORS and TAX ON PROFIT story , so the dividends will NEVER be taxable in the future and therefore second sentence of Asset Rule will allways apply here .(do you put amount before tax or after tax as your carrying amount?) (see dividends tablelike tis in ASSETS section for answer to question here.
CARRYING AMOUNT Less: TAX BASE =

=Temp.Diff
60 000 (RECEIVABLE FORM AN INVESTMENT IT MADE) 60 000 (this is becasue future economicbenefitsfrom asset areNOT taxable in this examples country,so per rule: TAX BASE = carrying amount
ZERO must be zero due to rule applied above. IN THE BOOKS OF COMPANY PAYING THE DIVIDEND. Dividends paid 69000 Bank 60000 Creditor : Taxation: 9000 (dividends paid to shareholders) Creditor Taxation 9000 Bank 9000 (Statement of withholding tax)
FINANCIAL STATEMENT PREPARATION: Rules 1: IAS 1 REQUIREMENTS

1. Deferred & Current Tax should be presented on the face of the Fin stats. 2. Deferred tax should ONLY be classified as NON-CURRENT, NEVER as current,
Rules 2: IAS 12 REQUIREMENTS : 1). OFFSETTING

1. CURRENT TAX : 1.1. Offsetting is NOT elective , entities MUST offset CURRENT TAX assets & liabilities, ONLY if following conditions are both met , otherwise it must be separate. 1.1.1.Has a legally enforcable right to set off current assets VS current liabilites 1.1.2.AND intends to settle on a net basis, or settle both simultaneously. 2. DEFERRED TAX: whether elective or not not sure, but entity may offset ONLY if BOTH of following are met: 2.1. Has a legally enforcable right 2.2. Relate to taxes levied by the same taxation authority on either the same entity OR different entities that intend to settle on a net basis , OR to setttle simultanously, in each future period in which significant amounts are expected to be settled.
3. THUS an entity may not offset a deferred tax asset of STC against normal deferred tax liability because SARS asseses these taxes differently (legally enforceable right) 4. Local/Foreign :The taxpayer usually has the right of offset if the taxes are levied by the same Authority and that authority permits entity to make /receive a single net payment. Thus entity may not OFFSET current local tax against current foreign tax in the SoFP. 5. Consolidated Statements: only allowed to offset 2 different entities if the above 2: Ias12.71 conditions are met.: IT IS NOT ALLOWED IN SA because : in SA separate legal entities are liable for income taxes, not groups of companies, groups are not allowed to settle their tax on a net basis.
2). Disclosure : IAS 12 REQUIREMENTS : PRESENTATION & DISCLOSURE

1. THE MAJOR COMPONENTS OF TAX SHOULD BE DISCLOSED SEPARATELY AND MAY INCLUDE THE FOLLOWING: 1.1. CURRENT TAX: 1.1.1. Current Tax Expense 1.1.2.Adjustments Recognised for Current tax of Prior Periods 1.1.3.Amount of the benefit arising from a previously unrecognised tax loss or tax credit or temporary difference that reduces the CURRENT TAX EXPENSE 1.2. DEFERRED TAX : 1.2.1.DEFERRED TAX relating to origination&reversal of temporary differences 1.2.1.1. ONLY OF P&L, THOSE THAT GO TO OCI (EG revaluation reserve) OR DIRECTLY TO EQUITY DO NOT GO HERE AT ALL- THEY ARE JUST LEFT OUT!!!! 1.2.2.DEFERRED TAX relating to changes in tax rates. 1.2.3.Amount of the benefit arising from a previously unrecognised tax loss or tax credit or temporary difference that reduces the DEFRRED TAX EXPENSE 1.2.4.DEFERRED TAX expense /income arising from the write down or reversal of a previous write down of a DEFERRED TAX ASSET. 2. THE FOLLOWING SHOULD ALSO BE DISCLOSED: 2.1. The aggregate current & deferred tax CREDITED DIRECTLY TO EQUITY ( table at end of Income tax Expense note) 2.2. Amount of income tax related to each companent of OCI : (on face SFP?) 2.3. A Tax reconcilliation in rands or a tax rate reconcilliation in percentages. 2.4. Explanation of changes in tax rate compared to previous accounting period (sentence in Income Tax Expense note I think - or where?) 2.5. Amount & expiry dates of temp diff.s unused tax losses and credits for which NO DEFERRED TAX ASSET IS RECOGNISED in the SFP. 2.6. Aggregate amount of temp diffs associated with subsidiaries,associates,joint ventures,branches for which a DEFRRED TAX LIABILITY HAS NOT BEEN RECOGNISED. 2.7. For each type of temp diff, tax loss & tax credit: 2.7.1.Amount recognised in SFP 2.7.2.Amount recognised in P&L unless it is apparent from the amount recognised in SFP. 2.8. Discontinued Operations: Tax expense relating to : 2.8.1.gain or loss on discontinuence 147 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
2.8.2.profit/loss from ordinary activities of discontinued operations 2.9. Dividends: amountof income tax consequnces from dividends declared before fin stats were issued(but after yr end) by not recorded as a liability in fin stats. 2.10.Change in total deferred tax assets of aquirer when a business combination happens. 2.11.Deferred tax asset not initially recognised in a business combination, but recognised afterwards : just the description of event that caused it. 2.12.Amount and nature of evidence supporting recognition of deferred tax assets when: utilisation of the tax asset needs profits in excess of existing temp differences , AND there was a loss in current or preceding period in tax jurisidiction to which the deferred asset relates. 2.13.Income tax consequences of 2.13.1. Payments of dividends to its shareholders ,(where dividends were declared before or after Yr End I think, for both, just a sentence in Income Tax Note I think.) 2.13.2. Potential income tax payments practically determinable 2.13.3. Potential income tax consequences NOT practically determinable.
3). Discosure : IAS 12 REQUIREMENTS : THE TAX RECONCILLIATION OR TAX RATE RECONCILLIATION
1. Special Notes: 1.1. Note that a deductable temp diff of 5 will DECREASE a loss, not INCREASE it, since it would make a 1 profit up to 6, therefore it will make a 10 loss down to 5. 1.2. In exam , at a tax rate of 29% ,a tax effect of 29000 due to an previous unused loss would = a loss of 100000 ( 29000 x 100/29) 2. A Tax Recon is : The purpose of the tax reconcilliation is to explain the difference between the accounting profit mutiplied with the applicable current tax rate , versus the Income tax expense actually presented in P&L. 3. The 2 Types of Recon : One of 2 types of recon must be supplied in the notes at the bottom of the Income Tax Expense note. 3.1. A TAX RECONCILLIATION: numerical recon between P&L Tax figure and accountiing profit * applicable tax rate. 3.2. A TAX RATE RECONCILLIATION: numerical recon between avg effective tax rate and the applicable tax rate. 4. Applicable Tax Rate: this is the tax rate that provides most meaningful info. to the users often this is the domestic rate of tax in the country eg 29% in SA. 5. The Tax Rate Recon is prepared from the Tax Recon. 6. METHOD: TAX RECON : 6.1. IF TAX AT TOP FROM ACCOUNTING PROFIT IS NEGAITVE, DONOT MAKE IT 0, KEEP IT NEGATIVE AND WORK FROM THERE. 6.2. Step 1: Fill in the Accounting Profit Before Tax showing in the P&L (Note : this already incl. deferred tax!) 6.3. Step 2: Fill in what should have been the tax on this Acc Profit at Applicable Rate chosen. Eg 29%.if it comes out negative (negative tax!) then just keep it negative, DO NOT MAKE IT ZERO ! 0. Work from the negative onwards. 6.4. Step 3: For each adjusting item :Add/Subtract it : [Descr + Amount * Tax Rate Difference] + Total 6.5. Last Step: End with the Actual Income tax Expense Charged in P&L 6.6. Step 3 Explained: you are adding/subtracting the tax in each line to the Imaginary Tax at Applicable Rate. Till you get the True Tax Charged. see next no.: 7. LIST OF ALL ADJUSTING ITEMS IN STEP 3 THAT COULD APPEAR IN A TAX RECON: 7.1. Non-Deductable Or Non-Taxable Items : (Only Permanent Differences) for tax purposes incl in P&L. 7.1.1. These are ONLY DIFFERENCE THAT WERE ALLWAYS PERMANENT or where SARS changed the law and now they will start to be PERMANENT . 7.1.2. So Basicly only those where no deferred tax was ever raised before sofor ASSETS they should fallunder rule IAS12.15/24 from day 1 .If a deferred tax was raised before then it does not go in here . 7.1.3. Assets that have used all their wear& tear at SARS do not just go in here only permanent difference from day1. 7.1.4. A building you buy which the last owner used all the wear&tear up on so SARS wont allow you any is a PERMANENT DIFFERENCE for you even if it wasnt for the last owner since any asset that satisfies RuleIAS 12.15/24 is a NON-DEDUCTABLE item and goes into reconcilliation. 7.1.5. Since they were missed by deferred tax they are left uncorrected in the accounting profit cause 148 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
deferred tax is a part of accounting profit already 7.1.6. note capital gains tax on a sale loss/profit is not caught by deferred tax so it goes in Diffferent Rates item in Recon . 7.1.7. Non-Deductable: (add it back) 7.1.7.1.ADD IT BACK: if 5000 was non-deductable per SARS, then you add it back (5000*29%). (Remember you used 29% to get the tax from the profit from which this amount should not have been deducted to get Imaginary Tax at 29% amount ) 7.1.7.2.ONLY IF item is permanently non-deductable : so if SARS never has and never will allow a deduction so no deferred tax has ever been raised before. if there was SARS wera and tear allowed on an item up to lasty year, but last year the last of it was used up.so there will never be any allowedagain- IT IS NOT a non-deductable item in recon at all. ONLY things where SARS NEVER HAS allowed wear & tear before are seen as non-deductable items in recon (or if law changes the status of an item , then it can become undeductable) 7.1.7.3.ITEMS THAT ARE NORMALLY NON-DEDUCTABLE : 7.1.7.3.1.Fines & Penalties (SARS does not allow a deduction ) 7.1.7.3.2.Some Donations. (SAS does allow some donations as deductions not all) 7.1.8.Non-Taxable : 7.1.8.1.SUBTRACT IT : if 2000 was not taxable per SARS but you did tax it , then deduct it from tha imaginary tax cause it should not be taxed at all.(2000 *29%) 7.1.8.2.ONLY IF: economic benefits from item is not taxable eg: gov grant. 7.1.8.3.ITEMS THAT ARE NORMALLY NON-DEDUCTABLE : 7.1.8.3.1.Dividends (already been taxed in SA withholding tax, becomes non-deductable) 7.2. Profits In P&L Taxed at Different Rates :eg: Capital Gains Tax on a sale etc. or Foreign Taxed Profits. : add/subtract it: if the rate was less than 29% subtract it, or if more then add it. So say : [29% - 20% ] X Item Amount eg 15000 = 15000* 9% = 1350 to be subtracted from the tax to make it less. 7.2.1. RATE LOWER THAN SARS : SUBTRACT IT , if rate was more than SARS ,ADD IT 7.2.2. Capital gains: 7.2.2.1.RECOUPMENT: the recoupment in a capital gains does not go in the Tax Recon at all- it goes nowhere. ONLY the portion over cost pricegoes in recon. 7.2.2.2.Using 2012 capital gains tax rates: since capital gains is 28% of 66.6% of Gain, therefore ONLY the 28% of 33.4% of any capital gains OVER THE COST PRICE of the item goes into the tax reconcilliation- you add the 28% of 33.4% back in . 7.3. If There Was Any Prior Years Under Or Over Provisions of Current Tax. : 7.3.1. PRIOR YEARS UNDER PROVISION : 7.3.2. PRIOR YEARS OVER PROVISION : 7.3.3. This is ONLY for if last year you worked out 100 and sars says it is 50, so you made a overprovision(orunderprovision). 7.3.4. This must go to BOTH major components of tax note, as well as tax recon- it balances in recon becasue it does not appear in this years Acc Profit at top (it was in last years), you put it in in Tax Expense at bottom, so the recon item must balance it. 7.4. Tax Rate Changes During the Year . : Change In Tax Rate: 1. A REDUCED RATE : : LESSEN current tax in the Recon, 2. INCREASED RATE : : INCREASE the Current tax to be paid in the recon- so increase taxable liability. 3. You take last yrs Deferred Tax Account balance and work out what the change in rate would cause . This amount is what must go in the tax reconcilliation- thats it NOTHING ELSE per lecturer.. Some of it may be at other rates like Capital Gains so one must be careful to weed out the right parts to put at new rates. 4. As soon as a rate change occours, where future deferred tax would be measured at a new rate, like a correction of Prior Period Estimate, the first thing one must do at end of fin yr, is to JOURNALISE to Deferred Tax Balance Account in the SFP , is the difference that the rate makes to last years old deferred tax balance, to bring it up to the new rate. Half may be at one rate(eg capital gains), the 149 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
other at another rate so one must be careful. Then for this years Temp. Diffs. you work them out at the new rate. Since the Deferred Tax Account has been changed they are now compatable with the old rate so you can minus one from the other to get the Net Change in Temp Diffs for the year. Dont worry about getting/putting the rate change in income tax expense for the year as a movement the rate change does not show there , rather it shows in the tax rate reconcilliation as a line item.( like a change in accounting estimate) 7.5. Dual Tax System : jurisdictions where a dula tax system operates. like a capital gains & normal tax or similar 7.6. ONLY IF A DEFERRED TAX ASSET WAS NOT RAISED FOR ALL DEDUCTABLE TEMPORARY DIFFERENCES AND UNUSED TAX LOSSES. If a Defeerred Tax Asset was raised for all Unused Losses & Temp Diffs both this AND last year , then this Line iItem is NOT required in the Tax Reconcilliation at all. This can be for : (only really happens for not recognised cause of not enough profit reason stuff at all per lecturer) 7.6.1.Last Years Unrecognised Tax loss or Deductable Temp. Diff. BUT RECOGNISED THIS YEAR : 7.6.1.1.TAX ASSET : LAST YEAR UNRECOGNISED: ADD IT BACK TO TAX IN RECON 7.6.1.2.TAX LIABILITY : LAST YEAR UNRECOGNISED: SUBTRACT IT FROM TAX IN RECON 7.6.1.3. 7.6.1.4.a tax loss from last year that was not able to be recognised as deferred tax LAST YEAR because there was doubt there would be enough future taxable profit , not enough profit, but this year it does get recognised. Say this was only recognised in deferred tax , not in current tax, this year cause it could not all get used up by this years profit, must it still go in here in the tax recon? so for current or deferred tax or for both. The answer is for BOTH per lecturer. 7.6.2.This Years Unrecognised Tax loss or Deductable Temp. Diff NOT RECOGNISED : a tax loss from THIS year IS not able to be recognised as deferred tax THIS YEAR because there is doubt there will be enough future taxable profit . 7.6.2.1.TAX ASSET : LAST YEAR UNRECOGNISED: ADD IT BACK TO TAX IN RECON 7.6.2.2.TAX LIABILITY : LAST YEAR UNRECOGNISED: SUBTRACT IT FROM TAX IN RECON 5.
For a Profit : TAX RATE RECONCILLIATION

........IN 2010 ENTITY EARNED A PROFIT of 100000.The SA tax rate was 29%. There was a movement in temp diffs of 20000 net TAXABLE temp diffs. The profit included :
15000 foreign profits not taxed in sa but taxed overseas at a different rate of 20% Non-Deductable items of 5000 Non-Taxable items of 2000 .
Profit before tax 6.1 Non-Deductable Items 6.1 Non Taxable Items 6.3 Foreign Profits Movement in Temp. Diff. Taxable profit Current tax at 29%
CURRENT TAX FOR SA CORPORATE TAX IS CALCULATED AS FOLLOWS:

100 000 5000 (2000) (15 000) (Not Taxed in SA but taxed in US at 20%) (20 000) 68000 19720
THE INCOME TAX EXPENSE NOTE IN P&L IS CALCULATED AS FOLLOWS:

Normal SA Tax -Current Tax -Deferred Tax Foreign Tax -Current Tax Total Tax Expense : 19720 5800 (20000*29%) 3000 (15000*20%) 28520
THE TAX RECONCILLIATION IS DONE AS FOLLOWS Profit before Tax Tax at Applicable Rate of 29% Non-Deductable [5000 * 29%] (expenses not deductable for tax purposes) Non-Taxable [2000 * 29%] (income that is not taxable for tax purposes) R 100000 29000 1450 (580)
Profits In P&L Taxed at Different Rates [15000 * (29% - 20%) ] (effect differnt tax rates other country) Income Tax Expense (in P&L) You Draft The Tax Rate Reconcilliation by starting with the tax rate recon and draft it from there. THE TAX RATE RECONCILLIATION IS DRAFTED FROM THE TAX RECON AN IS DONE AS FOLLOWS. Applicable Tax rate Non-Deductable [5000 * 29%] / 100000 * 100/1 Non-Taxable [2000 * 29%] / 100000 * 100/1 (income that is not taxable for tax purposes) Profits In P&L Taxed at Different Rates [15000 * (29% - 20%) ] / 100000 * 100/1 Effective Tax Rate (28520 / 100000*100/1)
(1350) 28520
% 29% 1,45 % (0.58 %) (1,35 %) 28.52 %
For a tax Loss : TAX RATE RECONCILLIATION see example pg 147 of txtbook no time
........IN 2010 ENTITY EARNED A PROFIT of 100000.The SA tax rate was 29%. There was a movement in temp diffs of 20000 net TAXABLE temp diffs. The profit included : 15000 foreign profits not taxed in sa but taxed overseas at a different rate of 20% Non-Deductable items of 5000 Non-Taxable items of 2000 . Profit before tax 6.1 Non-Deductable Items 6.1 Non Taxable Items 6.3 Foreign Profits Movement in Temp. Diff. Taxable profit Current tax at 29% CURRENT TAX FOR SA CORPORATE TAX IS CALCULATED AS FOLLOWS: 100 000 5000 (2000) (15 000) (Not Taxed in SA but taxed in US at 20%) (20 000) 68000 19720 THE INCOME TAX EXPENSE IN P&L IS CALCULATED AS FOLLOWS: Normal SA Tax -Current Tax -Deferred Tax Foreign Tax -Current Tax Total Tax Expense : 19720 5800 (20000*29%) 3000 (15000*20%) 28520 THE TAX RECONCILLIATION IS DONE AS FOLLOWS Profit before Tax Tax at Applicable Rate of 29% Non-Deductable [5000 * 29%] (expenses not deductable for tax purposes) Non-Taxable [2000 * 29%] (income that is not taxable for tax purposes) Profits In P&L Taxed at Different Rates [15000 * (29% - 20%) ] (effect differnt tax rates other country) Income Tax Expense (in P&L) You Draft The Tax Rate Reconcilliation by starting with the tax rate recon and draft it from there. THE TAX RATE RECONCILLIATION IS DRAFTED FROM THE TAX RECON AN IS DONE AS FOLLOWS. Applicable Tax rate Non-Deductable [5000 * 29%] / 100000 * 100/1 Non-Taxable [2000 * 29%] / 100000 * 100/1 (income that is not taxable for tax purposes) Profits In P&L Taxed at Different Rates [15000 * (29% - 20%) ] / 100000 * 100/1 Effective Tax Rate (28520 / 100000*100/1) % 29% 1,45 % (0.58 %) (1,35 %) 28.52 % R 100000 29000 1450 (580) (1350) 28520
Where you had a loss this year it can become a tax credit next year, so ONLY this year it appears as Deferred Tax IN THE YEAR IT HAPPENED FIRST, then in any following year SARS allows it to be Carried Over(if at all).(not next year cause it should get used up next year) .( !so you effectively a loss is you only loose 71%, the other 29% you can claim from tax next year !)
4). DISCLOSURE : ACCOUNTING POLICIES:

1. CURRENT TAX: a. Is based on taxable profit for the yr calculated according to the Income Tax Act of SA. b. The liability for current tax is calculated using tax rates and laws that have been enacted or substantivelty enacted by the reporting date c. Current tax assets & liabilities are offset when the group has a legally enforcable right to offset them and intends to either settle on a net basis or settle them simulaneoously 2. DEFERRED TAX: a. Is recognised using the statement of financial position method b. is calculated using tax rates and laws that have been enacted or substantivelty enacted by the reporting date c. reflects the tax consequences of the manner in which the group expects to recover or settle the carrying amount of the assets and liabilities at reporting date. d. Carrying amount of deferred tax assets is reviewed at each reporting date and is reduced to the extent that it is not probable that sufficient profit will be available to utilise the benefit. e. Can put IAS12.15&24 rule in here too ( if acc. & taxable profit not affected rule) 3. CURRENT & DEFERRED TAX: a. Current & deferred tax is recognised in P&L unless it relates to items that recognised outside P&L in OTH or directly in equity.
INCOME TAX EXPENSE NOTE : ( REFERENCE TO Income Tax Expense line item number in P&L Statement Only)
1. Major Componenets of Tax Expense. 2. THE MAJOR COMPONENTS OF TAX SHOULD BE DISCLOSED SEPARATELY AND MAY INCLUDE THE FOLLOWING: a. CURRENT TAX: i. Current Tax Expense ii. Adjustments Recognised for Current tax of Prior Periods iii. Amount of the benefit arising from a previously unrecognised tax loss or tax credit or temporary difference that reduces the CURRENT TAX EXPENSE b. DEFERRED TAX : i. DEFERRED TAX relating to origination&reversal of temporary differences ii. DEFERRED TAX relating to changes in tax rates. iii. Amount of the benefit arising from a previously unrecognised tax loss or tax credit or temporary difference that reduces the DEFRRED TAX EXPENSE (SASR assesment differences I think!) iv. DEFERRED TAX expense /income arising from the write down or reversal of a previous write down of a DEFERRED TAX ASSET. 3. SA NORMAL TAXATION CURRENT : TAXATION (only 2 special- go in prior) Current Year Prior Years (changes) 1)Adjustments Prior Years from SARS
up/down
2) Previously Unrecognised Tax Loss(used in current eg if 10 000 of a 25000 tax loss from last year was used this year and the rest 15000 carried forward as a deferred tax credit then show 10 000 here, ) Previously Unrecognised Tax Credit(in current) Previously Unrecognised Temp Diff.Nothey say if it relates to current tax in IAS12.80, but it would show in this note in the deferred tax note below , not here . goes to deferred tax auto. DEFERRED TAXATION: 1) Movement in Temporary Differences 2) Movement in Tax Losses/credits : ONLY the movement from last year to this year eg: 25000 loss balance last year, 15000 loss balance this year = movmement of 10000 less or liability (used your stuffgone-a liability) if new 20000 loss was created & recognised then = asset (deduct it from a temp diff liability if there is one or add to an asset) -One funny thing: if lat year you did not recognise a tax loss , then this year if you do recognise it do 2 steps : first do line 4 below and recognise it,by ADDING it to what was allwed to be recognised last year so you have a new total , THEN do line 2 above BUT use line 4 as you last Year balance to work out the movement to this years balance for line 2 above. 3)Change in Tax Rate ( add if up, subtract if . . . . . down) 4)Def. Tax. From Write down or Reversal of . . . .
2008 xxxx xxxx xxxx - As they come. - (makes a liability less / asset more)
2007 Xxxx Xxxx xxxx
xxxx Xxxx Xxxx -(makes a liability less / . asset more)
xxxx Xxxx xxxx
(Add a Asset Reversal from Last Yr to A Deferred Tax Asset and visa versa)subtract a write down from this year.
. . .
write down of a Deferred Tax Asset/loss .. . . . /credit from this or last year any of 2 (Huh sure ? dont think! Seems to go in top one)
NOTE: OCI : Major Companonts Note: any deferrd tax that went to OCI DOES NOT GO IN DEFERRED TAX SECTION OF this note in temp diffs.. It does go in deferred tax note as part of the temp diff of the asset, but does not go to this note at all. This Note is ONLY for the LINE ITEM Income Tax in P&L , anything not in that line item that went to OCI instead is separate! FOREIGN TAX TOTAL DEFERRED and CURRENT TAX and FOREIGN TAX xxxx xxxxxxxxx xxxx xxxxxxxxx
4. Tax Recon. R TAX RECONCILLIATION Accounting Profit Tax at the Applicable Rate of 28%
add back (tax effect of EXPENSES not deductable in determining taxable profit) Eg : Capital Gains 33.4% part, Fines/Penalties , Impairment in P&L (not impairment in OCI) 2-NON-TAXABLE subtract it (tax effect of INCOME not taxable in determining taxable profit) Eg: Dividends 3-PROFITS IN P&L TAXED AT DIFFERENT RATES Rate Lower : Subtract it Rate Higher Add It to Tax. (eg Foreign Profits taxed at differenct rates , or new line for Capital Gains )
R Xxx xxx
Xxx xxx
1-NON-DEDUCTABLE
4-THERE ARE NO UNDER OR OVER PROVISIONS RELATING TO THE CURRENT TAX OF PRIOR YEARS
Prior Years Under Provision : Add it back going to next year)
5-EFFECT OF CHANGE IN TAX RATES Reduced Rate: Lessen
Prior Years Over Provision : Subtract it - (same as logical.) Increased Rate: Increase (not changed this year but
6-Entity Operates in Jurisdiction with Dual Tax Rates 7-A DEFERRED TAX ASSET (NOT LIABILITY!) WAS NOT RAISED FOR ANY 1- TEMP DIFF 2-TAX LOSS/CREDIT
This year : TAX ASSET Last Year: TAX ASSET :UNRECOGNISED: ADD IT BACK TO TAX IN RECON : LAST YEAR but RECOGNISED this year : DEDUCTEDTAX IN RECON
=Income Tax Expense in P&L
Xxx
Xxx
5. Items Charged Directlly To Equity: ( I THINK items chrged to OCI are not included here because they are shown on the face of the SFP . must they be shown item by item on the SFP or can they be in 1 total amount (see ias 12.81.a and 0 after a like b.) pg a710.) from comprehensive example in book pg 153.bottom ANS: here below you show it exactly like it is written only a total for deferred tax and a total for current tax, with a grand total for both below it. One does not need to put it item by item , onlly the totals are needed like below per unisa lecturer ITEMS CHARGED DIRECTLY TO EQUITY Current Tax Deferred Tax Total 6. Items Charged To OCI (I see the items chargwed to equity includes current TAX & deferred tax =2, but for OCI should it only be 153 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax. 2007 2008
deferred tax or also current yr see example pg 153 txtbk bottom, and example 2 pg 1101 IAS book B.)ANS: put both current&deferred added up as one total under each separate item ITEMS CHARGED DIRECTLY TO OCI REVALUATION : TOTAL Deferred + Current Tax relating to revaluation of a building (per unisa you should rather put it on the face of the P&L statement in OCi like this to make it easier to mark when tax gets shown separate on face of P&L you put it like this- under each item the total current + deferred for that item), but you can also show it netted off there on P&L (after tax deducted) with the tax shown like it is here in this note.) ABC : :Total Defrred Tax + Current Tax Relating to ABC: In addition defrred tax of 575 was transferred from retained earnings to OCI relating to the diff between Acc.Depr. and SARS Depr. (Example 2 IFRS book B 2012 pg B1101) 2007 000 2008 xxxx
Not shown here
7. PREVIOUSLY UNRECOGNISED ASSESSED LOSS: gave rise to a benefit that was used to reduce the tax expense of this year : R XXXX 8. CHANGE IN TAX RATE: THE government changed the tax rate from 29% to 28% for next Fin Yr 2008, thsu deferred tax is calc. using the new rate. 9. DISCONTINUED OPERATIONS: tax expense relating to : a. Gain/loss on discontinuence b. And relating to Profit/Loss for each period presented. 10. DIVIDENDS DECLARED BEFORE FIN STATS ISSUED BUT NOT INCLUDED IN LIABILITIES (AFTER YR END:) income tax consequences of.
DEFERRED TAX NOTE :
(REFERENCE TO Deferred Tax Balance line item number in SFP Statement Only)
1. ANALYSIS OF TEMPORARY DIFFERENCES: ANALYSIS OF TEMPORARY DIFFERENCES: 2007 ONLY THE TEMPROARY DIFFERENCE- NOT THE TAX BASE & CARRYING AMOUNT!!!!!! FOR 2 YEARS!!!!! PPE (total of below 2) total: Accelerated Wear for Tax Purposes: Revaluations , net of related depreciation. INVESTMENT PROPERTY FINANCIAL ASSETS AT FAIR VALUE THROUGH OCI POST RETIREMENT BENEFIT OBLIGATION ALLOWANCE FOR CREDIT LOSSES CASH FLOW HEDGES ASSESED LOSS FOR NORMAL TAX Net Deferred Tax liability : xxx 2008
xxx
2. UNRECOGNISED 1)UNUSED LOSSES 2) UNUSED TAX CREDITS 3) TAX ASSETS(deductable temp..diffs.) : for which no deferred tax asset is recognised : 1) Amount AND 2) Expiry Date 3) Reason 3. RECOGNISED ANYWAY DEFERRED TAX ASSETS IN EXCESS OF TEMP.DEFERRED TAX LIABILITIES , WHERE THERE WAS A TAX LOSS: where there was a tax loss in current or preceding period in same jurisdiction, and a Tax Asset was recognised anyway in EXCESS of any Deferred Tax Liabilites that are available. 1) The Nature of Evidence to allow 2) Amount 4. SUBSIDIARIES & BRANCHES/ASSOCIATES/JOINT VENTUREES WHERE NO DEFERRED TAX LIABILIITIES WERE RECOGNISED FOR UNDISTRIBUTES EARNINGS : amount: R XXX : If Parent can control the the timing of these reversals + AND it is probable that they will NOT reverse in the foreseeable future, then a temporary difference may not be recognised. 5. BUSINESS COMBINATION: if aquirer causes a change in his pre-aquisition Deferred Tax Balance due to Combination : Amount . 154 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
6. BUSINESS COMBINATION: if deferred tax benfits are not recognised at aquisition date but after aquisition date, the 1) Events 2) Amount that caused the change.
Circular 1/2006 Special DISCLOSURES IN RELATION TO DEFERRED TAX: 1. It says entities need to consider whether the carrying amount is recovered through use , sale, or liabilities settled, because each cound cause different material differences in the deferred tax balance. 2. Circular 1/2006 requires additional disclosures only: a. If the manner of recovery of a component of deferred tax can CHANGE (eg from sale to use etc) b. If expected recovery manner changes, in which event will the deferred tax for that component be materially different AND c. when the user of the fin stats is not capable of determining the rate at which deferred tax has been raised on that component from the info provided in the fin stats 3. THE FOLLOWING EXACT DISCLOSURES SHOULD BE PROVIDED OR BE CAPABLE where If expected recovery manner changes the deferred tax for that component could become be materially different: a. The expected manner of recovery and the tax rate used to calc. the deferred tax balance( the one you went and used so far) b. Where more than 1 tax rate is used for each category of temp diff(if more than 1 tax rate in 1 categ. Or if each categ has a different tax rate?), the components of the deferred tax at the various rates incl. those components on which no tax is expected to be paid.(is a component a category or what? And what does no tax expected to be paid mean?- all exempt things to to be listed or what?)
GENERAL COMPREHENSIVE EXAMPLE :
VERY COMPREHENSIVE EXAMPLE: KNOW THIS ONE :
TAX IMPLICATIONS of CAPITALISTAION OF BORROWINGS:
INCOME STATEMENT METHOD (FOR INTEREST SAKES)

1. This is the old method, it is not allowed by IAS 12, onlt he balance sheet approach is allowed. But this method is good for comparison, and it used to be allowed until recent changes to IAS12 2. See scan below:
IAS 8 CHANGE IN ACCOUNTING ESTIMATE/ERRORS 1. SEE WHERE TAX EFFECTS ERRORS ARE DEALT WITH IN IAS INCOME TAXES ,SINCE IT IS NOT DEALT WITH IN THIS IAS SEE SCOPE EXCLISIONS. 2. See also SIC 2 and SIC 18 related to this chapter. SCOPE: 1. EXCLUSIONS : Tax Effects Errors Are Dealt With In Ias Income Taxes ,Since It Is Not Dealt With In This Ias See Scope Exclisions.(seems to have been deleted from IAS) DEFINITIONS: 1. IMPORTANT: a. RETROSPECTIVE APPLICATION : applying a policy as if that policy had always been applied back to infinity : (not from some date) i. ADJUST : BEGIN OF EARLIEST COMPARATIVES PERIOD SHOWN : adjust only EQUITY ,(but not assets & liabilities & income & expense nor anyP&L) for earliest period shown.(not assets & liabilities & equity like for prospective) ii. FROM DATE : back to infinity, as far as practicable: 3 periods must be disclosed for SFP this year,end lasy year, and end year before that (you dont have to do begin of 2nd- just do end of 3rd per unisa ) and 2 periods for all other statements. iii. IS TODAYS FULL DOMINO EFFECT FROM THE PAST KNOWN OR NOT? : it must always be known, if it is not known due to even just 1 period in past [must know both begin AND end data of every period, not just one of 2] not being known , then you must change to prospective immediately, from first date when all domino effects known. iv. RETROSPECTIVE RESTATEMENT : means correcting an error as if that error had never existed. (not from some date) b. PROSPECTIVE APPLICATION : from after date of change of policy/estimate only, not applied to periods before this date. i. ADJUST : BEGIN OF EARLIEST COMPARATIVES PERIOD SHOWN : adjust only EQUITY+ ASSETS+ LIABILITY ,(but not income & expense nor anyP&L) for earliest period .(not just equity like for retrospective) ii. FROM DATE : ONLY from date practicable ( q? even if in middle of current year???? ) c. IMPRACTICABLE : ONLY IF: either : 1 : amount not determinable, OR 2- estimate not possible without proper info, or 3- it requires assumptions of what mngmnt intention would have been years ago. d. ERRORS: ALLWAYS COULD HAVE BEEN AVOIDED- NOT CALLED THIS NAME IN IFRS IF IT WAS UNAVOIDABLE ERROR. 2. Material Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor. 3. Prior period errors are omissions from, and misstatements in, the entitys financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: a. was available when financial statements for those periods were authorized for issue; and
b. could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. 4. Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. 5. Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred. 6. Impracticable Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. For a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively or to make a retrospective restatement to correct an error if: a. the effects of the retrospective application or retrospective restatement are not determinable; b. the retrospective application or retrospective restatement requires assumptions about what managements intent would have been in that period; or c. the retrospective application or retrospective restatement requires significant estimates of amounts and it is impossible to distinguish objectively information about those estimates that: i. provides evidence of circumstances that existed on the date(s) as at which those amounts are to be recognised, measured or disclosed; and ii. would have been available when the financial statements for that prior period were authorised for issue from other information. 7. Prospective application of a change in accounting policy and of recognising the effect of a change in an accounting estimate, respectively, are: a. applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed; and b. recognising the effect of the change in the accounting estimate in the current and future periods affected by the change.
HOW MANY YEARS BACK DO YOU DO RESTATEMENTS? (errors+ accounting policies +estimates)
1. IAS 1.39 : When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items due to an ERROR in its financial statements or Change in Acc Policy ,when it reclassifies items in its financial statements, it shall present, as a minimum, three statements of financial position, two of each of the other statements, and related notes. An entity presents statements of financial position as at: a. the end of the current period,(end Y1) b. the end of the previous period (which is the same as the beginning of the current period), and (end Yr 2 c. the beginning of the earliest comparative period.( so end Y3 per unisa is just as good) 2. But : IAS 8 has a exemption clause in it: if it is impracticable to determine the effects in previous years, then you can do a prospective retatement FROM BEGINNING (not end) of earliest year where retrospective application is practicable.
IMPORTANT: (for errors+ accounting policies +estimates)

a. FOR RETROSPECTIVE APPLICATION : applying a policy as if that policy had always been applied back to infinity : (not from some date)
i. ADJUST : BEGIN OF EARLIEST COMPARATIVES PERIOD SHOWN : adjust only EQUITY ,(but not assets & liabilities & income & expense nor anyP&L) for earliest period shown.(not assets & liabilities & equity like for prospective) ii. FROM DATE : back to infinity, as far as practicable iii. IS TODAYS FULL CUMULATIVE DOMINO EFFECT FROM THE PAST KNOWN OR NOT? : it must always be known , to be allowed to apply retrospectively, if it is not known due to even just 1 period in past [must you know both begin AND end data of every period, not just one of 2] not being known , then you must change to prospective immediately, from BEGIN OF YEAR when all domino effects known. iv. RETROSPECTIVE RESTATEMENT : means correcting an error as if that error had never existed. (not from some date) b. PROSPECTIVE APPLICATION : from after date of change of policy/estimate only, not applied to periods before this date. v. ADJUST : BEGIN OF EARLIEST COMPARATIVES PERIOD SHOWN : adjust only EQUITY+ ASSETS + LIABILITY ,(but not income & expense nor anyP&L) for earliest period .(not just equity like for retrospective) vi. FROM DATE : ONLY from date practicable ( q? even if in middle of current year???? ) vii. IS TODAYS FULL CUMULATIVE DOMINO EFFECT FROM THE PAST KNOWN OR NOT? : no , it does not necessarily have to be known to be allowed to use this method. c. IMPRACTICABLE : ONLY IF: either : 1 : amount not determinable, OR 2- estimate not possible without proper info, or 3- it requires assumptions of what mngmnt intention would have been years ago. d. ERRORS: ALLWAYS COULD HAVE BEEN AVOIDED- NOT CALLED THIS NAME IN IFRS IF IT WAS UNAVOIDABLE ERROR.
SECTION 1 : ACCOUNTING POLICIES APPLYING ACCOUNTING POLICIES: 1) 2) 3) 4) all ifrs POLICIES NEED NOT BE APPLIED WHEN EFFECT IS immaterial VERTABIM PER IAS8.8 ACCOUNTING POLICIES SHALL BE APPLIED CONSISTENTLY Use relevant IFRS for each application, IFRS counts above framework. IN THE ABSENCE OF AN IFRS POLICY TO USE TO APPLY : a) Mngmmnt use judgment b) Use closest similar IFRS to situation, then c) Only then, use other frameworks from other bodies, textbooks, industry practices.
WHEN TO CHANGE ACCOUNTING POLICIES 1. YOU MAY CHANGE AN ACCOUNTING POLICY ONLY IF: a. EITHER : required by an IFRS b. OR : results in more relevant & reliable info. 2. THE FOLLOWING ARE NOT SEEN AS CHANGES IN ACCOUNTING POLICIES: a. Applying a policy to transactions etc. that differ in substance to other/old transactions. b. OR Apply a new policy to transactions that never occoured before c. OR Apply new policy to PREVIOUSLY IMMATERIAL transactions etc.
d. OR REVALUATION OF ASSETS : Initial application of a policy to REVALUE ASSETS (IAS 16 or IAS 38) is a change to be dealt with as a revaluation in according to IAS 16 or IAS 38, NOT according to this standard IAS8 per IAS8 vertabim METHOD OF CHANGING ACCOUNTING POLICIES
(A) HOW MANY YEARS BACK DO YOU DO RESTATEMENTS? (ERRORS+ ACCOUNTING POLICIES)
1. IAS 1.39 : When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items due to an ERROR in its financial statements or when it reclassifies items in its financial statements, it shall present, as a minimum, three statements of financial position, two of each of the other statements, and related notes. An entity presents statements of financial position as at: a. the end of the current period,(end Y1) b. the end of the previous period (which is the same as the beginning of the current period), and (end Yr 2) c. the beginning of the earliest comparative period.( so end Y3) d. Note: To Present StChEq from 2 years back AUTOMATICLY means you present it for 3 yrs: because of the way the St Ch Eq works : namely it ALLWAYS starts with the begin of 1 st period presented Balance disguised as end of previous period. So StChEq allways has 3 periods in the description line, but the 1st period is only the end of yr balance then any chnages in estimates after/at that date, then the 1st periods line items , then the 2nd (current). 1. TRANSISIONAL or RETROSPECTIVE : If IFRS does not have transisional provisions on how to apply it, then it MUST BE ONLY EVER APPLIED RETROSPECTIVELY to infinity- thats the rule, otherwise only use transisional provisions. 2. EARLY APPLICATION : early application of IFRS is NOT SEEN AS A VOLUNTARY CHANGE for purposes of this IFRS. 3. VOLUNTARY APPLICATION: If Voluntary application is made for any reason it MUST always be applied retrospectively, as far as practicable. 4. IF ACCOUNTANT USED STANDARDS FROM ANOTHER ACCOUNTING BODY FOR SOMETHING : because there was no IFRS that fitted, and those standards get updated /change later by that body ,so he wants to change his accounts and policy in his own accounts in accordance etc : then that 2 nd change is treated as a VOLUNTARY change by this IAS, not as one due to change in a standard 5. LARGE SIGNIFICANT ESTIMATES ARE OK: even if also if estimates must be made, this is normal for restatement per IAS8. 6. LIMITATIONS ON RETROSPECTIVE APPLICATION: a. IMPRACTICABLE : RETROSPECTIVE (meaning back to infinity- not only for 3 yrs ) application must be applied unless IMPRACTICABLE to either SOME PRIOR PERIODS effects or OVERALL Cumulative effects. b. WHEN IS IT IMPRACTICABLE TO APPLY A POLICY retrospectivel : data not available, estimate not possible, mngmnt intentions not guessable, c. IF IMPRACTICABLE FOR CERTAIN PRIOR PERIODS ONLY: if it is impracticable to apply it to some prior period , then it MUST BE APPLIED to the CARRYING AMOUNT OF ASSETS & LIABILITIES & EQUITY (not income/expenses) AT BEGINNING (not end) OF EARLIEST PERIOD PRACTICABLE,which may be the current period. i. IF IMPRACTICABLE TO DETERMINE O/B OF CURRENT PERIOD ( very tricky one -SEE application guidance IFRS example 3 in Volume B of IFRS) THEN ENTITY SHALL vertabim : ADJUST THE COMPARITIVE INFORMATION TO APPLY THE NEW ACC. POLICY PROSPECTIVELY FROM THE EARLIEST DATE PRACTICABLE . So this means that even if your balance will LOGICALLY be wrong after being carried forward from a past period where it was not practicable to work out that years effect you just ignore that year and start from the year you can .IAS 8.27 ,AND 24&25.
d. IMRACTICABLE FOR ALL PRIOR YEARS : changing an acc. policy is permitted even if it is impracticable to apply a new accounting policy prospectively for any or all prior periods. e. APPLYING A NEW ACCOUNTING POLICY RETROSPECTIVELY : This must be done by applying to all prior period as far back as possible, unless impracticable for some period (where impracticable would mean that either the begin OR end of that period figures could not be gotten hold of.- so then you ONLY implement from begin of next period forward, and not backwards from the impracticable period.) i. NOTE : how they define impracticable for this specific point:(where impracticable would mean that either the begin OR end of that periods figures could not be gotten hold of. So you be able to get BOTH to incl. that year in restatement. ii. IAS 8 . 26 then adds directly to this sentence above: 1. The amount of the resulting adjustment relating to periods before those presented in the financial statements is made to the opening balance of each affected component of equity of the earliest prior period presented. Usually the adjustment is made to retained earnings. However, the adjustment may be made to another component of equity (for example, to comply with an IFRS). 2. Also: in ias 8.26 : Any other information about prior periods, such as historical summaries of financial data, is also adjusted as far back as is practicable.: DISCLOSURE 1) Even if the change will have no effect on current year , but only possibly to have an effect on future years- you still disclose the below for it. 2) NON- VOLUNTARY ACCOUNTING POLICY CHANGE : ( even if no effect on current year , but only possibly to have an effect on future years- you still disclose the below a) Disclose: i) Title of ifrs ii) Whether made inaccordance with transisional provisions iii) Desc.of transisional provisions iv) Transisional provisions that might have an effect on future periods v) Nature of change in acc policy vi) Amount of adjustment for current & each prior period (1) For each Fin Stat line item (2) For IAS 33 Earnings per share vii) Amount : the amount of the adjustment relating to periods before those presented,to the extent practicable. viii) Impracticable: if it is impracticable for that or any prior period, or for any period before those presented, : (1) Circumstances of Condition (2) Descr. Of How And When It Was Actually Applied. ix) Future Fin Stats need not repeat these disclosures.
3) VOLUNTARY ACCOUNTING POLICY CHANGE : ( even if no effect on current year , but only possibly to have an effect on future years- you still disclose the below) a) Disclose: (different) i) Nature of change in acc policy ii) Reason why it provides more relevant & reliable info. iii) Amount (Same as Compulsory ) (1) of adjustment for current & each prior period
(a) For each Fin Stat line item (b) For IAS 33 Earnings per share iv) Amount : (Same as Compulsory ) (1) the amount of the adjustment relating to periods before those presented,to the extent practicable. v) Impracticable: (Same as Compulsory ) (1) if it is impracticable for that or any prior period, or for any period before those presented, : (a) Circumstances of Condition (b) Descr. Of How And When It Was Actually Applied. vi) Future Fin Stats need not repeat these disclosures. 4) EARLY APPLICATION OF ISSUED BUT NOT YET EFFECTIVE IFRS a) Disclose : i) This Fact : that there was early application ii) Impact of change : on financial statements in period of initial application. iii) Title of IFRS iv) Nature of change v) Date application will be officially required as a must byIFRS vi) Date of entitys own early application earlier than above. vii) Discussion of Impact on fin stats, viii) OR if impact on fin stats in not known then state that fact.
CHANGING ACCOUNTING POLICY ON INVENTORY VALUATION

Deferred Tax & Temporary differences & Current Tax
1) CURRENT TAX: rem that current tax comes from actual PROFIT CHANGE (the change in ret. Earn).each year so that ius the midle column in in-between years and the first & last column in non-in-between years BUT deferrd TAX COME ONLY FROM THE PROPER SCHEDULE OF TEMPORARY DIFFERENCES, DO NOT TRY TO USE THE HUGE YEARLY PROFIT/INVENTORY/RET.EARN. CALCULATION TO GET DEFERRED TAX OR YOU WILL GET IT WRONG FOR SURE- IT IS NOT SAME AS CURRENT TAX DIFFERENCE EACH YEAR !!!! 2) DEFERRED TAX: a) DEFERRED TAX COMES ONLY FROM THE PROPER SCHEDULE OF TEMPORARY DIFFERENCES, DO NOT TRY TO USE THE HUGE YEARLY PROFIT/INVENTORY/RET.EARN. CALCULATION TO GET DEFERRED TAX OR YOU WILL GET IT WRONG FOR SURE- IT IS NOT SAME AS CURRENT TAX DIFFERENCE EACH YEAR !!!! b) Note : mistake you make :Rem the defrred taxamount in the Accounting Policy Change note, is ALLWAYS the SFP DEFERRED TAX ACCOUNT BALANCE- never the movement in deferred tax for the year! c) CARRYING AMOUNT : REM : mistake: deferrred tax ONLY ever works with the ASSET BALANCES CARRYING AMOUNt so that is the inventory account figure . nothing else.like profit or tax on profit carried over etc!! d) THE TAX BASE : is of course the old inventory account figure for prior years before SARS allows recognition/payment of the tax , BUT in current year it will be as normal : = 0 since all prior years and current years tax will be paid in the current year when SARS allows it for the 1st time, since in prior years the wont re-open assesments.. e) REM the figure in Note is the SFPfigure the movement dosnt show anywhere in the Note, only the SFP figure.. f) There is a mix up that is difficult to resolve : the movement for the year in final year cannot be added to profit increase /decrease current tax for the year to get the final curren tax figure. This is becasue one must use logic to decide if to add a def tax asset or suntract a def tax liab since the normlal method of dedicing does not work , sometimes it will work opposite to the normal way of minus a def tax liab and add a def tax asset. So rather get the current tax from :simply the 28% tax on change in inventory for the year= curren tax in final year( also must = deferred tax in prior years use it to check your calcs.!) 3) DESCR 2004 2005 Profit Before Tax 1100 000 755000 Temporary Differences: 163 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
Movement 2003-2004 =115000 liability up to 20 000 liability = 95000 asset journal movement : YOU GET THIS FROM: 1. If you got begin 2004 + end 2004 figures : THE CHANGE IN INVETORY BETWEEN 2004 AND 2005 (since you got a new o/b for 2004 now so you must work it in, you cannot use the old o/b) SO THE TAX INCREASE YOU WOULD HAVE HAD TO PAY FOR THE EXTRA BIT OF PROFIT IS SENT TO DEFERRED TAX CAUSE SARS ONLY ASSESES IT IN THE CURRENT YEAR- THEY DONT NORMALLY REOPEN OLD ASSESMENTS ) 2. If you only got end 2004 figure: THEN THIS NUMBER IS NOT FROM THE CHANGE FROM 2005 less : 2004 , NO , THEN IT IS FROM JUST THE TAX ON THE INCREASE IN RETAINED EARNINGS , FOR THE 1 2004 FIGURE YOU GOT . SEE EXAMPLE BELOW Movement 2005 : 6000 liab up to 0 liab = 6000 asset journal move : GET FROM : SAME AS ABOVE EXPLANATION. TAXABLE INCOME CURRENT TAX @ 30%
+95000
+6000 1 130 000 339 000 850 000 225 000
General : 1) Nb: IF QUESTION SAYS SARS WILL NOT RE-OPEN PREVIOUS YEARS TAX RETURNS, ONLY FROM current YEAR: a) In this case all tax effects of every separate previous year must go to deferred tax, which will ALL disappear and immediately affect yearly profit in 1st year SARS agrees to act on new inventory method. 2) METHOD: a) Step 1: scan pg 81 w1 workings : i) To get the effect on cost of sales & profit in P&L for each year, the middle rows are used in W1 calculation. The reason is that it shows the effect on the change in ACCOUNT BALANCE from 1 year to the next. So the change from from 1 yr to next is shown in the MIDDLE column and this 2003 change to 2004 difference( ie 2004 2003).This is becaus e if they gave you the changed new balance of inventory for the begin end of last year, it means you have a new O/B for the next year- so you cannot use the old pre-error-correction balance to work out the years change, you must use the new balance you get after correcting ret.earn. at the begin of that year. You can leave out the top 2 rows- onlyuse the botom total row to get the middle years change in ret earn/profit change. ii) Make a cross hatch table with years across and old&new inventory method figures top down. iii) Then between years make an extra column for the cost of sales incr/decr (for the next coming year) between end last year and end next year.THIS IS THE COLUMN YOU USE FOR ALL MIDDLE YEARS , AND THEN THE 1ST & LAST COLUMN FOR 1ST & LAST YEARS. iv) For each same inventory method line sideways, minus LAST year from NEXT year but keep the brackets as signs in the final totals of [yr 1 minus yr 2 ]. So REM the negative less negative = negative plus positive rule, - 100 ( - 50) = - 100 + 50= -50 You can leave out the top 2 figures for this minusing 1 year from the next to get the movement. ALL YOU NEED TO USE IS THE TOTAL AT BOTTOM OF EACH YEAR AFTER YOU SAY MINUS THIS YEAR FROM LAST YEAR. SO THE THIS YEAR MUST GO ABOVE THE LAST YEAR AND YOU MINUS LAST YEAR FROM THIS YEAR TO GET A [TOTAL = CHANGE IN PROFIT FOR THE YEAR] THEN YOU MINUS THE CHANGE IN PROFIT FROM 2003 FROM 2004 TO SEE WHAT THE CHANGE IS IN PROFIT THAT MUST GO TO THE SCI FOR 2004 YEAR. (rem : with profit you are talking of cost of sales change, and you donrt know if the inventory is in cost of salse or in stock-inventory , so you must minus old inventory from new on to see if it increased {(you cannot use old o/b -which is 2003c/b to get the 2004 profit increase since you
retained earnings already contains 2003 inventory differnces that still show in the 2004 inventory numbers so you must ONLY USE THE INCREASE IN INVENTORY FROM 2003 TO 2004-LESS WHAT YOU ALREADY WORKED OUT YEARS AGO AS THE OLD INCREASE IN INVENTORY FOR THAT YEAR. SO THIS CALCUTALION TAKES CARE OF BOTH THOSE CALCULATIONS IN ONE GO. 1. In A Year Where ONLY the total for wend of year is give you do not need to calculate the movement for the year like said above. Here you only use this figure to say changed figure old figure = change in ret. Earn AND also movement for the year, since the o/b for that year IS NOT AFFECTED LIKE ABOVE.
v) FOR THE CHNAGE IN ACCOUNTING POLICY / ERRROR CORRECTION NOTE IN FIN STATS : (1) Now you must just put 1 line for each item in the fin stats that will change from the change in acc poilicy. They arrange it by : (a) starting with the simple building blocks :SCI items : like costsof sales& tax , ADDING inventory change ,total income tax line item change etc. (b) then ADDING all these building blocks to give the SFP basic buiding blocks below it : like SASR LIABILITY ACCOUT , DEFERRD TAX ACCOUNT extra , then finally : EQUITY CHANGE FOR THE YEAR. (rem equity ONLY includes SFP items NOT SCI : inventory plus either currwent or deferred taxREm assets = liabilities+equity , so if inventory changes on one side, equity changes on other. (2) STATEMENT OF P&L & OCI BUILDING BLOCKS LINE ITEMS (a) COST OF SALES CHANGE LINE ITEM : (i) decr/incr. FOR THAT YEAR: This one changes , so it must get a line in notes to show how it changed : This gives the first 2 middle row numbers, now minus the one with a minus sign from the positive figure in each COLUMN to get the ACTUAL DIFFERENCE IN COST OF SALES THAT YEAR-OVERALL between old& new method and also between years so between 4 numbers. Calleddifferencein scan below in W1 table. (b) TAX CHANGE line item in Notes : (i) decr/incr. FOR THAT YEAR: Now calc. the tax portion of each column : just say tax rate * difference = tax effect .IF the Difference is negative then it means costy of sales DECREASES for that year, so your tax figure must be POSITIVE cause IT INCREASES - you pay less tax by so much. If difference were + , your cost of sales is increasing, so tax would decrease and would be a minus sign. SO TAX IS ALLWAYS THE OPPOSITE SIGN TO THE DIFFERENCE allways only ever at all. (3) (4) (5) (6) STATEMENT OF SFP : Inventories CURRENT TAX IN SFP DEFRRED TAX
SECTION 2 : CHANGES IN ACCOUNTING ESTIMATES:

1. FOR EXAMPLE, estimates may be required of: (a) bad debts; (b) inventory obsolescence; (c) the fair value of financial assets or financial liabilities; (d) the useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets; and (e) warranty obligations (f) gain or loss recognized on the outcome of a contingency is a change in estimate, NOT an error! 2. REVALUATION : the initial application of a newpolicy to Revalue qualifies as a change in Acc policy, but it should be accounted for a a normal revaluation, and NOT a change in acc policy.( is it a change in estimate?) 3. BY ITS NATURE, : the revision of an estimate does not relate to prior periods and is not the correction of an error 4. CHANGE TO MEASUREMNT BASIS APPLIED IN ESTIMATIONS: This is seen as a change in ACCOUNTING POLICY, and not a change in ESTIMATE. 5. WHEN IT IS DIFFICLUT TO DISTINGUISH BETWEEN CHANGE IN POLICY or CHANGE IN ESTIMATE: then by default the change is treated as a change in estimate per IAS8 . 6. ASSETS & LIBILITIES & EQUITY to the extent that the change changes THESE 3 , it must be recognized in the period it happened by adjusting their values 7. INCOME AND EXPENSES: to the extent that the change changes THESE 2 , it must be recognized in the period it happened by adjusting their values in P&L and also in future periods.
DISCLOSURE FOR ESTIMATES:

1. POSITION IN NOTES: The disclosure usually goes at the bottom of the REVENUE/ PROFIT BEFORE TAX note in the Notes. It is just a sentence in which descr.&amnt. Is mentioned. : ie: Incl.in Depr. for this yr is a change in estimate amouting to 214000 extra depreciation to PPE as a result of changing from Reducing Bal method to Straight line method. Per textbook vertabim. 2. ACCOUNTING POLICY NOTE: when doing this one, you can mention there was a change from reducing bal to straight line method.- just that 1 sentence otherwise Simply state the exact new policy details eg Useful life, % s used , Residual value for the new policy ONLY, not the old one . DISCLOSE: a. Nature b. Amount c. Future periods (If practicable ) ( text book just said : this change will result in a decrease of depreciation in future periods of 214000 where 214000 was the amount of extra depreciation that was caused by the new method for current year. They did not work out next years figures or anything like that, but one could do so a bit if you wanted to.??? How much detail could there be/ must there be for exams? ) i. Expected Nature : ii. Expected Amounts : d. IF Impracticable to disclose future periods effect : disclose this fact. e. Future Fin Stats need not repeat these disclosures. f. Thats it .
METHOD OF DOING DEPRECIATION CHANGE .

1. NOTE: if you change from reducing balance method , to straight line method, but do not change the figures in 166 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
your books for past years- ie only start from this year just using the new method: it is simply trested as a change in acc. estimate- YOU DO NOT go and do the whole change in policy thing and disclosures per text book GAAP Hndbk. 2. REDUCING BAL METHOD :TO GET DEPRECIATION OVER LAST YEAR IF ONLY CARRYING AMNT at end of that yr is given: if it is 20% per yr , you say 20/80 * carrying amnt = depreciation that was actually deducted. 3. COMPARATIVES : For a change in depreciation estimate ,allways show as a comparative last yrs figure for depreciation next to this yrs as well., in Depreciation line item in Profit before Tax / Revenue Note as good practice in tests(not a must).
4. WORKINGS: just work out separately in a column the 1-OLD method and 2- NEW method of depreciation for each PPE category/Buildings /Cars etc. Then work out the TOTAL difference between old& new method: this difference must be your answer in the Profit before Tax Note one can also break it down into its components if you want and show them all for marks but txtbk only gives 1 total figure for difference.
ERRORS
1. DIFFERENT TYPES : a. Gain Or Loss Recognized On The Outcome Of A Contingency is a change in estimate, NOT an error! 2. HOW MANY YEARS BACK DO YOU DO RESTATEMENTS? (ERRORS+ ACCOUNTING POLICIES) 1. IAS 1.39 : When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items due to an ERROR in its financial statements or when it reclassifies items in its financial statements, it shall present, as a minimum, three statements of financial position, two of each of the other statements, and related notes. An entity presents statements of financial position as at: a. the end of the current period,(end Y1) b. the end of the previous period (which is the same as the beginning of the current period), and (end Yr 2) c. the beginning of the earliest comparative period.( so end Y3) 3. IFRS COMPLYING WITH : Fin Stats do not comply with IFRS if they contain immaterial errors made intentionally to achieve a specific presentation, nor if they contain material errors. 4. AFTER DISCOVERY OF ERRORS :Must correct Errors in 1st set of Fin Stats issued after discovery by: a. Restating all comparitive amounts b. If error occoured before earliest comparative amount show : then ALSO show Opening Balance of ASSETS & LIABILITIES & EQUITY for earliest prior period presented. 5. LIMITATIONS ON RETROSPECTIVE APPLICATION: a. IMPRACTICABLE : RETROSPECTIVE (meaning back to infinity- not only for 3 yrs ) application must be applied unless IMPRACTICABLE to either SOME PRIOR PERIODS effects or OVERALL Cumulative effects. b. WHEN IS IT IMPRACTICABLE TO APPLY A POLICY retrospectivel : data not available, estimate not possible, mngmnt intentions not guessable, c. IF IMPRACTICABLE FOR CERTAIN PRIOR PERIODS ONLY: if it is impracticable to apply it to some prior period , then it MUST BE APPLIED to the CARRYING AMOUNT OF ASSETS & LIABILITIES & EQUITY (not income/expenses) AT BEGINNING (not end) OF EARLIEST PERIOD PRACTICABLE,which may be the current period. i. IF IMPRACTICABLE TO DETERMINE O/B OF CURRENT PERIOD ( very tricky one -SEE application guidance IFRS example 3 in Volume B of IFRS) THEN ENTITY SHALL vertabim : ADJUST THE COMPARITIVE INFORMATION TO APPLY THE NEW ACC. POLICY PROSPECTIVELY FROM THE EARLIEST DATE PRACTICABLE . So this means that even if your balance will LOGICALLY be wrong after being carried forward from a past period where it was not practicable to work out that years effect you just ignore those past impractible years and start from the prior year you can and correct those to carry forwar the balance to begin of current year..IAS 8.27 ,AND 24&25.
6. PRIOR PERIOD ERROR EXCLUDED FROM PROFIT & LOSS : a prior period error is excluded from P&L in the prior year it occoured in .(not current year- the prior years) Prior years SCI is basicly NOT restated- so any prior year comparative figures shown in the SCI are NOT restated, only SFP and other Fin stats. 7. ANY INFO. PRESENTED ABOUT PRIOR YEARS IN THIS YEARS FIN STATS : if any info. is shown about prior years in the current yrs Fin Stats, eg historical summaries -they are restated as far back as is practicable.
DISCLOSURE FOR ERRORS: ( see example 1 in volume 2 IFRS application guidance)

1. IN THE NOTES : The effect on the ALL the prior periods, is disclosed, BUT NOT the effect on the current period at all-that only happens in Change in Accounting Policy type. 2. POSITION: gets its own line and heading called: CORRECTION OF PRIOR PERIOD ERROR 3. DISCLOSE: a. Nature of Error b. Amount of correction for ONLY : each prior period presented i. For each Fin Stat line item ii. For IAS 33 Earnings per share c. Amount : of correction at beginning of earliest prior period presented. d. IF RETRO-SPECTIVE RESTATEMENT IS IMPRACTIBABLE: for any particular period : i. Description of why it is impracticable ii. Descr. Of how and from when the error has been corrected. e. Future Fin Stats need not repeat these disclosures.
CORRECTING A ERROR OF NOT CAPITALISING SOME INTEREST PAYMENTS TO AN ASSET .

1. NOTES: a. REM TO SHOW the i. Finance Costs note: with their new amounts & current & last yr comparative. 1. Method: must be in this order: a. Total Interest Paid for the Year b. Less: amount capitalized c. = a Total. ii. Taxation note: with their new amounts. &1 yr comparative : in this order: 1. Current Tax 2. Deferred Tax 3. Total Tax. b. VOLGORDER: i. 1: SCI / or correction table in notes + other notes.. ii. 2: StChEq or correction table in notes. iii. SFP c. INT THE CORRECTION OF PRIOR PERIOD ERROR NOTE: ITSELF i. Give 1 sentence as a description of what happened, saying which years have been restated and if it was done retrospectively or what. ii. Do not give current years figures ANYWHERE in here- only prior period affected rem the IAS 8 rule! SO ONLY DO COLUMNS FOR ALL PREVIOUS YEARS FROM LAST YEAR UP TO BACK TO THE YEAR THAT THE ERROR OCCOURED IN PLUS FOR ANY SFP LINE ITEMS GIVE THE BEGIN OF EARLIEST COMPARATIVE PERIOD AFFECTED AMOUNTS SFP AS WELL. iii. TABLE: Then do a table of all amounts & line items to be shown.: 168 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
1. SECTION 1:SCI AFFECTED PARTS : a. Effect on Profit of Incr/Decr in Finance Costs : its incrementl incr. or decr. effect on profit (so note: this line item should be calledeffect on profit of incr./decr. in Finance Costs because you DO NOT just put the amount of finance costs here or the change in it you put the EFFECT ON PROFIT of the change in amount. So if Finance Costs was 200 lessyou put +200 ..positive 200 , NOT just - 200.. because that was the effect on profit- if finance costs decrease it means its effect on profit WILL BE A POSITIVE /INCREASE .Thats how this SCI section ALL works , or it all comes out wrong note this.) The amount you put here is just the amount that it differed by, NOT the FULL AMOUNT of the FINANCE COSTS. b. Effect on profit of Incr/Decr in Tax Expense : its incrementl incr. or decr. effect on profit.(so note: this line item should be calledeffect on profit of tax because you DO NOT put the amount of tax here- you put the EFFECT ON PROFIT amount. So if tax was 200 extra- you put (- 200) ..negative 200 , NOT just 200.. because that was the effect on profit-a increase in tax will effect profit by decreasing it so it is a minus effect on profit!!!.Thats how this SCI section ALL works , or it all comes out wrong note this.) THIS is just the amount that it differed by, NOT the FULL AMOUNT of the TAX. c. = Incr/Decr in Profit. : add 1 & 2 above. 2. SECTION 2:SFP AFFECTED PARTS : a. Remember SFP gets 3 years back, the rest only get 2 .to do ALL prior years affected up to max 1 year back , , plus BEGIN of EARLIEST COMPARATIVE PERIOD IF IT WAS ACTUALLY AFFECTED - BUT NOT current year at all ever. Same as for change in policy rule. b. Effect on Equity of incr/decr. in PPE /ASSET : incr. or decr. (not just incr/decr but put a minus or plus sign according to how it will affect equity.- must do this or it all comes out wrong) c. Effect on equity of incr/decr. . in TAX DUE ( SARS creditor account) : incr or decr. not just incr/decr but put a minus or plus sign according to how it will affect equity.- must do this or it all comes out wrong) d. EQUITY : incr. or decr. ADD THE ABOVE NUMBERS to get this. 3. SECTION 3: ADJUSTMENT (amount added or subtracted) TO RETAINED EARNINGS AT BEGIN OF EARLIEST PERIOD SHOWN: as per IAS8 this is one of the items that must be disclosed , see rules above. 4. SECTION 4 : EARNINGS PER SHARE : just the increase or decrease, nothing else. = incr/decr. in profit from section 1 divided by number of shares. d. P&l & OCI : DO THIS ONE FIRST TO GET THE PROFIT : i. COMPARATIVES: current and last year are rallways equiredremember. ii. START with OLD given profit before interest,then deduct the interest as it should be below to get the correct Profit Before Tax. iii. TAX: get the correct tax expense using % rate and new profit you calculated. REM to make a workings note somewhere for calc. this profit for marks in exam if enough time. iv. EPS : rem to restate the correct EPS at bottom of SCI. e. STATEMENT OF CHANGES IN EQUITY: i. See example below. ii. Open with ORIGINAL RET. EARN. BALANCE of END of earliest period affected, , the Retained Earnings by adding a line item iii. Correct this balance by ADDING /SUBTRACTING the needed difference to bring this Ret.Earn Balance up/down to the correct level.: the line line item is just called: correction of prior period error iv. Next line : RESTATED BALANCE: after adding up the above 2. v. Now just wind through the years adding profit & minus dividends till you get to Today! 169 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
vi. DONT FORGET TO MINUS THE DIVIDENDS EACH YEAR. f. SFP : i. COMPARATIVES: remember to do 3 years : Current +Last year + BEGIN of last year ONLY = 3 years basiclybut only do the BEGIN of last year if those figures were affected, not if they were not affected.

ACCA1 DIPAC Framework - Presentation - Revenue - Change in Acc Policies - Income Tax

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ACCA1 DIPAC Framework - Presentation - Revenue - Change in Acc Policies - Income Tax

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(E) EXAM TIPS: .....................................................................................................................................................................................................................................................9

MATCHING CONCEPT ............................................................................................................................................................................................................................................................. 20

5)Jse Listing Requirements: ..................................................................................................................................................................................................................... 38

STATEMENT OF CHANGES IN EQUITY : COMPREHENSIVE EXAMPLE: ................................................................................................................................... 63

STATEMENT OF CHANGES IN EQUITY. .............................................................................................................................................................................................. 63

(3) RENDERING OF SERVICES:ias 18.20-28 ...................................................................................................................................................................................... 81

INTEREST ,ROYALTIES & DIVIDENDS................................................................................................................................................................................................. 83

5.1 EXCHANGE TRANSACTIONS involving ADVERTISING SERVICES (SIC 31/AC431)...................................................................................................................... 93

STEP 1 : CALCULATING TEMPORARY DIFFERENCES .................................................................................................................................................................103

STEP 4 : APPROPRIATE TAX RATES & LAWS .................................................................................................................................................................................140

STEP 5: RECOGNITION OF THE DEFERRED TAX INCOME OR EXPENDITURE .................................................................................................................143

SPECIFIC ISSUES ............................................................................................................................................................................................................................................ 144

EFFECTIVE INTEREST RATE METHOD

1.4.2.Clearly and Concisely makes it understandable.

ACTUAL financial statements : Structure And Content Of Financial Statements

components IAS 2 Specified IAS IAS 1 1.78b ? ? ? ? ?

Specified IAS1 IAS1.79

2. INTANGIBLE ASSETS : Intangible assets Brand names Licences TOTAL

Carrying amount: Beginning of the year: acc.depreciation) Cost Accumulated amortisation

Compensation In respect of loss of office

Details of directors service contracts

executive directors must also be identified separately.

Xxxxxxx Xxxxxxx Xxxx Xxxxxxx

xxxx TOTAL TOTAL TOTAL

Total Sub-total Sub-total

NATURE Format :STATEMENT OF COMPREHENSIVE INCOME

R IAS 18 xxxxx Xxxxx

Xxxxx Xxxxx Xxxxx Xxxxx Xxxxx XXX

Expenses: i) SIGNIFICANT ITEMS : (eg: damage from a earthquake)

ii) iii) iv) v)

STATEMENT OF CHANGES IN EQUITY : COMPREHENSIVE EXAMPLE:

PER IAS 1 : THE NOTES

MARK TO MARKET RESERVE

RETAINED EARINGS /ACCUMUL

Balance on 1 January 2005 Total Comprehensive Income

b/d Profit after tax , but before anything else

receivable .(see definition of fair value)

USE financial calculator above one and below one.

2- RECOGNITION OF REVENUE NOTESl

NOTE there is a TRAP HERE read this method well!!!!!

\ 1.3. ANOTHER EXAMPLE FROM UNISA TUT102

SALES SERVICES INTEREST ROYALTIES DIVIDENDS total

PENALTIES & INTEREST

STEP 1 : CALCULATING TEMPORARY DIFFERENCES

HOW THE DEFERRED TAX WORKS:

1) ASSETS TAX BASES : RESEARCH COSTS (Assets Special Case 1 Of 5)

CARRYING AMOUNT Less: TAX BASE = =Temp.Diff

CARRYING AMOUNT Less: TAX BASE = =Temp.Diff

CARRYING AMOUNT Less: TAX BASE = =Temp.Diff

CARRYING AMOUNT Less: TAX BASE

=Temp.Diff DEFERRED TAX

CARRYING AMOUNT Less: TAX BASE = =Temp.Diff

CARRYING AMOUNT Less: TAX BASE = =Temp.Diff

CARRYING AMOUNT Less: TAX BASE

CARRYING AMOUNT Less: TAX BASE

CARRYING AMOUNT Less: TAX BASE = =

CARRYING AMOUNT Less: TAX BASE = =

CARRYING AMOUNT Less: TAX BASE = = =Temp.Diff DEFERRED TAX

CARRYING AMOUNT Less: TAX BASE = =Temp.Diff = DEFERRED TAX

Less: TAX BASE

=Temp.Diff DEFERRED TAX

CARRYING AMOUNT Cost=7000 000 Revalued =9000 000

No Residual Value this column below