LEARNING UNIT 1

INTRODUCTION

IFRS: particular types of transactions should be recognized, measured and reported in AFS

Goal:

  • global framework
  • general guidance
  • important for large companies
  • simplify accounting standards
  • cohesive view of finances

COMPANY BACKGROUND

  • Legal person
  • Companies Act 71 of 2008 (''the Act'')

fulfil the following needs:

  • Acquire more capital
  • Continued existence
  • Easy way to exchange owners
  • Limit financial liability
  • shares in profit
  • shares are transferable,
  • share certificates serves as evidence
  • right to vote is determined by the number of shares held

Incorporated by lodging:

  • Notice of incorporation
  • Memorandum of incorporation

Profit companies include: private, public, state-owned and personal liability VS NPC(public benefit) page 488 of textbook

Preliminary expenses are debited

Public company: 3 directors minimum
Private company: 1 director minimum

HISTORY OF THE COMPANIES ACT (not in exam)

ANNUAL FINANCIAL STATEMENTS

SHARE TRANSACTIONS

Share capital structures

Types of shares

Issue of capitalization shares

  • Build up reserves from profits
  • capitalization shares (not in form of cash but rights to shares)
  • referred to as bonus issue
  • shared held increase, portfolio stays same

  • reduce value per share, increase shares held


  • Journal


    DR Retained earnings (with capitalization amounts)


    KR Share capital account

Rights issues and options

  • rights issue offered to existing shareholders
  • price set as below market price, sold at higher price
  • can sell rights (further profits)
  • refer to page 10 study guide for respect of rights issue

Underwriting of share issues

  • require funds=share issue
  • financial institution
  • underwriters commission
  • commission not exceed 10%
  • not affected by shares public took up
  • refer to study guide for calculation on underwritten issue

Dividends

  • profit divided among shareholders
  • pro rata portion of profits

Ledger accounts, cash receipts and payment journals are used in prep. of AFS

Financial position and performance

Specific requirements:

  • drawn up in accordance of IFRS
  • Annual general meeting of shareholders
  • reflect state of affairs (profit/loss)
  • 4 qualitative requirements
  • pre-existing guidelines & legislation

Capital contributed=share capital

Authorized - maximum issued

Journal entry issue of shares:
DR Bank
KR Share capital
(1000 ordinary shares x R1.80 = R1800)

Ordinary shares (equity shareholders):


  • gives full voting rights
  • dividends only after provision is made for preference dividends
  • Dividend depend on profits

Preference shares:


  • both debt and equity
  • higher claim on assets and earnings
  • fixed-rate dividend
  • right to pay out first (bankruptcy)
  • usually no voting rights
  • issued various rights
  • 4 types: cumulative preferred (must be paid), non-cumulative preferred (skipped not included), participating preferred (plus extra), convertible (exchanged for ordinary)

Cumulative preference shares:

  • fixed preferential dividend accumulates if not paid out
  • not declared or paid should be disclosed
  • paid in full before ordinary preference dividends

Redeemable preference shares:

  • redemption on a specific date
  • redemption is solely at discretion of the issuer