Department of
Accounting
FRK121
Chapter 5: Presentation
of financial statements
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Par 5.1-5.4 (Qualitative characteristics &
SPLOCI)
Example 5.1 (SPLOCI)
Exercise 5.1 (Homework)
Learning outcomes of Chapter 5
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Explain the purpose of the accounting policy note to the financial statements;
Implement the following adjustments in the financial statements:
 Inventory and inventory losses
 Asset realisation
 Intangible assets and amortization
 Depreciation
 Impairment of assets
 Loans and interest on loans
Prepare a statement of profit or loss and other comprehensive income;
Prepare a statement of change in equity;
Prepare a statement of financial position;
Prepare the notes that accompany the financial statements
Introduction
 Objective of financial statements (FS) is:
 to provide information that is useful for
decision making to various users (e.g.
Investors, Lenders, Owners, Managers,
Employees), about:
 Objective of qualitative characteristics of FS is
to achieve this
Qualitative characteristics
QUALITATIVE CHARACTERISTICS
Understandability
Prudence
Relevance
Completeness
Materiality
Comparability
Reliability
Timeliness
Substance over form
Benefit vs Cost
Qualitative characteristics - Understandability
 information should be presented in a way that
makes it understandable to users who have a
reasonable knowledge of business and economic
activities and accounting, and
 a willingness to study the information with
reasonable diligence
Qualitative characteristics - Relevance
 Information presented must be relevant to
the decision-making needs of users
 Information is relevant if capable of
influencing the economic decisions of users
by helping them evaluate past, present or
future events
Qualitative characteristics - Materiality
 Information is material if its omission or misstatement
could influence the economic decisions of users
 Materiality depends on the size and nature of the
omission or misstatement
 Size: large ZAR amount, e.g. pending lawsuit of
R1m
 Nature: e.g. theft of assets by director
Qualitative characteristics - Reliability
 Information is reliable if it is free from material
error and bias and represents faithfully
 Financial statements should not skew information
to achieve a predetermined result or outcome
 Example: use accruals to smooth income to make
a bad year of profits look good
Qualitative characteristics - Substance over form
 Transactions and other events and
conditions should be accounted for and
presented in accordance with their
substance and not merely their legal form.
 Example: car purchased on finance lease
Qualitative characteristics - Prudence
 Prudence is using a degree of caution when
exercising judgement to ensure that
estimates of assets or income are not
overstated and liabilities or expenses are
not understated
Qualitative characteristics - Completeness
 Information in financial statements
must be complete - an omission can
cause information to be false or
misleading
Qualitative characteristics - Comparability
 Financial statements must be:
 comparable over time to identify trends
 comparable with different entities
 How to achieve?
 Account for similar transactions consistently over time
and across other entities
 state accounting policies used to prepare FS
Qualitative characteristics - Timeliness
 Financial information must be presented within the
decision-making time frame to influence the
economic decisions of users.
 Undue reporting delays may render information
irrelevant
 Example: reporting results too long after year-end,
e.g. Steinhoff
Qualitative characteristics - Balance between benefit and cost
 The benefits derived from information should
exceed the cost of providing it - judgemental
process
 Example: sophisticated inventory system may
produce better inventory valuations, but may be
excessive in cost
Complete set of financial statements (Par 5.3)
A complete set of financial statements must include:
1.
2.
3.
4.
5.
Statement of profit or loss and other comprehensive income
(SPLOCI) or (SOPL);
Statement of changes in equity (SOCIE);
Statement of financial position (SOFP);
Statement of cash flows (SOCF), and
Notes to the financial statements
More than just FS…integrated reporting
Interaction between statements
Total Equity
• SOP/L
• Income minus
Expenses
Profit or loss
• Statement of
changes in
equity
• Movement in
equity
• Includes profit or
loss
• SOFP
• Notes
SOCF
• Movement
in cash
A=E+L
Example: MTN Group Limited 2021
Notes to the financial statements
 Accounting policies are principles applied by an entity in
preparing FS and serve to inform users on what basis the
FS were prepared
 Examples of accounting policies:
 Measurement basis, e.g. historic cost
 Depreciation policy for tangible non-current assets
 Measuring of inventories, e.g. FIFO
Notes to the financial statements
Examples of notes to the financial statements:
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Property, plant and equipment
Intangible assets
Inventories
Trade receivables
Other current assets
Cash and cash equivalents
Long-term loan
Trade and other payables
Example 5.1
Step 1: Prepare a template
Dynamic Dynamite
Statement of profit or loss and other comprehensive income for the year ended 30 June 20.18
R
Revenue
Cost of sales
Gross profit
Other income
Rent income
Credit losses recovered
Other expenses
Sundry operating expenses
Adjustment to the allowance for expected credit losses
Depreciation
Loss on damaged vehicles
Amortisation
Finance costs
Interest expense
Profit for the year
Step 2: Use and interpret information
Dynamic Dynamite
Statement of profit or loss and other comprehensive income for the year ended 30 June 20.18
R
Revenue
Cost of sales
Gross profit
Other income
Rent income (R6 850
Credit losses recovered
Other expenses
Sundry operating expenses (R60 000
Adjustment to the allowance for expected credit losses (R9 000
Depreciation
Loss on damaged vehicles
Amortisation
Finance costs
Interest expense
Profit for the year
845 840
Information 1 & 2 and calculations:
Information from the trial balance:
Depreciation: Equipment
Calculation of interest
1 Jul 20.17
30 Jun 20.18
1 Jun 20.18
SOPL = accrual concept
R500 000 x 15% x 1/12 = R6 250
Step 3: Complete the statement
Dynamic Dynamite
Statement of profit or loss and other comprehensive income for the year ended 30 June 20.18
R
Revenue
Cost of sales
Gross profit
Other income
Rent income (R6 850
Credit losses recovered
Other expenses
Sundry operating expenses (R60 000
Adjustment to the allowance for expected credit losses (R9 000
Depreciation (R130 000 + R8 750
Loss on damaged vehicles
Amortisation
Finance costs
Interest expense (R6 250
Profit for the year
845 840
Information 3 and calculations:
Calculation of depreciation and loss on
damaged vehicle
THIS
YEAR
1 Jul 20.15
1 Jan 20.16
30 Jun 20.16
1 Jul 20.16
1 Jan 20.17
30 Jun 20.17
1 Jul 20.17
1 Jan 20.18
28 Feb 20.18
30 Jun 20.18
Calculation: Loss on damaged vehicle
Calculation: Depr on remaining vehicles
[(R400 000 – R100 000) – (R58 000 – R14 500)] x 10% = R25 650
Step 3: Complete the statement
Dynamic Dynamite
Statement of profit or loss and other comprehensive income for the year ended 30 June 20.18
R
Revenue
Cost of sales
Gross profit
845 840
Other income
Rent income (R6 850
Credit losses recovered
Other expenses
Sundry operating expenses (R60 000
Adjustment to the allowance for expected credit losses (R9 000
Depreciation (R130 000 + R8 750 + R5 850 + R25 650)
Loss on damaged vehicles
Amortisation
Finance costs
Interest expense (R6 250
Profit for the year
(9 650)
Information 4 and calculations:
Rent income (according to the Trial balance) R6 850
1 Jul 20.17
1 Jan
20.18
30 Jun 20.18
July
Let x = rent before 10% increase,
Implies rent after 10% increase is 1.1x
Therefore 6 months between 1 July 20.17 to 31 Dec 20.17 is 6x, and
7 months between 1 Jan 20.18 to 31 July 20.18 (remember one month extra paid), is 7.7x
Therefore:
6x + 7.7x
= R6 850
13.7x
= R6 850
x
= R500
1.1x
= R550
Therefore, rent to be disclosed is R6850 – R550 = R6 300
Step 3: Complete the statement
Dynamic Dynamite
Statement of profit or loss and other comprehensive income for the year ended 30 June 20.18
R
Revenue
Cost of sales
Gross profit
Other income
Rent income (R6 850 – R550)
Credit losses recovered
Other expenses
Sundry operating expenses (R60 000
Adjustment to the allowance for expected credit losses (R9 000
Depreciation (R130 000 + R8 750 + R5 850 + R25 650)
Loss on damaged vehicles
Amortisation
Finance costs
Interest expense (R6 250
Profit for the year
845 840
6 300
(9 650)
Information 5 & 6
Additional information
5. A debtor, Mr Bombastic, who owed R500, was declared insolvent. His account was written off and
recorded as irrecoverable. In February 20.18, a direct deposit was received from him for the amount of
R430. This transaction was not recorded.
6. The allowance for expected credit losses must be adjusted to R9 000.
Allowance for
expected credit
losses per TB is
R6 700
Solution - Calculations
5. Debit Bank, Credit Credit losses recovered R430
6. Credit losses adjustment: R9 000 – R6 700 = R2 300
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Increase in risk = Increase in expenses
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Debit Adjustment to the allowance for expected credit losses
Credit Allowance for expected credit losses
R2 300
R2 300
Step 3: Complete the statement
Dynamic Dynamite
Statement of profit or loss and other comprehensive income for the year ended 30 June 20.18
R
Revenue
Cost of sales
Gross profit
Other income
Rent income (R6 850 – R550)
Credit losses recovered
Other expenses
Sundry operating expenses (R60 000
Adjustment to the allowance for expected credit losses (R9 000 – R6 700)
Depreciation (R130 000 + R8 750 + R5 850 + R25 650)
Loss on damaged vehicles
Amortisation
Finance costs
Interest expense (R6 250
Profit for the year
845 840
6 300
430
(2 300)
(170 250)
(9 650)
Information 7
Additional information
7. Development costs should be amortised over a period of five years according to the straight-line
method commencing from 1 July 20.17.
Solution: Calculations
 Amortisation: R875 330 / 5 = R175 066
Development costs
per TB R875 330
Step 3: Complete the statement
Dynamic Dynamite
Statement of profit or loss and other comprehensive income for the year ended 30 June 20.18
Revenue
Cost of sales
Gross profit
Other income
Rent income (R6 850 – R550)
Credit losses recovered
Other expenses
Sundry operating expenses (R60 000)
Adjustment to the allowance for expected credit losses (R9 000 – R6 700)
Depreciation (R130 000 + R8 750 + R5 850 + R25 650)
Loss on damaged vehicles
Amortisation
R
xxx
(xxx)
845 840
6 730
6 300
430
(417 266)
(60 000)
(2 300)
(170 250)
(9 650)
(175 066)
Finance costs
Interest expense (R6 250)
(6 250)
Profit for the year
429 054
Exercise 5.1 - Question
Exercise 5.1 - Solution
Exercise 5.1 - Solution