2016 Accounting & Bookkeeping Fundamentals for Tax Practitioners

Transcription

1 2016 Accounting & Bookkeeping Fundamentals for Tax Practitioners Presented by Herman van Dyk CA(SA), RA, MCom(SA and international tax) Herman van Dyk is the Programme Leader for Taxation at the Potchefstroom Campus of the North-West University. He is a Chartered Accountant (SA) and Associate Chartered Accountant (England & Wales). He graduated with an MCom in South African and International Taxation cum laude. He received an academic award for the research part of this qualification titled Grounds for allowing a tax deduction for employee share incentives (best dissertation in the class). In 2012 he received the Rapport Top Lecturer Award for inspirational teaching and academic leadership in the Faculty of Economic and Management Sciences. In 2014, he received an Institutional Teaching Excellence Award.

2 Programme: 08:15 08:55 Registration 09:00 10:30 Accounting & Bookkeeping Fundamentals for Tax Practitioners 10:30 10:50 Tea Break (20 mins) 10:50 13:00 Accounting & Bookkeeping Fundamentals for Tax Practitioners 13:00 Conclusion

3 Welcome Accounting & Bookkeeping Fundamentals Presented by Herman van Dyk Sponsored by: Upcoming CPD Events 1

4 Upcoming CPD Events Refer to our website for all upcoming events Personal Income Tax Vat Fundamentals Accounting Reconciliation for Tax Practitioners 2016 Accounting & Bookkeeping Fundamentals 2

5 Overview of today's seminar Background and introduction Scope of IFRS for SMEs Pervasive principles Presentation of financial statements Statement of cash flows Inventories Property, plant and equipment Investment property Leases Intangible assets Impairment of assets Revenue Background and introduction External financial reporting 3

6 Double-entry accounting Luca Pacioli, an Italian mathematician, published the Summa de arithmetica, geometria, proportioni et proportionalita in Venice in It contained the first published description of the doubleentry accounting system and describes most of the accounting cycle as we know it today (use of journals and ledgers). Pacioli warned that one should not go to sleep at night before all the debits equalled all the credits. Users of financial statements Financiers Revenue authorities Potential investors Owners and managers (especially where internal management reporting is not available) Decision-making 4

7 The rules of accounting Financial statements are therefore used by a wide range of interested parties. It is therefore important that a set of uniform rules exist to which financial statements must adhere International Financial Reporting Standards (IFRS) is a set of international accounting guidelines. Financial reporting standards IFRS: International Financial Reporting Standards ("FULL IFRS") IAS and IFRS standards. Used in EU, Asia, Australia and South Africa but not in the USA. US GAAP: Generally Accepted Accounting Principles used in the USA. 5

8 Information reported in financial statements Financial performance Financial position Cash flows The accounting cycle 1 Transaction 6 Pre-adjustment trial balance 7 Adjustments 2 Source document 5 Balancing of accounts 8 Final trial balance 3 Analysis and entry 4 Posting to ledgers 9 Financial statements Nominal accounts closing 6

9 Statutory obligation to prepare financial statements Companies Close corporations Trusts (implied) Recognition Recognition is the process of incorporating in the financial statements an item that meets the definition of an asset, liability, income or expense. It is therefore the process of recording/including an asset, liability, income or expense (transaction or balance) in the financial statements. 7

10 Measurement Measurement is the process of determining the monetary amounts at which items are included in the financial statements. Historical cost Fair value Scope IFRS for SMEs 8

11 IFRS for SMEs International Financial Reporting Standard for Small and Medium-sized Entities. Easier to apply than full IFRS. Still high quality financial reporting principles that are tailored to the capability of smaller businesses. Scope of IFRS for SMEs The IFRS for SMEs is intended for use by small and medium-sized entities (SMEs). Entities that do not have public accountability 9

12 Public accountability An entity has public accountability if: its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses (most banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks would meet this second criterion). Scope of IFRS for SMEs Any company of any size is eligible to use the IFRS for SMEs, provided it does not have public accountability. No bright-line size test in the Standard. Local jurisdictions often impose such size tests. 10 1

13 Scope in South Africa Companies and close corporations Category Financial reporting standard State owned companies Public companies (listed) Public companies (not listed) Private companies: PI score 350+ Private companies: PI score Private companies: PI score < 100 and statements independently compiled Private companies: PI score < 100 and statements internally compiled IFRS (unless PFMA provides otherwise) IFRS IFRS or IFRS for SME's IFRS or IFRS for SME's IFRS or IFRS for SME's Determined by company Public Interest Score (PI Score) Calculation 1. Number of points equal to average number of employees during the financial year + 2. One point for every R1 million (or portion thereof) in third party liability at the financial year end + 3. One point for every R1 million (or portion thereof) in turnover during the financial year + 4. One point for any individual who has at the end of the financial year, to directly or indirectly have a beneficial interest in any of the company s issued securities (or nonprofit companies: one point for every member of the company). 11 1

14 Interpretation: "employee" According to Companies Regulations, use definition in Labour Relations Act (66 of 1995): Interpretation: individual who has "beneficial interest" Right to participate in distributions Ability to exercise rights Ability to dispose 12 1

15 Case study #1 10 minutes Pervasive principles IFRS for SMEs 13 1

16 Accrual basis IFRS for SMEs uses an accrual basis of accounting (except for the statement of cash flows). Qualitative characteristics Understandability Relevance Materiality Reliability Substance over form Prudence Completeness Comparability Timeliness Balance between benefit and cost Undue cost or effort 14 1

17 Financial position Balance sheet (SPF) Equity Assets Liabilities Assets Equity Liabilities Asset An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. 15 1

18 Liability A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Equity aka owner's interest or NAV Equity is the residual interest in the assets of the entity after deducting all its liabilities. Equity Assets Liabilities 16 1

19 Financial performance Income statement (SOCI) Profit (Loss) Income Expenses Income Income is increases in economic benefits during the reporting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from owners. Revenue Gains 17 1

20 Expenses Expenses are decreases in economic benefits during the reporting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to owners. Recognition criteria Item meets the definition of an asset, liability, income or expense It is probable that any future economic benefit associated with the item will flow to or from the entity; and The item has a cost or value that can be measured reliably. 18 1

21 How does financial performance interact with financial position? Income Expenses = Profit(+) or Loss(-) Equity Cash flows Cash and cash equivalents Day 1 Cash IN Cash OUT Cash and cash equivalents Day 365 Operating activities Investing activities Financing activities 19 1

22 Case study #2 10 minutes Presentation of financial statements in terms of IFRS for SMEs Section

23 Frequency and consistency reporting and comparative information Must present complete set of financial statements every twelve (12) months. Must retain the presentation and classification of items in the financial statements from one period to the next unless following a change that another presentation or classification would be more appropriate (retrospective restatement would be required). Must present/disclose comparative information in respect of the previous comparable period for all amounts presented in the current period s financial statements. Also for narrative or descriptive information when relevant to understanding. Complete set of financial statements Statement of financial position (balance sheet) Statement of comprehensive income (P&L and other comprehensive income) Statement of changes in equity Statement of cash flows Notes including basis of preparation and accounting policies Each statement presented with equal prominence 21 2

24 Identification of financial statements Must clearly identify each of the financial statements and the notes and distinguish them from other information in the same document. Following must be displayed prominently (and repeated where necessary): the name of the reporting entity and any change in its name since the end of the preceding reporting period; whether the financial statements cover the individual entity or a group of entities; the date of the end of the reporting period and the period covered by the financial statements; the presentation currency the level of rounding, if any, used in presenting amounts in the financial statements. Identification of financial statements Must disclose the following in the notes: the domicile and legal form of the entity its country of incorporation address of its registered office (or principal place of business, if different from the registered office); and a description of the nature of the entity s operations and its principal activities. 22 2

25 Statement of cash flows Section 7 Statement of cash flows Cash and cash equivalents Day 1 Cash IN Cash OUT Cash and cash equivalents Day 365 Operating activities Investing activities Financing activities 23 2

26 Scope of section 7 This section sets out the information that is to be presented in a statement of cash flows and how to present it. The statement of cash flows provides information about the changes in cash equivalents of an entity for a reporting period, showing separately changes from operating activities, investing activities and financing activities. Cash equivalents Benefits of cash flow information A statement of cash flows provides information that enables users to evaluate the changes in net assets of an entity, its financial structure (including liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different entities. Enhances comparability. 24 2

27 Cash equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Investments only qualify as cash equivalents if they have a short maturity (usually less than three months). A bank overdraft is usually treated as a financing activity, unless the overdraft forms an integral part of the entity's cash management system and is repayable on demand. Presentation of statement of cash flows Cash flows must be reported by classifying them as: Operating activities Investing activities Financing activities 25 2

28 Operating activities The principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Cash receipts from the sale of goods and the rendering of services; Cash receipts from royalties, fees, commissions and other revenue; Cash payments to suppliers for goods and services; Cash payments to and on behalf of employees; Cash payments or refunds of income tax, unless they can be specifically identified with financing and investing activities; and Cash receipts and payments from investments, loans and other contracts held for dealing or trading purposes, which are similar to inventory acquired specifically for resale. Investing activities The acquisition and disposal of long-term assets and other investments not included in cash equivalents Cash payments to acquire PPE, intangible assets and other long-term assets. Cash receipts from the sale of the above. Cash flows from purchases/sales of subsidiaries, associates and joint ventures. Cash flows from loans to others. Derivative instruments not held for trading. 26 2

29 Financing activities Activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. Cash flows from the issue/repurchase of shares. Cash receipts from the issue of debentures, loans, notes, bonds and other borrowings. Cash payments for the repayment of the above. Cash payments for finance lease instalments by the lessee. Direct vs Indirect Operating activities Direct method: cash flows from operating activities are presented by disclosing the main classes of gross receipts and payments separately. Indirect method: cash flows from operating activities are presented by beginning with the profit/loss for the period (as per the SoCI) and are then adjusted by non-cash items and cash flows from investing and financing activities. Use of the direct method is encouraged by IAS 7 (full IFRS) 27 2

30 Cash flows from interest and dividends Cash flows from interest and dividends received and paid shall each be disclosed separately. Each shall be classified in a consistent manner from period to period as either operating, investing or financing activities. Usually OPERATING ACTIVITIES Income tax Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. Usually OPERATING ACTIVITIES 28 2

31 Non-cash transactions Non-cash transactions are excluded from the SOCF. Non-cash transactions include: Acquiring assets by means of a finance lease Depreciation Conversion of debt to equity Creating provisions Non-controlling interest No bank leg in the journal entry! Cash flows in foreign currency It is translated at the spot exchange rate that was applicable on the date on which the cash flow occurred. Cash flows of a foreign subsidiary are also translated at the spot exchange rate on the date the cash flows occurred. 29 2

32 Direct method Indirect method 30 3

33 Case study #3 15 minutes Inventories Section

34 Definitions Inventories are assets: held for sale in the ordinary course of business OR in the process of production for such sale OR in the form of materials or supplies to be consumed in the production process or in the rendering of services Scope When does it apply? Section 13 applies to all inventories except: WIP under construction contracts Financial instruments Biological assets and agricultural produce Also not applicable to the measurement of inventories of commodity broker-traders who carry their inventories at fair value less costs of disposal. 32 3

35 Measurement of inventories Inventories are measured at the: LOWER OF: Cost Estimated selling price less costs to complete and sell Measurement of inventories Cost Costs of purchase Costs of conversion Other costs 33 3

36 Costs of purchase Purchase price Import duties Other taxes like VAT (in cases where it cannot be claimed back) Inwards transport costs and handling costs Deduct: trade discounts and rebates Applies to both CASH discounts and expected SETTLEMENT discounts See circular 09/2006 Costs of conversion Direct labour Variable production overheads Fixed production overheads Allocation rate is based on normal ("budgeted") capacity Actual allocation: Allocation rate Actual production Under allocation: expense (COS) Over allocation: reverse against cost of inventories 34 3

37 Costs of conversion Fixed production overheads are indirect costs that remain relatively constant regardless of the volume of production. Depreciation Factory rental and maintenance. Variable production overheads are indirect costs of production vary directly with the volume of production. Indirect materials Indirect labour. Costs of conversion Joint products: when the costs of conversion of each product are not separately identifiable, they are allocated between the products on a rational and consistent basis (such as relative sales-value). By-products: usually immaterial and then measured at selling price less costs to complete and sell and this value is deducted from the cost of the main product. 35 3

38 Other costs Costs incurred in bringing inventories to their present location and condition are included. Costs exclude: Abnormal wasted materials, labour and other productions costs Storage costs (unless production is still in progress) Administrative overheads Selling costs 36 3

39 Use of standard costing and retail method Standard costing, retail method or most recent purchase price may be used if their results approximate actual costs. Standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions. The retail method measures cost by reducing the sales value of the inventory by the appropriate percentage gross margin. Cost formulae Only relevant where prices fluctuate Specific identification must be used for items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects. FIFO assumes that inventories that were purchased first (at the old price) are sold first. Weighted average a new weighted average cost is calculated after every purchase or production. The use of LIFO is not permitted 37 3

40 Measurement of inventories Inventories are measured at the: LOWER OF: Cost Estimated selling price less costs to complete and sell Impairment of inventories Section An entity shall assess at each reporting date whether any inventories are impaired. Carrying amount Selling price less costs to complete and sell Dr Impairment loss (P&L) Cr Inventory 38 3

41 Inventories recognised as expense Inventory Sold Cost of sales Asset: SFP Expense: P/L Case study #4 10 minutes 39 3

42 Investment property Property, plant and equipment Section 16 Section 17 Investment property Section 16 Investment property is property (land or a building, or part of a building, or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both. instead of for: use in the production or supply of goods or services or for administrative purposes; or sale in the ordinary course of business. 40 4

43 Measurement of investment property Initially: at cost including its purchase price and any directly attributable expenditure such as legal and brokerage fees, property transfer taxes and other transaction costs. Subsequently (at each reporting date): fair value with changes in fair value recognised in profit or loss. If FV can be determined reliably without undue cost or effort Otherwise account for using cost model (PPE) Transfers FROM: If reliable measurement of FV is no longer available without undue cost or effort, property is then accounted for under PPE cost model until a reliable measure of FV becomes available (carrying amount on that date becomes cost). TO: If property meets the definition of investment property. 41 4

44 Property, plant and equipment (PPE) Section 17 Property, plant and equipment are tangible assets that: are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and are expected to be used during more than one period. Section 17 also applies to investment property whose FV cannot be measured reliably without undue cost or effort Measurement of PPE Initially: at cost including its purchase price, including legal and brokerage fees, import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. These can include the costs of site preparation, initial delivery and handling, installation and assembly and testing of functionality. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. 42 4

45 Measurement of PPE Subsequently: Cost model Revaluation model Cost OCI (equity) Less: Accumulated depreciation Depreciation Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount = cost residual value. Depreciation is expensed in profit or loss. Begins when asset is available for use. Straight-line Diminishing balance Production unit 43 4

46 Impairment of PPE Section 27 An entity shall assess at each reporting date whether there is any indication that an asset may be impaired. External indications Internal indications Impairment of PPE Section 27 If indicators of impairment exist at the reporting date, compare: Carrying amount Recoverable amount Dr Impairment loss (P&L unless revalued asset) Cr PPE 44 4

47 Recoverable amount Higher of: Fair value less costs to sell: fair value less costs to sell is the amount obtainable from the sale of an asset in an arm s length transaction between knowledgeable, willing parties, less the costs of disposal Value in use: present value of the future cash flows expected to be derived from an asset. JB Traders Notes for the year ended 31 December 2012 Property, plant and equipment Land and buildings Office Equipment Vehicles Total Carrying amount on 1 Jan 2012 xxx xxx xxx xxx Cost xxx xxx xxx xxx Accumulated depreciation - (xxx) (xxx) (xxx) Movements Additions at cost xxx xxx xxx xxx Disposals at carrying amount (xxx) (xxx) (xxx) (xxx) Depreciation (xxx) (xxx) (xxx) (xxx) Cost xxx xxx xxx xxx Accumulated depreciation - (xxx) (xxx) (xxx) Carrying amount on 31 Dec 2012 xxx xxx xxx xxx Land and buildings consist of stand 212, Windhoek, Namibia and is held under title deed 212/1985. Vehicles are pledged as security for the long-term loan. 45 4

48 Case study #5 10 minutes Intangible assets Section

49 Intangible asset An intangible asset is an identifiable non-monetary asset without physical substance. Section does not deal with goodwill or financial assets Measurement Initially measured at cost Subsequently measured at cost less accumulated amortisation Expenditure on an intangible item that was initially recognised as an expense shall not be recognised at a later date as part of the cost of an asset. 47 4

50 Leases Section 20 Classification A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. Substance over form 48 4

51 Lease accounting Lessees This section focuses on identifying when a lease is economically similar to purchasing the asset ("risks and rewards of ownership test") being leased and then classified the lease as either: Finance lease Operating lease Asset and liability reported on the balance sheet Lease payment expensed (straight-line method) Disclosure of commitment in notes Lease accounting Lessees operating leases A lessee shall recognise lease payments under operating leases (excluding costs for services such as insurance and maintenance) as an expense over the lease term on a straight-line basis. 49 4

52 Lease accounting Lessees finance leases At the commencement of the lease term, a lessee shall recognise its rights of use and obligations under finance leases as assets and liabilities in its statement of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments. The present value of the minimum lease payments shall be calculated using the interest rate implicit in the lease. If this cannot be determined, the lessee s incremental borrowing rate shall be used. Dr Lease liability Cr Cash/bank (lease payment) Lease accounting Lessees finance leases Subsequently Dr Interest expense Dr Lease liability Cr Cash/bank (lease payment) Dr Depreciation Cr Accumulated depreciation 50 5

53 New lease accounting in full IFRS The IASB issued IFRS 16 during January IFRS 16 replaces IAS 17. IFRS 16 is effective from 1 January Early application is permitted, but only if IFRS 15 is also applied. Operating lease model for lessees (removed) due to offbalance sheet finance. Case study #6 10 minutes 51 5

54 Revenue Section 23 Revenue 52 5

55 Section 23 Two primary issues are dealt with in section 23: Measurement of revenue Revenue is measured at the fair value of the consideration received or receivable. Take into consideration trade discounts and volume rebates allowed by the entity. According to Circular 09/2006, discounts allowed should reduce revenue and not be treated as an expense. This includes settlement discount that must be estimated at the time of the sale. 53 5

56 Principal vs agent Amounts collected on behalf of others are EXCLUDED from revenue Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such are not economic benefits which flow to the entity and do not result in increases in equity. Collected on behalf of SARS Commission? Collected on behalf of owner by agent Deferred payment When the inflow of cash related to revenue is deferred, the fair value of the consideration may be less than the nominal amount received. Interest-free credit or below-market interest. When the arrangement effectively contains a financing transaction: Amount receivable (nominal) Revenue (present value) Interest revenue 54 5

57 Deferred credit terms The fair value is then determined by discounting the future cash receipts to their present value by using an imputed rate of interest. The imputed rate of interest is the more clearly determinable of either: The prevailing rate for a similar instrument of an issuer with a similar credit rating; or A rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services. Recognition The revenue recognition criteria is usually applied separately to each transaction. In certain circumstances, it is necessary to the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. In other cases, two or more transactions are linked in such a way that the commercial effect cannot be understood without applying the criteria to both transactions together. 55 5

58 Recognition Sale of goods Rendering of services Interest, royalties and dividends Recognition: sale of goods Revenue from the sale of goods is recognised when all the following conditions have been satisfied: 1. the entity has transferred to the buyer the significant risks and rewards of ownership of the goods 2. the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; 3. the amount of revenue can be measured reliably; 4. it is probable that the economic benefits associated with the transaction will flow to the entity; and 5. the costs incurred or to be incurred in respect of the transaction can be measured reliably. 56 5

59 Recognition: sale of goods In most cases, the transfer of risks and rewards coincides with the transfer of legal title (but in some cases it does not). If an entity retains the significant risks of ownership, revenue is not recognised. If an entity retains only an insignificant risk of ownership (such as legal title is retained to protect collectability or offers a warranty), revenue is recognised. Revenue cannot be recognised if related expenses cannot be measured reliably. Recognition: rendering of services When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage of completion of the transaction at the end of the reporting period. 57 5

60 Recognition: rendering of services The outcome of a transaction can be estimated reliably when all the following conditions are satisfied: 1. the amount of revenue can be measured reliably; 2. it is probable that the economic benefits associated with the transaction will flow to the entity; 3. the stage of completion of the transaction at the end of the reporting period can be measured reliably; and 4. the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. Recognition: rendering of services Service revenue is recognised with reference to the stage of completion (percentage of completion method). Stage of completion may be determined by using a variety of methods: Surveys of work performed % performed to date as % of the total services to be performed. % of costs to date as % of total costs Progress payments and advances are not an appropriate determinant. 58 5

61 Recognition: rendering of services When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable. Recognition: interest Interest shall be recognised using the effective interest method as when: 1. it is probable that the economic benefits associated with the transaction will flow to the entity; and 2. the amount of the revenue can be measured reliably. 59 5

62 Recognition: royalties Royalties shall be recognised on an accrual basis in accordance with the substance of the relevant agreement when: 1. it is probable that the economic benefits associated with the transaction will flow to the entity; and 2. the amount of the revenue can be measured reliably. Recognition: dividends Dividends shall be recognised when the shareholder s right to receive payment is established when: 1. it is probable that the economic benefits associated with the transaction will flow to the entity; and 2. the amount of the revenue can be measured reliably. 60 6

63 Case study #7 10 minutes 61 6