FAC2601/103/3/2022

Tutorial Letter 103/3/2022

Financial Accounting for Companies

FAC2601

Semesters 1 and 2

Department of Financial Accounting

IMPORTANT INFORMATION
Please register on myUnisa, activate your myLife e-mail account and
make sure that you have regular access to the myUnisa module
website, FAC2601-2022-S1/S2, as well as your group website.

Note: This is a fully online module. It is, therefore, only available on MyUnisa.

Open Rubric
 CONTENTS
Page

1 INTRODUCTION ........................................................................................................................ 3
2 PURPOSE OF THIS TL103...................................................................................................... 4
2.1 Purpose ............................................................................................................................. 4
2.2 Outcomes .......................................................................................................................... 4
2.3 Assessment criteria ........................................................................................................... 4
2.4 Key concepts ..................................................................................................................... 5
3 FOUR PILLARS ......................................................................................................................... 5
3.1 Integrated reporting framework (IR) ........................................................................................ 5
3.1.1 Part 1 – Introduction .................................................................................................................. 6
3.1.2 Part 2 – The Integrated Report............................................................................................... 13
3.2 Different reporting frameworks ............................................................................................... 14
3.2.1 Full IFRS (International Financial Reporting Standards): ................................................... 14
3.2.2 IFRS for SME’s (Small and Medium-sized entities)............................................................. 15
3.2.3 GRAP:........................................................................................................................................ 17
3.3 CA2025 competency framework ............................................................................................ 20
3.3.1 Profession values and attitudes: ............................................................................................ 20
3.3.2 Acumens: .................................................................................................................................. 21
3.4 Companies act requirements.................................................................................................. 23
3.4.1 Capitalisation of profit companies: ......................................................................................... 23
3.4.2 Governance of companies: ..................................................................................................... 24
3.4.3 Application and general requirements regarding enhanced accountability and
transparency: ............................................................................................................................ 25
3.4.4 Transactions (shareholders and directors): .......................................................................... 26
4. SELF-REFELCTIVE EXERCISES ........................................................................................ 27
4.1 Adopt a professional attitude .................................................................................................. 27
4.2 Relational acumen ................................................................................................................... 27
5. CONCLUSION ......................................................................................................................... 28

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1. INTRODUCTION
Dear Student

We are pleased to welcome you to FAC2601 – an important module in the Financial

Accounting 2 curriculum and trust that you will find it both interesting and rewarding. We will do
our best to help you succeed with your studies in this module. You will be successful in this
module if you commence with your studies early in the semester and resolve to do the
assignments properly and without assistance from your peers.

FAC2601 is a fully online module, and therefore you will need to use the MyUnisa platform to
study and complete the learning activities for this module. The website for your module is
FAC2601-2022. Please ensure that you visit this site regularly.

The semester that you register for will be indicated on your registration documents. Please
ensure that you are registered for the correct semester as you are obliged to write the
examination for that semester (i.e. either the first or second semester). The examination for the
first semester will be during May/June 2022 and the examination for the second semester will
be during October/November 2022.

It is imperative that you familiarise yourself with all the information enclosed in ALL tutorial
letters. A tutorial letter is our way of communicating to you about teaching, learning and
assessment. You must read all the tutorial letters you receive during the semester
immediately and carefully, as they always contain important and sometimes urgent
information. You must also review all announcements that are sent out timeously to ensure that
you are aware of the changes and developments on the module.

Tutorial Letter 101 contains important information about the work plan, resources and
assignments for this module. We urge you to read it carefully and to keep it on hand when
working through the study material, as well as during your preparations for the assignments and
exams. It is also useful when formulating your questions to the lecturers. You will also find the
assignments and assessment criteria as well as instructions for the preparation and submission
of the assignments in this tutorial letter.

Tutorial Letter 102 contains additional exam-type questions and solutions. Podcasts and
lecture recordings explaining key concepts and providing exam technique are also available on
MyUnisa so you may obtain a better understanding of the module content. We encourage you
to refer to MyUnisa regularly for updates.

This tutorial letter 103, contains important tuition material that forms part of your module and
must be studied in detail. The pertinent details and new concepts are discussed in this separate
tutorial letter and is of utmost importance to be successful in FAC 2601.

Should you be faced with specific subject content problems in your studies, please do not
hesitate to contact us by e-mail, telephone or personally by appointment. We trust that you will
enjoy this module and wish you success with your studies!

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2. PURPOSE OF THIS TL103

2.1 Purpose

The purpose of this TL 103 is to familiarise yourself with the new tuition material and content
that form part of FAC 2601. The new material outlined in this tutorial letter is aligned with the
CA2025 competency framework. This framework describes CA’s(SA) as responsible leaders
who behave ethically and deliver sustainable value to a wide range of stakeholders, now and
into the future. The CA2025 competency framework sets out the competencies entry-level
CA’s (SA) are expected to demonstrate and has been rigorously and robustly researched to
ensure the ongoing, future-focused relevance of accountants in the world we live and work in.

Tutorial Letter 103 we will be addressing all new competencies required as per the above tuition
requirements in four pillars, consisting of:

 The International Integrated Reporting (IR) Framework

 Reporting frameworks:

o Full IFRS (International Financial Reporting Standards;

o IFRS for SME’s (Small and medium-sized Enterprises);
o GRAP (Standards of Generally Recognised Accounting Practice) framework

 CA2025 competency framework

 Companies Act 71 of 2008 requirements

IR Reporting CA2025 Companies

(Integrated frameworks competency Act 71 of
Reporting)
framework 2008

2.2 Outcomes

We include the learning outcomes that you should accomplish for each learning unit at the
beginning of each chapter. These learning outcomes will indicate to you the knowledge and
skills we expect you to have mastered by the time you have completed this tutorial letter. These
outcomes are translated into assessment criteria for the respective key concepts. The
assessment criteria indicate a required end-result, that is, what you should have achieved once
you completed the necessary learning outcomes.

2.3 Assessment criteria

After studying the concepts in the TL 103 you should be able to:

 Understand the integrated reporting framework of an integrated report;

 Explain and define the main purpose of an integrated report according to the integrated
reporting framework;
 Identify, define, explain and apply the fundamental concepts;

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 Identify, define, explain and apply the guiding principles;

 Identify, define, explain and apply the types of capitals;
 Understand and identify differences between different reporting frameworks;
 Identify, define and evaluate CA2025 competency framework;
 Identify, define and evaluate the Companies Act Requirements.

2.4 Key Concepts

 Integrated reporting framework

 Value creation, preservation or erosion
 Inter-relatedness and connectivity of information
 The capitals
 Integrated thinking
 Guiding principles
 Different reporting frameworks (IR; IFRS; IFRS for SME’s; GRAP)
 CA2025 competency framework
 Companies act 71 of 2008 and the requirements

3 FOUR PILLARS

3.1 INTEGRATED REPORTING FRAMEWORK (IR)

What is integrated reporting? IR seeks to tell the story of how an organisation creates value.
Integrated reporting is the means by which the broader value drivers of a business are
managed internally and then communicated to investors and other stakeholders. It involves a
widening of focus from traditional models, which look mainly at financial and manufactured
resources. It also involves a more connected approach, i.e. understanding how the other
resources a business uses (for example, human, social and relationship, and natural) interact
and impact on the financials and each other. It requires a forward-looking stance where all
these interrelated factors are considered at a strategic level. We refer to these other resources
as pre-financials.

The International Integrated Reporting Council (IIRC) is a global coalition of investors,

regulators, companies, standard setters, accounting professionals in academia and NGO’s who
came together in formulising an integrated report to set a standard for the future with the vision
of which integrated thinking is embedded within mainstream business practices in the private
and public sectors, facilitated by Integrated reporting as the reporting norm.

The IIRC issued The International IR Framework in January 2021 of which consist of
two (2) parts:

 PART 1 – Introduction
 PART 2 – The Integrated Report

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FAC 2601 will be dealing with both of these Parts. The Integrated reporting framework consist
of the following:

PART 1 – INTRODUCTION

1. USING THE IR FRAMEWORK

A. Integrated report defined

B. Objective of the IR Framework
C. Purpose and users of an integrated report
D. A principle-based approach
E. From of report and relationship with other information
F. Application of the IR Framework
G. Responsibility of an integrate report

2. FUNDAMENTAL CONCEPTS

A. Introduction
B. Value creation for the organisation and for others
C. The capitals
D. Process through which value is created, preserved or eroded.

PART 2 – THE INTEGRATED REPORT

1. GUIDING PRINCIPLES

A. Strategic focus and future orientation

B. Connectivity of information
C. Stakeholder relationships
D. Materiality
E. Conciseness
F. Reliability and completeness
G. Consistency and comparability

3.1.1 Part 1 – Introduction

1. USING THE IR FRAMEWORK

A: Integrated Report defined:

Definition: The IIRC define in their Integrated Reporting Framework issued in

January 2021 as the following:

An integrated report is a concise communication tool about how an

organization’s strategy, governance, performance and prospects, in the context
of its external environment, lead to the creation, preservation or erosion of value
over the short, medium and long term. An integrated report should be prepared
in accordance with the IR framework.

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B: Objective of the IR Framework:

The purpose of the IR Framework is to establish guiding principles and content elements that
govern the overall content of an integrated report, and to explain the fundamental concepts that
underpin them.

The IR Framework is primarily written in the context of the private sector, for profit companies of
any size and can also be applied and adapted wherever necessary to be used by non-profit
organisations and by the public sector.

The IR Framework identifies information to be included in an integrated report for use in

assessing an organization’s ability to create value; it does not set benchmarks for such things
as the quality of an organization’s strategy or the level of its performance.

C: Purpose and users of an integrated report:

The main primary purpose of an integrated report is to explain to providers of financial capital
how an organization creates, preserves or erodes value over time. It therefore contains relevant
information, both financial and other.

An integrated report benefits all stakeholders interested in an organization’s ability to create

value over time, including employees, customers, suppliers, business partners, local
communities, legislators, regulators and policymakers.

D: A Principle-based approach

The IR Framework is principles-based. The intent of the principles-based approach is to strike

an appropriate balance between flexibility and prescription that recognizes the wide variation in
individual circumstances of different organizations while enabling a sufficient degree of
comparability across organizations to meet relevant information needs.

The IR Framework does not prescribe specific key performance indicators, measurement
methods or the disclosure of individual matters. Those responsible for the preparation and
presentation of the integrated report therefore need to exercise judgement, given the specific
circumstances of the organization, to determine:

 Which matters are material,

 How they are disclosed, including the application of generally accepted measurement
and disclosure methods as appropriate. When information in an integrated report is
similar to, or based on other information published by the organization, it is prepared on
the same basis as, or is easily reconcilable with that other information.

Quantitative indicators, including key performance indicators and monetized metrics, and the
context in which they are provided can be very helpful in explaining how an organization
creates, preserves or erodes value and how it uses and affects various capitals. While
quantitative indicators are included in an integrated report whenever it is practicable and
relevant to do so:

 The ability of the organization to create value can best be reported on through a
combination of quantitative and qualitative information.

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 It is not the purpose of an integrated report to quantify or monetize the value of the
organization at a point in time, the value it creates, preserves or erodes over a period,
or its uses of or effects on all the capitals.

E: Form of report and relationship with other information

An integrated report is intended to be more than a summary of information in other

communications (e.g. financial statements, a sustainability report, analyst calls, or on a
website); rather, it makes explicit the connectivity of information to communicate how value is
created, preserved or eroded over time.

An integrated report may be prepared in response to existing compliance requirements. For

example, an organization may be required by local law to prepare a management commentary
or other report that provides context for its financial statements. If that report is also prepared in
accordance with the IR Framework it can be considered an integrated report. If the report is
required to include specified information beyond that required by the IR Framework, the report
can still be considered an integrated report if that other information does not obscure the
concise information required by the IR Framework.

An integrated report may be either a standalone report or be included as a distinguishable,

prominent and accessible part of another report or communication.

For example, it may be included at the front of a report that also includes the organization’s
financial statements.

An integrated report can provide an “entry point” to more detailed information outside the
designated communication, to which it may be linked. The form of link will depend on the form
of the integrated report (e.g. for a paper-based report, links may involve attaching other
information as an appendix; for a web-based report, it may involve hyperlinking to that other
information).

F: Application of the IR Framework

Any communication claiming to be an integrated report and referencing the <IR> Framework
should apply all the requirements identified in bold italic type unless:

 The unavailability of reliable information or specific legal prohibitions results in an

inability to disclose material information.
 Disclosure of material information would cause significant competitive harm.

In the case of the unavailability of reliable information or specific legal prohibitions, an integrated
report should:

 Indicate the nature of the information that has been omitted.

 Explain the reason why it has been omitted.
 In the case of the unavailability of data, identify the steps being taken to obtain the
information and the expected time frame for doing so.

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G: Responsibility for an integrated report

An integrated report should include a statement from those charged with governance that
includes:

 An acknowledgement of their responsibility to ensure the integrity of the integrated

report.
 Their opinion or conclusion about whether, or the extent to which, the integrated report
is presented in accordance with the IR Framework.

Where legal or regulatory requirements preclude a statement of responsibility from those

charged with governance, this should be clearly stated.

Where an organization is in the process of adopting the IR Framework, it is appropriate to

identify which requirements have not been applied and the reasons why.

The organization will take into account its own governance structure, which is a function of its
jurisdiction, cultural and legal context, size and ownership characteristics. For example, some
jurisdictions require a single-tier board, while others require the separation of supervisory and
executive/management functions within a two-tier board. In the case of two-tier boards, the
statement of responsibility is ordinarily provided by the body responsible for overseeing the
strategic direction of the organization.

In cases where legal or regulatory requirements preclude a statement of responsibility from

those charged with governance, an explanation of measures taken to ensure the integrity of the
integrated report can provide important insight to users. Accordingly, disclosures about the
process followed to prepare and present the integrated report are encouraged. Such
disclosures can include:

 Related systems, procedures and controls, including key responsibilities and activities
 The role of those charged with governance, including relevant committees.

Process disclosures are encouraged as a supplement to a statement of responsibility from

those charged with governance as this information indicates measures taken to ensure the
integrity of the integrated report.

3. FUNDAMENTAL CONCEPTS

An integrated report aims to provide insight about the resources and relationships used and
affected by an organization – these are collectively referred to as “the capitals” in the (IR)
Framework. It also seeks to explain how the organization interacts with the external
environment and the capitals to create, preserve or erode value over the short, medium and
long term.

The capitals are stocks of value that are increased, decreased or transformed through the
activities and outputs of the organization. They are categorized in the IR Framework as
financial, manufactured, intellectual, human, social and relationship, and natural capital,
although organizations preparing an integrated report are not required to adopt this
categorization or to structure their report along the lines of the capitals.

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The ability of an organization to create value for itself enables financial returns to the providers
of financial capital. This is interrelated with the value the organization creates for stakeholders
and society through a wide range of activities, interactions and relationships. When these are
material to the organization’s ability to create value for itself, they are included in the integrated
report.

A: Introduction

An integrated report explains how an organization creates, preserves or erodes value over time.
Value is not created, preserved or eroded by or within an organization alone. It is:

 Influenced by the external environment

 Created through relationships with stakeholders
 Dependent on various resources.

An integrated report therefore aims to provide insight about:

 The external environment that affects an organization

 The resources and the relationships used and affected by the organization, which are
referred to collectively in this Framework as the capitals (financial, manufactured,
intellectual, human, social and relationship, and natural)
 How the organization interacts with the external environment and the capitals to create
value over the short, medium and long term.

B: Value creation for the organisation and for others

It’s useful for the organisation to understand how it and its key stakeholders view value. The
value creation process is not static and requires regular reviews of the various components and
capitals and how they interact with one another.

Figure 1: Value created, preserved or eroded for the organisation and for others.

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C: The capitals

At the core of the organization is its business model, which draws on various capitals as inputs
and, through its business activities, converts them to outputs (products, services, by-products
and waste). The organization’s activities and its outputs lead to outcomes in terms of effects on
the capitals. The capacity of the business model to adapt to changes (e.g. in the availability,
quality and affordability of inputs) can affect the organization’s longer-term viability.

In general, the capitals can be described as resources and relationships. Clearly, the
organisation has effects on the capitals through its activities, products and services. These can
be positive, negative or both. Each capital offers inherent benefits, risks and opportunities to the
organisation. The capitals are not mutually exclusive – in fact they are very often interdependent
on each other.

Figure 2: The business model, sitting at the heart of the organisation, within the context of the
external environment.

In the Framework, the six capitals are categorised and described:

 Financial capital – The pool of funds that is available to an organization for use in the
production of goods or the provision of services.
 Manufactured capital – Manufactured physical objects (as distinct from natural
physical objects) that are available to an organization for use in the production of goods
or the provision of services. Manufactured capital is often created by other
organizations, but includes assets manufactured by the reporting organization for sale
or when they are retained for its own use.
 Intellectual capital – Organizational, knowledge-based intangibles.
 Human capital – People’s competencies, capabilities and experience, and their
motivations to innovate.

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 Social and relationship capital – The institutions and the relationships within and
between communities, groups of stakeholders and other networks, and the ability to
share information to enhance individual and collective well-being.
 Natural capital – All renewable and non-renewable environmental resources and
processes that provide goods or services that support the past, current or future
prosperity of an organization.

The integrated report should set out how the organisation uses and affects the capitals (the
ones that are important to it) and how the various trade-offs are managed.

For example, an organisation relies on fresh water as an input in its production process and in
so doing depletes the overall fresh water resource (natural capital). It uses its in-house experts
(human capital) to develop technology (intellectual capital) and pays (financial capital) to build a
more environmentally friendly production plant (manufactured capital), which uses less fresh
water and so decreases its negative impact on the environment. By using financial capital to
increase the positive value of the organisation’s manufactured, human and intellectual capital, it
decreases its negative impact on natural capital, which may in turn lead to an improvement in
the relationship with environmental groups and local communities also reliant on water, which in
turn improves its social and relationship capital.

The organisation should consider all six capitals when preparing its integrated report to ensure it
covers all aspects of its value creation story – they serve as a completeness check. While each
capital should be considered if it’s found not to be materially used or affected it may be
excluded. The organisation is not obliged to use the capitals as categorised in the Framework –
it’s free to determine its own categories and if so, it’s suggested that this is explained in the
report.

D: Process through which value is created, preserved or eroded

 The external environment, including economic conditions, technological change,

societal issues and environmental challenges, sets the context within which the
organization operates. The purpose, mission and vision encompass the whole
organization, identifying its intention in clear, concise terms.

 Those charged with governance are responsible for creating an appropriate oversight
structure to support the ability of the organization to create value.

 At the core of the organization is its business model, which draws on various capitals as
inputs and, through its business activities, converts them to outputs (products, services,
by-products and waste). The organization’s business activities and outputs lead to
outcomes in terms of effects on the capitals. The capacity of the business model to
adapt to changes (e.g. in the availability, quality and affordability of inputs) can affect
the organization’s longer-term viability.

 Business activities include the planning, design and manufacture of products or the
deployment of specialized skills and knowledge in the provision of services.
Encouraging a culture of innovation is often a key business activity in terms of
generating new products and services that anticipate customer demand, introducing
efficiencies and better use of technology, substituting inputs to minimize adverse social
or environmental effects, and finding alternative uses for outputs.

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 Outcomes are the internal and external consequences (positive and negative) for the
capitals as a result of an organization’s business activities and outputs.

 Continuous monitoring and analysis of the external environment in the context of the
organization’s purpose, mission and vision identifies risks and opportunities relevant to
the organization, its strategy and its business model.

 The organization’s strategy identifies how it intends to mitigate or manage risks and
maximize opportunities. It sets out strategic objectives and strategies to achieve them,
which are implemented through resource allocation plans.

 The organization needs information about its performance, which involves setting up
measurement and monitoring systems to provide information for decision-making.

 The value creation, preservation or erosion process is not static; regular review of each
component and its interactions with other components, and a focus on the
organization’s outlook, lead to revision and refinement to improve all the components.

3.1.2 Part 2 – The Integrated Report

1. GUIDING PRINCIPLES

A: Strategic focus and future orientation

An integrated report should provide insight into the organization’s strategy, and how it relates to
the organization’s ability to create value in the short, medium and long term, and to its use of
and effects on the capitals. The report should clearly show the linkages between strategy, risks
and opportunities, current performance, as well as future outlook and targets.

B: Connectivity of information

An integrated report should show a holistic picture of the combination, interrelatedness and
dependencies between the factors that affect the organization’s ability to create value over time.
The report should highlight the connection, for example, between past, present and future
performance, between financial and non-financial information, and between qualitative and
quantitative information.

C: Stakeholder relationships

An integrated report should provide insight into the nature and quality of the organization’s
relationships with its key stakeholders, including how and to what extent the organization
understands, takes into account and responds to their legitimate needs and interests.

D: Materiality

An integrated report should disclose information about matters that substantively affect the
organization’s ability to create value over the short, medium and long term. A focus on
materiality should assist in avoiding irrelevant and detailed information from cluttering the report.
The integrated report is a high-level, concise report that contains only the most material matters
and information affecting the organisation and its ability to create value over time. Additional
information can be placed in supporting reports.

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E: Conciseness

An integrated report should be concise. Conciseness implies more than ‘as short as possible’. It
implies that the information should be accessible through crisp presentation, the omission of
immaterial information, and a logical easy-to-follow structure.

F: Reliability and completeness

An integrated report should include all material matters, both positive and negative, in a
balanced way and without material error. Integrated reporting requires that consideration is
given to both good and bad news and performance. Furthermore, both the increases and
reductions in the value of the important capitals should be reflected. Where the information is
not perfectly accurate, estimates should be used and appropriate processes in place to ensure
that the risk of material misstatement is reduced.

G: Consistency and comparability

The information in an integrated report should be presented:

(a) on a basis that is consistent over time; and

(b) in a way that enables comparison with other organizations to the extent it is material to
the organization’s own ability to create value over time.

The use of industry benchmarks, indicators of best practice, and ratios are tools that can
improve reporting consistency and industry comparability.

3.2 DIFFERENT REPORTING FRAMEWORKS

3.2.1 Full IFRS (International Financial Reporting Standards):

The International Financial Reporting Standards (IFRS) are accounting standards that are
issued by the International Accounting Standards Board (IASB) with the objective of providing
a common accounting language to increase transparency in the presentation of financial
information.

The IASB wanted to create “understandable and enforceable global accounting standards that
require high quality, transparent and comparable information in financial statements and other
financial reporting to help participants in the various capital markets of the world and other users
of the information to make economic decisions.” So they invented an international accounting
standard, usable all over the world and since the year 2000, the European Commission made
these standards with the “endorsement practice” a legal right in the European Union
(IASB 2009). It consists of the standards themselves (the IFRS and the IAS), the interpretations
(SIC and IFRIC) to the standards additionally and the framework.

The objective of IFRS is to ensure that an entity’s IFRS financial statements contains high
quality of information that:

 Is transparent for users and comparable over all periods presented;

 Provides a suitable starting point for accounting in accordance with International
Financial Reporting Standards (IFRS); and
 Can be generated at a cost that does not exceed the benefits

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It is mandatory for all entities that have public accountability to follow full IFRS.

IFRS are mandatory pronouncement and comprise:

 IFRS;
 IAS (International accounting standards); and
 Interpretations developed by the IFRS Interpretation Committee (IFRIC) or its
predecessor body, the Standing Interpretations Committee (SIC Interpretation).

3.2.2 IFRS for SME’s (Small and Medium-sized entities):

There have been many considerations about the necessity of a reduced form of the full IFRS.
Because for a certain group of entities, most regulations are not needed. Or it is a huge financial
effort to provide this information to the receiver of the statements. So eventually, the IASB
conceived a new standard especially for small and medium-sized entities and released it in
July 2009. They have worked on it for more than five years and the result is a document with
about 230 pages, detached from the full IFRS.

In July 2009 the International Accounting Standards Board (IASB) published the International
Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs). SMEs are
estimated to represent well over 95 per cent of all companies in both developed and developing
countries. The standard was developed to reduce the complexities and burden associated with
applying IFRS whilst fulfilling the needs of the users of SME Financial Statements.

IFRS for SMEs may be used by those entities that are owner managed and has NO PUBLIC
ACCOUNTABILITY.

Public Accountability is:

 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)
regardless of the size of the entity, 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

So, the IASB classifies them as entities, “that do not have public accountability and publish
general purpose financial statements for external users only.” This means, that if the financial
statements of an entity follows a specific intention (for example for taxation), they are not
supposed to use IFRS for SMEs, because the statements are not according to the standard.
Explicitly excluded are entities having debt or equity instruments in a public market or in the
process of issuing such instruments for trading in a public market. But also entities holding
assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.
Characteristic examples are banks, credit unions, insurance companies or investment banks.

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Example 1: Can the following entity apply IFRS for SME’s?

Question:

 Fashion retailers is an unlisted company primarily involved in the clothing retail industry.
Fashion retailers intends expanding its operations and issues listed bonds on the Bond
Exchange of South Africa (BESA).

Solution:

 Applying the definition of public accountability above, as Fashion Retailers has issued
bonds on the BESA, the bonds are traded in a public market. This means fashion
retailers does have public accountability. Fashion Retailers would therefore be required
to provide more extensive financial information to its users would be required to apply
full IFRS and not IFRS for SMEs.

All entities apart from public companies, state-owned companies and certain non-profit
companies are allowed to apply IFRS for SMEs

FAC 2601 – Full IFRS is being used as the reporting framework

The following table indicates the use of the applicable Financial Reporting Standard:

Company Financial Reporting Standard

State owned companies Full IFRS, but in the case of any conflict with any
requirements in terms of the Public Finance
Management Act, or other applicable national
legislation, the latter prevails
Public companies listed on an exchange Full IFRS, but in the case of any conflict with the
applicable listing requirements of the relevant
exchange, the latter prevails
Public companies not listed on an Full IFRS or IFRS for SMEs
exchange
Profit companies, other than state Full IFRS or IFRS for SMEs
owned or public companies, whose
public interest score for the particular
financial year is at least 350.
Profit companies, other than state Full IFRS or IFRS for SMEs
owned or public companies: (a) whose
public interest score for the particular
financial year is at least 100 but less
than 350; or (b) whose public interest
score for the particular financial year is
less than 100, and whose statements
are independently compiled.
Profit companies, other than state There is no prescribed Financial Reporting
owned or public companies, whose Standard – it is determine by the company
public interest score for the particular
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financial year is less than 100, and

whose statements are internally
compiled.
Non-profit companies that are required IFRS, but in the case of any conflict with any
in terms of regulation 28 (2)(b) to have requirements in terms of the Public Finance
their annual financial statements audited Management Act, or other applicable national
legislation, the latter prevails
Non-profit companies, other than those Full IFRS or IFRS for SMEs
contemplated in the first row above,
whose public interest score for the
particular financial year is at least 350.
Non-profit companies, other than those Full IFRS or IFRS for SMEs
contemplated in the first row above––
(a) whose public interest score for the
particular financial year is at least 100,
but less than 350; or (b) whose public
interest score for the particular financial
year is less than 100, and whose
financial statements are independently
compiled.
Non-profit companies, other than those There is no prescribed Financial Reporting
contemplated in the first row above, Standard – it is determine by the company
whose public interest score for the
particular financial year is less than 100,
and whose financial statements are
internally compiled.

What is PI Scores:

A score used to determine what financial reporting framework can be used.

The Public Interest Score (PIS) is calculated as:

 1 point for each employee or the average number of employees throughout the year;
 1 point per million rand of third-party liability. This is the money owed in terms of loans,
debentures and other financing;
 1 point for each million rand of turnover during the financial year. If the turnover is half a
million-rand score ½ point.
 1 point for every individual who, at the end of the year is known to have a direct or
indirect beneficial interest in the company. This will include shareholders, beneficiaries
of a trust where a trust is a shareholder and other stakeholders.

3.2.3 GRAP:

Generally Recognized Accounting Practice, also known as GRAP, is a set of fundamental

concepts that serve as accounting process guidelines for South African-based companies.
These guidelines laid down by the Accounting Standards Board (ASB) ensure that the public
sector agencies record their financial activities accurately and consistently.

The Public Finance Management Act or PFMA is the act on which the accounting standards
board issues the accounting standards (GRAP) in South Africa. GRAP ensures that
accountants all across South Africa follow a standard process to record financial transactions.
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This ensures transparency and consistency in the handling of funds by public entities.
Therefore, it is important that all state-owned entities in South Africa strictly comply with the
GRAP.

To understand how it affects state-owned companies, first, you need to understand what a
state-owned company is.

A State-owned company is an enterprise which is:

● Listed as a public entity under the Public Finance Management Act (PFMA), 1999; or
● Owned by a municipality under the Local Government Municipal Systems Act, 2000,
and is otherwise similar to an enterprise as mentioned above.

The ASB determines that the Standards of GRAP to be used for:

 Departments (including national, provincial and government components)

 Public entities
 Trading entities (as defined in the PFMA)
 Constitutional institutions;
 Municipalities and boards, commissions, companies, corporations, funds or other
entities under the ownership control of a municipality
 Parliament and provincial legislatures.

The ASB has approved the application of IFRS for:

 Public entities that meet the criteria outlined in the Directive on the Selection of an
Appropriate Reporting Framework for Public Entities; and
 Entities under the ownership control of any of these standards.

Standards with GRAP with IFRS equivalents:

Standard of GRAP IFRS (Full)

The Conceptual Framework for General The Conceptual Framework for General Purpose
Purpose Financial Reporting Financial Reporting

GRAP 1 - Presentation of Financial IAS 1 - Presentation of Financial Statements

Statements

GRAP 2 - Cash Flow Statements IAS 7 - Statement of Cash Flows

GRAP 3 - Accounting Policies, Changes in IAS 8 - Accounting Policies, Changes in

Accounting Estimates and Errors Accounting Estimates and Errors

GRAP 4 - The Effects of Changes in IAS 21 - The Effects of Changes in Foreign

Foreign Exchange Rates Exchange Rates

GRAP 5 - Borrowing Costs IAS 23 - Borrowing Costs

GRP 7 - Investments in Associates IAS 28 - Investments in Associates and Joint

Ventures

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GRAP 8 - Interest in Joint Ventures IFRS 11 - Joint Arrangements

IAS 28 - Investments in Associates and Joint
Ventures
GRAP 9 - Revenue from Exchange IFRS 15 - Revenue from Contracts with Customers
Transactions

GRAP 10 - Financial Reporting in IAS 29 - Financial Reporting in Hyperinflationary

Hyperinflationary Economies Economies

GRAP 11 - Construction Contracts IAS 11 - Construction Contracts

GRAP 12 - Inventories IAS 2 - Inventories

GRAP 13 - Leases IFRS 16 - Leases

GRAP 14 - Events after the Reporting date IAS 10 - Events after the Reporting Period

GRAP 16 - Property, Plant and Equipment IAS 16 - Property, Plant and Equipment

GRAP 17 - Investment Property IAS 40 - Investment Property

GRAP 18 - Segment Reporting IFRS 8 - Operating Segments

GRAP 19 - Provisions, Contingent IAS 37 - Provisions, Contingent Liabilities and

Liabilities and Contingent Assets Contingent Assets

GRAP 20 - Related Party Disclosures IAS 24 - Related Party Disclosures

GRAP 25 - Employee Benefits IAS 19 - Employee Benefits

GRAP 26 - Impairment of Cash-generating IAS 36 - Impairment of Assets

assets

GRAP 27 - Agriculture IAS 41 - Agriculture

GRAP 31 - Intangible Assets IAS 38 - Intangible Assets

GRAP 32 - Service Concession IFRIC 12 - Service Concession Arrangements

Arrangements: Grantor

GRAP 100 - Discontinued Operations IFRS 5 - Non-current Assets Held for Sale and
discontinued Operations

GRAP 104 - Financial Instruments IFRS 7 - Financial Instruments: Disclosures

IFRS 9 - Financial Instruments
IAS 32 - Financial Instruments: Presentation
IAS 39 - Financial Instruments: Recognition and
Measurement
(Superseded by IFRS 9 where IFRS 9 is applied)

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3.3 CA2025 COMPETENCY FRAMEWORK

3.3.1 Profession values and attitudes:

1. Ethics, values and attitudes:

Personal ethics

 Personal ethics refers to a personal value system applied by an individual to decision-

making, conduct and interaction between self and others.

Business ethics

 Business ethics refers to the ethical principles and values applied by an entity, in
making decisions, conduct and relationship between the enterprise and all its
stakeholders as well as the society (King 1V).

Professional ethics

 Professional ethics refers to the fundamental ethical principles and values applied by a
professional CA to decision making, conduct and the relationship between the
professional, its stakeholders and society.

2. Citizenship, values and attitudes:

Personal citizenship

 Personal citizenship refers to the rights and responsibilities that individuals must have
towards the communities they belong to.

Professional citizenship

 Professional citizenship refers to the rights and responsibilities that professionals must
have towards the communities they belong to.

3. Lifelong learning, values and attitudes:

Self-development

 Self-development refers to the planning and management of personal development and

an appreciation of how personal strengths and weaknesses may impact work, learning
and goal attainment.

Adaptive mind set and agility

 Adaptive mind set and agility means taking initiative to improve performance by
reviewing and reflecting on one’s performance.

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3.3.2 Acumens:

1. Decision-making acumen

Analytical/critical thinking

 To research, investigate, critically analyse, reflect and apply professional judgement to

the evaluation of data and information from a variety of sources and perspectives.

Integrated thinking

 This is the decision-making approach for complex problems, based on finding new
creative solutions rather than merely choosing the best solution from a list of
alternatives.

Problem solving

 To collate and compare information from a variety of sources to correctly define a

problem, assess alternative solutions against decision criteria and making the optimal
decision.

Judgement and decision making

 The ability to make considered and effective decisions, come to sensible conclusions,
perceive and distinguish relationships, understand situations and form objective
opinions.

Professional scepticism

 Having a questioning mind. Being alert to anything that may indicate misstatement due
to error or fraud. Critically assessing audit evidence.

2. Relational acumen:

Communication skills

 Effectively convey information and ideas to individuals and groups in a variety of

situations in a focused way using verbal and non-verbal techniques and skills.

Leadership skills

 Work with others and manage and lead teams.

People skills

 People skills are patterns of behaviour and behavioural interactions. Among people, it is
an umbrella term for skills under three related set of abilities: personal effectiveness,
interaction skills, and intercession skills.

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Relationship-building skills

 Build authentic relationships and effective collaboration across a wide range of teams
and stakeholders.

Teamwork

 Interrelated abilities that let you work effectively in an organised group. Teamwork
happens when people cooperate and use their individual skills to achieve common
goals.

Self-management

 Plan and manage personal development and appreciate how personal strengths and
weaknesses may impact work, learning and goal attainment.

Managing others

 Work with others and manage and lead teams.

Emotional intelligence

 Establish and sustain trusting relationships based on self-awareness, sensitivity to the

situation, culture and people involved.

3. Digital acumen:

Computational thinking

 Computational thinking is a set of problem-solving methods that involve expressing

problems and their solutions in ways that a computer could also execute.

Data knowledge and strategy

 Understanding the types of financial and non-financial information available within an

entity, identifying possible relationships between data sets, requesting the required data
(including normalisation (clean-up) thereof), understanding the security and privacy
risks associated with the use, storage and transfer of data, and understanding the
importance of the implementation of sufficient data protection policies and controls.
Advanced data management should be performed by expert data scientists and/or IT
experts.

Data analytics

 Performing basic data modelling or where necessary requesting advanced data

modelling by experts, and then interpreting the results, concluding and reporting/
presenting/ communicating as applicable. The W2 competency comprises both a
technical computer skill and the ability to apply the underlying technical competency.

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Automation

 Automation is the technology by which a process or procedure is performed with

minimal human assistance.

New developments and protocols

 Artificial intelligence (AI), block chain, Internet of Things etc.

Cyber security

 Cyber security is the practice of defending computers and servers, mobile devices,
electronic systems, networks and data from malicious attacks.

User competencies

 Use technology ethically as an enabler to optimise decision making and to promote

business efficiencies and controls.

At the end of the tutorial letter are self-reflective exercises to enable you to understand the
concepts outlined in 3.3.

3.4 COMPANIES ACT REQUIREMENTS

3.4.1 Capitalisation of profit companies:

Company act sections and regulations (35 – 43; 46 – 48) Regulations 31 (3) & (5)

1. Share transactions

Section 35 of the Companies Act 2008 discusses the issue where shares can no longer be
issued with a nominal value or par value. For new classes of shares there will no longer be a
separation the share capital and share premium accounts.

Regulation 31 provides further clarification on the position regarding existing classes of par
value shares. In summary:

 No new classes of par value shares may be authorised;

 If there is an existing class of par value shares of which no shares are in issue, no
shares may be issued from that class until the shares have been converted to no par
value shares;
 If there is an existing class of par value shares of which some shares have been issued:

o the number of shares may not be increased, but

o existing authorised par value shares may be issued..

Section 40 (1) discusses the issue of the issue price of shares. The board may issue shares
only for an ‘adequate consideration’. In other words, the board must determine the
consideration for which shares must be issued. Section 40 (3) the determination by the board
on the adequacy of the consideration may only be challenged on the basis that the directors did
not conduct themselves in accordance with the standards of directors’ conduct contemplated in
Section 76. This therefore, gives the directors substantial discretion to determine the
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appropriate share price for any issue of shares. The directors will therefore have to take account
of all relevant factors, including but not limited to the valuation of the company.

2. Share incentive schemes

Section 41(d) determines that where the issue of shares, securities or rights is pursuant to an
employee share scheme that satisfies the requirements of S.97 (i.e. a compliance officer has
been appointed to take responsibility for the above duties) approval by special resolution is not
required for the issue of shares, securities or rights. Note that existing share schemes by the
new definition of ‘employee share schemes’ which appears to be limited to the issue of shares
or granting of options, but which no longer requires the use of a trust.

3. Rights of shareholders

If the voting power of the class of shares that are issued or issuable as a result of the
transaction or series of integrated transactions will be equal to or exceed 30 per cent of the
voting power of all the shares of that class held by shareholders immediately before the
transaction or series of transactions, this will require a special resolution by the shareholders as
per section 41 (3) of the Companies Act.

4. Dividends

Section 46 requires that any distribution by a company to shareholders (including dividend

distributions and the buy-back of shares) will be subject to the solvency and liquidity test.

3.4.2 Governance of companies:

Companies act (57 – 65) & regulations 38

1. Prescribed officers

In terms of Regulation 38 a person is a prescribed officer of a company if ‘despite not being a

director of that company’ that person:

 Exercises general executive management of the whole, or significant portion, of the

business and activities of the company; or
 Regularly participates to a material degree in the exercise of general executive control
over management and the whole, or a significant portion, of the business and activities
of the company.

2. Shareholder meetings:

Section 57 relates to any profit company (including public companies but excluding state-owned
companies) that has only one shareholder is not subject to Section 59 to 65 of the Act. The
provisions relate to record dates, round robin resolutions, shareholders’ meetings, conduct of
meetings, quorums and adjournments as well as shareholders’ resolutions generally do not
apply to companies with one shareholder.

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3. Shareholder resolutions:

Section 65 provides an opportunity for companies to apply different voting thresholds for
different decisions. A distinction is to be made between ordinary and special resolutions. A
company may provide that different matters will require different levels of support for them to be
passed.

The Act details that the support of more than 50% voting rights exercised on an ordinary
resolution. A special resolution will require at least 75% of the voting rights on the resolution.
However, the MOI may provide for a higher than 50% voting rights for ordinary resolutions or a
higher or lower than 75% voting rights for a special resolution as long as certain thresholds are
met.

3.4.3 Application and general requirements regarding enhanced accountability and

transparency:

Companies act 84 – 85 & Regulation 26 – 28

1. Application of enhanced accountability:

Chapter 3 (Companies Act 84, Annexure C and Annexure D) deals with the appointment of an
auditor, company secretary and audit committee. Not all the issues in Chapter 3 are applicable
to all companies.

The following companies have to comply with all the requirements of Chapter 3, i.e. the
requirements pertaining to audit, audit committees and company secretaries:

 Public companies, and

 State-owned companies

Private, personal liability and non-profit companies have to comply with the requirements of
Chapter 3 which pertains to audit committees and company secretaries to the extent required in
the MOIs of these companies.

To ascertain whether a company requires an audit or review, and which financial reporting
standard should be applied, the company should calculate its public interest score (PIS) for the
financial year.

A company’s (company level and not consolidation level) public interest score is calculated as
follows (Regulation 26(2)):

 A number of points equal to the average number of employees of the company during
the financial year;
 One point for every R1million (or portion thereof) in third party liability of the company at
the financial year end;
 One point for every R1 million (or portion thereof) in turnover during the financial year;
and
 One point for every individual who, at the end of the financial year, is known by the
company to directly or indirectly have a beneficial interest in any of the company’s
issued securities.

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Regulation 28 all the subsidiaries of listed companies, meeting the definition of a company in
the Companies Act, must apply the Public Interest Score and if they qualify for the audit they will
have to be audited.

3.4.4 Transactions (shareholders and directors):

1. Financial assistance for subscribing for shares (Sec 44)

Section 44 of the Act allows that the company allows financial assistance for the subscription of
securities, but contains very onerous requirements.

Except unless stated otherwise in the MOI, the company may provide assistance in the form of
a loan, guarantee, provision of security or other form for the subscription of the company’s
securities. Section 44 does not apply to Companies whose primary business is the lending of
money.

Despite any provisions in the MOI, a board of directors must not authorise and form of financial
assistance to another party to purchase shares in the company unless the following provisions
are met:

 The financial assistance must be pursuant to an employee share scheme (satisfying the
requirements of S97) or a special resolution adopted within the previous two years, and
 The board of directors must have decided that:
 The company will meet the liquidity and solvency test immediately after the rendition of
financial assistance,
 The terms under which the financial assistance is proposed to be given are fair and
reasonable to the company.

2. Loans or other financial assistance to directors (Sec 45)

In terms of this section, unless the company’s memorandum of incorporation provides

otherwise, the board may authorise direct or indirect financial assistance to the following parties:

 A director and prescribed officer of the company or of a related or inter-related

company;
 A related or inter-related company or corporation;
 A member of a related or inter-related corporation; or
 A person related to any of the above parties.

Before the Board may authorise any financial assistance, it has to ensure all statutory
requirements are met. Despite any provision of a company’s MOI to the contrary, the board may
not authorise any financial assistance in S45, unless:

The financial assistance is:

 Provided pursuant to an employee share scheme (that satisfies the requirements of

S97); or
 Provided in line with a special resolution (which must be passed prior to rendering of the
financial assistance) of the shareholders adopted within the previous two years, which
approved such assistance either for the specific recipient or generally for a category of
potential recipients; and

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The board ensured that:

 The company will satisfy the solvency and liquidity test immediately after providing the
financial assistance; and
 The terms under which the financial assistance is proposed to be given are fair and
reasonable to the company.

4. SELF-REFELCTIVE EXERCISES

4.1 Adopt a professional attitude

1. Set and monitor personal learning and development objectives through a wide
range life-long of learning opportunities:

 Lifelong and Lifewide Learning - a Perspective (tennessee.edu)

(After opening the link above answer the questions which follow?)

2. Acquire new knowledge, skills and experiences to remain relevant, adapt career
goals, and empower others:

 Tips for Adult Learning - Bing video

(After opening the link above answer the questions which follow?)

3. Identify and distinguish between the need to learn, unlearn and relearn, so as to
facilitate adaptation to changing practices, roles and work contexts:

 Learn, Unlearn, Relearn - Bing video

(After opening the link above answer the questions which follow?)

4.2 Relational acumen

1. Demonstrate an awareness of language differences in all cross-cultural

communication:

 Cross Cultural Communication (communicationtheory.org)

(After opening the link above answer the questions which follow?)

2. Manage conflict between individuals and across teams:

The video below is an example of conflict and management thereof:

 https://www.bing.com/videos/search?q=examples+of+management+of+conflict+in+the+
workplace&ru=%2fvideos%2fsearch%3fq%3dexamples%2bof%2bmanagement%2bof%
2bconflict%2bin%2bthe%2bworkplace%26FORM%3dHDRSC4&view=detail&mid=C815
A80B878AFB717524C815A80B878AFB717524&&FORM=VDRVRV

(After opening the link above answer the questions which follow?)

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 FAC2601/103/3/2022

3. Adapt to different professional settings and cultures:

 https://www.bing.com/videos/search?q=examples+of+management+of+conflict+in+the+
workplace&ru=%2fvideos%2fsearch%3fq%3dexamples%2bof%2bmanagement%2bof%
2bconflict%2bin%2bthe%2bworkplace%26FORM%3dHDRSC4&view=detail&mid=C815
A80B878AFB717524C815A80B878AFB717524&&FORM=VDRVRV

(After opening the link above answer the questions which follow?)

4. Set appropriate goals, monitor and self-reflect on own performance:

 https://www.indeed.com/career-advice/career-development/self-management-skills
(After opening the link above answer the questions which follow?

5. CONCLUSION

Please do not hesitate to contact us by e-mail or telephonically if you are dissatisfied with the
content of this tutorial letter or with any academic aspect of the module.

Despite the care taken to ensure that the study material, assignments and solutions are
comprehensive and free from errors and omissions, discrepancies may still occur. Should you
come across such matters, please inform us so that we may make the necessary corrections.

Kind regards,

Mr A Eysele
Ms F Aboo
Mr C Mkefa
Mr M Mokgobinyane

LECTURERS: FINANCIAL ACCOUNTING II – FAC2601

FAC2601_2022_TL_103_3_B.doc

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