2. Objectives
To familiarize with an overview of the Malaysian Companies Acts, Securities Industry Act, Malaysian Accounting Standards Board (MASB), International Accounting Standards (IAS).
To know why these standards arose and become mandatory or necessary, leading to the industry or market being regulated.
To introduce students to some examples of corporate collapse.
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3. Objectives To understand the concept of national differences
To understand the reasons for differences in financial reporting
To identify the classification of national accounting systems
To understand the attempts to reduce national differences
To know the work of international standard setters
To understand the US GAAP
To identify the reconciliation and supplementary statements.
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4. Companies Acts Section 14. Formation of companies.
COMPANIES ACT 1965 PART III - CONSTITUTION OF COMPANIES DIVISION 1 - INCORPORATION Section 14. Formation of companies. (1) Subject to this Act any two or more persons associated for any lawful purpose may by subscribing their names to a memorandum and complying with the requirements as to registration form an incorporated company. (2) A company may be –
(a) a company limited by shares; (b) a company limited by guarantee;
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5. Companies Acts
(c) a company limited both by shares and guarantee; or (d) an unlimited company.
Prohibition of unincorporated associations of more than twenty members for gain. (3) An association or partnership shall not be formed for the purpose of carrying on any business which has for its object the acquisition of gain by the association or partnership or the individual members thereof unless -
(a) it is an association or partnership formed for the purpose of carrying on any profession or calling which is declared by the Minister to be a profession or calling which is not customarily carried on by an association or partnership incorporated under this Act;
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6. Companies Acts [Am. Act A949: s.2]
(b) in the case of any other association or partnership, it consists of not more than twenty members;
[Am. Act A836: s.7]
(c) it is incorporated under this Act; or (d) it is formed in pursuance of some other written law or letters patent.
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7. International Accounting Standards
The globalization of the business world and the attendant structures and regulation which support it, as well as the development of e-commerce have all had a profound effect on business. Deregulation and increased competition are also bringing paradigm changes to the way in which the profession operates.
As markets converge and geographical borders no longer present the same trade barriers increasingly there is a need for globally accepted accounting standards. Business needs them, investors are demanding them and accountants are under an obligation to ensure delivery.
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8. International Accounting Standards
High standards of financial reporting, auditing and ethics underpin the trust investors place in financial and non financial information. At present, all countries of the world except for the United States and Canada accept International Accounting Standards (IAS) for reporting relating to cross-border listings without recourse to national accounting standards, at least to some extent. Several countries have adopted IAS instead of national standards for local use and many others use IAS as a basis for decisions on national standards.
The decision in May 2000, by the International Organisation of Securities Commissions (IOSCA) to endorse IAS for use in connection with cross-border listings was a major step forward. The proposal by the European Commission to require all listed companies in the European Union to report in accordance with IAS by 2005 was greeted as a landmark for international harmonisation.
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9. International Accounting Standards
Whilst individual professional bodies such as the Institute may regulate their members on a proactive basis, individual action is not enough. The picture needs to broaden dramatically.
Most vital are initiatives that spread good practice to countries considering adopting IAS, in particular by highlighting the benefits that a reputation for rigorous financial processes will bring to their economies. To this end we are working with organisations such as the International Federation of Accountants, the Forum of European Securities Commissions*, The Financial Stability Forum, IOSCO, the International Monetary Fund and the Basel Committee of Bank Supervisors.
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10. International Accounting Standards
Our aim is to encourage the adoption of international standards for accounting and auditing, underpinned by principles of transparency, objectivity and good governance, and backed with robust enforcement. All vital objectives for the wealth of nations and the successful integration of economies.
*A new Committee of European Securities Regulators, is to be known as CESR (The Committee of European Securities Regulators), is to be established by the European Commission. Its role will be to advise the EC on securities policy issues including the issue of guidelines, recommendations and standards for implementation in EU member states on a voluntary basis. CESR will formally replace FESCO once the necessary constitutional changes have worked there way through the EU administration.
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11. Character of national legal system
Legal system based on common law
Importance of equity
Legal system based on Roman Law
Importance of codification.
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12. Ways in which industry is financed
Different reliance on equity funding
Figure 1.1 Domestic equity market capitalisation/gross domestic product
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13. Ways in which industry is financed (contd.)
Different information needs
Equity investors
Objective information for stewardship
Fair information for investment decision making
Reliance on external information
Loan creditors
Banks principal lenders and shareholders
Access to internal information
Published disclosures less relevant.
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14. Relationship of the tax and reporting systems
Reporting and tax separate
Separate rules for computing profit for tax
Financial reporting less prescriptive
Primacy to taxation rules
Allowance only if in the financial accounts
Possible misinterpretation when comparing different countries
Example: treatment of depreciation.
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15. Influence and status of the accounting profession
If market-sensitive information has been required
Reliable and relevant information required
Growth of established profession and audit function
Impact on accounting regulation.
Where there has been less need for market-sensitive information
Less need for expertise
Less need for financial management.
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16. Accounting theory Theory has impacted on practice.
Theory has been developed by the profession as with the Netherlands influence on current cost inflation accounting.
Theory has been developed by academics as in the UK with the influence on current purchasing power.
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17. Accidents of history Effect of commercial scandals Pooling resources
In US led to SEC being set up
In UK led to publishing accounting standards
Financial reporting less prescriptive
Pooling resources
External pressures
Joining EU and becoming subject to directives imposed.
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18. Two approaches to reduce national differences
Standardisation approach
Rules to account for similar items in all countries
Harmonisation approach
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19. Two approaches to reduce national differences
Harmonisation approach
Provides a common framework
Allows for some different national approaches
Benefit from reducing national differences
Reduces training costs for profession
Permits greater comparability.
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20. International bodies Standardising and Harmonising
IASC
IASs
IFRSs
European Union
Directives
Adopting IASs
IOSCO
Core standards
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21. Current convergence and improvement projects
In 2001 the IASB announced a project to improve twelve IASB standards.
The objective of project was to
improve the quality of financial reporting under IASs by converging on best practice around the world
reduce choice in the application of the standards.
The date for compliance with IASs by EU listed companies is 2005.
The IASB issued fifteen improved standards in December 2003 as a result of this project.
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22. Current convergence and improvement projects (contd.)
Convergence is a two-way process.
IASB was making changes to bring its standards in line with global best practice.
national standard setters aligning their standards with IASs e.g. in the UK, the ASB’s FREDs 24 to 30 were part of its ‘convergence project’.
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23. IASs/IFRSs and UK accounting standards compared
Relevant UK standard(s)
Effect of any substantial differences
IFRS 1 First-time adoption of International Financial Reporting Standards
No equivalent standard
IFRS 2 Share-based payment
FRS 20 Share-based payment
FRS 20 issued in April (apart from the exemption for entities applying the FRSSE) implements IFRS 2
IFRS 3 Business combinations
FRS 6 Acquisitions and mergers
Merger accounting is not permitted under IFRS 3
IFRS 4 Insurance contracts
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24. IASs/IFRSs and UK accounting standards compared (contd.)
Relevant UK standard(s)
Effect of any substantial differences
IFRS 5 Non-current assets held for sale and discontinued operations
FRS 3 Reporting financial performance
An operation becomes 'discontinued' when it meets the criteria for being 'held for resale' (FRS 3 has more stringent criteria).
IFRS 5 prohibits retroactive classification of an operation as discontinuing.
FRED 32 will be issued as a UK standard to replace parts of FRS 3 and introduce new requirements for non-current assets held for disposal.
IFRS 6 Exploration for and evaluation of mineral resources
No equivalent standard
IAS 1 Presentation of financial statements
FRS 18 Accounting policies
Under IAS 1, the statement of total recognised gains and losses can be presented as a separate statement (like the UK STRGL) or as part of the statement of changes in equity.
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25. IASs/IFRSs and UK accounting standards compared (contd.)
Relevant UK standard(s)
Effect of any substantial differences
IAS 2 Inventories
SSAP 9 Stocks and long-term contracts
IAS 7 Cash Flow Statements
FRS 1 Cash flow statements
Under IAS 7, the statement must report change in cash and cash equivalents (rather than cash, as in FRS 1).
IAS 8 Accounting policies, changes in accounting estimates and errors
FRS 18 Accounting policies
FRS 3 Reporting financial performance
Under IAS 8, all material errors must be adjusted for (FRS 3 only requires restatement for fundamental errors).
IAS 10 Events after the balance sheet date
FRS 21 Accounting for post balance sheet events
FRS 21 issued in May 2004 (apart from the exemption for entities applying the FRSSE) implements IAS 10.
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26. IASs/IFRSs and UK accounting standards compared (contd.)
Relevant UK standard(s)
Effect of any substantial differences
IAS 11 Construction contracts
SSAP 9 Stocks and
long-term contracts
IAS 12 Income taxes
FRS 16 Current tax
FRS 19 Deferred tax
Under IAS 12, deferred tax must be recognised on all liabilities, including gains on revaluation (not required under FRS 19).
IAS 14 Segment reporting
SSAP 25 Segmental reporting
IAS 14 additionally (to SSAP 25) requires separate identification of segments with different risks, returns or expectations.
IAS 16 Property, plant and equipment
FRS 15 Tangible fixed assets
Under IAS 16, fair values must be used where one asset is obtained in exchange for another. The depreciation charge for each year has to reflect any increase in assets’ residual value ascertained at the balance sheet date. (Under FRS 15 increases in residual value are generally reflected in profits on disposal in the final year of the assets’ lives rather than in reduced depreciation.)
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27. IASs/IFRSs and UK accounting standards compared (contd.)
Relevant UK standard(s)
Effect of any substantial differences
IAS 17 Leases
SSAP 21 Accounting for leases and hire purchase contracts
Under IAS 17, leases of land and buildings are split into one operating lease for the land and another lease (finance or operating, depending on the terms) for the buildings. (Under SSAP 21 long-term property leases are generally treated as operating leases.)
IAS 17 requires disclosure of total minimum lease payments (rather than SSAP 21’s requirements of commitments within one year).
IAS 18 Revenue
SSAP 9 Stocks and long-term contracts
IAS 19 Employee benefits
FRS 17 Retirement benefits
Some differences in detail of measurement approach.
‘Corridor’ approach to recognising actuarial gains and losses in IAS 19 means that recognition may be deferred.
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28. IASs/IFRSs and UK accounting standards compared (contd.)
Relevant UK standard(s)
Effect of any substantial differences
IAS 20 Accounting for government grants and disclosure of government assistance
SSAP 4 Accounting for government grants
IAS 21 The effects of changes in foreign exchange rates
FRS 23 The effects of changes in foreign exchange rates
FRS 23 issued in December 2004 implements IAS 21.
IAS 23 Borrowing costs
FRS 15 Tangible fixed assets
IAS 24 Related party disclosures
FRS 8 Related party disclosures
Related party transactions must be disclosed by type of related party, but names do not have to be given under IAS 24. There is no exemption equivalent to that in FRS 8 for intra-group transactions with 90% subsidiaries whose accounts are publicly available.
IAS 26 Accounting and reporting by retirement benefit plans
SORP Financial reports of pension schemes
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29. IASs/IFRSs and UK accounting standards compared (contd.)
Relevant UK standard(s)
Effect of any substantial differences
IAS 27 Consolidated and separate financial statements
FRS 2 Accounting for subsidiary undertakings
Profits should be recognised in the P&L.
IAS 28 Investments in associates
FRS 9 Associates and joint ventures
IAS 28 requires a parent to recognise only the obligations or payments made on behalf of a loss making associate. This is a stricter definition of when liabilities should be recognised than under FRS 9.
IAS 29 Financial reporting in hyperinflationary economies
FRS 24 Financial reporting in hyperinflationary economies
FRS 24 issued in December 2004 implements IAS 29.
IAS 30 Disclosures in the financial statements of banks and similar financial institutions
FRS 13 Derivatives and other financial instruments: Disclosures
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30. IASs/IFRSs and UK accounting standards compared (contd.)
Relevant UK standard(s)
Effect of any substantial differences
IAS 31 Interests in joint ventures
FRS 9 Associates and joint ventures
Proportionate consolidation of joint ventures (prohibited by FRS 9) is the benchmark treatment under IAS 31.
IAS 32 Financial instruments: Disclosure and Presentation
FRS 25 Financial Instruments: Disclosure and Presentation
FRS 25 also has the effect of withdrawing FRS 4 ‘Capital Instruments’, except for material on the measurement of debt and gains and losses on the repurchase of debt. This material is withdrawn for entities applying the measurement requirements in FRS 26, but remains applicable for other entities.
IAS 33 Earnings per share
FRS 22 Earnings per share
FRS 22 issued in December 2004 implements IAS 33.
IAS 34 Interim financial reporting
ASB statement on interim financial reporting
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31. IASs/IFRSs and UK accounting standards compared (contd.)
Relevant UK standard(s)
Effect of any substantial differences
IAS 36 Impairment of assets
FRS 11 Impairment of fixed assets and goodwill
IAS 37 Provisions, contingent liabilities and contingent assets
FRS 12 Provisions, contingent liabilities and contingent assets
Definitions in IAS 37 are more strictly associated with definite legal obligations.
IAS 38 Intangible assets
FRS 10 Goodwill and intangible assets
SSAP 13 Accounting for research and development
Under IAS 38, goodwill can stay on the balance sheet indefinitely (subject to impairment reviews) whereas FRS 10 has a rebuttable presumption of a maximum life of 20 years.
Rules for capitalising research and development expenditure differ – more will be capitalised under IAS 38.
IAS 39 Financial instruments: recognition and measurement
FRS 26 Financial Instruments: Measurement
FRS 26 issued in December 2004  implements the measurement and hedge accounting requirements of IAS 39.
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32. IASs/IFRSs and UK accounting standards compared (contd.)
Relevant UK standard(s)
Effect of any substantial differences
IAS 40 Investment property
SSAP 19 Accounting for investment properties
Under IAS 40, companies can choose between depreciated cost and fair value (with gains or losses going through the income statement). In contrast, SSAP 19 requires market value with gains and losses going through STRGL.
Leased investment properties on leases can be accounted for as investment properties under IAS 40 and the present value of the minimum lease payments is recognised as a separate liability at the start of the lease.
IAS 41 Agriculture
No equivalent standard
Financial reporting standard for smaller entities (FRSSE)
Companies claiming compliance with IFRS must follow all standards in full, regardless of their size.
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33. Economic consequences of accounting differences
Results under different national rules can paint very different pictures.
IOSCO
Core standards.
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34. Results under different rules
Rover results under UK and German rules
Rover results using UK rules Rover results using German rules
£m £m
unpublished
1995 (51) (163)
1996 (100) (109)
(91)
1998 (571) (620)
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35. Dangers of making assumptions under different rules
Daimler Benz results under US and German rules
Daimler Benz results using
US rules
DM m
Daimler Benz results using
German rules
DM m
1990 1,
1991 1,942 1,886
1992 1,451 1,350
1993 1,615 (1,839)
1994 1,895 1,052
1995 (5,734) (5,729)
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36. Dangers of making assumptions under different rules (contd.)
Daimler Benz results under US and German rules
In the year of listing (1993) there was a large difference. This created the impression that US and German accounting principles were very different and US rules were more prudent.
In reality 1993 was atypical and most of the differences could be attributed to permitted treatments of provisions, which vary between the two countries.
However, the financial markets did not understand and responded to the information available at the time.
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37. US GAAP The USA has the largest economy in the world.
It is an attractive source of capital for foreign companies.
There has been apparent competition for international supremacy between US GAAP and IASs.
So it is appropriate to consider the US regulatory environment.
UK and the USA systems of financial reporting have much in common but
there are more rules in the USA than in the UK
resulted in greater standardisation and disclosure of information.
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38. US GAAP (contd.) Legislation
No direct equivalent of the UK Companies Acts in the USA.
The main federal regulation of trade in shares comprises the Securities Act 1933 and the Securities Exchange Act Neither of these includes any detailed provisions for the form and content of financial statements.
The Securities and Exchange Commission (SEC) is responsible for requiring the publication of financial information for the benefit of shareholders.
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39. US GAAP – the SEC
The SEC has the power to dictate the form and content of reports.
The largest companies whose shares are listed must register with the SEC and comply with its regulations.
The SEC monitors financial reports filed in great detail.
The majority of companies fall outside of the SEC’s jurisdiction.
Individual states have the power to introduce their own legislation to control businesses and even set taxes.
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40. US GAAP – Standard setting
FASB
The Financial Accounting Standards Board (FASB) is responsible for setting accounting standards in the USA.
Its independence is ensured by limiting the voluntary contributions to its funding from the various public accounting firms, industry and other interested parties.
FASB issues the following documents:
Statements of Financial Accounting Standards, which deal with specific issues
Statements of Concepts, which give general information
Interpretations, which clarify existing standards
Emerging Issues Task Force.
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41. US GAAP – other mandatory pronouncements
The APB
The Accounting Principles Board (APB) publishes Opinions.
The AICPA
The American Institute of Certified Public Accountants (AICPA) publishes Accounting Practice Bulletins and Opinions.
APB and AICPA pronouncements should all be regarded as mandatory.
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42. US GAAP - What if no Bulletins or Opinions?
Refer to the
FASB Technical Bulletins
AICPA Industry Audit and Accounting Guidelines cleared by FASB
AICPA Statements of Position.
Other AICPA interpretations and implementation guidelines published by FASB staff may also be relevant.
Finally, companies should refer to practices that are widely recognised and prevalent, either generally or in the industry.
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43. Supplementary statements
Figure 1.5 Examples of multiple reporting
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44. Review questions
1 How does the local national regulatory framework for financial reporting in the UK differ from that in the USA?
Which is better for particular interest groups and why?
2 ‘Standardisation is the only way forward for European financial reporting.’ Discuss this statement in the light of efforts that have already been made in the harmonisation of company law and the requirement for listed companies to follow IASs.
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45. Review questions (contd.)
3 Suggest criteria that could be used to classify systems of financial reporting employed in different countries. What difficulties are there in performing an exercise of this nature?
4 Consider the role of scandal in the development of accounting regulation.
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46. Review questions
5 The current differences between IASs and US GAAP are extensive and the recent pairing of the US Financial Accounting Standards Board and IASB to align IAS and US GAAP will probably result in IAS moving further from current UK GAAP.
Discuss the implication of this on any choice that non-listed UK companies might make regarding complying with IASs rather than UK GAAP after 2005.
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47. The End
End of Topic 1
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