INTERNATIONAL TRAINING COLLEGE - LINGUA

Towards Educational Excellence

NCHE Reg. No: R0014
NQA Accreditation No: 000095

DEPARTMENT OF BUSINESS AND MANAGEMENT

Task 4 Marking Key

Lecturer: MR W. MUSHONGA Due Date: 12 June 2020

QUALIFICATION : HONOURS DEGREE IN ACCOUNTING AND FINANCE ( NQF Level 8)

MODULE : Financial Reporting and Analysis (NQF Level 8)

ASSIGNMENT :
TOTAL MARKS : 20 marks

Task 4

INSTRUCTIONS:

 Your assignment must have a cover page with your name, student number, course
name and lecturer name
 Marks awarded will be indicated both as actual and percentage
 The assignment must be the work of the student and not shared or completed by any
other student and must be typed.
 Students will be penalised for plagiarising or simply copying passages from the study
notes or web sites, other texts and from another student’s assignment/project/rough
work, etc., without any referencing attached thereto.
 Students may work together but must not submit similar or identical assignments. You
must be able to show that you worked independently.
 Retain a copy of each assignment before submitting it, in case the original does not
reach the lecturer.
 Students who are mailing their assignments must ensure that the assignment
reaches the lecturer before or on the due date.
 Assignments may NOT be submitted via fax
 Your assignment MUST have references (APA method) written in alphabetical order.
 Use ARIAL -12 to type your work. Your work must be justified.
 Consult the lecturer if you do not understand assignment questions by calling 061-
301032

ANSWER ALL QUESTIONS

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Task 4

Explain what you understand by the reporting entity in the context of the
objectives and scope of financial statements. [10marks] [20 May 2020]

The objective of financial statements is to provide information about an entity's assets,

liabilities, equity, income and expenses that is useful to financial statements users in
assessing the prospects for future net cash inflows to the entity and in assessing
management's stewardship of the entity's resources.

This information is provided in the statement of financial position and the statement(s) of
financial performance as well as in other statements and notes.

Reporting period

Financial statements are prepared for a specified period of time and provide
comparative information and under certain circumstances forward-looking information.

Perspective adopted in financial statements and going concern assumption

Financial statements provide information about transactions and other events viewed
from the perspective of the reporting entity as a whole and are normally prepared on the
assumption that the reporting entity is a going concern and will continue in operation for
the foreseeable future.

The reporting entity

A reporting entity is an entity that is required, or chooses, to prepare financial

statements. It can be a single entity or a portion of an entity or can comprise more than
one entity. A reporting entity is not necessarily a legal entity.

Determining the appropriate boundary of a reporting entity is driven by the information

needs of the primary users of the reporting entity’s financial statements.

Consolidated and unconsolidated financial statements

Generally, consolidated financial statements are more likely to provide useful

information to users of financial statements than unconsolidated financial statements

[ 2 marks for each clearly explained point]

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Discuss the Qualitative characteristics of financial information2 [Thursday 21 May
2020] [20 marks] Marking Key

PRUDENCE AND NEUTRALITY

In response to numerous stakeholders, prudence is reintroduced in support of the

principle of neutrality for the purposes of faithful representation.

Prudence is understood here as the exercise of caution when making judgements under
conditions of uncertainty. For example, the exercise of prudence means that assets and
income are not overstated and liabilities and expenses are not understated.

The principle of prudence as defined by the IASB does not require asymmetry in the
recognition of assets and liabilities, namely the recognition of assets with a very high
degree of certainty by comparison with the recognition of liabilities as soon as they are
probable.

This reflects the recognition criteria set out (see point 5 below). Nonetheless, the text
recognizes that asymmetry can be necessary in order to select the most relevant and
faithfully represented information.

MEASUREMENT UNCERTAINTY AND FAITHFUL REPRESENTATION

The text provides clarification concerning measurement uncertainties. These are now
conceived in terms of faithful representation, rather than in terms of the relevance of the
information (as in the exposure draft).

This is because the faithful representation of information does not mean that that
information must be accurate in all respects. The Conceptual Framework observes that
the use of estimates, which imply a certain degree of uncertainty, is an essential part of
the preparation of financial information and this does not necessarily weaken the
usefulness of the information, if the estimates are clearly and accurately described and
explained.

Note that these clarifications come in response to stakeholders’ requests for the
reintroduction of the concept of measurement reliability, which was among the
recognition criteria for assets and liabilities in the previous Conceptual Framework and
in some existing IFRSs.

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When this chapter in 2010 was drafted in 2010, the IASB considered that the concept of
reliability was understood differently by stakeholders (in particular, as a synonym for
verifiability or free of material error). These two aspects are considered as too simplistic
by comparison with the IASB’s interpretation.

The concept of faithful representation adopted by the IASB is broader and, the Board
says, covers the aspects of reliability. We will see at point 5 below that the IASB no
longer includes reliable measurement in its recognition criteria for assets and liabilities.

The IASB has reintroduced the need, in some cases, to strike a balance between
relevance and faithful representation in order to provide useful information to the users
of financial statements. For example, estimated information entailing a very high degree
of uncertainty could be more usefully replaced by information whose estimation involves
less uncertainty, or even by an absence of an estimate, as long as explanations are
provided.

Substance over form and faithful representation

The IASB states that a faithful representation provides information about the substance
of an economic phenomenon instead of merely providing information about its legal
form.

When the IASB drafted this chapter in 2010, this clarification was regarded as
redundant in the light of the concept of faithful representation. It has been included in
the new version following stakeholders’ requests for the reintroduction of this concept in
an explicit fashion in the Conceptual Framework.

How substance is analyzed is set out in the chapter on the elements of financial
statements. Obviously, the contract terms must be analyzed in order to determine
whether a term can be exercised in practice, or to identify terms that bind neither of the
parties.

But the analysis does not stop there. Contract terms should generally be read in the
light of the law on which the contract is based, but should also be considered in the
context of other contracts or events and circumstances which could impact the analysis
of its terms.

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Some IFRSs, including IFRS 15 on contracts with customers, provide criteria for
bundling different contracts.

The IASB also draws on this analysis in its project on rate-regulated activities in order to
take account of the relationship between the supplier and the regulatory authority, and
to reflect in the accounts the deferral that can arise between the costs incurred by the
supplier and the period over which it can cover them through the rates it charges its
customers.

The concepts of prudence, measurement uncertainty and the primacy of substance over
form are reintroduced, alongside explanations of the qualitative characteristics of useful
financial information.

[ 4 marks for each clearly explained point]