Overall aim of the syllabus

To develop knowledge and understanding of the underlying principles and concepts relating to
financial accounting and technical proficiency in the use of double-entry accounting techniques
including the preparation of basic financial statements.

Question Styles

The syllabus is assessed by a two-hour computer-based examination.

Questions will assess all parts of the syllabus and will test knowledge and some comprehension or
application of this knowledge.

The examination will consist of two sections.

Section A will contain 35 two-mark objective test questions.

Section B will contain 2 fifteen-mark multi-task questions.

On successful completion of this exam, candidates should be able to:

A. Explain the context and purpose of financial reporting

B. Define the accounting principles, concepts and qualitative characteristics of useful financial
information
C. Demonstrate the use of double-entry and accounting systems
D. Record transactions and events
E. Perform reconciliations
F. Prepare a trial balance
G. Prepare financial statements
H. Prepare basic consolidated financial statements
I. Interpret financial statements
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Accounting System/Process

A. Recording (in Book of Prime Entry)

B. Classifying and Summarising (Ledger and Trial Balance)
C. Reporting (Financial Statements)

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Investors and potential investors are interested in their potential profits and the security of their
investment.

Lenders need to know if they will be repaid.

Government agencies need to know how the economy is performing in order to plan financial and
industrial policies. The tax authorities also use financial statements as a basis for assessing the
amount of tax payable by a business. 3
Suppliers need to know if they will be paid. New suppliers may also require reassurance about the
financial health of a business before agreeing to supply goods.

Competitors may also access publicly available information to assist decision-making in relation to
their own business activities.

Customers need to know that an entity can continue to supply them into the future.

The public may wish to assess the effect of the entity on the economy, local environment and local
community.

Management would also use the financial statements of a business to make economic decisions.
Management, however, would predominantly use management accounting information as their main
source of financial information for decision-making.

Employees and trade union representatives need to know if an employer can offer secure
employment and possible pay rises. They will also have a keen interest in the salaries and benefits
enjoyed by senior management.

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The Framework

The preparation of financial statements is based on the Conceptual Framework for Financial
Reporting 2010 issued by the IASB

It includes discussion of:

• the purpose of the Conceptual Framework

• the objectives of financial reporting

• the qualitative characteristics of useful financial information

• the definition, recognition and measurement of the elements from which the financial
statements are constructed

• the accruals and going concern concepts, and

• the concepts of capital and capital maintenance.

The purpose of the Framework

The purpose of the Conceptual Framework is to assist the IASB in the development of financial
reporting standards and to assist preparers of financial statements to develop accounting policies
when reporting standards do not provide sufficient guidance, or where there is a choice of accounting
policy.

It is also a useful reference document to assist in understanding and interpreting reporting standards.

The Purpose of financial reporting

A. To provide information useful to the users in making decisions.

B. To show the results of management

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Qualitative characteristics

Qualitative characteristics are the attributes that make information provided in financial
statements useful to others.

The Conceptual Framework splits qualitative characteristics into two categories:

(i) Fundamental qualitative characteristics

A. Relevance
B. Faithful representation

(ii) Enhancing qualitative characteristics

- Comparability
- Verifiability
- Timeliness
- Understandability

Relevance

Information is relevant if:

- it has the ability to influence the economic decisions of users, and

- is provided in time to influence those decisions.

Materiality has a direct impact on the relevance of information. Qualities of relevance

Information provided by financial statements needs to be relevant. Information that is relevant has
predictive, or confirmatory, value.

✓ Predictive value enables users to evaluate or assess past, present or future events.
✓ Confirmatory value helps users to confirm or correct past evaluations and assessments.

A threshold quality is

• a cut-off point - if any information does not pass the test of the threshold quality, it is not
material and does not need to be considered further.

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information is material if its omission or misstatement could influence the economic decisions of
users taken on the basis of the financial statements.

Faithful representation

If information is to represent faithfully the transactions and other events, they must be accounted
for and presented in accordance with their substance and economic reality and not merely their legal
form.

This is known as 'substance over form'.

To be a perfectly faithful representation, financial information would possess the following

characteristics:

Neutrality

Information must be neutral

Free from error

Information must be free from error within the bounds of materiality.

Free from error does not mean perfectly accurate in all respects. For example, where an estimate has
been used the amount must be described clearly and accurately as being estimate.

Completeness

To be understandable information must contain all the necessary descriptions and explanations.

Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability are qualitative characteristics that

enhance the usefulness of information that is relevant and faithfully represented.

Comparability

Users must be able to:

A. compare the financial statements of an entity over time to identify trends in its financial
performance and financial position.

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 A. compare the financial statements of different entities to evaluate their relative financial
performance and financial position.

For this to be the case there must be:

- consistency and
- disclosure.

An important implication of comparability is that users are informed of the accounting policies
employed in preparation of the financial statements, any changes in those policies and the effects of
such changes.

Compliance with accounting standards, including the disclosure of the accounting policies used by
the entity, helps to achieve comparability.

Because users wish to compare the financial position and the performance and changes in the
financial position of an entity over time, it is important that the financial statements show
corresponding information for the preceding periods.

Verifiability

Verification can be direct or indirect. Direct verification means verifying an amount or other
representation through direct observation i.e. counting cash. Indirect verification means checking the
inputs to a model, formula or other technique and recalculation the outputs using the same
methodology.

Timeliness

Timeliness means having information available to decision makers in time to be capable of

influencing their decisions. Generally, the older the information is, the less useful it becomes.

Understandability

Understandability depends on:

- he way in which information is presented.

- the capabilities of users.

It is assumed that users:

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have a reasonable knowledge of business and economic activities

• are willing to study the information provided with reasonable diligence.

The elements of the financial statements

Asset -A present economic resource controlled by the entity as a result of past events

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Liability -A present obligation of the entity to transfer an economic resource as a result of past events.

Equity - This is the 'residual interest' in the assets of the entity after deducting all liabilities. It is
effectively what is paid back to the owners (shareholders) when the business ceases to trade.

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Income - This consists of the increases in assets, or decreases in liabilities, that result in increases in
equity, other than those relating to contributions from holders of equity claims.

Expense - This consists of the decreases in assets or increases in liabilities that result in decreases in
equity, other than those relating to distributions to holders of equity claims.

The components of a set of financial statements

A set of financial statements comprise:

A. the statement of financial position

This statement summarises the assets, liabilities and equity balances of the business at the
end of the reporting period.
Classification or grouping of assets, liabilities and equity in a consistent manner helps users
of financial statements to understand that information and it more easily identify information
which is of particular relevance to them. Consistent presentation of information also helps
users to make comparison and undertake analysis of financial information.

B. the statement of profit or loss and other comprehensive income

This statement summarises the revenues earned and expenses incurred by the business
throughout the reporting period. This used to be referred to as a 'profit and loss account.

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 A. the statement of changes in equity
This statement summarises the movement in equity balances (share capital, share premium,
revaluation surplus and retained earnings - from the beginning to the end of the reporting
period. It applies only to limited liability companies and would not be required for a sole
trader or partnership.

B. the statement of cash flows

This statement summarises the cash paid and received throughout the reporting period.
Normally, it would be relevant to limited liability companies only, rather than to sole
traders and partnerships.

C. the notes to the financial statements

The notes to the financial statements comprise a statement of accounting policies and any
other disclosures required to enable the shareholders and other users of the financial
statements to make informed judgements about the business. The notes to the financial
statements are usually more detailed and extensive for limited liability company financial
statements, rather than for the accounts of a sole trader or partnership.

Other important accounting concepts

There are a number of other accounting principles that underpin the preparation of financial
statements. The most significant ones include:

Materiality

An item is regarded as material if its omission or misstatement is likely to change the perception or
understanding of the users of that information. Materiality

i.e. they may make inappropriate decisions based upon the misstated information

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Substance over form

if information is to be presented faithfully, the economic reality must be accounted for and not just
the strict legal form.

The going concern assumption

Financial statements are prepared on the assumption that the entity is a going concern, and will
continue to operate for the foreseeable future (i.e. it has neither the need nor the intention to
liquidate or significantly curtail its operations).

The normal expectation is that, based upon current knowledge and understanding of the business,
it is reasonable to assume that the business will continue to operate for the next twelve months.

The business entity concept

This principle means that the financial accounting information presented in the financial statements
relates only to the activities of the business and not to those of the owner. From an accounting
perspective the business is treated as being separate from its owners.

The accruals basis of accounting

This means that transactions are recorded when revenues are earned and when expenses are
incurred. This pays no regard to the timing of the cash payment or receipt.

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Prudence concepts

Prudence is the exercise of caution when making judgements under conditions of uncertainty. The
helps to ensure that assets and income are not overstated in the financial statements, and that
liabilities and expenses are not understated.

Consistency

Users of financial statements need to be able to compare the performance of an entity over a number
of years. Therefore, it is important that the presentation and classification of items in the financial
statements is retained from one period to the next, unless there is a change in circumstances or a
requirement of a new IFRS Standard.

The consistency of accounting treatment and presentation relates not only from one accounting
period to the next, but also within an accounting period, so that similar transactions are accounted
for in a similar way.

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 Types of Organisation

BUSINESS ENTITY / ORGANIZATION

It is a place where a group of people are working together to achieve a common goal.

Sole Trader

A sole trader is the simplest form of business where it is owned and managed (operated) by one
person (although there might be any number of employees). These are the people who work for
themselves. Sole trader term refers to the ownership of business and a sole trader can have
employees.

The sole trader and their business are legally the same entity and therefore the sole trader is fully
and personally liable for any losses of the business.
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Partnership

A partnership occurs when two or more people decide to share the risks and rewards of a business
together. It is where a business is owned jointly by a number of partners (minimum 2). Some, or all,
of them will be actively involved in the business. Partners share profits and losses in accordance with
their agreement. The maximum number of partners allowed in a business varies with respect to law
of every country.

The partners and their business are legally the same entity and therefore the partners are jointly and
severally liable for the losses of their business.

Companies

A company is a business owned by many people and operated by many (though not necessarily the
same) people.

A company is a legal entity in its own right, and therefore the shareholders have only limited liability
for any losses a company makes. Limited liability means that the owners (shareholders) are only
responsible for the amount to be paid for their shares. (Discussed in detail later)

Limited companies are of two types:

1. Public (shares issued to general public)

2. Private (share issue restricted to friends and family)

CONCEPT OF LIMITED AND UNLIMITED LIABILITY

Unlimited liability means that in case a business becomes bankrupt or is shut down, the owners will
have to repay the liabilities (payables) of the business with their own personal assets, if required.

Limited liability means that shareholders of a company are only responsible for money they have
invested. If a business becomes bankrupt or is shut down, shareholders lose only the amount of
capital invested in business (money paid for buying shares). Even in case of further loss, they do not
need to make any payment from their personal assets.
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Non-for-profit entities

It is not just profit-making businesses that will need to have accounting information and prepare
financial statements – also charities, clubs and government (or public sector) organisations need it.

Comparison of companies to sole traders and partnerships

The fact that a company is a separate legal entity means that it is very different from a sole trader
or partnership in a number of ways.

• Property holding

The property of a limited liability company belongs to the company. A change in the ownership of
shares in the company will have no effect on the ownership of the company's property. (In a
partnership the firm's property belongs directly to the partners who can take it with them if they
leave the partnership.)

• Transferable shares

Shares in a limited company can usually be transferred without the consent of the other
shareholders. In the absence of agreement to the contrary, a new partner cannot be introduced into
a firm without the consent of all existing partners.

• Suing and being sued

As a separate legal person, a limited company can sue and be sued in its own name. Judgements
relating to companies do not affect the members personally.

• Security for loans

A company has greater scope for raising loans and may secure them with floating charges. A floating
charge is a mortgage over the constantly fluctuating assets of a company providing security for the
lender of money to a company. It does not prevent the company dealing with the assets in the
ordinary course of business. Such a charge is useful when a company has no non-current assets such
as land, but does have large and valuable inventories.
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Generally, the law does not permit partnerships or individuals to secure loans with a floating charge.

• Taxation

Because a company is legally separated from its shareholders, it is taxed separately from its
shareholders. Partners and sole traders are personally liable for income tax on the profits made by
their business.

Disadvantages of incorporation

The disadvantages of being a limited company arise principally from restrictions imposed by
relevant company law:

When being formed companies must register and file formal constitution documents with a Registrar.
Registration fees and legal costs have to be paid.

In addition it is normally a requirement for a company to produce annual financial statements that
must be submitted to the Registrar. It is also usually a requirement for those financial statements to
be audited (in some countries this is only a requirement for large and medium sized companies). The
costs associated with this can be high. Partnerships and sole traders are not subject to this
requirement unless their professional bodies require this.

A registered company's accounts and certain other documents are open to public inspection. The
accounts of sole traders and partnerships are not open to public inspection.

Limited companies are subject to strict rules in connection with the introduction and withdrawal of
capital and profits.

Members of a company may not take part in its management unless they are also directors, whereas
all partners are entitled to share in management, unless the partnership agreement provides
otherwise.

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