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Financial Accounting and

Accounting Standards

Chapter
1

Chapter
1-1
Chapter 1 Learning Objectives
1. Identify the major financial statements and other means of
financial reporting.
2. Explain how accounting assists in the efficient use of scarce
resources.
3. Describe some of the challenges facing accounting.
4. List the objectives of financial reporting.
5. Explain the need for accounting standards.
6. Identify the major policy-setting bodies and their role in the
standard-setting process.
7. Explain the meaning of generally accepted accounting principles.
8. Describe the impact of user groups on the standard-setting
process.
9. Understand issues related to ethics and financial accounting.

Chapter
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Accounting Standards and Financial Reporting

Financial Statements
Parties Involved in Generally Accepted Issues in Financial
and Financial
Standard Setting Accounting Principles Reporting
Reporting

Accounting and Securities and Political Environment


Capital Allocation Exchange The Expectations
Commission (SC) Gap
Challenges
Malaysian International
Objectives Accounting Standard Accounting
The Need to Board (MASB) Standards
Develop Standards Malaysian Institute of Ethics
Certified Public
Accountant (MICPA)
Changing Role of the
MICPA

Chapter
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Characteristics of Accounting

Essential characteristics of accounting are:


• the identification, measurement, and
communication of financial information about
• economic entities to
• interested parties.
parties

Chapter
1-4 LO 1 Identify the major financial statements and other means of financial reporting..
Characteristics of Accounting
Economic Entity Financial Statements Additional Information

Financial Balance Sheet President’s letter


Information
Income Statement Prospectuses,
Accounting?
Statement of Cash SC Reporting
Identifies Flows
News releases
and Statement of
Forecasts
Measures Owners’ or
Stockholders’ Equity Environmental
and Reports
Note Disclosures
Communicates
Etc.

GAAP Not GAAP


Chapter
1-5 LO 1 Identify the major financial statements and other means of financial reporting..
Accounting and Capital Allocation

Resources are limited. Efficient use of resources often


determines whether a business thrives.
Illustration 1-1 Capital
Allocation Process

Financial
Users Capital Allocation
Reporting
Information to help Investors, creditors, The process of
users with capital and other users determining how and
allocation decisions. at what cost money
is allocated among
competing interests.

Chapter
1-6 LO 2 Explain how accounting assists in the efficient use of scare resources.
Challenges Facing Financial Accounting

Non-financial Measurements
Forward-looking Information
Soft Assets
Timeliness

Chapter
1-7 LO 3 Describe some of the challenges facing accounting.
Objectives of Financial Accounting

Financial reporting should provide information:


(a) that is useful to present and potential investors and
creditors and other users in making rational investment,
credit, and similar decisions.
(b) to help present and potential investors and creditors and
other users in assessing the amounts, timing, and
uncertainty of prospective cash receipts.
(c) about the economic resources of an enterprise, the claims
to those resources, and the effects of transactions,
events, and circumstances that change its resources and
claims to those resources.

Chapter
1-8 LO 4 List the objectives of financial reporting.
Need to Develop Standards

Various users Financial Statements


need financial Balance Sheet
Income Statement
information Statement of Stockholders’ Equity
Statement of Cash Flows
Note Disclosure

The accounting profession


has attempted to develop a Generally Accepted
set of standards that are
Accounting Principles
generally accepted and
universally practiced. (GAAP)

Chapter
1-9 LO 5 Explain the need for accounting standards.
Malaysian Financial Reporting Practices
Historical perspective
­ Companies Ordinances (and amendments) of 1940, 1946 and 1956  
   ~ regulates financial reporting.

­ Companies Act (1965) ~ reporting requirements, rules & 
   regulations on accounting were formally established.

­ Ninth Schedule ~ disclosure requirements

­ Malaysian Association of Certified Public Accountants (MACPA) – 
  1958 ~ regulates the practices of its members who carry the title of 
  certified public accountants.

­ 1967 ~ Malaysian Institute of Accountants (MIA) was established 
   ~ its regulations cover the practices of the whole accounting 
  profession in Malaysia.
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­ 1978­ MACPA became member of the International Accounting
 Standards Committee (IASC) ~ adopts the International Accounting
 
 Standards until 1997.
  
­1984 ~ first Malaysian Accounting Standard (MAS 1) on “Earnings 
Per Share” was issued.

­ 1987 ~ MIA began to issue standards

­ The process of adopting the IASs and MASs continued until 1997 
  when the Malaysian Accounting Standards Board (MASB) was 
  established.

Chapter
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Financial reporting regime in Malaysia

Key players in the Financial Reporting Process

(1) Accountant General’s Office

 Manages the nation’s accounting and financial aspects


 Functions:
 Managing the human resources and career
development for the accounting services in public
sector,
 Establishing accounting standards for the public sector,
 Providing consultancy services on accounting and
financial matters to public sector,
 Preparing monthly accounting financial information,
 Accounting for payments and receipts on a daily basis,
Chapter
1-12  Preparing Annual Public Accounts.
(2) Malaysian Institute of Accountants (MIA)

 Sets professional requirements for


accountants, conduct research and
published materials on many different
subjects related to accounting, auditing,
attestation and assurance services,
management consulting services and taxes.

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(3) Auditor’s General department

 Ensures that the accounting and reporting


standards prescribed by the Accountant
General’s Office are complied with by the
public sector.

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(4) The Companies Commission of Malaysia (CCM)

 Functions:
 Ensure that the provisions of the following Acts and
laws are administered, enforced, carried out and
complied with:
Companies Act 1965
Trust Companies Act 1949
Registration of Business Act 1956
Any subsidiary legislation made under the Acts
specified above.

 Enhance and promote the supply of business and


corporate information
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 Actingas agent of the Government and providing
services in collecting and enforcing payment of
prescribed fees

 Regulating
matters relating to corporations,
companies and businesses

 Encourage and promote proper conduct amongst


director, secretaries and other officers of a
corporation

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(5) Central Bank (Bank Negara Malaysia)

 Promoting economic growth, a high level of


employment, maintaining price stability and
a reasonable balance in the country’s
international payments position, eradicating
poverty and restructuring society.

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(6) Securities Commission (SC)

 Function:
 regulate all matters relating to the securities
industry.
 Emphasise on high standards of disclosure
and accounting standards by companies.

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(7) Malaysian Accounting Standard Board (MASB)

 Financial Reporting Foundation (FRF) and MASB were


established under the Financial Reporting Act 1997

 FRF’s functions:
 to provide views to MASB concerning the issuance,
review or
 development of accounting standards.
 To review the performance of the MASB
 responsible for the financing arrangements of the
MASB
 to perform other functions as prescribed by the
Minister of Finance
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 MASB’s functions:
 to issue new accounting standards

 to review, revise or adopt existing accounting


standards
 to issue statements of principles for financial
reporting
 to sponsor or undertake development of possible
accounting standards
 to conduct public consultation
 To develop a conceptual framework for the purpose
of evaluating
 proposed accounting standards
 To make changes to the form and content of
proposed accounting standards
- to perform other functions as prescribed by the
Minister of Finance
Chapter
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(8) The corporations – directors and
management

 Directors’ are responsible to ensure that the


accounts are in compliance to the approved
accounting standards (Sec 166A(A))

Chapter
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(9) Public Accounting Firms

 Perform many different services related to


accounting, auditing, attestation and
assurance services, management consulting
services and taxes.

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Statutory regulation on Financial Accounting and 
Reporting

(1) Financial Reporting Act 1997
­Deals with compliance with approved accounting standards

(2) Companies Act 1965
­Requires every companies to keep proper accounting and other 
 records to sufficiently explain the transactions and the financial 
 position of the company and to enable true and fair view of the 
 accounts.
­Must comply with the act Ninth Schedule concerning disclosure
 requirements.

Chapter
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(3) Income Tax Act 1967
­ Significant to financial accounting and reporting because taxation 
      is considered as business expense that must be reported in the 
      income statement.

(4) Guidelines of the Securities Commission (SC) 1995
­ In 1995 issued “Policies and guidelines on Issue/Offer of securities”

      (i) Corporate disclosure policy
           ­     Requires public company to maintain high standards of 
                 disclosure.
           ­     public listed companies (plc) must immediately release 
                 information which are expected to have material effect on 
                 market activity.

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     (ii) Post­listing obligations
          ­ Requires plc to submit:
   * Annual report within 14 days from the date of the annual
                  general meeting
               * Interim and periodic report to SC immediately figures are
                  available
               * related party transactions must be disclosed in the annual
                  report

    (iii) Accounting standards and valuation / revaluation of assets
              * public companies must comply with approved accounting
                 standards and GAAP
              * accountants’ reports must be prepared by qualified 
                 accountants
              * the information disclosed must be in accordance with the 
                 practices at least those required under the Companies Act  
                 1965 and the approved accounting standards
Chapter
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(5) KLSE Listing requirements
­Areas of financial accounting and reporting:

      (i) Submission of reports
* annual audited report 
~ must be issued to the shareholders within a period not 
                           exceeding 6 months from the close of the financial year

                        ~ must be submitted to the Exchange within a period
                          not exceeding 4 months from the close of the financial
                          year

~ must be in the form of consolidated financial 
                           statements

~ should be prepared in accordance to MASB and the 
                           Ninth Schedule 
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* Interim reporting
   ­ must comply with the Quarterly Reporting requirement.
~ submit to the Exchange a quarterly report  (Balance 
                           sheet, income statement and explanatory notes) in 
                           consolidated form not later than 2 months after the 
                           end of each quarter of the financial year.

~ the balance sheet must be as at the end of the current
                           quarter and a comparative balance sheet as of the 
                           end of the immediately preceding financial year;
                           income statement must cover the current quarter 
                           and cumulative for the current financial year to date
                           and comparative income statement for the 
                           comparable quarter (current and year to date) of the
                           immediately preceding financial year.

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  (ii) Additional disclosure
          * particulars of material contracts involving directors’
            interest
          * a statement setting out:
~ names of substantial shareholders and their interest
~ number of holders of each class of equity security
                           and its voting rights
~ a distribution schedule of each class of equity 
                           security setting out the number of holders and
                           percentage in the categories of less than 500.
~ the percentage of the total holding of the 20 largest
                          holders of each class of equity security.
~ the names of the 20 largest holders of each class of 
                           equity security and the number of equity security
                           of each class held.
          * Properties held (address, description, exiting use, tenure, 
             terms of lease etc.)
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(6) Bank Negara Malaysia (BNM)
     ­ Guidelines on financial reporting practices of financial 
       institutions are:
(i) BNM/GP 3 – streamlines the method of income recognition 
                and loan loss provision. Main provisions:
* where a loan is classified as non­performing loan, 
                           interest accrued should be suspended and credited to 
                           interest­in­suspense account;

* build up and maintain a general provision for bad 
                           debts and doubtful debts of at least 1% of total
                           outstanding loans, net of interest­in­suspense and 
                           specific provision for bad debts and doubtful debts; 
                           and

* a specific provision is required for doubtful or bad
                           loan account where there is a shortfall in security
Chapter
                           value over the amount of loan outstanding.  
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(ii) BNM /GP8
                  ­ standardise the format of financial reports for banks and
                    financial institutions.
                  ­ 3 specimen accounts: Model Bank Berhad, Model 
                    Merchant Bank Berhad and Model Finance Company 
                    Berhad have been prepared as guidance for standard 
                    practices on the basis of the following criteria:
* Classification of assets and liabilities;
* liquidity pf assets and liabilities;
* maturity analysis of assets and liabilities; and
* concentration of assets and liabilities. 

Chapter
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Accounting standards pronouncements in Malaysia

Pronouncements before the new financial reporting regime

 Before the establishment of the MASB; the MIA and


MACPA regulate the financial accounting and reporting
in Malaysia.

 Both bodies do not have power to enforce compliance


by companies.

 To ensure wider acceptance, the compliance were


professionally mandatory to members.

Chapter
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 The standards were comprises of :
 International
Accounting Standards
 Malaysian Accounting Standards

 Also issued technical bulletins and other


pronouncements that formed part of the
generally accepted accounting practices of
Malaysia.

Chapter
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 To ensure the widest compliance MIA and MACPA
through their respective Financial Statements
Review Committee conduct a regular reviews of
financial statements prepared and audited by their
members.

 These 2 bodies stop issuing the accounting


standards when the Financial Reporting Act was
gazetted in 1997, signaling the shift of the
Malaysian accounting standard setting process from
private sector accounting bodies to the public sector
statutory body.

Chapter
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Pronouncements under the New Financial Reporting Regime

Due process of the MASB

 Is a process by which the Board develops or adopts and


issues accounting standards.

 The accounting standards issued by the Board are


designated as MASB standards.

 The Board pursues a policy of harmonisation of MASB


standards so as to be compatible with the standards of
international and other national standard setters.

Chapter
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 In September 1998, the Board adopted 24 of the
extant IASs and MASs issued by the MIA and
MACPA, thus given these standards the status of
approved accounting standards.

 This status will continue to apply until each of the


standards is amended, rescinded or superseded by
a new MASB standard.

 The Board has commenced a project to adopt or


adapt the extant of IASc and MASs; and developing
new accounting standards.

Chapter
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 MASB also issued technical pronouncements which
includes Statements of Principles (SOP), Urgent Issues
Abstract (UIA), Technical Releases (TR) and Guidance
Notes (GN).

 Purpose of technical pronouncements: to provide


guidance on the application of GAAP to the resolution of
a particular accounting issue.

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Due process in the issuance of MASB standards

Stage 1: Identify topics for MASB standards either from


its own research, external sources or from
submission by regulatory authorities and other
interested parties.

Stage 2: Undertake investigation which involves


consultation and consideration of the relevant
conceptual issues, any pre-existing
pronouncements and practices both in
Malaysia and overseas, and the economic,
legal and practical implications of the
introduction of particular accounting
requirements.
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Stage 3: When the relevant issues have been
identified, a working group is appointed by
the MASB to debate the issue.

Stage 4: A draft document is prepared in the form of


either Draft Statement of Principles (DSOP)
or an Exposure Draft (ED). This is presented
to the MASB for review and next presented to
the FRF for comments.

Stage 5: When the issues involved require more


discussions and deliberations, a Discussion
Paper (DP) may be issued.

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Stage 6: The draft pronouncement is then
published to allow an opportunity for
interested parties to comment on the
proposal and for the MASB to gauge the
appropriateness and level of
acceptance of those proposals.

Stage 7: An exposure draft may be amended in


the light of feedback resulting from the
exposure period.

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Role of the profession in accounting standard setting

 The profession plays a significant role in the standard


setting by being involved in the activities of the MASB.

 MIA and other professional accountancy bodies provide


input to the MASB.

 The professional bodies and MIA continues to educate


members by providing interpretations and guidance on
the standards issued by the Board.

Chapter
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Generally Accepted Accounting Principles

Those principles that have substantial authoritative


support.

Chapter
1-41 LO 7 Explain the meaning of generally accepted accounting principles.
Issues in Financial Reporting

Standard Setting in a Political Environment


Accounting standards are as much a product of
political action as they are of careful logic or
empirical findings.

Chapter
1-42 LO 8 Describe the impact of user groups on the standard-setting process.
Standard Setting Illustration 1-5 User
Groups that Influence
Business Entities Accounting Standards

CAs and Financial


Accounting Firms Community

MICPA ) MASB Preparers

Academicians Government (SC,


IRS, other agencies)

Investing Public Industry


Associations
Accounting standards

Chapter
1-43 LO 8 Describe the impact of user groups on the standard-setting process.
Issues in Financial Reporting

Expectation Gap
What the public thinks accountants should do vs.
what accountants think they can do.

Difficult to close
Sarbanes-Oxley Act (2002)
Public Company Accounting Oversight Board
(PCAOB)

Chapter
1-44 LO 8 Describe the impact of user groups on the standard-setting process.
Issues in Financial Reporting

Ethics in the Environment of Financial Accounting


In accounting, we frequently encounter ethical
dilemmas.

GAAP does not always provide an answer


Doing the right thing is not always easy or obvious

Chapter
1-45 LO 9 Understand issues related to ethics and financial accounting.