Introduction to accounts
Chapter 9
Business ownership revision
Pty Ltd.
Ltd.
 Pty Ltd is an abbreviation for
 Ltd simply means ‘limited’
proprietary limited.
 Proprietary companies are
the most common form of
company.
 This type of company may
only have up to 50
shareholders, and they are
private.
 Equivalent of “Ltd”. in UK
and refers to limited liability.
 Limited liability companies
are public companies, which
means the public has a
certain amount of
ownership.
 Equivalent of “Plc”. in UK
Objectives
 Define accounting terms
 Reasons why companies are required to produce
annual reports and financial statements
 Accounting framework
 Users of accounting financial statements
(accounts/AFS)
 List and describe the financial statements to be
prepared
1. The accounting framework:
Statutory requirements
 Statement of profit or loss and other comprehensive
income:
 How much profit (income – expenses) were the company
able to produce from operations?
 Statement of financial position:
 Assets, Liabilities and Shareholders funds (equity)
 Cashflow statement:
 How was cash generated and used during the year?
 Statement of changes in equity:
 Changes in equity (ownership)
1. The accounting framework p.3
 Notes to the AFS
 Auditors report
 Directors report
Statement of profit or loss and
other comprehensive income
Statement of profit or loss and
other comprehensive income
 Financial performance
 Income and expenses
Income – expenses = profit / loss
 Over a specific period – financial year
 Income statement*
 What are income/expenses?
 Homework: Make list of income/expenses
Statement of financial position
Statement of financial position
 Financial position
 Assets, liabilities, equity
 Profit belongs to owner
 Specific point in time
 Balance sheet*
 Homework: Make list of assets/liabilities
Statement of cash flows
Statement of cash flows
 Actual money!
 Cash is the lifeblood of businesses
 Where cash comes from and how it is spent
Statement in changes of equity
 Shows the composition of the owners’ share in the
company
1.1 Users (p.3 & 4)
 Four main groups of users:
 Equity investors
 Loan creditors
 Employees
 Business contacts
 Other users:
 Stock exchange (JSE)
 Management
 Tax authorities
 Analysts
 Credit rating agencies
1.1 Users (p.5)
 Financial statements will also be read by:
 Government agencies (including tax authorities)
 Competitors
 Potential predators
1.1 Why financial statements?
1.2 Sources of regulation p.5
 The Companies Act, Act no. 71 of 2008 was signed
by the President on 8 April 2009 and gazetted in
Gazette No. 32121 (Notice No. 421).
 The Act replaces the Companies Act, 61 of 1973 and
came into effect on 1 May 2011.
 International Accounting Standards (IFRS)
 Stock exchange requirements (JSE)
 Other legislation e.g. King III, LTIA, STIA, FAIS,
FICA
1.2 Sources of regulation p.5
 Diagram p.5
1.3 Statutory requirements
 Companies Act requires:
 Statement of financial position
 Statement of profit or loss
 Detailed disclosures
 Director’s report
 Auditor’s report
1.3 Directors report p.7
 A report, usually at the first/second page of the AFS by
the directors.
 Contain:
 Detail about companies’ activities
 Summary of financial decisions by the directors e.g
dividend proposed, donations etc.
 Details of who were directors, their shareholding and
interests in the company
 Question p. 7 & 8
2.1 International Accounting
Standards Board p.9
 IASB = is a body that develops, issues and withdraws
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accounting standards
Accounting standards – International Financial
Reporting Standards (IFRS)
IFRS used in UK, SA, Singapore, Hong Kong, Russia
European Union and Australia
IASB no authority to comply, but other regulations e.g.
Johannesburg Stock Exchange can require it!
Why would companies use a standard set of ‘rules’ how
to report financial issues?
2.2 International Accounting
Standards Board p.9
Arguments FOR
Arguments AGAINST
 Eliminate variations between
 The sets of rules may not always
companies in the way they
prepare accounts.
 The discussion process on
standard being issued focuses
attention on particular areas for
debate about accounting
practice.
 They oblige companies to
disclose more information than
that required by national law.
 Allows some degree of
flexibility.
be appropriate to all companies
in all circumstances.
 Standard-setting may not be
entirely objective.
 Standards often allow more than
one alternative treatment, which
negates the attempt to ensure
conformity between companies.
 Some standards are so general as
to be meaningless, while others
are far to detailed.
3. Annual Report (p.11 & 12)
 Just read through p.11-12
4. The auditor’s report p.13
 All widely held companies and some other companies
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should appoint an auditor to report on the AFS
Appointed by the shareholders
Shareholders approve the auditors’ fee
Auditors must comment on whether, in their opinion, the
AFS have been properly prepared in accordance with the
Companies Acts and relevant accounting standards, and
whether, in their opinion, the accounts give a true and fair
view
The fundamental purpose of the audit report is to add
credibility to the AFS
Read p14 and 15 – 4.1 The contents of an auditors’ report
4. The auditor’s report p15: Various
opinions
Qualified Auditor’s opinion can have the
following impact on a company:
 Reduce its credit rating
 Increase its cost of borrowing
 Reduce its share price
 Can reflect badly on the management team controlling
the company and as a result lead to them being
replaced or taken over!
4.3 Regulation of auditors p.17
 Companies Act
 Auditing Practice Board – International Auditing
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Standards
SA: IRBA (Independent Regulatory Board for Auditors),
may only sign off if a registered auditor
Regulator (FSCA – Financial Sector Conduct Authority)
needs to approve auditor (insurance industry)
NB that an auditor is independent from the company!
Major fears about auditors (eg. KPMG)
 Conflict of interest
 Familiarity