Accounting: International Financial Reporting Standards

Accounting Principles

• In Grades 10-12, students learn to define and explain IFRS and GAAP, including their basic concepts.

International Financial Reporting Standards (IFRS)

• The main objective of recording transactions involves preparing the financial statements
• IFRS mandates statements prepared using fundamental assumptions like accrual basis/matching and going concern.
• Accrual basis/matching states transactions are recorded when they occur, not when cash is settled, therefore tracking expected movement instead of cash movement.
• It is assumed a business will continue in the foreseeable future under a "going concern" assumption, which makes preparing financial statements pointless if closure is expected.
• Desirable characteristics are necessary to prepare financial statemetns.
• Understandable financial information must be comprehensive for those with business knowledge
• Reliability means users should be confident that financial statements are fair and a reliable representation
• Materiality requires including relevant information for decision-making, which is determined by its nature and relevance.
• Comparability (consistency) is when Financial policies and formats should be consistent for year-to-year and business-to-business comparisons.

Generally Accepted Accounting Practice (GAAP)

• Prudence is when financial results should be recorded conservatively, avoiding over/understatement to favor specific outcomes.
• The business entity rule states the financial affairs of a business must be separate from its owners, requiring separate financials for each business owned by a single person.
• Historical cost rule is when assets like land, buildings, equipment, vehicles, and trading inventories should be recorded at their original purchase prices.

Ethics

• Students need to epxlain the basic principles and use/purpose of a code of ethics in the financial/business environment.
• Ethics encompasses moral beliefs about right and wrong that guide behavior.
• Many businesses create a Code of Ethics (or Conduct) to address ethical issues because money may tempt unethical behavior.
• A Code of Ethics sets rules for employees, reflecting the organization's norms, beliefs, and expected behavior.
• A Code of Ethics explains the values, ethics, and beliefs that guide the organization's policies and behavior providing standards for conduct.
• A Code of Ethics provides external confidence in the integrity of the organization's members and prevents undesirable behaviors.

Professional Bodies

• Most South African accountants belong to SAICA or SAIPA.
• SAICA members are called chartered accountants (CA’s) and can draw up/audit books and provide business advice; members of SAIPA can perform the first two functions only.

Code of Conduct

• Professional bodies provide training, news, IFRS updates and professional behavior standards to members.
• Accountants must sign codes of conduct and may lose qualifications for violations.
• Objectivity is important, because accountants must be impartial and fair, not influenced by personal feelings/preferences.
• Integrity is important, because honest behavior is crucial for establishing trust between accountant and business.
• Confidentiality dictates financial information should not be disclosed without proper authority.
• Professional competence is when accountants should perform services with due care, competence, and diligence.
• Professional behavior is when accountants should maintain a good reputation and avoid discrediting the profession.
• Technical standards require accountants to maintain technical/professional skills through training and staying updated on accounting changes.

Ethics in Tests and Exams

• Being able to explain "ethics" and "code of ethics" is important
• You must analyze behavior, explain if actions were ethical (with reasons), and suggest future improvements will be required.
• Being “mean” does not automatically make something unethical (e.g. raising coat prices in winter).

Internal Control

• Students must define and explain internal control and basic processes, integrating it with other topics.
• Internal control is policies and procedures (rules) put in place to safeguard assets (cash, stock, debtors, fixed assets) and ensure the organization works towards its objectives/goals.
• Internal control is a broad term; any rule a manager implements to ensure smooth business operations, prevent fraud, limit adverse events, or enact safety measures.
• Internal control processes can be divided into physical safeguards, separation of duties, authorisations, and documentation.
• Physical safeguards are controls over tangible assets like security guards, cameras, burglar bars, safes, and alarms for cash, stock, or fixed assets.
• Separation of duties can reduce the risk of fraud.
• Separation of duties tasks may be assigned to multiple people or require double-checks.
• An example of separation of duties, is where the purchasing manager places an order and the finance manager makes the payment.
• Authorizations are when approval by a manager is required, like setting budget limits.
• Documentation dictates all transactions should be supported by appropriate source documents.

Types of Internal Controls

• Preventative controls deter or prevent undesirable events from taking place
  • Burglar-proof buildings, security cameras, separation of duties, signs (e.g. arm response or no smoking), access control or barcodes on products
• Detective controls help to assist in detecting an undesirable event after it has occurred
  • Alarm systems, magnetic tags attached to stock, physical stock-taking, inspecting fixed assets and comparing to asset register, anti-virus software on IT infrastructure
• Corrective controls normalise a situation after an undesirable event has taken place
  • Armed response, fire extinguishers, insurance and injury bonuses, backups of information
• Directive controls encourage desirable events to take place
  • Procedural manuals and policies, codes of ethics, employee training or job descriptions
• Accounting controls ensure accurate and reliable financial reporting
  • Training for accountants, pre-numbered sequential source documents, transaction authorisations, reconciliations and control accounts and auditing (internal and external)

Fraud

• Fraud and theft are real dangers that can lead to the downfall of businesses, therefore accountants design internal controls to limit them.
• Theft is physically removing an object without the owner's consent to deprive them of it permanently.
• Fraud is criminal deception that intends to result in financial or personal gain.
• Fraud differs from theft, because no physical object has to be stolen, because the gain can take many forms.

Employee Fraud

• Employee fraud includes crimes by employees of respectable status
  • Bribery: Employee receives money/goods to influence a decision.
  • Ghost employees: Employee calculates salaries for fictitious employees and transfers the money into their account.
  • Theft: Employee takes cash, goods, or fixed assets for private gain.
  • Kick-backs: Employee orders goods/services from a friend at an inflated price, receiving a portion in return and is known as "taking money under the table.”.
  • Rolling of cash: Cashier understates deposits each month, taking a large amount and replacing it with new funds near the end of the month.
  • Insider trading: Manager uses confidential company information for self-gain by buying/selling shares.
  • Forgery: Employee fabricates documents to acquire money illegally.
  • Money laundering: Processes illegally acquired money through legal transactions.
  • Embezzlement: Using funds for purposes other than intended.

Business Fraud

• Business fraud occurs when ethical corporate culture is lacking and senior managers perpetrate it, or it occurs when lower-level employees are lacking oversight.
  • Tax evasion: Avoiding taxes illegally (e.g. lying about income).
  • Price-fixing: Competitors agree on high minimum prices, eliminating consumer choices.
  • Industrial espionage: Using spying methods to obtain competitor information.
  • Trading in illegal goods: Buying/selling stolen or illicit goods, including legitimate items from disreputable sources (e.g. child labor).
  • Money laundering: Illegally obtained money is processed through legitimate transactions.
  • Misrepresentation: Deliberately twisting facts to take money or property.
  • Misleading advertising: Using false info about products, prices, or abilities.
  • Embezzlement: Using funds obtained from a customer or shareholders for unintended purposes.

Internal Control in Tests and Exams

• Being able to expxlain "internal control" is important
• The ability to identify fraudulent behaviour and suggest corrective internal controls is required
• HR paying "ghost employees" requires employees to provide ID and bank statements (documentation) and requires the accountant to double-check payroll and make payments (separation of duties) .

Financial and Management Accounting

• Financial accounting and management accounting are the two types of accounting
• Financial accounting identifies, measures, and records transactions to produce a Statement of Income (profitability) and a Statement of Financial Position (worth of a business).
• Financial Accounting is used externally by owners, creditors, lenders, and SARS
• Financial accounting is gathered and presented to comply with IFRS, GAAP, and other legal requirements.
• The focus is the past.
• Management accounting uses business information for planning, internal control, and decision-making.
• This Accounting is used internally (budgets, cost projections) and is tailored to the business.
• The focus is the future