Financial Accounting for Companies FAC2601 Semesters 1 and 2

1.1 INTRODUCTION In Accounting I you were introduced to company annual financial statements. You studied aspects such as the format and layout of a statement of financial position, statement of comprehensive income and cash flow statement. In Accounting II you will be studying the above aspects in greater detail and you will be acquiring knowledge of International Financial Reporting Standards (hereafter called IFRS). IFRS are being developed by the International Accountants Standards Board (IASB) and will form part of your study material in future. What is IFRS? IFRS is a set of international accounting standards stating how particular types of transactions and other events should be recognized, measured and reported in annual financial statements. Goal of IFRS? From your accounting I studies you’ll remember that the goal of IFRS is to provide a global framework for how public companies prepare and disclose their annual financial statements. IFRS provides general guidance for the preparation of annual financial statements, rather than setting rules for industry-specific reporting. FAC2601/001/3/20156 Having international accounting standards is especially important for large companies that have subsidiaries in different countries. Adopting a single set of world-wide standards will simplify accounting procedures by allowing a company to use one reporting language throughout. A single standard will also provide investors and auditors with a cohesive view of finances. 1.2 COMPANY BACKGROUND In general a company can be described as an association between persons that work together with the aim to make a profit. A company as an entity is a legal person which is incorporated in terms of the Companies Act 71 of 2008. The entity exist independently from its owners, the shareholders. Companies as a form of entity were established in order to provide the following needs: the acquisition of more capital, as it is normally not possible in a sole entity ensure the continued existence of the company easy way to exchange owners procedure to limit the financial liability of the owners. A company can have a multitude of shareholders (eg. Listed company) and it is impractical to open a capital account for each shareholder. To solve this problem, the capital of a company is divided into small units, called shares (See sections “share transactions” below). Each shareholder shares in the profits of the entity in relation to the value of his or her shares. In view of the fact that the shares of a company are transferable, it happens that the shareholders continually change without threatening the company's continuance. A share certificate serves as evidence of a person's interest in a company. Share certificates are negotiable documents and the shareholder has the power to sell all his or her shares or to purchase additional shares. Each shareholder's interest and rights to vote are determined by the number of shares he or she owns. The right to vote gives the shareholder the voice to appoint directors and determines the objectives of the company. A company is formed by its founders. The establishment of a company is regulated by the provisions of the Companies Act 71 of 2008. A company is incorporated by thelodging of the following main forms: Notice of incorporation Memorandum of incorporation (MOI) The MOI is the most important document governing the company. The Act imposes certain specific requirements on the content of a Memorandum of incorporation (MOI) to protect the interest of shareholders in the company, and provides for a number of default company rules, which companies may accept or alter as they wish as long as its in line with the Companies Act. A company is deemed to be a juristic person from the date and time that its incorporation is registred. Two types of companies may be formed in South Africa: (Study par 3 of chapter 19 of the prescribed textbook) a profit company a non-profit company. FAC2601/001/3/20157 Incorporating a company requires costs such as registration fees and related legal costs. All these costs are described collectively as "preliminary expenses". Preliminary expenses are debited to the 'preliminary expenses' account. The name of the public company ends with the word 'Limited', whereas the private company ends with the words '(Proprietary) Limited'. The minimum number of directors of a public company is three. The minimum number of directors of a private company is one. Public companies may be listed on the Johannesburg Securities Exchange which will promote the marketability of the shares. 1.3 HISTORY OF THE COMPANIES ACT (NOT EXAMINABLE) The Companies Act 61 of 1973 as amended, came into being after the Commission of Inquiry into the Companies Act tabled the Supplementary Report and Draft Bill in Parliament on 1 June 1972. The commission, which was appointed on 14 October 1963 under the chairmanship of Mr Justice J van Wyk de Vries, operated chiefly on a temporary basis. The principal report of the commission, dated 15 April 1970, which deals with principles, new concepts and important amendments, was tabled in Parliament on 17 September 1970 and formed the basis for the draft companies bill and eventually for the Companies Act of 1973. The terms of reference of the Commission of Inquiry into the Companies Act were not only to report on the various aspects of company law, but also "to submit a draft bill in order to implement any recommendations made for the amendment of the present Act" (our translation). During the sixty years that intervened since the Transvaal Companies Act was passed in 1909 – an act which was largely ratified as the Companies Act of 1926 – numerous amendments were made without the Act ever having been consolidated. The members of the commission decided that the Act simply did not lend itself to further amendment and set themselves the task of drafting the draft consolidated companies bill. The Consolidated Companies Act was finally approved by Parliament in 1973 and was given the title of the Companies Act 61 of 1973. This act was replaced by new companics Act 71 of 2008. The Companies Amendent Bill (B40--2010) was tabled in Parliament on 9 November 2010. The Bill was published in the Government Gazette for public comment and public hearings were held on 30 November and 1 Desember 2010. The Bill proposed the amendment of the Companies Act, No 71 of 2008 to correct errors, legal-techical and grammatical issues. The Companies Amendment Bill was approved by the Portfolio Commitee on Trade and Industry on 10 March 2011. The new Companies Act was signed by the President on the 8th April 2009 and gazetted in Gazette No. 32121 (Notice No 421). This Act is called the Companies Act, Act no. 71 of 2008. 1.4 ANNUAL FINANCIAL STATEMENTS Companies are obliged to draw up annual financial statements, using ledger accounts, cash receipts and payment journals. FAC2601/001/3/20158 Annual financial statements are a structured representation of the financial position and financial performance of an entity. The objective of annual financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users. Annual financial statements provide information about an entity’s assets, liabilities, equity, income and expenses, including gains and losses, contributions by and distributions to owners and cash flows. Users use this information to base realistic business and economic decisions. The numerous groups of users who rely for information on these statements of financial reporting include: owners (shareholders) potential investors management borrowers suppliers creditors tax authorities bankers employers For users the annual financial statements of a company form the basis for conclusions and eventual decision making. In order to help the user to draw sensible conclusions from his or her investigation and analysis of the annual financial statements of the company, the Companies Act 71 of 2008 contains certain specific requirements regarding the disclosure of information in the annual financial statements of companies. According to the Companies Act 71 of 2008 a company's annual financial statements have to be drawn up in accordance with International Financial Reporting Standards (IFRS) or IFRS for SME, depending on the category of the company. Although the sections of the Companies Act of 2008 and companies regulations are very important for your studies, you are not expected to read them all. In order to cover the ground thoroughly, we shall, however, refer to them from time to time in the study guide. Company annual financial statements are drafted, published and submitted to the annual general meeting of shareholders. These statements are therefore drafted mainly for and directed to the shareholders. The annual financial statements must reflect the state of affairs of the company and its business at the end of the financial year in question as well as the profit or loss for that financial year. Annual financial statements must comply with four qualitative requirements. It is clear that annual financial statements have to be drafted in accordance with preexisting guidelines and legislation. After you have completed your study of this study guide, you will be able to draft such statements yourself, using our guidelines. 1.5 SHARE TRANSACTIONS 1.5.1 INTRODUCTION Before we can continue our account of the drafting of the annual financial statements of a company, there are certain matters regarding the share capital of companies that we have to discuss in more detail.