Investment & Financing

FINANCING

-Issue of shares ( shares certificate )

-Dividends

-Raising a long - term loan

-Finance charges and loan repayments

INVESTMENTS ( Fixed assets )

-Acquisition of PPE

-Disposal of PPE

-Depreciation and Net Asset Values

-Property - Title deed

-Equipment - Invoice

-Market value - registered in your name

Initiation: Authorisation

-Company policy and director's resolution ( minutes of director's meetings ) .

-Adhere to any limitations set out in the MOI .

-Any requirements in the Companies Act ( E.g. section 40 regarding the share price ) .

-Cash flow considerations , budget preparation and cash flow statements .

-Liquidity and solvency must be considered .

Transactions types: Investment Transactions

-Acquisition and disposal of tangible non - current assets & financial instrument investments

-Acquisition , internal generation and disposal of intangible assets

-Receipt and accrual of interest income and dividends received on investments

-Accounting for the use of and changes in value of tangible and intangible assets through :

1. Depreciation / amortisation

2. Revaluation / other fair value adjustments

3. Impairments and write - downs

4. Profits / losses on disposal

Transactions types: Financing Transactions

-Issue and repurchase of shares

-Receipt of loan funding ( and payment thereof ) Issue of debentures and subsequent repayments

-Handling of / accounting for the obligations that arise out of financing :

1. Dividends declared and paid

2. Finance charges accrued and paid ( on loans )

3. Finance charges and accounting adjustments in relation to debentures

Purpose of the transaction

-Ensure that an entity invests funds in non - current assets to commence and operate a business and generate working capital that ultimately provides profits for the entity ( direct or indirectly ) .

-Also invest funds in other investement assets to generate investment returns .

-Ensure that an entity obtains sufficient financing in order to be able to commence and operate a business .

Characteristics of the cycle

-Magnitude of transactions in this cycle are usual material on FS

-Frequency of transactions are usually lower than for other cycles

-Transactions not subject to routine IC

-Many transactions are subject to management assumptions and estimates and may involve complex calculations

-Since many transactions are done internally , often done without supporting external documentation

-Transactions are governed by statutory and governance requirements such as : Companies act 2007, Μemorandum of incorporation (MOI)

Functional Areas: Financing

-Issue of shares

-Payment of dividends

-Raising a long term loan

-Finance charges and loan repayment

Purpose Issue of shares

To obtain cashflows by allowing potential ( or current ) shareholders to purchase an interest in the company

Activity Issue of shares

-Approval of issue of additional shares by board of directors ( approval must be had by parent company and resolution be minuted )

-Above must be in accordance with S38 , $ 39 and s40 of companies act

-Shareholders agreement must be drawn up and entered into by new investors and the entity

-Investor pays for shares in terms of the agreement

-Share certificate issues

-Transaction recorded in accounting records

People Issue of shares

1. Board of directors

2. Company secretary

3. Accountant

Purpose Payment of dividends

To provide returns for shareholders for their investment in the company

Activity Payment of dividends

-Dividend is authorised by a resolution of BoD ( must comply with S46 Companies Act . )

-Must be minuted .

-Settlement of dividend takes place in accordance with decision of BoD

-Dividend recorded in accounting records

People Payment of dividends

1. Board of directors

2. Company secretary

3. Accountant

Purpose Raising a long term loan

To obtain cash flows from a bank or lender for funding purposes

Activity Raising a long term loan

-Directors decide on the best financial decision to acquire new PPE

-Obtain approval from board and reach agreement with lender on details of loan and repayments .

-Documented in a formal agreement .

-Signing of loan agreement , funds advanced and general ledger accounts updated to reflect transaction .

People Raising a long term loan

1. Board of directors ( specifically financial director )

2. Accountant

Purpose Finance charges and loan repayment

To account for finance charges and loan repayments in terms of agreement

Activity Finance charges and loan repayment

1. Interest calculated by lender and added to loan account . Statement sent to entity on a monthly basis ( reflect monthly interest charge )

2. Payment of interest takes place automatically

3. Accounting records updated monthly to reflect payment of interest

4. Repayments have to be made in terms of agreement . Take form in monthly amount , usually automatically paid .

5. Updates to accounts in general ledger are made

People Finance charges and loan repayment

1. Accountant

Functional areas: Investments

-Acquisition of PPE

-Disposal of PPE

-Accounting for use of assets and changes in asset values

Purpose Acquisition of PPE.

To invest funds in non - current assets to commence and operate the business & to generate working capital that provides for profits for the entity

Main activity Acquisition of PPE

-Gaining approval from BoD for significant transactions

-Conducting feasibility studies

-Acquisition process ensues- invoice by supplier is processed

-Acquisition requisition document is completed for less significant acquisitions

-All new PPE are recorded on the fixed asset register and GL

People Acquisition of PPE

1. BoD

2. Department . head / person requesting asset

3. Relevant accounting personnel

Main activity Disposal of PPE

-Significant transactions require approval by BoD and have to be within memorandum mandate of MOI

-Once BoD approves sale , asset is advertised for sale , buyer is identified , invoice for the sale price issued by the entity .

-Buyer settles the invoice and takes delivery of the asset

-Original cost and acc dep of asset must be removed from GL account after sale .

-Profit / loss must also be recorded .

People Disposal of PPE

1. BoD

2. Accountant

3. Relevant accounting personnel

Purpose Accounting for use of assets and changes in asset values

To account for the use of and changes in value of PPE over time

Main activity Accounting for use of assets and changes in asset values

-Depreciation os calculated according to useful life of the category of class of PPE

-Accordingly , entity staff estimate useful lives and residual values

-Recorded on fixed asset register and GL

-Qualified member of staff consider the impairment of assets annually

-If no one is suitably qualified -expert in the field may be appointed by BoD

People Accounting for use of assets and changes in asset values

1. BoD

2. Production managers / directors

3. Accountant

4. Other relevant accounting personnel

Documents and Records: Investment activities

-Ordering and acquisition of assets:

1. Capital Budget

2. ΜΟΙ

3. Minutes of the board meeting

3. Asset Requisition

4. Specific purchase agreements contracts

-Receipt and custody of assets:

1. Share certificate

2. Detailed Fixed Asset register

3. Master file amendment forms

4. Schedule Calculations

Documents and Records: Financing Activities

-Receipt of debt or equity funds:

1. Minutes of board meeting

2. MOI

3. Specific financing agreement / contract

-Holding of debt or equity funds:

1. Securities register

2. Master File amendment forms

3. Schedules of financing calculations

Risks Investing activities

-Fictitious or obsolete assets no longer used recorded in SFP

-Management manipulate asset values as IFRS estimates are subjective

-Inappropriate capitalisation of ( expense ) costs may occur

-Entity may record an asset it does not have rights to

-An asset may need to be impaired due to a loss in value owing to various internal and external factors ( necessary write - down may be recorded incorrectly )

-Accounting of complex financial instrument investments may be incorrect

-Misappropriation risk may arise because of theft of tangible assets and personal use of assets by management

Risks Financing Activities

-Failure to recognise financial liabilities at reporting date

-Understanding of value of loans / debentures at reporting date

-Accounting of complex liabilities incorrectly

-Failing to account for accruals in relation to financing expenses ( e.g. interest expense and dividends declared )

Validity risks - investments

-Invalid purchases or capitalisation of assets .

-Overstatement of assets due to fictitious purchases .

-Invalid development costs being capitalised

Validity risks - financing

-Unauthorised financing obtained .

-Overstatement of owner's equity and liabilities .

-Overstatement of expenditure due to invalid recording of finances .

Accuracy risks - investments

-Purchases or capitalisation of assets recorded inaccurately = overstatement .

-Incorrect recording of investment revenue and expenditure .

Accuracy risks - financing

-Inaccurate recording of equity and loan receipts or repayments

-Over or understatement of owners equity .

-Overstatement of expenditure due to invalid recording of finances

Completeness risks - investments

-Assets purchased are omitted from recording = understatement of assets .

-Incorrect recording of investment revenue and expenditure .

Completeness risks - financing

-Incomplete equity and loan receipts or invalid recording of loan repayments = understatement of equity .

-Incomplete recording of financing expenditure .

CONTROL OBJECTIVES FOR THE INITIAL RECEIPT OF THE LONG TERM LOAN

To ensure that :

-The long - term loan is appropriately authorised and is allowed in terms of the Companies Act

-The long - term loan relates to funds actually received by the business during the current period

-The long - term loan is accounted for at the correct amount in the financial records .

-The long - term loan is classified correctly in the accounting records .

-The long - term loan is accounted for timeously in the accounting records .

INTERNAL CONTROLS FOR THE LOAN FROM A BANK

-The approval must be given at a directors ' meeting and noted in the minutes of the meeting

-Before the decision is authorised , the following must be considered:

1. Statutory requirements such as the Companies Act

2. The company's policy and Memorandum of Incorporation

3. The estimated cash requirements of the company supported by cash flow estimations and budgets

4. Any other valid point

- Legal advice should be obtained to consider any legal implications for the company

-Contracts with all relevant terms and conditions must be signed by an authorised staff member of TGS ( one of the directors ) , as well as a representative from the party advancing the loan

Authorisation

-The approval by the board of directors of the specific property at the agreed price

-Control objective ( s ) : Validity

Independent review

-The general ledger was updated with the purchase by the financial accountant and this has been reviewed for accuracy and appropriateness by the financial manager

-Control objective ( s ) : Accuracy