Accounting Framework and Financial Accounting and Reporting in Malaysia LECTURE 1

1. Accounting Framework and Financial Accounting and Reporting in MalaysiaLECTURE 1 ISSUES • Accounting Techniques to measure Economic Activities • Evolution of Accounting influenced by Economic, Structure and Legal Systems – RESULT IN Different Regulations and Practices – Government, Accounting Bodies, Government Regulatory Activities Involvement in the Financial Standards Setting Process MALAYSIA • The Companies Act 1965 requires ALL REGISTERED COMPANIES to submit to Companies Commission of Malaysia annual audited financial statements prepared in accordance with approved accounting standards • Changes in Reporting Environment and Good Governance – More demand for ENTERPRISES to increase volume of disclosure, voluntary disclosures are highly encouraged. MORE IMPORTANTLY to present High-Quality of Financial Information

2. Financial Reporting Dev in Msia • Earlier up to 1970s – Companies Act 1965 • Main reference for Reporting framework • Specifically Sch. 9 – Specific Disclosure of Financial Information • But, it did not provide format and contents for Fin Stat • 1979 – Malaysia represented in IASC(Now IASB) - Adopted most of IASs • 1980s - MIA & MACPA (Now MICPA) – Collaborated to issue New Standards to meet local requirements • Following, MASs were produced for areas not addressed by IASC; E.g MAS 1 on Earnings Per Share or Standards on Specific Industries - Aquaculture , Insurance.

3. Continue…Fin. Reportg Development • 1997- Financial Reporting Act gazetted - 2 important independent bodies formed (a) Financial Reporting Foundation (FRF) *Govern operating policies of MASB (b) Malaysia Accounting Standard Board (MASB) *Issue New Standards *Adopt IASs as extant standards *Review, revise or adopt present actg stdrs *Issue Statement of Principles, *Develop Conceptual Framework

4. Continue… MASB roles • Initially, standards Issued referred as MASB Standards 1 • Issues interpretations bulletins to highlight differences in IAS, Technical Release, Statement of Principles, Urgent Issue Abstracts and Guidance Notes – Guidance on addressing spec. actg issues not covered by accounting standards • 2004: ED Proposed Improvements to MASB Standards • Reviewed 13 Existing Standards to match with respective IASs • 2005: All Standards issued by MASB *IASs Refer as FRS and renumbered, e.g. MASB 101 *New standards issued by IASB, IFRS 1, 2, 3 were numbered FRS 1,2,3 *Local standards adopted by MASB renumbered to MASB 201, 202… • 2006: All public companies must comply with FRSs

5. Reporting of Financial Info. • Malaysia companies MUST comply with the requirements of: • Companies Act 1965 • Other Regulatory Authorities • Bank Negara • Securities Commission • Inland Revenue Board • Companies Commission of Malaysia • However, they mostly address specific issues and industries activities • GAAP (i.e. IAS + MASs/MASB) • Main references for preparation and presentation of information for financial reporting financial purposes, Reporting enterprises must comply, TO FURTHER REFER OTHER STATEMENTS AND/OR PRONOUNCEMENTS when no accounting standards exist on respect aspects.

6. Continue…. • Companies and Other Entities subjected to Income Tax, Income Tax Act 1967 – E.g: Determination or Recognition of Income or Loss, Provision for Deferred Taxation, Franking of Dividends (Double Taxation of Dividends) • SECURITIES COMMISSION: *Oversee Public Companies activities, Specifically on areas: • Corporate Disclosure Policy. E.g: Level of Disclosure required for companies • Post Listing Obligations. E.g. For Co. to submit reports, Annual reports, Interim Reports, Related Party Transactions • Accounting Standards and Valuation of Assets – E.g Min compliance to Accounting standards and other statutory requirements

7. Continue…. • BURSA MALAYSIA • Responsible for the Listing Requirements (i.e. Disclosure, Compliance, Penalty) of Public Listed Companies • Financial Reporting – Submission of Required Reports and Add. Disclosures • BANK NEGARA • Issued guidelines on Financial Reporting for Banks and Financial Institution • Non-performing loans and interests, Preparation and Presentation of • Financial statements for bank • IASB – Late 1990s, IASB replaced IASC functions, setting of IASs • Seeks to harmonise regulations and accounting standards and procedures • Preparation and Presentation of General purpose financial statements EXCLUDING issues concerning local reporting issues

8. Private Entities • Smaller co costly to comply to req. actg stds • Hence exempted from applying FRS, apply PERS from July 2007 • Earlier, private entities were allowed to keep to the ‘unimproved standards’ – Old MASB, enforced in 2005 • Incorporated under Co Acts 1965, such that (i) x need to lodge a/c to Bank Negara, Securities Com, (ii) Not sub, Assoc., Jointly controlled by entity req to submit a/c to regulatory authorities

9. Continue….. • Co Act 1965- Private Co. – With S/K+ Incorp+ MOA (a) Restricts the right to transfer its shares (b) Members ≤ 50 ( joint holders as 1, x include person in N of the co. or its subsidiaries or previous Nyee of the co or its sub was and thereafter continued to be member of the co) (c) Prohibits public from subscribing any shares or debentures of the co (d) Prohibits public to deposit money with the co for fixed periods or payable at call, bearing or not bearing interest • Private Co – X required to apply the FRS in 2005 - ED (MASB 52) Private Entity Reporting Standards issued in 2006, effective July 2007. - PERS > simplified + cover ltd area than FRS, > cost effective, Meet obj of meeting needs of Priv. Ent. - Maintain status throughout annual/interim report - PERS X applic. for entities a/c to PUBLIC (Charities, Other social and publicly acc. entities to apply FULL SET of FRS); Partnership and Sole-Proprietor may apply them as best pract. of fin reportg - May comply with FRS, THAT IS to abide by ALL the FRS; If chosen to follow selected FRS, x revert to respective PERS

10. Continue…. • FRS 1 First Time Adoption of FRS for Private co. just becoming Public Co. • Before July 2007, Co may be classified as Exempt Enterprise, under SOP 1, when: (a) Enterprise x public accountability (b) At bal. sheet date, all owners members of enterp. governing body (c) Enterprise x large Enterprise considered large: (a) Annual gross rev. of RM1o Mil (b) Gross Assets RM5 Mil at the end of fin yr (c) Average 50 Nyees From JULY 2007, companies with public accountability must apply FRS, Private Entities to apply either PERS or FRS What are the importance knowing the difference between Public and Private Entities ?

11. International Perspective • BIG MULTINATIONAL COs: - Operations worldwide. E.g. ? - Need to comply actg stds of those countries, to raiset finance need to prepare f/s to follow local GAAP International Accounting Standard Board - Previously IASC issued standards, IAS, guidance by Standing Interpretation Com (SIC) - Most countries adopt its standards - 2001 constitution of IASC was changed,

12. IASC Foundation IASB Standards Advisory Council (SAC) International Financial Reporting Interpretation Committee IFRIC Continue… OBJECTIVES of IASC under new constitutions: • For public interest, to dev. set of high quality, understandability and enforceable global actg. stds. such that they provide transparency and comparability of info in f/s & similar reports, assist user making econ. decisions • Promote use and rigorous application of the stds • Converge Nat.Actg Stds and IAS and IFRS to high-quality solutn. New Structure:

13. Continue…. • IASC Foundation – In USA, Activities directed by 19 Trustees whom appoint IASB, SAC, IFRIC members, diverse locations, functl bkground, 6 from North America, 6 Europe, 4 Asia Pacific, 3 other places. • IASB – Solely responsible develop + issue New Internat Stds – The IFRS, 14 members of technical expertise, 8 out of 14 must approve b4 a standard, ED or final IFRIC can be published • IFRS – IFRIC, IASs, SIC Interpretations remain in force unless amended or withdrawn; 2004 5 IFRS, IFRS 3 replaced IAS 22 Business Comb • SAC – Advices IASB topics to focus, implications proposed standards to users and preparers. • IFRIC – Committee of IASB, Assists IASB establishg + improving finl & reportg stds users, preparers and auditors of f/s. Provide guidance the IFRIC to users if (i) New problems arise (ii) Existing stds x satisfactorily interpreted.

14. CONCEPTUAL FRAMEWORK • Guide to basic req. for practices and principles to apply in recording transactions and events, ultimately preparing and presenting finl. stat. • Gov, regulatory authorities, accountancy bodies regulate reporting req of enterp to ensure f/s ‘true and fair’ + comparable • Actg stds were established • Framework for the Preparation and Presentation of Finl Stats - Concepts underlyg prepare + present of f/s to ext. users - Not MASB appr actg std. Hence x define + x override them - Purposes: (a) Assist MASB + future MASB dev of stds (b) Assist Nat std setting bodies dev stds (c) Assist preparers in applyg stds + related issue (d) Assist auditors forming opinions on f/s (e) Assist users evaluate info in f/s (f) Meeting needs of prospective users

15. Continue …Scope of Framework • Obj of f/s including CFS - Prepared and presented min annually for wide range users, com info for many users relyg f/s as major source of finl info. [ X include special purpose finl reports, ie prospectus, tax computation, can be ref] • Qualitative Characteristics – Det Usefulness of Info in F/S • Elements of F/s – Def., Recog, Measurement • Concepts of Capital & Capital Maintenance Complete set of F/s (i) Bal. Sheet (ii) P&L (iii) C/Flow (iv) Stat of Eq Change (v) Notes & Sup {Info used by mgt about fin position, perform.Changes in Fin Post. of the Entity} (Exclude Di Reports, Chair Stat, Mgt Disc and Analysis and similar items) • Requirement for Commercial, Industrial and Business Entities + for a/c to sub SC, Bank Negara, CCM. • Para 9(a) –(g) identified 7 type of f/s users: INVESTORS key users as provider of risk cap, meet their need meet most others need?

16. Who prepare F/S? • Mgt primary responsibility , has the ability to determine the form and content of such additional info to suit it bus plans, strategy, decmkg? COMMENTS? mgt OBJ OF F/S (a) Provide Info (i) Fin Position (ii) Fin Perform (iii) Changes in (i) for wide range user to make econ. Dec. (b) Largely portray fin effects past events and x necess. Provide non-fin info (c) Show stewardship & accountability of mgt deployment of resources, user evaluate hold/sell invest, to reappoint/ replace mgt. Financial position, performance and Changes (d) User evaluate ability to gen cash & cash equivalents, timing and certainty of generation; To meet obligations, For this purpose need to assess components of f/s (e) Make prediction capability cash gen, financial structure – liquidity (net cash avai in near future after meeting fin commit) & solvency (ava of cash over longer term to meet obligations)

17. Continue……. • Profitability – to assess potential changes in eco resources • Performance – Forming judgments effectiveness employing add resources; Income Stat • Changes Fin Info – Assess financing, investg, operatg reporting period, Funds comprise, all fin resource, workg cap, liq assets (FRAMEWORK x define Funds); Sep f/s • Fin Info – Bal Sheet • Components of F/s have to be evaluated as a whole (Para 20) Notes, Supplementary & Other Schedules • Add Info relevant about items in b/s or P&L • Disclose risks + uncertainties , resources and oblig. not recog in bal sheet (i.e. method of discount valuation) • Info geographical and industry segments and implications of pr. fluctn.

18. Take Home Notes • Financial Reporting Environment in Malaysia • Regulatory Authorities, Malaysia. • Standard Setters, Malaysia International • Conceptual Framework • Users of Financial Statements • Prepare + Presentation of F/S – Disclosures • Components of Financial Statements