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Financial Reporting TOPIC 1 Suhaimi Bin Ismail Faculty of Business Management and Globalization Tel : 603 8317 8833 (Ext 8408)

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Presentation on theme: "Financial Reporting TOPIC 1 Suhaimi Bin Ismail Faculty of Business Management and Globalization Tel : 603 8317 8833 (Ext 8408)"— Presentation transcript:


2 Financial Reporting TOPIC 1 Suhaimi Bin Ismail Faculty of Business Management and Globalization Tel : (Ext 8408) BACCT2102 Corporate Reporting

3 BACCT2102Corporate Reporting2 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.

4 BACCT2102Corporate Reporting3 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. Objectives

5 BACCT2102Corporate Reporting4 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;

6 BACCT2102Corporate Reporting5 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;

7 BACCT2102Corporate Reporting6 Companies Acts [Am. Act A949: s.2][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][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.

8 BACCT2102Corporate Reporting7 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.

9 BACCT2102Corporate Reporting8 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.

10 BACCT2102Corporate Reporting9 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.

11 BACCT2102Corporate Reporting10 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.

12 BACCT2102Corporate Reporting11 Character of national legal system Legal system based on common law –Importance of equity Legal system based on Roman Law –Importance of codification.

13 BACCT2102Corporate Reporting12 Ways in which industry is financed Different reliance on equity funding Figure 1.1 Domestic equity market capitalisation/gross domestic product

14 BACCT2102Corporate Reporting13 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. Ways in which industry is financed (contd.)

15 BACCT2102Corporate Reporting14 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.

16 BACCT2102Corporate Reporting15 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.

17 BACCT2102Corporate Reporting16 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.

18 BACCT2102Corporate Reporting17 Accidents of history Effect of commercial scandals –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.

19 BACCT2102Corporate Reporting18 Two approaches to reduce national differences Standardisation approach –Rules to account for similar items in all countries Harmonisation approach

20 BACCT2102Corporate Reporting19 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. Two approaches to reduce national differences

21 BACCT2102Corporate Reporting20 International bodies Standardising and Harmonising IASC –IASs –IFRSs European Union –Directives –Adopting IASs IOSCO –Core standards

22 BACCT2102Corporate Reporting21 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 The IASB issued fifteen improved standards in December 2003 as a result of this project.

23 BACCT2102Corporate Reporting22 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 ASBs FREDs 24 to 30 were part of its convergence project. Current convergence and improvement projects (contd.)

24 BACCT2102Corporate Reporting23 IASs/IFRSs and UK accounting standards compared IASRelevant 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 2004 (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 No equivalent standard

25 BACCT2102Corporate Reporting24 IASs/IFRSs and UK accounting standards compared (contd.) IASRelevant 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.

26 BACCT2102Corporate Reporting25 IASRelevant UK standard(s)Effect of any substantial differences IAS 2 InventoriesSSAP 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. IASs/IFRSs and UK accounting standards compared (contd.)

27 BACCT2102Corporate Reporting26 IASRelevant UK standard(s)Effect of any substantial differences IAS 11 Construction contracts SSAP 9 Stocks and long-term contracts IAS 12 Income taxesFRS 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.) IASs/IFRSs and UK accounting standards compared (contd.)

28 BACCT2102Corporate Reporting27 IASRelevant UK standard(s)Effect of any substantial differences IAS 17 LeasesSSAP 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 21s requirements of commitments within one year). IAS 18 RevenueSSAP 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. IASs/IFRSs and UK accounting standards compared (contd.)

29 BACCT2102Corporate Reporting28 IASRelevant 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 costsFRS 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 IASs/IFRSs and UK accounting standards compared (contd.)

30 BACCT2102Corporate Reporting29 IASRelevant 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 IASs/IFRSs and UK accounting standards compared (contd.)

31 BACCT2102Corporate Reporting30 IASRelevant 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 shareFRS 22 issued in December 2004 implements IAS 33. IAS 34 Interim financial reporting ASB statement on interim financial reporting IASs/IFRSs and UK accounting standards compared (contd.)

32 BACCT2102Corporate Reporting31 IASRelevant 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 assetsFRS 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. IASs/IFRSs and UK accounting standards compared (contd.)

33 BACCT2102Corporate Reporting32 IASRelevant 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 AgricultureNo equivalent standard Financial reporting standard for smaller entities (FRSSE) Companies claiming compliance with IFRS must follow all standards in full, regardless of their size. IASs/IFRSs and UK accounting standards compared (contd.)

34 BACCT2102Corporate Reporting33 Economic consequences of accounting differences Results under different national rules can paint very different pictures. IOSCO –Core standards.

35 BACCT2102Corporate Reporting34 Results under different rules Rover results using UK rules Rover results using German rules£m unpublished 1995(51)(163) 1996(100)(109) (91) 1998(571)(620) Rover results under UK and German rules

36 BACCT2102Corporate Reporting35 Dangers of making assumptions under different rules Daimler Benz results using German rules DM m Daimler Benz results under US and German rules Daimler Benz results using US rules DM m 19901, ,9421, ,4511, ,615 (1,839) 19941,8951, (5,734)(5,729)

37 BACCT2102Corporate Reporting36 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. Daimler Benz results under US and German rules Dangers of making assumptions under different rules (contd.)

38 BACCT2102Corporate Reporting37 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.

39 BACCT2102Corporate Reporting38 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.

40 BACCT2102Corporate Reporting39 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 SECs jurisdiction. –Individual states have the power to introduce their own legislation to control businesses and even set taxes.

41 BACCT2102Corporate Reporting40 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.

42 BACCT2102Corporate Reporting41 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.

43 BACCT2102Corporate Reporting42 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.

44 BACCT2102Corporate Reporting43 Supplementary statements Figure 1.5 Examples of multiple reporting

45 BACCT2102Corporate Reporting44 Review questions 1How 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? 2Standardisation 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.

46 BACCT2102Corporate Reporting45 3Suggest 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? 4Consider the role of scandal in the development of accounting regulation. Review questions (contd.)

47 BACCT2102Corporate Reporting46 Review questions 5The 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.

48 BACCT2102Corporate Reporting47 End of Topic 1 The End

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