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ccounting techniques were developed to measure economic

activities.The evolutionof accountingin vadouscounties has
been inlluenced by the economic structure and legal systemsof
the countries.This ha€inevitably ied to differcnt regulationsand practices.
\\ilhout doubt,in everycountrythereis somedegreeofregulationby the
€oliemmentor accountingbodiesor somegovernmentauthorities,

1.1 mnuysrlNPERsPEcrvE
h \talaysia, the Companies Act 1965 requires all registeredcompanies
ro submit annual audited financial statements, prepared in accordance
Fith approved accounting standarils, to the Companies Commission of
\fala,lsia (Suruhanjaya Syarikat Malaysia).
Changesin the reporting environment and good govemancehave put
pr6sure on entities to make adequateand even voluntary disclosure of
bori financial and non-financial information about the entitres. With
gobalisation ofeconomies there is a move to presenthigh-quality financial
foJormationwhich is intemationally comparable.
In Malaysia, the financial reporting pmcrices have developed over
rhe 1_ears. Up to the late 1970s, the Companies Act 1965 was the main
lqislation that addressed the issue of what information compani€s should
pnoride. Schedule 9 of the Companies Act requires companies to disclose
?€cfic information in the financial statements,which is the minimum
idormation that G lega\ required. Th€ folrnat and content of financial
svtrcmentsarc not coveredby the Schedule.
Frcm 1979, Malaysiawas representedon the International Accounting
S€ndards Committee (IASC) and soon after thaa.most ofthe Intemational
-{ccounting Standards(IASS)were adopted in Malaysia.
In the I980s, thejoint bodies of tlte Malaysianlnstitute ofAccountants
\tL{) and the Malaysian Association of Certified Public Accountants
\L1CPA), now knom as Malaysian lnstitute of Certified Public
lccountants (MICPA), issued new standardsto meet th€ local reporting
requirements. These siandards, known as Malaysian Accounling Standards
\L{ss), were in areasnot addressedby accountingstandardsissuedby the
L-{sC (later known as Intemational Accounting StandardsBoard or IASB),
for example, MAS I Eamings Per Sh,,:re,or to regulare reporling practices
in speciflcindustdes like insurance or aquaculturc.
ln 1997, the Financial Repo{ing Act was passed.This Act createdtwo
independent bodies, namely fte Financial Reporting Foundation (FRF)
and the MalaysianAccounting StandardsBoard (MASB).
The FRF overees the opemting actiyities of the MASB. Among the
functions of the MASB are to issue new standards,review,reyise or adopr
existing accounting slandards,issue starementsof principles and develop
a conceptualframework.
In Malaysia, companies must comply with the ftquiremenls set out in
the Companies Act 1965 and those of other regulatory authorities such
as Bank Negara, SecuritiesCommission, Inland RevenueBoard and the
CompaniesCommission of Malaysia.
The requirements of th€s€ regulatory audlorities, however, are not
comprehensive.In mostinstances,they apply only !o specificrcquiremenrs
or specific entities. In order to prepare and preseni high-qualiry frnancial
informalion, companies therc{ore have to apply generally accepted
accounting principles (Gtu{P).
For companiesand oth€r entities which are subject to income tax, they
are required to comply wilh the requiremenrsof the lncome Tax Acr 1967
lbr income or loss to be ascertained-The Securities Commission (SC)
requirementsare focusedonpublic companies.The following are the areas
addrcss€dby the SCI
(a) CorporateDisclosurePolicy.
(b) Post Listing Obligations.
(c) Accounting Standardsand Valuarion of Assels.

The Corporate Disclosure Poiicy r€quires companies to maimain. a high

level of disclosure. The Post Listing Obligations require companies
to submit reports such as annual repo s, intedm reports and related
party tmnsactions. The Securities Commission also addressesthe issue
of minimum compliance to accounting standards and orhet sraturory
TheBursaMalaysia(Kuala LumpurSrockExchange)requiremenrsapply
to listed companies.Companiesthat do not comply *.ith rh€ requircments
may be delisted. For frnancial reporling purposesj lhe Bursa Malaysia
listings addressrhe submission ofreporrs and additional disclosures.
Bank Negara, on the other hand, has issued guidelines on financial
reporting for banks and flnancial inslitutions that deal specifrcallyin non,
performing loans and interests, and specimen financial statements for
ln addition to the reporting standards,starements,guidanceandvarious
pronouncements.there is also the rcquir€ment for financial statementsto
be true and fair.
Repofting entitiesmust adhereto rhe requirementso{financial reporring
standards-Statementsand other pronouncements are not mandatory but
whereissuesarenotaddressedinthe standards,then thesepronouncements
should be fo1lowed.
framework >

ln the past, Malaysiagenerallyadopted the accounting standardsissued

br the IASC and rhe MalaysianAccounting Standardswhich were issuedby
ihe accountancybodies of the Malaysianlnstitute of Accountantsand the
\ IalaysianAssociationof CertifiedPublic Accountants.In the late 1990s,the
lnternatlonal Accounting StandardsBoard (IASB) took over the standard-
.etting funciion of the IASC. This Board seek to convergeregulationsand
accountingstandardsand proceduresrelating to general-purposefinarcial
>tatementspreparedand presentedfor economic decision making. lt was
rround this time lhe Mala]-sianAccounting SlandardsBoard (MASB) rook
responsibility to convergereporting standardswith those ofthe IASB.The
MASB has adopt€dmosl of the lnternational Accounting Standards(IASS)
as extant standards.As the relevant standardsare issued and adopted, the
extant lASs will be supersededby theseslandards.
lnitiallv. standards issued bv the MASB were relerred to as MASB
Standards.These MASB Standardswere in subslancesimilar lo the lASs
er.cept lor the numbers. The MASB also issued lnterpretation Bulletins
ro highiighr differing interpretation or application of a particular
standard. For example, Interpretation Buletin I deals with preliminary
and pre-operaring expenditure which comes *.ithin the scope of
MASB 1 P/esentaiionolFinancial Statements.The MASBalsoissuesTechnical
Releases,Statement of Principles, Urgent Issue Abstracts and Cuidance
\otes. Thes€ pronouncements provrde guidance on the application of
any particular accounting issueswhich are generally not covered by the
ln 2004, the MASB issueda number ofexposure drafts called'Proposed
Improvements to MASB Standards'.These improvements, affectlng 13
rxisting slandards,were made to be in iine with the changesintroduced to
correspondingIASSby the IASB.
However, from January 2005, all srandardsrssued by the MASB are
.alled Financial Repoting Standards(FRS)andrenumbered.The numbers
rssignedwere changedto coincide with the numbers assignedto lASs.
Srandardsin line \,r'ithlASs are numbered with'100'digit. For example,
\L{SB I PresdiltdtionoJFinanci4l Statements i LumberedFRS 101; MASB 2
becomesFRS 102; MASB 5 is now FRS 107 and so on. New standards
::sued by IASB were numbered IFRS 1. 2, 3, etc. The MASB nuinbered
-heseas FRS 1, 2, 3. etc.
Local standardsadopted by the MASB have also been renumbered but
:he! starr with '200' digit.
Below is the list of MASB, IFRS (Intemational Financial Repoting
:hdards) and FRSstandads:


FarVaue Measurement
F R S1 FRS1 of lnternatonal
F rsttimeAdoplion F nancal
I F R S2 FRS2 Share-based
I F R S3 FRS3 Business
6 chaptet1


4 FRS4 Insurance
IFRS5 FRS5 NoncurrentAssersHeldfor Saleand
6 FRS6 Exporation
forand Evaluatonol M neral
FRS7 FRS7 F nanciainstruments:
FRS8 FFS8 OperatingSegments
't AS]ol FcS 0 Preserra-io'r
o'E narcalStatements
2 tAS2 FRS102 lnventories
5 IAS7 FRS107 CashFlowStatements
3 rAS8 FRS108 AccountingPolicies,
Changesin Accountlng
19 tAS10 FRS110 EventsAiterthe Reporijng
7 IAS11 FRS111 Construction
25 tAS12 FRS112 lncomeTaxes
15 IAS16 FRS116 Property,
10 AS 17 FRS117 Leases
9 AS18 FFS118 Revenue
29 tAS19 FFS119 Employee
31 tAS20 FRS120 Accountingfor GovernmentGrantsand
of GovernrnentAssistance
6 rAS21 FRS121 TheEffectsof Changesin Foregn Excha

21 tAS23 FRS123 Borfowing

t{s 24 FRS124 RelatedPartyDisclosures
30 tAS26 FRS126 Accolntng andReporting
by Retirement

11 AS27 FRS127 Consolidated

atStatements -
12 AS2A FRS128 nvestmenisn Associates br
IAS29 FRS129 HyperinfatlonaryEconomies CT

16 lAs31 FRS131 Interestsin JoinrVenrure rh

tAs 32 FRS132 Financial
IAS33 FRS133 Earnings
IAS34 FRS134 InterimFinanciaReporting
23 tAS36 FRS136 lmpairment
20 IAS37 FRS137 Provislons,

AS38 FRS138 ntangjbleAssets

AS39 FRS139 Flnancialnstruments:
Becogntionand h
Measurement rb
IAS40 FRS]40 Invesrment
Property -E
IAS41 FRS]41 d
Regulototyand CanceptuolFronewotk 7


32 FFS201 Actlvites
FRS202 GeneralnsuranceBusiness
Llte LnSUTAnCe
FRS204 forAquacuture

FRS139 Fin4nci4l l?rstnrmmts:Recognitiond,lrdMeLslLrementi,s effective

{rom 2010 and IAS 4IIFRS 141 is still an exposure draft- Fair value
measurement is usedin thesetwo standards.
ln 2012,Malaysiawill be fully IFRScompliant.This shouldnot cause
anv maior Droblemsas the FRS5are all basedon lFRSs.

Smaller companies 1nay find it costly to comply with the requirements
of accounting standards. Small entities classified as p vate entities were
exempted from applying FRS in 2006 and can continue to apply the old
VASB5, referrcd to as Pdvate Entity Reporting Standards (PERS).
Private entrlies are companies incoryorated under the Companies Act
That are llot required to prepar:eor lodge any frnancial statements
under any law to the SecuritiesCommissionor Bank Negara,and
(b) That arenot a subsidiaryor associate of, or joindy controlledbn an
entity which is rcquircd to prepareor lodge any financial statements
under any law to the SecuritiesCommissionor Bank Negara.
The CompaniesAct 1965defines'private company'as a companyhaving a
sharecapitalandincorporatedasapdvatecompanywhereits memorandum
or articles oI association:
(a) Restrictsthe nght to bansfer its shares;
(b) Limits to not more lhan 50 the number of its members (counting
joint holdersof sharesas one pe6on and not countingany person
in the emplol'rnent of th€ companyor of its subsidiary or any person
who $hile preriou<lvin lhe emplovrnent ol the companyor of its
subsidiary was and thereafterhas continued to be a member of the
Prohibits any invitation to the public to subscribefor any sharesin or
debenturesof the company;and
Prohibits any invitation to the public to deposit money with the
companyfor fired periods or payableat call, whether bearing or not
b€arine interest.
entities are not rcquired to apply the improved and new Financiai
Standards. An entity is treated as private il it is a private entity
t tie pedod covered by the annual or interim report.
PERSare not applicable to entities that arc accountableto the public
, chadties and other social and publicly accountable entities
use the full seto{ FRSand no! PERS.
Partnershipsand sole propietors may appiy PERSas guidelinesofbesr
practice on frnancialrepolting. b
Privare enliries may comply \rirh FRS. tf they do then rhey have to 3.
r o t n p l y$ r t h t h e f u l l , e t o t f R \ i n t h e i re n l i - e r y
On the otherhand, private enririesthar apply PERSare allowed to apply 9
selectedFRSs.However,rheycannor switch from applying rhe specificfR! 625
to PERS, s29
PERSdo not cover rhe full range of irems as do FRS.Therefore,in the
absenceofrequiremenrs or guidancein PERSon rrarsactions and evenrs.
the following are applied or complied wirh in descendingorder: e-
(a) FRSdealingwith similar and relaredissues_If a FRSprescribeschoices F.
in a measurementbasis. rhe pdvare entity is to apply rhe cost basis;
and Ib
(b) The defrnition, recognirion criteria and lneasuremenr concepts for
assets,liabilities,income and expensesin the Frarneworh. t\
An entity that has adop{edPERSand need or wanl to swirch to FRS such
as a private company becoming a public company on transirion from
PERSto FRS,has ro apply FRS I Firsr-rimeAdoption oJ Financial Reporting
Below is the lisr ofPERS:

MASBNumber Title
1 Presentatlon
of Financal Statements
3 NetProlitor Losslor rhe Period,FLrndamentat
Changesn AccoufringPotrcies
ResearchandDevelopment Costs
5 CashFlowStatemenrs
6 TheEtfectsof Changes in ForeignExchange
7 ConstrLrcton
I Consolidated
F nancal Srateme
12 lnvestment
ln A€socates
15 Property,PanrandEquipmen!
16 F nafcia Repoding
of nrefestsin JointVentures
19 EventsAftertheReportns Period
2A Provisons,Contingenr
23 mpannentof Assets
27 Borrowing
29 EmpoyeeBenefits
30 Accounting Benefitptans
andFeportng by Bettrement
Regulatory Frcmewok9

3l Account
ngfor Government
andD scosureof
32 PropeftyDeveopmentActivties
IAS29 FnancalFepodns
in HypernJatonary
MAS5 Account
B] PrelmnaryandPre-operat
ng ExpenditLre

BeforeJury 2007. companiesmight be classifiedas exempt enterp ses

:rd ne€d not comply \\.ith certainspecifiedM,A.SBSrhar are usually onerous
r: \1here!he cost outweighs rhe benefirs.
The Starem€nrofPrincipleI (SOP1) on Exempt Enterpdseswas adopted
r-- lune 2000. The premise on which an entit,v is considered as exempt
::rends on rvhether there are depend€ntusers of the financial sratements
:: ihe enrerprise,$'hether there exists public accountability in that there
::; sulficient stakeholderswho depend on rhe financial statementsof the
:.:.rprise, or *'h€ther owners of the entily make up the governing bod,v
' ,lrp -7. ni,hp Fn,prnn<p

{n enterpriseis classifiedasan exemptentitywhen:

, Theenterprisedoesnot havepublic accounrabilirvl
- \' I l- I r ', .h"" l. r" 'l o l^e o\\.lerr alc t]lerDbcr!o[ the
gor.emingbody of the enrerprise;and
: The enteerise is not large.
- :nterprise is consideredto be larg€if it erceedsany tr,r'oof the follo\\,tng
. rlas en annual grossfev€nue of RNfl0 million.
- 1as grossasses ofRM5 million at the end of the frllanciAl)ear.
, Has an averageof 50 employeesfor the finarcial year.
>-: I is no longer applicable fromJuly 2007. Entiiies thal have public
::: -:rtabiliqr are to apply FRS arld pdvare entities mal appllr PERSor

: . :r'jrLtinationalcorpomiions operalein many differenl countries. These
, ::::arionsneed!ocomplywithrheaccountingstandardsof th€couniries
'-:;: _:e\ operatein or raise frnancein \\'hich will require
them to prepare
--::!l stalements according ro local generall)' accepted accounting
11:;i countdes. like Malaysia, have rheir o1.i11narional standards.
::. r rational standards usually complv with the standards issued by
-jr .::rmational Accounting
SlandardsBoad (IASB). \\,.hichconsists of
?-:::!::1!,1tires from accoundng bodies ftom all over the world.
:i:::. ltlo1, the srandardswere issuedby the Intetnarional Accounring
i:E-::: Committee (IASC) ard were called internatlonal Accounting
10 chapter

Standards(IASS),and the guidancewas inter?retationsby Standing

Interpretafons Committee(SlC).
In 2001,the structureand constitutionof the IASCwerechang€d.The llE
objectivesof the IASCunderthe new constitutionareas{ollows: s,i
(a) To develop, in the public interest, a single set oI high-qualitn orl
understandable and enforceableglobal accounting standards that :fi:
require high-qualitl transparent and comparable inlbrmadon in IF
financialstatementsand other frnancial(eportingto help participantsin
the world! capital marketsand other usersmake economicdecisions; 2 gt
(b) To promotethe useand rigorousapplicationof thosestandards; and 3&;
(c) .To bring about convergence of national accountingstandardsand fs.
Internadonal Accounting Standardsand Intemational Financial 5-\iv-
ReportingStandards to high-qualitysolutions.
The new struclure is asfollows:



The IASCFoundationis an independentorganisation basedin the United
Statesof America. lts activities are directed by the Trusteeswho appoint
membersto the IASB,SAC (StandardsAdvisory Council) and IFRIC.
The Trusteesare individuals from diverce geographical and functional
backgroundsand comprise6 membersfrom North America,6 from
Europe,4 from AsiaPacificand 3 hom otherpartsof the world. Of the 19
memb€rs.5 representthe accountingprcfessionwhile the othersrepresent tliLi,.
the intemationalorganisations ofpreparers,usersand academics. EEE

(':r :
The IASB is solely responsible for developing and Gsuing new intemational
standards. These standards are known as lnternational Financial Reporting
Standards(IFRS). The IASB consistsof 14 memberswell-known for their
technical expertise. Before a standard, er?osure draft or a 6nal IFRIC
interpretation can be published, at least B out of the 14 members must fi
t brsr
All existing IAS5 and SlCs remain in force untii amended o n'ilhdra,i'n
in the future.

Therefore, the term IFRS includes lFRSs, lFRlC. lASs and SIC
lnitiall)a the IASB issued five new standardsand improvements lo the
eaisting lASs forming !h€ platform standardsas countries in the European
Lnion and others made the switch to IFRS from their national standarcls
in 2004. The frrsr frve new standardsare as Iollows:
a) IFRS 1 first-iit1'le Adoption oJ Intemational Fi andal Reparting
b) IFRS 2 Shdr(:-bds.dPdl,merts.
c) ] S l , l s j r P ca. o f l b i n , r , ; 0 , ) \ .
J ) l L R 5 + l I s r . r . d n a eL 0 n a r 4 a r 5 .
I FRS 5 Non-.urrfii As setsHeld Jor Sale and Discontinued OPerdtions.

Jf dese lFRSs,IFRS 3 Business CombinatiansreplacedIAS 22 Strsiness

. The resl oI them erein
aombirdtiOns new aleasand areadditionsto lh€

standordsAdvisory counciI
-he StandardsAdvisory Council (SAC) advisesthe IASB on lopics that ihe
:iSB should pay attenrion to. It also informs the IASB on the implicalions
:: proposedstandardsfor usersand preparersof financial statements

:r. IFRIC G a commiltee of the IASB. lt assisrsthe LASBin establishing
::l improving srandardsof financial accounting and reporting for the
:trefit ofusers, preparersand auditors offlnancial stalemenls-
The IFRIC givesguidancefor usersin two situations:frrst,ifa complelely
::r problem arises;a11dsecondl):if exisdngslandardsarcbeing interpreted
= :nsatisfactory or conllicting \a,ays.lts guidelinesare called lFRlCs.

\t-'r1 o[ the guide]ines,procedures.practicesand Principles that an enlity
E :.quired to use in recording events and lransactiorx and preparing and
=nling frnancial statemenlshav€ undergone many changesovel the
'true and fai/ and comparablebetween
:i. To make financial statements
:res. r€gulatory authodties, the government and accounlancy bodies
;: anempted to regulaie the repofting requirements of entities Some principles and pmctices have been formalised into accounting
::iards with mos! o{ the accounting standardsaddrcssingspecifrcareas
::: ar accounling for mventoDl
a.iii e!er. the basicreouir€mentis alwavsa framework. This framework
i !e a guidance to standard setting. The MASB has to date issued The
:-a' cnltlor the PrepatatiolrLnd PresentdtionoJFinctnci1lStatement(the
.t:.rrorft) rvhich is similar to the one issuedby the IASC.
12 cha|tet1

The Frameworkdealswith the following:

(a) The objectiveof linancialstatements;

l:; 8*il',li::i.':Il"li.l.''., na,'|on
l:, -::;:T':l:;iT;::i".i'iiTi,l.T
([) Conceprso{ capitaland capitalmamtenance'
rheFdme iffi:::'l::
ol hnan
"TffiHiX:"ilX1fr[ dealswith,rccosnition' rccoldins

1"1'"H;;;:";;;g and
:i:r1"JiiG For example' when can
,i-i* a -1t"" tl-t" *'ent has taken place
a buYir recognisean assetas his?
'b \4ea'uremenl
e l e m e ni t' r o b er e 'o ' d e d F o r
M€asuremenl is lhe amount at v' l ' t t ' ' n "
' ac'ounr'
Ti::l:]l: 0...".ur€orJebirins
(d) Presentation the
a fiansaclion is disclosed in
Presenladon is how an event or
financial statements

'].,1.1 FinancialRePorting
aIfairs of an entity Financial
Financial reporling disclosesthe Enancial such informatior'
.*i"-"*. ,tt" pt-cipal meansof communicating
"i" 6161p11ionthat is userul for:
.a In\e.rmenrandcreditde(isionma*.Ji;,".,.r, and other
Thc hnancul mfolmaton is usetul L *ll h^*
,]r*r't"'*"ii"* t^u"na1 economicilecisions Those 1
[*"#ri'""i"1",""a-* t oi'*::Ji3^,T:H,Tfrl'il'.'::i"T:
to study the information I
understaridthe informadon presented
*' uncelraintv
f:ff:il: ii:XtJrl'"';'.n"li,'i;,n"
of ner cashflows ro rhe enlity'

- 1.cess to inlbrmation about the economic resources(assets),claims

.rn those resources(liabililies) and changesin them.

:l,inges lo the resourcesand ciains to the rcsources.

Usersof Financial
:::: -.f llnancial reporLsnced lnfonnairon to make economic decisions.
: -.;: j.cisiorls conld be confnflator! ar pr.dictiye.
:.:-rJurcholders. for example.lf they buy additionalsharesexpeclingthe
, ::. :.. make more profits. they need financial inlormaiion ro jusdS' iheir
: .. L. rtore p;-. irt^rnd or '- r. q,r 1d for, . ,fT-roq pLryo-i.
' . 1 , r . J - e . r e e . lr r f o r r a r ' o rl o r J l r eJ e L i .o r . a r. nri).
-: "bolr
r:r need addirional informarion to predicr or for€cast growth or
:::::::lnnce. As futurc information rvill not be available.and even if ii
. : :: rbLe Lt na) not be re1iab1e, uscrs mar have io make use of past
_ - ,rnn r. mrl.. ,hni n,<

': - .an be classifiedinto the follo$.ing groups:

-h-'.h. /lpr- n'., F, | \. n\.-r,.'. rr I il, ir

..r. f^r'n , l-ro. or^',n ^i ' -pr. ^l lrnrn, ,l r nnrr. | ,r,.r., -
::-.rrde risk'capitaland are inlerested
in the risk and retum on
l,p. ,rp ,h.rpLrp n p'p-,p/l n ,1,. ,. h m-,'..

: fie endtv and the stewarclshjpof the r-esources. They \rill also be
.r'd i , leJ li ) ^f heenri) rofn) drrd"nd. Und"
' n . r n 1 ( e - . r \ . ' . o r - r i l ' l c c J' ' r b r m r . o r r ^ J e r . - n r . I t e \
.::.ruld bu; sell or hold lheir sharesin ihe etiit):
r :mployees
.. r n p 1 o 1-. ,o l a n e r t . 1 r r d t \ " . r . e p r ,- , r ar . . - o r , , , n o r h c
-..up $.ho will be inleresieclin information about lhe s|abilitv and
:::,ntabiliry of their etnplover. They will require information that
:::-rblesrlleln ro assessrhe abilirt ofrhe enrir,vio provide remunerarion,
:.:::femenlbenefits and employment benefits.
l:rders include all those who hnve 'aclively lent to the €ntity,such as
::rks aml debenturehoklers. Thel will be interestedto kno\1 i[ lhe
:-:it\ is solvent and liquid enough to repa,vthe borrowings and also
:., the interestson thoseborrowings
: :.rppliers and other trade creditors
. ','.' l',i.,ih.- sl,nh,\p,' n 'l'..1 o..d.-,,1 -.'\,..,,h

. ... |,.'nI) l h p ' s l l b p . r . p r ^ t e d r n h e d l ' l r ) u J r t , f i , . r \r u

l ' " r r , , , n , .d ' F I n l e r v o - r - L f f i F l r i l d l . o b e . r . F r . - r , d
. q . o . r r r r l ' a b r - r t r . d n e r . r ' ) d r t h e l n a r b . r r t e r e - , c |J'
:... rloplrg a long-term businessrelationship.

: : i l omers Dra,v
bc interestedin the continuatcc of the enLilvespecjally
:.-i . \ho ha\.e a long-term involr.ernent $'ith or ar€ deperdent
14 chopter1

on the entiqr For example, those who have bought houses and are
dependenton the entlty to provide certain servicesor amenities will
be concernedabout the entity
(t) Government and their agencies
The goverrrment and their agencies will need information, among
others, to make macro economic policies and allocate resources,
reguiateactivities and detemine taxation policies.
All those who do not have a direct imercst in rhe entiry can be loosely
classifled as 'public'. Some entities are large and may contribute to the
economyin a substantialway (e.g.,TenagaNasionalBerhad,Telekom).
The general public or community groups such as consumer nghts
grcup or envfuonment protection advocates may be interested in non-
financial information.

Objectiveof FinancialStatements
Financial statements presert information abou! an entityb
(a) Financialposition,
(b) Performance,
(c) Changesin financial position, and
(d) Others.
They also presentresults of stewardshipof managementor accountability
of management for resources entrusted to tlre entity.

The statement offinancial position disclosesthe financial position of an entity
at a point in tim€. The endqls assets,liabillties and equity are presented.
The frnancial position is affected by the following factors:
(a) The econornicresourcesit contols
Resourcesarc the assetscontrolled by an entitl If the non-current
assetsof an entity are old and nearly fully depreciated,then it is an
indication that the entity will be replacing its assetssoon. This will
affect its cash flow By examining the asset accounts and asset values,
the user may be able to predict the future cash flow of lhe entity
(b) Its frnancial structure
Financial sEucture relates to how an entiry is flnanced, for example,
the amount of equity to bonowings. By examining the frnancial
sffucture, a user may be able to piedict future borrowing needs, the
ab ny of the entity to raise future finance and how the profils and
cash $.ill be dGtribut€d among those with an inLerest in the entity
(c) Liquidity and solYency
I rquidiq of an enLrq delermine\rt5 ability to settle sho lerm
borrowings.Soivencydeterminesits ability to setde long-term
fl nancial conrmitments.

(d) Capacity to adapt to changesin the environment

Entities that are well diversified are more likely to be able to adapt to
changesin rhe econorny.Their caPacityto changealso dependson the
products they deal with and fte industry they are in

The total comprehensiveircone statemenl disclos€sthe performance of
.'.nenrity during a given time period. lt disclosesthe revenue or income
:amed and the expensesincuned 1()earn ihai revenue Profit is lrequently
'- o 15d n-ea'ure^[P.rfor-n31'e

in FinanciolPosition
lre statementof cash flows disclosesthe changesin lhe financial position
r: an enlitl froln one pertod !o another. The statementdisclosesthe cash
::r from the investing. frnancing and operatilg activities of the enlily
:-::]ng a given time period.

' : - :.sandsupplementaryschedulesusuallyaccompanyfi nancialsiatements
-j ie Iirancial stalemen6 mayrot give all the deuiled information, these
--::.t end schedulesshould give additional relevarl information about ihe
-_:r: rn ihe financial sialementsofan entiq,:Supplementaryslat€ entson
-:: :erformance and net assetsof the di{ferent segmentso[ the €rtity may
.L.: be disclosed.

f ::4Eng assumptions are those principl€s. concepis or praciices
ri.:: .:1ti!ies are assumedto apply in preparing and presenting financial
!5!:::lenis. The underl)'ing assumptionsIof the preparation of financial
s:::ants are the:

b i:.rxal basisand
ie accrualbasis,transactiols and eventsare tecognisedwhen they
::d arerecordedand reportedin lhe financialstatenentsin the period
:r::: rhel-relateirrespectiveof whether cashis receivedor paid Revenue
ir-_-: ie\penses) are accrued as they are eamed or incurred ln the
c:frerenue, the conceptused is the redlis4tioncollcePi.For example'
E:n s€llssome goodson credit, the saleis immediatelyrecordedand
: receilable will be recordedeven though the cuslomer hes not yet
t-r i. goods.If fie goodsrveredeliveredon l8June and the pa1'rnert
:. ..n 20June,fie saleis deemedto havetakenplac€on lSJune
are also recognisedwhen they occur artd not \\'hen money
Frr eramplc, utility bills lor lhe monlh of December (year-end
is l1 December) will be taken in as expensesof rhe curenr month/year
and a liability for the expenseswili be recorded even though the bills will
be settled in the following year. This is termed as accrued expenses.In
contrast, sometimes pa)rmentsmay be made in advanc€. For example,
insurance premium for 18 months is paid on l January year 1 At the end
of year 1, the anount taken in as insurance e*pensefor year I will be dlat
for 12 months and the amount paid for the 6 months for year 2 will be
teated as prepaid expenses.
At the same !ime, the income for the year is matchedwith the expenses
incurred in earning thal incom€. Out oflhe principle ofaccruals comesthe
ncttchingconctpt. The concept re{ersto the rneasurcmenrof profir where
costsor er?ensesare set agai[st the revenue that the expensesgen€mt€d.
Saleslor the period offset the costs of rh€ inventory sold. An example is
the provision lor and charying of depreciation over the €conomic life of

The financial statementsare preparedon the assumptionthat an entitywill
continue to be in operation for the foreseeablefuture. lr orh€r words. the
entity has no intention to liquidate or reduce the size of its operations.If
the conceptis not applicableth€n rhe entity will not use the historical cost
pdnciple. As a goinS concem, the enrity will show irs asseGin rhe balance
sheeta!hislorical cost, as the entitywillbe ir €xisrenceover the remaining
life ofthe assets.Conespondingl]I debtorsare shown on the balancesheet
at the amount receivablein the ordinary courseofbusiness-
If the entity is not a going concern any more, then the asserswill be
shown at realisablevalue or break-up value.

1..t..5 QualitativeCharacteristics
Thepuryoseof providingfinancialinformationis to enableusersto make
well-informeddecisions.The Frdmerrorklists four principal qualitarive
(a) Unde6landability:
(b) Relevance;
(c) Reliability;and
(d) Comparability.

Therearemanydifferentusersand decisionsmake6. The levelofaccounting
and business knowledge they possess,the methods of decision making
they employ, the ability to process the information rhey already possess
and their ability to obtain additioral information, differ. lr is assumedthat
users of frnancial information have a reasonableknowledge oI business,
accountingand economic aclivities and, with due diligence,rvill be able to
anal'-sethe information provided.

-_..:_:narioncan influence the economic decision of users.By evaluating
,-;:j.:lr.sent and futuft events. useful information can be dedved. For
-_-:::rlarion to be useful, it has to be relevant ro ihe decisions ihar are
:€::i made.

ir-._.lial inforrnation is reliable if it is free fron error and bias, and
:.:::..nts faithfully the evenlsand transactionsthathaveoccurred.Reliable
: :rr.rtion rellects the eventsor tmnsactionsthat have taken place.lf the
_:.1.11 siatenents are prepared under condidons
of uncertaintl, then
=-::rn is adr.isedin exercisingjudgment and in making any estinates.
-' -'. rmation.r.r1J bc -on',dc co rnor" elr:l- e I rr.
-:::urement can be r.erified.

. _l o n . - r k eJ e , t , i o n , .u . c , r c i d l o J r n p o r eI n l o r n d l i oI D e t s ( .r
:r: rts end over a time period. The in{onnation from different entities
- :-'nparable if there is consistencyin the accounring rrcalrnenl of rhe
-:: -r.rmic events and transactions orer tine and ln the disclosure o{
::: : rnting policies.

Other Characteristics
-,. :.bsenceofany of the ebove mentioned charactedsticswill cast doubt
r .. infomation supplied by &e endq. There are other characrerislics
_:: nar add some value. These other characte stics are:

-: )late ality
E.sides the nature of the item the olher lactor affecting relevanceof
' ^ r ' r t i o n . , r h e m J r " t ' d l i l )o I r h " r r en . V r r " r " . r r ) r e f e r .r o r ' "
.i:. {)1 the i|em. An item is considered material if ils ornission or
:nisrepresentalionmay inlluence the econornlcdecisionsof the us€rs
i o r . l . r " \ " n p r F ". h r g e r . i D \ r h ' . l r l i o r - o l
' ' f r ' ; r . r a lr n [ o r r n a
:inggit ofassetsbuysa n'aEr dispensercosringRM2,000 which can be
e d o r h r e ) e a r . a r d t l c ,t d c .l o - r ' t a .a r . , , p , . r . t . H " . . r " r .
" .Irlall entil,vl11a,v record that purchaseas an asset.
r Faithful representation
I nlormation pro\ided should representthe transaclionsand evenlsrhar
ra\ e taken place as to the recognition. measurenent arld presentaiiotl
of rhesetransactionsand eleirts.
.{bsenceoI faithfu Lrepresentation\r'111 make information unreliable.
Ho{ever, sometirnestheremaybe difflcultyln identifying a transaction
' ' 1 e \ c n r o . r h . r c d ) b € d r l f , u l r y r n l r e d \ u n n gd n l e r f o r
e::arnple,rvherea loan for three nonths is renewedconstantly,it rrray
rLrt be trearedas a current liabiliry bur a non-current liability.
18 Chapter

G) Substance over form

Transactions and evens are to be reported as to the commeicial
or economic reality and not strictly according to legal form. The
substanceof a trar$action may not be consistentwith ihat suggested
by its legal form and so the transaction or event has to be examined in
whole along with its related transactio4s.
For example, where an assetis acquired through hire purchase,
the legal title stays with the seller and only passes to the customer
when all the hire-purchasepayrnentshave been made. Therefore,it
may appear that the asset should appear in the accounts of the seller
as the seller has legal title. The substanc€of the transaciion is that
the control and benefrtsattached !o the assetarc with the customer.
Therefore, the commercial substance is that the asset will be reported
in the accounis of the customer.The amount owed on the capital sum
to the seller will be trcated as a liabilily
Another exampleis when an entity contractsto leasemolorvehicles
w i r h r h e o p t i o nr o p u r c h a \ el h e m T h o u g h r rm a \ a p p e a r / ra r e n l a l
'beneficial ownership' and not
of motor vehicles. it is in facl acquidng
legal ownership at the beginning of the leasecontmc!. Therefore,the
motor vehicles are considered to be the assetsof the entity (lessee).
(d) Neutiality
lnfomation contained in the firuncial statements is to be free from
bias (deliberate or systematic) and should not be govemed by
ecoromic consequerceolthe reporting endq lnformation should not
be presented in a manner that influences the use$ to make decisions
or judgments in ways that the piesenler wants them to-
Prudence requires preparersof flnancial information to be caulious
in the exerciseofjudgment to ensure that income and asseGare not
ove$tated and expensesand liabilities are not underctated. Out of
lhis comes the rules such as recognisinggains and income only when
realised;and rccognising immediately lossesthat seemprobable. For
example,if the net realisablevalue of inventory falls below cost, the
loss is recognised immediately in that the inventory r 'ill be measured
at the lower value. On the other hard, if the inventoryS selling price
incrcases,the gain is recognisedonly when the inventory is sold and
the inventory is valued at cost. Anolher example is the practice of
providing for doubt{ul debts.
Pr-udencealso requires curent assetsto be measur€dat cost or at
net realisable value, whichever is lower.
However, there is no rcquirement to exercise prudence wh€n there
is no uncertainty or in order to creale secret reserves by overstating
o,?enses and liabilities.
(t) Completeness
Infomation in the financial statemells has to be complete; otherwise
it will not be reliable and relevant. Omission of information may
render lhe infomation presented false or misleading.


on Relevantand Reliabtre
r e t \ c r " n r r g hbt e m o r co r ' e l r ' a r , c t l r , r Ir . l a b i r r ) .a r d r . c c r c r - - r .
-- re\er, there must be a balance between relevance and reliabilit\':
l_: following consideraiions affect ihe balance betr.een relevance and
: Timeliness
lf there is a delay in supplying financial information, dre information
ma)' be relevant in a lirnited manner even thouSh it ma)' be reliable.
In orher words a delay in reporting may mAke the information reliable
but it ma_rnot be relevant.
Therelore,eriities havc to find a balancebetrveenprovidirg iimely
rnfomation {.hich is rele\.antand reliable.More of one may meanless
r tne othcr.
: Balancebetween beneflt and cost
lnfornation is nor cosi-freeand the benelit trust alwaysourweigh the
.ost, lha!is, lhe benefil derived from lhe information mus! exceedthe

: Balancebet$eenqualitative characteristics
.. re. F*,i I to ba arcc or lr"dc olf belweel l\e qu,r-rrdr\F
.haracte stics in order to meet the oblectiva oI frnancial statements.
D * r ^ n r l l r d g n . n t , - . o b e e \ € - ( . e d ' n d e l e n - r r r r n lS\ e n ^ r F
" l
:.ler.ant characteristicin different situations.
: True and fair vie$y'lair pr€sentation
\\ hen fi€ qualitativecharactedsticsand generallyacceptedaccounting
rnnciples are faithfully applied, the financial statements can be
to present a lrue and fair view of the pedornance, position

: r . p , l t r n " r r : o I h r a r . r a r r . r r € m e . tdr .r e J ' . e 1 . . i r b l i L r e - e
. qLrD.
- : . r ' n d e \ p c r - c . \ > > e 1 .l.' a b r l i r i e,.n d e q u i r l e l a t er o I n . n . i a l
:, .: r,rn \r,hile incorne and expensesrelate to performance.

: Definitions
'_ -..t is a resourcecontrolled by an entity as a result of past eventsand
=:::- r hrch future economic benefitsare expectedto flo\r to the entit)'.
l:: economic benelit embodied il1 an asset has the poieliial ro
:-:-bute directly or indirectly to the flow of cash and cash equiralents
:- _-:-:.:nlitl
l:: iuture benefitsmay Ilo$. into the entity in various ways such as:
. - -.d in rh. p ' r o no l g o " d . .en .
'_ -\ "Ju, "nr "-.
htrnop.l f^r ^,hpr '<<.k
20 chopt",I

(c) Usedro serdeliabiliries.

(d) Distributedto ownersof the entlry.

4liabilir\ is lhe_prr.enrobligaLionot an entir\ arisinglrorn pasr
I n e > e l l l e m e noll w h i ' h i \ e y p e rLe dr o r e " u i l r , rnn o u t f ol q f r o mr
h ee n | I l v
ot resourcesembodlng economic benefits.
An essenrialelement is thar there is a p/eser! obligation.
The obligarion may be settled by:
(a) Pa'.mentof cash;
(b) Transferof other assers;
(c) Provision of services;
' d' Repla,emenroi an obrigarion wirh orhe-obligarion):ol
rel a o n ! p 1 5 i oonl l h e o b l i g r t i o nt o e q u i D .

Equityis the residualinterestin the assetsof an endryafterdeductingall
i t . l i a b i i i l i eF, o r d r - c l o c u r e p u r p o . e < . m
e qau1bi le\ . u b _ c l a _ i hreod. i o w
lundsconrflbured bv shareholders. re{ainpd profir,andothefresenei.

Income includes both revenue and gains. Revenuearisesin rhe cou$e
the ordinary activities of an entiry. Examples of revenue are sales,fees,
intercst income,.dividend income, royalty and rental income. Gains
nol ari<efroh the ordinaD dcrvilies olan enrit\ .uch as tho)e
lrom lhe di<po.alof non-Lurfentd\)els.50me gairs may be
such as the surplus on the revaluationofnon_current assets.Gains
lhat are
disclosedin the income statementsuch as a gain on the clisposal
of non,
current assetswill be showr net ofrelated expenses.
lncome and gainsgive dse to an increasein economicbenentsduring
accounting pedod. Thesemay be in the form of inflows or enhancements
of assetsor decreasesof liabilities rhat result in increasesin equity
than ihose rclating to contributions from equity participanrs.

Expensesincludeboth lossesas well as expensesIhat arise in the
c{urse_olbusiness,Er?ensesinclude cost ofsales.wagesand depreciation.
Cost ofsales and wagesinvolve an outflo.lvof resourclswhile depreciation
and depledon of assets do not. Losses cause decreasesin economic
Expensesdecreaserhe economic benents dudng the accounting pe
LnalrecuttIn dpc-easejin equir\.othet rhandroserclrringlo conlribuLion\
or pa).mentsfrom or to equiry participanrs.
ond ConceptuotFronewatk 21

-r iiem is recognisedif:

" Ir is probable thar af'y ecananic beneJitassociatedwith the item rfill

forr, ro and from the entity, and
- The ifem has a cosl or value that can be rneasuredNith relidbilitj.

of on Asset
- asseris recogdsed ir the statenent of linancial position lvhen it is
:-rrdble that its future economic benefits will flo$' to the entity and the
--.r has a cosl or rdlue that can be me.lsrredrelidbll,.

of a Liability
: :rbiljty is recognisedin the statem€nrof frnalcial position when it is
-_-:iclle that an outllow of resourcesembodying economic benefrtswill
.::: . the presentobligarion and the amount can be measuredreliably.

of Income
-.:rme is recognis€din the income staiement when an increasein futurc
::::.-mic benefits related to an increasein an asset or e decreasein a
:::-irr has arisen that can be measuredreliably

of Expense
: - :acoglised in the statementof comprehensiveincome when a decrcase
r =iure economicb€nelits related ro a decreasein an assetor an lncrease
E . :.1bilityhas adsen and the amount can be measuredrellabl,v


V=:rrem€niis the processofdetermining the monetary value atlached|o
rie : :ments of financial statemenlsthat are recognisedand disclosedin
fr< ,::rement of financial position and income statement.
- ..: following are the measurem€ntbasesdiscussedin the Frdmelrork:
{r Histodcal cost
:;se!s are recorded at the amoun! of cash or cash equivalent paid or
;he fair valuc of the considerationgiven to acquire them. Liabilities
are record€d at the amount of proceedsreceivedin exchangefor the
: Current cost
issets ere carried at the amount of cash or cash equival€nt that will
:e paid ifthe assersare acquiredcurrent\ Liabilities are carried at the
liscounted value or cash equivalent thar $ill be requircd to setile the
lebts currently

22 choptet1

(c) Realisablevalue
Assetsare cauied at the amount of cash or cash equivalent that can
currently be obtained by selling the assetsin an orderly disposal. The
liabilities are canied at their settlement values being undiscoumed
amounrsol ca.h rhrr needto be prid in r he . our.e ol bu-rne-".
(d) Presentvalue
Ass€ts are carried at the discounted value of the future cash inflows
that the assets are expected to generate in the normal course of
business.Liabilities are carded at th€ discounted value of the future
net cash outflows requircd to settle lhe liabilities in the normal coure
of business.

ACE boughta car coslingRM1OO,OO0 on l Januaryyearl. The car canbe
used for five yearswith no scrapvalue at lhe end of its useful life.
At the end of y€ar 2, the net book valueof rhe car will be RM60,000.
This G the car+ng valueofthe carusinghisroricalcostbasis.
Suppose ACElosthis carandheneedsa replacement. tfa similarca!will
costhim RM68,000,thenthe replacement or currentcostis RM68,000.ln
otherwords,the costof replacinghis existingcaris RM68,000.
SupposeACE wantsto disposeof his car and he canget RM56,000for
ir- The amountof RM56,000is th€ realisable value.Usingrealisable vdlue
is relevantwhena businesswane to selloff its assets or whenit is no more .
a goingconcem.
SupposeACE usesth€ car as a taxi and eamsRM18.000per annum.
Assuming that the car can be used as a taxi for rhree more yearc lhen the
cashflow from the assetis RM54,000.lf the presentvalueof the RM54,000
wereto be RM49,000,then the presentvalueof the caris RM,19,000.

tt'"." ain"'"n' , oncepsol"apiral.Capiulcanbe rhenera5\ebolan
entityor theamountof capitalcontributedby the ownersplus increases in
the net assetsthat remainin the entity Capitalcanbe expressed
investedor purchasingpowerinvested.Ir can alsobe expressed in terms
of productivecapaciqa
The capitalmaintenance approachmeasures incomeby comparingthe
net assetsat two pointsin time,
For example, if the net assets at the beginning o{ the year were
RM200,000and at the end of the year the net asserswere RM240,000
thenthat canbe reprcsented as the openingcapitalofRM200,000plus an

Under this concept, the profit is the differencein money terms between
the opening and closing capital excluding any contributions from and
disdbution to the entity's owners.In the aboveexample,if there were no
rtanewark 23
.apLlal contdbution and no withdrawals of capital rhen rhe pro{it for the
r ear is RM40.000. lf the o$'ners withdra\r' al1 their profits of RM'10.000
ihe capital renaining rvill be RM200,000 Therefore' the opening capiral
i5 mailltained.

Physicalor OperotingCoPital
this concepl, profit is earned only if lhe operating capacitl at the
.:tl ol the perlod exceedsftat oi the beginning ol the Period Adiustuents
::: rnade to the net assetsfor all price changes
for example,let us say the nei assetswele RM500,000at the beginning
:: rhe,vear and RM610'000 at the end of the 1'car and there is a l0o/o
::re.rse in the price level o[ thes€ assetsin lhe lear' ln order !o maintain
.- opening."pital tt"t asse6valued at RN{550,000(RM500'000 x f10%)
. .: ,o b" t"tained itt rhe businessand the o$'ner \'!'iil onl)' eams RM60,000
:I Ia'10,000 RM550,000).The sum of RNI60.000 is rhe maximumpro6l
-: .an be .lisdbuted while maintaining the opening lapiral lf an)'thing
: :. ii distributed then it can be said thal the opening capital ls not

f:r :rapter covers the conceptual Pramryorh Jor tlrc Preqar.ltio and
l'.rr:.irion of Iindn.idi Stdtenents.As a guide, it sets otl the objective
::.:.ral stalem€ntsand lisrs the user groups and iheir lr]formational

l : -nancial statementsare to be Preparedbased on the under\ing

=:iions of. going concern and accrual principle of aacounting
-.rnciAl information ro be useIul they have to have rhe four basic
::::.r.i.tics ofunderstandabilirl, relevance,reliabiliryar]d cornparability
: :raract€dstics. rvhose absencema1' render dle inlbrmation lo bc
:.i:ul. are materialitll laithful repres€rtalion, substanceover lolm'
:: 1 prudence and complerenessThere musl be a balance between
:_,:.ind r€liable information.
:'.r?n.1iorh discussesthe clefimtion,recognition and measurement
-. :.. elenents of linancial stalements of assets,liebiliti€s, equity.

for lhe Prcparationand Presentaliono[ Finan.ial