FINANCIAL ACCOUNTING

Introduction and
Regulatory framework

PRESENTATION PREPARED BY BRUNO MURAMUZI

 FINANCIAL ACCOUNTING
Course Description
This is an introductory course in accounting designed to equip learners with basic principles and concepts of
financial accounting. The learners will appreciate the importance of financial data in determining the
performance and status of an entity, and how this will be applied in revenue administration. The learner will
accordingly be able to prepare financial accounts or statements, and interpret them for tax purposes.

Course Objectives
• Appreciate the role and concepts of financial accounting and reporting.
• Account for transactions using double entry.
• Enable the learner record transactions in the respective ledger accounts (sales, purchases, etc.)
• Post entries to the trial balance and agree balances to the respective ledger accounts.
• Prepare basic financial statements
• Interpret financial statements from tax purposes.
 FINANCIAL ACCOUNTING
• Summary of learning units under the course
• Financial reporting
• Qualitative characteristics of financial information
• Double entry and accounting systems
• Recording transactions
• Trial balance
• Preparing basic financial statements
• Interpretation of financial statements for tax purposes.
 TOPIC ONE: INTRODUCTION TO FINANCIAL
ACCOUNTING
Definition of financial accounting, meaning and purpose
• Financial accounting is the art and science of recording and classifying
financial transactions in the books of accounts, summarizing and
communicating financial information through production of financial
statements, and interpretation of the operating results portrayed in the
financial statements to facilitate decision making. Financial transactions are
recorded in books of original/prime entry; Analyzed and totals posted to
the ledger accounts and finally Summarized in the financial statements.
• The output of financial accounting is a set of financial statements.
• It is related or differs from book keeping, Cost accounting and management
accounting in the following ways;
• Book keeping/Record keeping is the process of recording business transactions
accurately and systematically in an enterprise, in monetary terms.
• Cost accounting is a tool of management that provides a detailed record of the
costs relating to products, services, operations or activities. It refers to the
process of determining and accumulating the cost of some particular product or
service.
• Management accounting is defined as the application of accounting techniques
for providing information designed to help all levels of management in planning
and controlling the activities of a business enterprise and in decision
• Key to note is that the information reported in financial statements is the same
information reported in various tax returns. Therefore, it is important for one to
understand how the knowledge gained in preparation and interpretation of
financial statements is key revenue administration.
• What then is a business?
• A business can be defined as;
• a commercial or industrial concern which exists to deal in the manufacture, resale
or supply of goods and services;
• an organization which uses economic resources to create goods or services which
customers will buy;
• a business invests money in resources (e.g. it buys buildings, machinery and so
on, it pays employs) in order to make even more money for its owners;
• Business enterprises vary in character, size and complexity. They range from very
small businesses (the shop keepers in suburbs, Hairdressers, Carpenters etc.) to
very large ones (MTN Uganda Ltd, Mukwano, Brewery companies etc.). However,
all of them want to earn a profit.
• This last definition introduces the important idea of PROFIT
• PROFIT is the excess of revenue over expenditure. When expenditure exceeds
revenue, the business is running at a LOSS
• This therefore means that one of the roles of an accountant is to measure
revenue, expenditure and profit. It is not such a straightforward problem as it
may seem.
• The concept of Business Entity;
The business as an accounting entity refers to the separate identities of the business and
its owners.
• Forms of business entity
There are three main forms of business entity based on the type of ownership and the
implication they have for financial reporting. These are;
• Sole trade
• Partnerships
• Limited Liability companies

• Sole proprietorship
This is a business owned and run by a single proprietor (usually one individual but it may
be a group of individuals such as a family) and controlling their work. The individual’s
business and personal affairs are for legal and tax purposes inseparable. It is the oldest and
most and most straightforward structure for a business
Characteristics of Sole proprietorship
• Single ownership. A sole trader owns and runs the business single handedly, contributes the start-up capital alone, and runs
it with or without employees.
• One-person control. Planning and direction of the business is in the hands of one individual.
• Unlimited liability. Owner takes personal liability for all debts of the business in case of bankruptcy. In law, a sole trader is
not legally separate from the business they operate.
• All risks and rewards of the business are enjoyed and born by one person
• A sole trader must maintain financial records and produce financial records which can be used gauge the financial
performance and position of the business or be used by external users such as banks and revenue authorities in decision
making.

Advantages/Benefits of being a sole proprietorship

• Owner has complete control over the business.
• Owner is entitled to all the profits and the ownership of the assets.
• Can be highly flexible.
• Less stringent reporting obligations compared to other business structures-no requirement to make financial accounts
publicly available, no audit requirement.
• It does not require much capital to start.
• He enjoys top secrecy
Disadvantages/Limitations of being a sole trader
• Owner is personally liable for the debts (unlimited liability)
• Personal property may be vulnerable for debts and other business liabilities.
• May lead to long working hours without the normal employee recreational leave and
other benefits.
• Capital resources are limited which limits expansion of the business
• Limited perpetual continuity of business in the event of death or illness of the owner.
• Poor decision making since there is no external guidance from other people.

Partnerships
Partnerships occur where two or more people decide to run a business together with a
common view making and sharing profits and losses. The key feature in partnership is
sharing of profits/losses and not gross revenue. This form of business is common among
professional bodies such as accountancy, medical and legal practices.
• Partnerships are generally formed by a contract technically termed as Partnership agreements/deeds. These
deeds are legally binding and are designed to outline the proportionate amount of capital invested,
allocation of profits between parties, responsibilities of each party, allocation of salary and procedures for
dissolving the partnership. Like sole traders, partnerships are not separate legal entities from their owners.
To overcome the problematic risk factors associated with unlimited personal liability for the debts of the
business, a limited liability partnership can be formed.
As with sole traders, partnerships must maintain financial records and produce financial accounts.
Features/Characteristics of Partnership
• The minimum number of members in a partnership is 2 and maximum is normally 20.
• It may be a group of individuals/companies owning one business and who contribute capital.
• They have unlimited joint and several liabilities for each member.
• There is no perpetual/continuous succession. i.e. death of one partner leads to dissolution of the
partnership.
• The main objective is profit for the partners.
• Partners are governed and guided by a partnership deed which acts as the constitution of the partnership.
• Each partner acts as an agent of the enterprise and can enter into contract on behalf of the firm basing on
the partnership deed.
• Profits and losses are shared basing on the agreed terms in the partnership deed.
Advantages of partnerships
• Less stringent reporting obligations- no requirement to make financial accounts
publicly available, no audit requirement, unless the partnership has limited
liability status.
• Additional capital can be raised by admitting new partners Division of roles
and responsibilities and an increased skill set.
• Sharing of risks and losses between more people.
• No tax on the business (profits are distributed to partners and then subject to
personal tax)
• A partnership can have a better combination of talents.
• Formation is fairly simple; there are no legal requirements to be complied with
except registration of the business’s name.
• In the event of difficulty, mutual discussions among partners are likely to come up
with better solutions.
Disadvantages of partnerships
• Partners are jointly liable for all debts (unlimited liability) unless they have
formed a limited liability partnership.
• There are costs associated with setting up partnership agreements.
• There may be issues of continuity of the business in the event of death or
illness of the partners.
• Slower decision making due to the need for consensus between partners.
• Unless a clause is written into the original agreement, when one partner
leaves, the partnership is automatically dissolved and another
• agreement is required between existing partners.
• Profits are shared, which reduces the amount received by each partner.
Limited Liability Companies
A limited liability company is formed when two or more people come together and
subscribe to its share capital and thereby become its owners. The business so formed is
then registered with the registrar of companies to become a limited liability company.
Because they may be very many, the owners or shareholders elect from amongst
themselves, a Board of Directors to supervise the business operations on their behalf and
act as agents of the business.
Limited liability companies are incorporated to take advantage of “limited liability” for
their owners (shareholders). This means that, while sole traders and partners are
personally responsible for the amounts owed by the business, the shareholders of a limited
liability company are only responsible for the amount paid for their shares. They are not
responsible for the company’s debts unless they have given personal guarantees (of a bank
loan, for example). However, they may lose the money they have invested in the company
if it fails. Shareholders may be individuals or other companies.
A limited liability company is legally a separate entity from its owners or shareholders. This
implies that in the face of the law, the business is taken as a legal person with legal rights
and responsibilities. It can sue or be sued, own and dispose of property, and operate a
business as specified in its memorandum and articles of association. A limited liability
company has a perpetual life that is separate from its owners.
Formation of a Company
Persons desirous of forming a company are required to furnish the Registrar of companies with the following documents;
• Memorandum of association. This lays down and defines the powers and limitations of the company. It is designed to govern the relationship of the
company with outsiders. It contains the following clauses; name clause, situation clause, objects clause, capital clause, liability clause, declaration clause.
• Articles of association. This lays down the rules and regulations for the internal organization of the company. These include among others, the rights and
powers of each shareholder, the powers of directors, method of calling and conducting general meetings, rules governing the election of directors and
auditors, etc.
• List of directors
• A statement signed by the directors stating that they agree to act as such.
• A declaration that the necessary requirements of registration have been duly complied with.
• Declaration may be signed by the Secretary, or by one of the directors, or promoters of the company.
If the Registrar of companies finds these documents in order, he may ask the promoters (people who wish to form a company) to pay registration fees. On
receipt of these fees, he issues a certificate of incorporation. This certificate gives legal entity of the company.

Types of limited liability companies

Private limited companies. They are usually formed by small proprietors mainly to gain the benefits and privileges of companies limited by shares.
Public limited company. It’s a company which by its articles of association does not impose any of the restrictions imposed by the private company.
Features of a public limited company include;
• It is limited by shares
• Minimum number of members is 7 and it has no maximum It can offer its
shares and debentures to the public to subscribe.
• Its shares are transferable without any restrictions.
• It has to hold a statutory meeting and file a statutory report.
Companies limited by Guarantee. If a company has no share capital, the liability
of its members may be limited to the sum guaranteed by them. If such a company is
liquidated and its assets are not sufficient to meet its debts, the members would be
asked to contribute up to the maximum of the amount guaranteed by them at the
time of taking membership.
Companies Limited by guarantee are usually utilized by charitable organizations, i.e.
non-profit driven organizations. Such companies are required to register under as
non-governmental organizations under the NGO Registration Act Cap 113 with
the NGO Board before they can register as companies limited by guarantee.
Advantages of a limited liability company
• Can easily raise capital through issue of shares.
• Owner’s liability for debts of the company is limited to the share capital contributed.
• Company has a separate legal entity from its owners. So it continues to exist regardless of the identity of
its owners.
• It is relatively easy to transfer shares from one owner to another.
• There are tax advantages to being a limited liability company. The company is taxed as a separate entity
from its owners and the tax rate on companies may be lower than the tax rate for individuals.
• Can employ experts, be more efficient and enjoy economies of scale.

Disadvantages of a limited liability company

• Limited liability companies have to publish annual financial statements to the public. This means that
anyone (including competitors) can see how well or badly they are doing. In contrast sole traders and
partnerships do not have to publish their accounts.
• Company financial statements have to comply with legal and accounting requirements, particularly the
accounting standards. Sole traders and partnerships may comply with the accounting standards, e.g. for
tax purposes. Company financial statements have to be audited to ensure compliance with legal
requirements and accounting standards. This can be inconveniencing, time consuming and expensive.
• Share issues are regulated by law. For example, it is difficult to reduce share capital. Sole traders and
partnerships can increase or decrease capital as and when the owner wishes.
• Delays in decision making.
Practice question
• State 10 (ten) differentiating features between a partnership and a
limited company.
PARTNSHIP LIMITED LIABILITY
COMPANY
1 Commencement of business operations After paying and After obtaining a
obtaining a trading license certificate of incorporation

2 Raising capital Admitting new partners Selling shares to people

willing to invest their money

3 Liability of owners Partners have Limited liability. i.e. creditors of the company can
unlimited liability only recover from the assets of the company.

4 Continuity/life of Death, bankruptcy or retirement of a partner A company has perpetual

business can lead to the business closing. succession. A company is a separate person/entity
from its owners
5 Formation Formed by two or more persons who come
together and contribute capital to a Formed when two or more people come
business with a view of making profits. together and subscribe to its share capital and
thereby become its
owners
7 Share of profits and losses Based on the agreed profit and loss sharing Profits are distributed to shareholders in form of
ratios, or otherwise equally dividends based on
6 Regulation Partnership Act Cap share holdingsAct Cap 110
Companies
114

8 Taxation profits are A company is taxed as

distributed to partners and then subject to one unit before distributing profits.
personal
tax)

9 Control of business Partners share responsibilities in the control Owners have no direct control except if they have been
and management of the business. elected as directors by the other shareholders.

10 Publishing Are not required to publish accounts. Public limited companies are required to
Accounts publish their accounts.
 Discussion Questions
1. Explain how tax compliance requirements differ across the different business forms.
2. Explain the risks associated with managing the tax compliance of each of the 3 business forms
above and suggest possible ways of mitigating them so as to safe guard revenue.
B: REPORTING FRAMEWORK OF ACCOUNTING IN UGANDA
a) THE REGULATORY FRAME WORK
• The following are the factors that have shaped the development of financial accounting;
• National law/local legislation like constitution, company’s act
• Accounting concepts and individual judgment
• Accounting standards i.e IAS, IFRS
• Institute of certified public accountants of Uganda
• Generally Accepted Accounting Principles (GAAP)
• Fair presentation
National/local legislation
In most countries, limited liability companies are required by law to prepare and publish accounts annually. The form and content of the
accounts is regulated primarily by national legislation.
Accounting concepts and individual judgement
Many figures in the financial statements are derived from the application of judgement in applying fundamental accounting assumptions and
conventions. This can lead to subjectivity. Accounting standards were developed to try to address this subjectivity so as to improve
comparability of financial statements.
Examples of areas where judgement of different people may vary are as follow;
• valuation of buildings in times of rising property prices
• accounting for inflation
• research and development: is it right to treat this only as an expense? In a sense it is an investment to generate future revenue.
GAAP (Generally Accepted Accounting Principles)
Is a general term for a set of financial accounting standards and
reporting guidelines used to prepare accounts in a given environment.
UK GAAP, US GAAP are more specific statements.

International Financial Reporting Standards Foundation (IFRS

Foundation)
Responsible for governance of standard setting process. It oversees,
funds, appoints and monitors the operational effectiveness of:
 International Financial Reporting
IFRS Advisory Council (IFRS Standards Interpretations
AC) Committee (IFRS IC)
International Accounting
Standards Board (IASB) • Assist the IASB to establish
•Provide advice to IASB on: and improve standards
• Develop new accounting
standards • Issues Interpretations (known
• their agenda and work as IFRICs) which provide timely
prioritization • Liaise with national standard- guidance on emerging
setting bodies to promote accounting issues not
• the impact of proposed convergence of international and addressed in full standards
standards national accounting standards
• Assist in the
international/national
• Provides strategic advice
convergence process
STANDARD SETTING PROCESS
• The due process for developing an IFRS comprises of six stages:
• 1. Setting the agenda
• 2. Planning the project
• 3. Development and publication of Discussion Paper
• 4. Development and publication of Exposure Draft
• 5. Development and publication of an IFRS Standard
• 6. Procedures after a Standard is issued
Regulating Financial Reporting
Financial Reporting is a way of recording, analysing and summarising financial data. Financial data is the name given to the
actual transactions carried out by a business e.g sale of goods, purchases of goods, payment of expenses. The transactions are
recorded in the books of prime entry. The transactions are analysed in the books of prime entry and the totals are posted to the ledger
accounts. Finally, the transactions are summarised in the financial statements.
Need for regulation of financial reporting
• Financial statements are used by a wide range of users-investors, lenders, customers, etc.
• They need to be useful to the users.
• They need to be comparable.
• They need to provide at least some basic information.
• They increase users’ understanding of, confidence in, financial statement.
• They regulate the behaviour of companies towards their investors.
Different forms of financial reporting regulation
• The Companies Act (Cap 110)
• Accounting standards.
• The Capital markets Authority
• The Uganda Securities Exchange.
• Financial Institutions Act (Cap 54)
• Insurance Act (Cap 213)
Institute of certified public Accountants (ICPAU)
ICPAU was established in 1992 under the Accountants Act 1992, which has since been repealed by the
Accountants Act 2013 and Accountants Regulations 2016. Its membership comprises professional
accountants and auditors. In addition to auditors, who must be members of ICPAU, mandatory
membership in the institute is required for all heads of accounts, finance, and internal audit in public and
private sector entities that are of public interest.
The roles of ICPAU include:
• Setting and maintaining accounting and auditing standards
• Setting licensing requirements for accounting firms, and issuing and renewing licenses
• Issuing practicing certificates to qualified members who wish to practice accountancy;
• Maintaining a register of practicing accountants;
• Setting initial professional development and continuing professional development requirements and
regulating practical training;
• Establishing ethical requirements;
• Monitoring the conduct and performance of its members, including quality assurance reviews
• 1nvestigating and disciplining members for misconduct and breach of professional standards; and
• Advising the government on matters of financial accountability.
 THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING 2018
The IFRS Framework describes the basic concepts that underlie the preparation and presentation of financial statements for
external users. A conceptual framework can be seen as a statement of generally accepted accounting principles (GAAP) that
form a frame of reference for the evaluation of existing practices and the development of new ones.

Purpose of framework

• Assist the Board of IASC in the development of future International Accounting Standards and in its review of existing
International Accounting Standards;
• Assist the Board of IASC in promoting harmonisation of regulations, accounting standards and procedures relating to the
presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments
permitted by International Accounting Standards;
• Assist national standard-setting bodies in developing national standards;
• Assist preparers of financial statements in applying International Accounting Standards and in dealing with topics that
have yet to form the subject of an International Accounting Standard;
• Assist auditors in forming an opinion as to whether financial statement conform with International Accounting Standards;
• Assist users of financial statements in interpreting the information contained in financial statements prepared in
conformity with International Accounting Standards; and
• Provide those who are interested in the work of IASC with information about its approach to the formulation of
International Accounting Standards.
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPOTING (Revised - March 2018)
In March 2018, the International Accounting Standards Board (the Board) finished its revision of The Conceptual Framework for Financial
Reporting (the Conceptual Framework) a comprehensive set of concepts for financial reporting. The Board needed to consider that too many
changes to the Conceptual Framework may have knock-on effects to existing International Financial Reporting Standards (IFRS®). Despite that,
the Board has now published a new version of the Conceptual Framework.
It sets out:
• the objective of financial reporting
• the qualitative characteristics of useful financial information
• a description of the reporting entity and its boundary
• definitions of an asset, a liability, equity, income and expenses
• criteria for including assets and liabilities in financial statements (recognition) and guidance on when to remove them (derecognition)
• measurement bases and guidance on when to use them
• concepts and guidance on presentation and disclosure

Chapter 1 – The objective of general purpose financial reporting

The objective of financial reporting is to provide financial information that is useful to users in making decisions relating to providing resources
to the entity. Users’ decisions involve decisions about buying, selling or holding equity or debt instruments, providing or settling loans and other
forms of credit and voting, or otherwise influencing management’s actions
Chapter 2 – Qualitative characteristics of useful financial information
Qualitative characteristics identify the types of information likely to be
most useful to users in making decisions about the reporting entity on
the basis of information in its financial report
The framework identifies fundamental and enhancing qualitative
characteristics (diagram).
 Qualitative characteristics

Fundamental
Enhancing

Relevance Faithful representation Comparability

Underst.
Verifiability
Timelines

Completeness Neutrality Free from error

Fundamental qualitative characteristics
If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent.
Relevance
• Relevant financial information is capable of making a difference in the decisions made by users. Information influences decisions
if it has predictive value, confirmatory value, or both.
• Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value or both.
• Financial information has predictive value if it can be used by users to predict future outcomes.
• Financial information has confirmatory value if it provides feedback about previous evaluations so that it is used to confirm or
correct past evaluations and assessments.
• The predictive value and confirmatory value of financial information are interrelated. For example, one uses revenue information
for the current year, as the basis for predicting revenues in future years. One compares actual and the predicted revenue made in
past years in order to correct and improve the processes that were used to make those previous predictions.
• For example, a bank will give a loan to a client if it can predict repayment of the loan from the client’s financial statements.
• Materiality is an aspect of relevance specific to an entity. Information is material if omitting it or misstating it could influence
decisions that users make on the basis of financial information about a specific reporting entity.
Faithful representation
Financial information is useful if it faithfully represents the economic aspects of an entity in words and numbers that it purports to
represent. Transactions and events are accounted for in accordance with their substance and economic reality and not merely their
legal form.
Information faithfully represents the entity if it is:
• Complete – includes all necessary descriptions and explanations that is necessary for a user to understand
the item like the nature and amount (whether original cost, or fair value) of an asset.
• Neutral – the information is presented without bias and is not manipulated to be received favourably or
unfavourably by users.
• Free from error – means: There are no errors or omissions in the description of the item. The process used
to produce the reported information has been selected and applied with no errors in the process.
Enhancing qualitative characteristics
These enhance the usefulness of information that is relevant and faithfully represented. These are:
• Comparability
Information about a reporting entity is more useful if users can compare it with similar information:
• For earlier periods of the same business
• Of other businesses for the same period.
• In the budget or forecast.
• Comparability enables users to identify and understand similarities in and differences among
items.
• Consistency helps to achieve comparability. Consistency refers to the use of the same methods for
the same items, either from period to period within a reporting entity or in a single period across
entities.
Comparability is improved by:
• Compliance with accounting standards.
• The disclosure of accounting policies used in the preparation of the financial statements, any changes in
those policies and the effect of such changes.
• Showing comparative financial statements of the preceding period.
• Information should be compared if it is relevant and faithfully represents the different entities.
• Comparability is important in performance assessment. The assessment is improved if the entity has used
similar accounting policies or the effect of the different policies can be identified.
Verifiability
Verifiability helps assure users that information faithfully represents the economic aspects it purports to
represent. Verifiability means that different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful representation.
For example, cash is verified by counting it or inventory is verified by checking the inputs (quantities and costs)
and recalculating the ending inventory using the first-in, first-out method.
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 is. However, some information may continue
to be timely long after the end of a reporting period because, for example, some users may need to identify
and assess trends.

•
Understandability
Classifying, characterizing, and presenting information clearly and
concisely makes it understandable.
• Some aspects are inherently complex and cannot be made easy to
understand and information should not be excluded from financial
reports to make the reports easier to understand as this would make
it incomplete and therefore potentially misleading.
• Financial reports are prepared for users who have a reasonable
knowledge of business and economic activities and who review and
analyze the information diligently.
Chapter 3 – Financial statements and the reporting entity
• This chapter describes the objective and scope of financial statements and provides a description of the
reporting entity.
• A reporting entity is an entity that is required, or chooses, to prepare financial statements. It can be a single
entity or a portion of an entity or can comprise more than one entity. A reporting entity is not necessarily a
legal entity.
• Determining the appropriate boundary of a reporting entity is driven by the information needs of the
primary users of the reporting entity’s financial statements.
Chapter 4 – The elements of financial statements
• Asset. A present economic resource controlled by the entity as a result of past events.
Economic resource. A right that has the potential to produce economic benefits.
• Liability. A present obligation of the entity to transfer an economic resource as a result of past events.
Obligation. A duty of responsibility that an entity has no practical ability to avoid.
• Income. Increases in assets or decreases in liabilities that result in increases in equity other than those
relating to contributions from holders of equity claims
• Expenses. Decreases in assets or increases in liabilities that result in decreases in equity other than those
relating to distributions to holders of equity claims.
• Equity. Residual amount resulting from deducting the entity’s liabilities from assets.
Chapter 5 – Recognition and derecognition
In terms of recognition, the 2010 Conceptual Framework specified three recognition criteria which applied to all assets and
liabilities:
the item needed to meet the definition of an asset or liability,
• it needed to be probable that any future economic benefit associated with the asset or liability would flow to or from the
entity
• the asset or liability needed to have a cost or value that could be measured reliably.
• The Board has confirmed a new approach to recognition, which requires decisions to be made by reference to the
qualitative characteristics of financial information. The Board has confirmed that an entity should recognise an asset or a
liability (and any related income, expense or changes in equity) if such recognition provides users of financial statements
with:
• relevant information about the asset or the liability and about any income, expense or changes in equity
• a faithful representation of the asset or liability and of any income, expenses or changes in equity, and
• information that results in benefits exceeding the cost of providing that information
• A key change to this is the removal of a ‘probability criterion’. This has been removed as different financial reporting
standards apply different criterion; for example, some apply probable, some virtually certain and some reasonably possible.
This also means that it will not specifically prohibit the recognition of assets or liabilities with a low probability of an
inflow or outflow of economic resources.
• This is potentially controversial, and the 2018 Conceptual Framework addresses this specifically in chapter 5; paragraph 15
states that ‘an asset or liability can exist even if the probability of an inflow or outflow of economic benefits is low’.
Derecognition
Is the removal of all or part of a recognized asset or liability from an entity’s statement of financial position.
For an asset. It will normally occur when the entity looses control of all or part of the recognized asset
For a liability. This normally occurs when the entity has no longer a present obligation for all or part of the recognized liability.
Measurement of the Elements of Financial Statements
The Framework recognises four possible measurement bases:
• Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire
them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some
circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the
normal course of business.
• Current cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the
obligation currently.
• Fair value continues to be defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants.
• Value in use (or fulfilment value) is defined as an entity-specific value, and remains as the present value of the cash flows that an entity
expects to derive from the continuing use of an asset and its ultimate disposal.
• Realisable (settlement) value. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the
asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents
expected to be paid to satisfy the liabilities in the normal course of business.
• Present value. Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the
normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be
required to settle the liabilities in the normal course of business.
Chapter 7 – Presentation and disclosure
• This is a new section, containing the principles relating to how items should be presented
and disclosed.
• The first of these principles is that income and expenses should be included in the
statement of profit or loss unless relevance or faithful representation would be enhanced
by including a change in the current value of an asset or a liability in OCI.
• The second of these relates to the recycling of items in OCI into profit or loss. IAS 1
Presentation of Financial Statements suggests that these should be disclosed as items to
be reclassified into profit or loss, or not reclassified.
• The recycling of OCI is contentious and some commenters argue that all OCI items should
be recycled. Others argue that OCI items should never be recycled, whilst some argue
that only some items should be recycled. Sometimes the best way forward on a project
isn’t necessarily to seek the wisdom of crowds.
• Luckily, the Board has managed to find a middle ground on recycling. The 2018
Conceptual Framework now contains a statement that income and expenses included in
OCI are recycled when doing so would enhance the relevance or faithful representation
of the information. OCI may not be recycled if there is no clear basis for identifying the
period in which recycling should occur.
Explain the Information needs of the users of financial statements?
Users of Accounting Information - Internal & External
• Accounting information helps users to make better financial decisions. Users of financial information may be both internal and external to the
organization.
Internal users (Primary Users) of accounting information include the following:
• Management: for analysing the organization's performance and position and taking appropriate measures to improve the company results.
• Employees: for assessing company's profitability and its consequence on their future remuneration and job security.
• Owners: for analysing the viability and profitability of their investment and determining any future course of action.
Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements
External users (Secondary Users) of accounting information include the following: perseverance fluorescent
• Creditors: for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their
customers' financial health. Creditors include suppliers as well as lenders of finance such as banks.
• Tax Authorities: for determining the credibility of the tax returns filed on behalf of the company.
• Investors: for analysing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their
investment before they commit any financial resources to the company.
• Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long
term.
• Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations
set in order to protect the interests of the stakeholders who rely on such information in forming their decisions.
• Lenders: Banks and other financial institutions who lend money to a business require information that helps them determined whether loans
and interest will be paid when due
• The Suppliers: these are interested in information that enables them to determine whether amounts owing to them will be
paid when due.
• The Government and its agencies, these are interested in the allocation of resources and, therefore, the activities of
entities. They also require information in order to regulate the activities of entities, determine taxation policies and as the
basis for national income and similar statistics.
• The Public, Financial statements may assist the public by providing information about the trends and recent developments
in the prosperity of the entity and the range of its activities.
• Financial Analysts: Investment analysts are an important user group - specifically for companies quoted on a stock
exchange. They require very detailed financial and other information in order to analyse the competitive performance of a
business and its sector. Much of this is provided by the detailed accounting disclosures that are required by the London
Stock Exchange. However, additional accounting information is usually provided to analysts via formal company briefings
and interviews.
ACCOUNTING CONCEPTS/PRINCIPLES/ASSUMPTIONS
Accounting concepts also known as principles, conventions or postulates are basic ground rules which must be followed when financial accounts are
being prepared and presented. They are also referred to as assumptions or prepositions that underlie the preparation and presentation of financial reports.
The following are the common accounting concepts:
• Business Entity Concept
This convention seeks to ensure that private financial transactions and matters relating to the owner of a business is recorded and separated from
financial transactions that relate to the business. It should be noted that a business exists separate from its owner. A business owner usually owns
personal items as well as business items. The business’ financial records and reports should not be mixed with the owner’s personal records and reports.
For instance, a business owner may incur rent for his home and rent for the business. Only the rent related to the business should be recorded in the
business’ financial records while the home rent is recorded in the personal financial records. The business entity concept ensures that the amount
invested by the owners in the business is defined (capital) and allows a return on capital employed to be computed to show whether the investment is
worthwhile.
• Monetary measurement / unit of measurement concept
According to this concept, all transactions to be recorded must be quantified in monetary terms, since money is a common denominator for all
transactions e.g. cost, sales, the value of stocks, machinery, debts and investments. This is because a record of transactions is quantified and assessed in
a monetary unit. Thus it is assumed that the monetary unit is capable of acting as the common denominator of the values to the point of determining
exchangeable equivalents
• Going Concern/ continuity
This requires the accounting records to be maintained in such a way that the business is seen to continue in its foreseeable future. That is, the financial
reports are prepared with the expectation that a business will remain in operation indefinitely. This makes it possible for the accountant to prepare or
project estimates for a long period into the future.
• Periodicity and disclosure concept
This requires a company to prepare and disclose financial reports at the end of every accounting or financial year. This enables comparability, timely
performance measurement and tax computations. Of course, the impact of transactions is measured for a specific time period usually known as the
financial year. Thus, it is assumed that the continuous life time of the entity (see going concern assumption) can be broken down into specific time
periods. Then the results of operation for each time period can be measured. At the end of each period, a “static” picture of the resources and claims to
those resources is taken. This depicts the financial position of the entity at that specific point in the lifetime of the entity. In practice, this financial year
has come to be 12 months period and in Uganda, this principle has been enshrined in law (see companies’ Act of Uganda).
• Historical cost
This principle requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost. That is, the actual amount paid for
items bought is recorded. The actual amount paid for an item in a business transaction may be different from the value.
In the process of acquiring assets by an entity, such assets are valued and recorded in books of accounts at the cost at which they were acquired i.e. the price paid.
Thus, assets are entered in accounting records at their cost. This is generally called historical cost basically because it is always the valuation of a consummated
transaction. Limitation; during inflation, historical cost will not reflect the true value of the assets of the business.
• Realization concept
This concept requires that transactions are recognized and recorded at the point of sale or transfer of legal ownership – rather than just when cash actually changes
hands. For example a company that makes a sale to a customer can recognize that sale when the transaction is legal – at the point of contract. The actual payment due
from the customer may not arise until several weeks (or months) later – if the customer has been granted some credit terms.
• Materiality
This requires the recognition of only material items and excluding immaterial or trivial items. Information is material if its omission or misstatement could influence the
economic decisions of users taken on the basis of the financial reports. Financial statements should therefore show material items separately, but immaterial items
may be aggregated with amounts of a similar nature. For example buying furniture for shs 14,000,000/ represents an amount large enough to significantly affect the
amount of net income reported if recorded as an expense. Therefore, the furniture should be recorded as an asset and depreciated each year of its useful life.
• Consistency
According to this concept, transactions and valuation methods are treated the same way from year to year, or period to period. Business decisions are often made by
comparing current financial reports with previous financial reports. Users of accounts can therefore make more meaningful comparisons of financial performance from
year to year. Accounting information recorded and reported differently each accounting period makes comparisons from one accounting period to another impossible.
Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change.
• Prudence/ conservatism
This concept requires the profits are not recognized until a sale has been completed. In addition, a cautious vie should be taken for future problems and costs of the
business as soon as there is a reasonable chance that such costs will be incurred in the future i.e. provide for all possible losses, for example, provision for bad debts.
The concept can be summarized by the phrase ‘anticipate no profit and provide for all possible losses’. Further still, the concept tends to undervalue assets i.e.
whenever there are alternative methods of valuing an asset, an accountant should choose the one that leads to a lower value or profit and a higher liability. This stems
from the accountants’ fear that if they prepare the financial reports with too much optimism they may overstate profits and cause dividends to be paid out of capital if
these profits are not realized.
• Accrual concept
This requires the recognition of items at the occurrence of the transaction and not when cash is received or paid. For example, Income is recorded as
earned even though it might have not been received. The portion of income that has not been received is recorded as an asset (accrued income or
debtors). Expenses or costs should be recorded as incurred although cash may not have been paid. For example, if rent expenses paid by the year close
was shs 1,500,000/ and yet some electricity equivalent to shs 200,000/ was used but not paid for, the amount of rent expense be considered should be
shs. 1,700,000/ (i.e. 1,500,000/ + 200,000/). The unpaid shs. 200,000/ should be recorded as an accrued expense. It should be recorded as current
liability in the balance sheet.
• Matching
This concept requires that revenues from business activities and expenses associated with earning that revenue are recorded in the same accounting
period. Business activities for an accounting period are summarized in financial reports. To adequately report how a business performed during an
accounting period, all revenue earned as a result of business operations must be reported. Likewise all expenses incurred during the same accounting
period in producing the revenue must be reported. Matching expenses with revenue gives a true picture of business operations for an accounting period
• Substance over form
This states that transactions and other events should be recorded in accordance with financial and economic reality (substance) other than their legal
form. E.g. in a hire purchase, the buyer takes possession and use of the asset but does not become the legal owner until the last installment has been
paid. Though he is not the legal owner, he has to recognize this transaction in his books.
• Duality concept (dual aspect)
This is the basis of double entry book keeping and stems from the fact that every transaction has a double (dual) effect on the position of a business as
recorded in the accounts. For example when as asset is acquired, either another asset (cash) is reduced, or a liability (promise to pay) is acquired. At the
same time, when a business borrows money, a liability to the lender is created, and at the same time an asset (cash) is increased. It follows that the
assets of the business are equalled by claims on the business, either by creditors or owners for the funds they have invested in the business and which
have been translated into assets for use by the business. The balance sheet which summarizes assets and claims must therefore balance. The double
entry system is further explained in Topic three.
• Accrual basis
In order to meet their objectives, financial statements are prepared on the accrual basis of accounting. Under this basis, the
effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid)
and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.
Financial statements prepared on the accrual basis inform users not only of past transactions involving the payment and
receipt of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future.
Hence, they provide the type of information about past transactions and other events that is most useful to users in making
economic decisions.

END
THANK YOU
PREPARED BY Bruno Muramuzi