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    FAR410 CHAPTER 1 Part 1 PDF

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    ABLE OF CONTEN pow Wooers BIE! peation pout the Author Preface Indes of Referenced Standards . abbreviations of Referenced Standards, Laws, Good Practice and Some Terms An Overview of the Financial Reporting in M CHAPTER I laysia.. 1.1 Introduction 12 AHistorical Perspective....... The Current Financial Reporting Regime... Statutory Regulations on Financial Accounting and Reporting... 14. The Financial Reporting Act 1997........ 14.2. The Companies Act 2016 .. 14.3 The Income Tax Act 1967... 13 14 144 Regulations by the Securities Commission 14.5 The Audit Oversight Board 1.4.6 — Regulations by Bursa Malaysia... 1.4.7 Regulations by Bank Negara Malaysi: 1.5 Accounting Standard Pronouncements in Malaysia... 1.5.1 Pronouncements before the Current Financial Reporting Regime 1.52 Pronouncements under the Current Financial Reporting Re . 1.5.3. Future Pronouncements — IFRS-compliant Financial Reporting Standards... 2 1.6 Summary of Reporting Requirements by Types of Entity... 1.7 The State-of-the-Art Accounting and Reporting Practices 1.8 The Directors’ Report of Companies. 1.9 Management Commentary and Business Review. 1.9.1 Management Commentary.. 1.9.2 Business Review in Director 8° Report, CHAPTER 2 — The Conceptual Framework for 21° Why the Need for an Accounting Framework? 22 Background to the MASB"s Conceptual Framework x0 23° The Salient Features of the Revised Conceptual Framework aT] 32 24 Status and Purpose of the Conceptual Framework ... 2.5 The Objective of General Purpose Financial Reporting Financial Accounting and Reporting in Malaysia, Volume 1 CHAPTER 1 AN OVERVIEW OF THE FINANCIAL REPORTING IN MALAYSIA ‘This chapter will help you to: (a) understand the development of financial accounting and reporting practices in Malaysia: (b) understand the statutory requirements of financial reporting; and (c) understand the setting of financial reporting standards in Malaysia. 1.1 Introduction This chapter provides an overview of financial accounting and reporting practices in Malaysia. The first part of the chapter traces the development of financial reporting from a historical perspective to the current state-of-the-art practices. Next, the statutory requirements on financial reporting are dealt with in general (the specific requirements will be dealt with in the subsequent chapters) to provide readers with an understanding on “what is financial reporting in Malaysia”. This is followed by the financial reporting standard-setting process in Malaysia and a listing of approved financial reporting standards and other technical guidance. 1.2_A Historical Perspective The origin of financial reporting in Malaysia cannot be traced precisely but it must have existed at the time when businesses were first established as separate legal entities. However, the first documented financial reporting regulations were those of the Companies Ordinances (and amendments) of 1940, 1946 and 1956, before Malaysia (then Malaya) achieved her independence on 31 August 1957. These Ordinances continued to play an important role in regulating financial reporting after the independence of Malaysia, until the establishment of the original Malaysian Companies Act in 1965 repealed them. With this Companies Act 1965, reporting requirements, rules and regulations on accounting were formally established. The original Act also contained a schedule, the Ninth Schedule, which specified the disclosure requirements in the financial statements of Malaysian companies. Over the years, the reporting requirements of the Act remained relatively unchanged until 1985 when the original Act was amended to incorporate a revised Ninth Schedule. The revised Ninth Schedule contained more comprehensive disclosure requirements and specifically required that a statement of source and application of funds be an integeal part of the financial statements. Financial Accounting and Reporting in Malaysia, Volume 1 " 1] 2 Chapter 1: An Overview of the Financial Reporting in Malaya), Under the original Companies Act 1965, financial statements must contain a Sea Aecoun, bilance sheet, a statement of source and application of funds, and the sccompany ine 1 ACCoUny, The original Act's main concern was thatthe socom shuld he true and Shir. Pesvetes, © Gi tot sy explicitly how this true and fair view should be judged. Also, prior to | Sep os "Thniaing : id not may reference to the accounting standards issued by the professional accountancy °7% © Thus, in practice ang, the absence of an accepted accounting framework for financial reporting in MalaySt®, COMPRES hen tens, to use the Actas the absolute diselosure requirements rather than as minimum requiremeht. PMD TCA sug, [Tan, et a. (1990) and Tan and Chew (1996)] had shown thatthe extent of VOWS CA2016 TTA.I967 ss2eooo - . LASS (1978) === - MASS (1984) KLSE.LRS seeeen BNM. GPs SC, (1998) ‘MASB(1997) --- Convergence to IFRSs (2004) Faull ‘Convergence (2012) MPERS e016) Nove: CA.1965: Companies Act. 1965 CA, 2016: Companies Act 2016 TTA, 1967: Income Tax Act, 1967 IASS(1978) The yest in which Intemational Accounting Standards were first adopted as ‘Approved Accounting Standard [MASS (1964): The year of commencement of issuance of Malaysian Accounting Standards KLSE, LRs: Kuala Lumpue Stock Exehange Listing Requirements BNM. GPs Bank Negara Malaysia General Practice Guidelines No3 & No SC, (1995) Securities Commission guidelines ‘MASBI1997)) The year MASBeommenced operations and started issuing MASBStandards 'FRS (2004). The year MASBbeganconvergng its MASBstandards to 1FRSS MFRS (2012) Tae year of full convergence with IFRSs for public entities -MPERS (2016) The year the IFRS for SME was adapted for private entities Financial Accounting and Reporting in Malaysia, Volume 1 15 22 Chapter 1: An Overview of the Financial Reporting i, Ma, Ny i ypes of Entity 1.6 Summary of Reporting Requirements by Types. °-™ don the form of business 3s organisation it takes, 4 "0 The reporting requirements of an entity depen: hin, centity in Malaysia may take the form of: (a) assole proprietorship; (b) a partnership; or (c)_acompany incorporated under th (i) aprivate company (a Sdn Bhd); (i) an unlisted public company (an unlis (iii) a listed public company (a listed Bhd). e Companies Act, which can be — isted Bhd); oF Securities Commission’ guidelines, Centra pay. yanies Act, Income Tax Act, Grohe owi ; nr ong Regus, ad Approved Aceounine — as follows: (a) The Income Tax Act applies to all business ent cds apply to al (b) The Approved Accounting Standart or ot ncerpoxstd, ‘and whether or not listed. Exemp! standards. ly to companies incor (©) The Companies Act applies only applicable to all oer entities that are not incorporated under the Act (4). The Secures Commission's guidelines apply tall public companies, whether listed or not sted Th, guidelines are not applicable to private companies. (e) The Bursa Malaysia Listing Requirements apply only to companies listed on the Bursa Malays Exchange. The requirements are not applicable to unlisted public companies and to private compas (The Central Bank’s guidelines apply only to Banks and Financial Institutions licensed under the BAFI, The guidelines are not applicable to all other entities IMarise} ies with assessable income. Il commercial, industrial and business entities, wh, tions, if any, may be provided in the specs porated under the Act. Its provisions ae yy Foranon-incorporated entity (for example, asole proprietor ora partnership), its reporting requirements a (a) to comply with the Approved Accounting Standards in the preparation and presentation ofits financial statements: and (b) to submit its financial statements to the Director General of Inland Revenue for the purpose of determining assessable income under the Income Tax Act. No other external reporting or submissions are required. Also, note that the financial statements do nt hhave to be audited, unless its constitution requires that the statements be audited. For a private company, its reporting requirements are: (a) to comply with the Approved Accounting Standards in the preparation and presentation of is finan‘ statements; (b) to comply with the Companies Act. More specifically, reflect a true and fair view and should be its financial year end; and its financial statements must be audited, sul! submitted to the Registrar of Companies within six months! (©) to submit its audited financial statements to the Director General of Inland Revenue for the purpos® determining assessable income under the Income Tax Act. It does not have to comply with the requirements of both t the SC and the Bursa Malaysia. Thus, nit! the quarterly reports nor the preliminary fin vancial statements are required. 16 2019 Commerce Clearing House (Malaysia) Sdn 84 sec: An Overview ofthe Financial Reporting n Malaysia per: chat 23 or an wnlisted public company, all the reporting requirements of a private company stated above are rota Aktion 4) itinstalso comply with the SC’s corporate disclosure policy conceming high standards of disclosure (2) ad dissemination of information, However, it does not have to comply with the SC’s guidelines which ‘late to listed public companies; and Oey bank or financial institution licensed under BAFIA, it must comply with the Bank Negara Malaysia's guide fora listed public company, its reporting requirements are more extensive as it has to comply with: ia) the Approved Accounting Standards; (hy the Companies Act ig) the Securities Commission's guidelines (g) the Bursa Malaysia Listing Requirements; (2) the Income Tax Act; and {the Bank Negara Malaysia's guidelines, if itis a bank or financial institution More specifically, a listed public company should submit: (a) quarterly financial statements to the Securities Commission and the Bursa Malaysia; {b) other interim and periodic financial reports to the Securities Commission; (©) the final audited financial statements to the Securities Commission, the Bursa Malaysia, the Companies Commission and the Director General of Inland Revenue; and (@) financial statements that have been drawn up to show a true and fair view and are in compliance with Approved Accounting Standards. 1.7_ The State-of-the-Art Accounting and Reporting Practices The history of formal financial accounting and reporting in Malaysia is fairly short, spanning over a period ofonly lightly more than five decades, when compared to the more developed economies. Also, development and advancement of accounting standards only began in the late 1970s and most ofthe approved standards were intlly mere adoption of [AS. While some improvements were noticeable inthe 1990s, the reporting practices then were largely based and strongly influenced by statutes, such as the requirements of the Companies Act and the Bursa Malaysia Listing Requirements. As such, not much have changed over the years in terms of the reporting format and the disclosure practices. In particular, the profit and loss account disclosure in the 19805 and 1990s was the abridged version and companies in Malaysia had a tendency to stick very closely to mandatory disclosures. Voluntary disclosure practices then were the exception. The focus appeared to be that of stewardship accounting and reporting, rather than on the usefulness of accounting inform: Om to users. These past practices, which can be described as steward reporting, may be a result of the absence of a ‘senerally accepted framework for financial reporting in Malaysia then. The closest equivalent to an accounting framework then was that of the true and fair view requirement under the Companies Act. However, this View is not defined in the Companies Act or in Approved Reporting Standards. Guidance of what should be considered as a true and fair view is based largely on convention rather than on any particular concept, 2nd this generally centres on: (a) compliance with Approved Reporting Standards; (b) compliance with the ‘ompanies Act; and (c) compliance with the requirements of other statutes. ‘The issue of whether the accounts show a true and fair view is often a 1atter of subjective judgement. It ‘au only be authoritatively decided by a court. Legal cases in some countr have shown that the courts will Financia Accounting and Reporting in Malaysia, Volume 1 o Chapter 1: An Overview of the Financial Reporting [7 Malays, normally tre, : A compliance with ac, Hue and fair, Thus. deviation trom Aecounts do not show a u ic evidence that the accounts », ed accounting standards as prima fact ie evidence that y aveepted standards are usually prima Fe Tue and fair view jecountin Also, accounts will not show a ttue AWantity and quality to satisfy the Mere compliance a true info hey contain 15 sufficten, and fair view unless the information they conmatn 7 NU gSt y Feasonable expectation of the readers to whom they are fit cian atts Companies Act andl approved reporting standards does not RESET LN nt N26 as been presented, iti considered navessary in order 10 give a tue Id ENE mation presented in the financial statements shall include voluntary informatic Fequirements of the Companies Act and reporting standards. —_— In 1999, when the MASB began issuing its MASB standards that were a aaitia 1 st Stvtements in Malaysia took a “quantum leap” in that the focus shifted Cee ace Teporting to that of providing information that is useful to external u: ae .d by the then SC’s guidelines shift towards more transparent and full disclosure was also strongly infaspligation to fully disclose to the ‘hich contained a policy statement, stating that public companies have an obliEi ye a Public the information necessary to make an informed investment decision. The feu ON’ Te 8 on the usefulness of information to users, which is consistent with most ac z the more developed economies. arily mean wardship i 9 MRSS effective I Januar In 2006, the MASB issued a batch of some 21 FRSs (which were renamed 9 NESS coc | Nn 2012) that were adoptions ofthe new IFRSs nd IAS» issued by the LASB. The MASB has ine Oi puns a policy of converging its Standards with those of the IASB, ae eee most overseas jurisdictions have adopted the IFRSs as their national accounting 7 porting (first issued in 2008 The MASB has also issued the Conceprual Framework for Financial Laced dato = ded in 2011 and revised in 2018). This Framework, which is based on the s ke aetave a sone influence on the subsequent MFRSs issued in Malaysia. For example, the issuance of MFRS Soteoer a ef Financial Satenencs represents a significant advancement in that it focuses on fa: ee | statements with users as the prime audience. The prescribed disclosures for the Francia ‘saiemeats are, more or less, a full disclosure requirement, Malay to date has moved in tandem with is thus heartening to note that the financial reporting in y ‘ ns eee of the IFRSs issued by the IASB. By the year 2012, the MFRSs in Malaysia are fully we erged with the IFRSs issued by the LASB. In the year 2016, the MI 'S Framework was put in place and this brings the private entity reporting to be at par with the current global financial reporting. 1.8 The Directors’ Report of Companies 4 Malaysian company’s annual report, apart from presenting the audited fin: ancial statements, must also contain a directors’ report. Section (1) of the Companies Act 2016 specifies that the directors of 4 company shall prepare for each financial year a Directors’ Report and such report shall be attached to the “nancial statements, The report shall be approved by the Board and sh by at least two directors, oF in the case of a single director, that director wall be signed on the directors’ behal! Section 25 31) oF the Act requires a directors’ report for a financial year shall contain [fe pame of every person who way a director of the company during the om the end of the Finar () during the financial year; and ial year and ending on the date of the reper in the course of the financial ye: Fifth Schedule period commencing (b) the principal ac the matters set out sw including its subsidiaries: a0 18 2019 Commerce Clearing House (Malaysia) Sdn 8d -4:An Overview of the Financial Reporting in Malaysia 25 chapter jors’ report prepared under s 252 may include a business review as set out in PE II of Fifth ie direct ie + reporting as prescribed [5 253(3)]. sfule or any other seh ‘he Fitth Schedule of the new Companies Act 2016 specifies the detailed requirements of a Directors’ apart Each report 10 which s 282 ofthe Act relates, shall state the following detail: she net amount of the profir or loss after tax of the company for the financial year; the amounts and particulars of any material transfers to or from reserves or provisions: fe) the purposes, classes, numbers and terms of shares and debentures issued duting the year, |g) the directors” (past and present directors in the financial year) interests in shares and debentures of the company and its related companies (parent, subsidiaries and fellow subsidiaries); the director's notification of his interests in shares and debentures of the company and of the related e companies: the amount of dividend paid and declared since the end of the previous financial year: whether the directors took reasonable steps to ensure that all known bad debts had been written off and * shat adequate provision had been made for doubtful debts; whether the directors are aware of any circumstances which would render the amount written off for bad debts or the amount of the provision for doubiful debts inadequate and, if so, giving particulars of the circumstances: whether the directors have ensured that any current assets which were unlikely to be realised in the ordinary course of business have been written down to an amount realisable; whether the directors are aware of any circumstances which would render the values attributed to current “assets misleading and which would render adherence to the existing method of valuation of assets or liabilities of the company misleading or inappropriate, and, if so, giving particulars of the circumstances: whether there exists: (i) any charge on the assets of the company which has arisen since the end of the financial year and if so, giving particulars of any such charge and the amount secured and (ii) any contingent liability which has arisen since the end of the financial year and, if so, stating the general nature of the liability and the maximum amount, or an estimate of the maximum amount, for which the company could become liable in respect of the liability; whether any contingent or other liability has become enforceable, or is likely to become enforceable, within the period of 12 monchs after the end of the financial year which will or may affect the ability of the company to meet its obligations when they fall due and, if'so, giving particulars of any such liability; whether the directors are aware of any circumstances not otherwise dealt with in the report or accounts which would render any amount stated in the accounts misleading and, if so, giving particulars of the 0 (m circumstances; (1) whether the results of the company’s operations during the financial year were substantially aftected by any item, transaction or event of a material and unusual nature and, if so, giving particulars of that item, transaction or event and the amount or the effect of the item, transaction or event, if known or reasonably ascertainable; and (0) whether there has arisen in the interval between the end of the financial y any item, transaction or event of a material and unusual nature likely to affect substantially the results of the company’s operations for the financial year in which the report is made and, if so, giving particulars Of the item, transaction or event. The report shall state, in respect of the directors or past directors of the company. the amounts of: ar and the date of the report a) fees a r ! es and other benefits distinguished separately, paid to or receivable by them from the company or its Subsidiary companies as remuneration for their services to the company or its subsidiary companies Financi ‘sncial Accounting and Reporting in Malaysia, Volume 1 oI 26 Chapter 1:An Overview of the Financia Reporing i. ta, My Tse beni include all fe, percentages, bonuses, commissions. COMPERSAion fen - pension or retirement benefits scheme and commission for subscribing of any shares in op eben the company or ofits holding company or any subsidiary ofthe company; op (b) the estimated money value of any other benefits received or receivable by them other from the company or from any of its subsidiary companies; (©) the total of the amount paid to or receivable by any third party in respect of the serve Provided ompany o any ofits subsiiary companies by any director or past rector of the company (@) the total amount, if any, of any indemnity given to or insurance effected for, any ditector Of, auditor of the company. ® Seton ing the end of the previous financial A director of a company shall state whether he has, since t Year, ees, ‘or become entitled to receive a benefit by reason of a contract made by the company o a related comers with the director or with a firm of which he is a member, or with a company in which he has Substani financial interest, and, if so, the general nature of the benefit. The other disclosures required in the directors’ report are as follows: (a) The name of the corporation regarded by the directors as being the company’s ultimate hold and if known to them, the country in which itis incorporated (b) The number and class of shares in espct of which the option has been granted to directors the day expiration ofthe option; the basis upon which the option may be exercised; and whether the person ‘whom the option has been granted has any right to participate by virtue ofthe option in any share, of any other company ing company (©) The particulars of shares issued during the period to which the report relates by virtue ofthe exer options to take up unissued shares ofthe company, whether granted before or durin that period ana number and class of unissued shares ofthe company under option as atthe end ofthat period, the pe, or method of fixing the pice, of issue of those shares, the date of expiration of the option and theres if any, of the persons to whom the options have been granted to Participate by virtue of the options in any share issue of any other company. Snecify clearly either inthe profit and loss account ofthe holding company or consolicated profit and loss account of the holding company and of its subsidiary companies the name, place of incorporation Drincipal activites, and pereentage of issued share capital held by the holding company in each Subsidiary to which that profit and loss account or other document relates, (©) {the auditors report on the accounts ofa subsidiary company is qualified in any way, the consolidated balance sheet of the holding company, as the case may be, shall contain Particulars of the manner in ‘which the report is qualified in so far as the matter which is the subject of the qualification is not covered by the holding company’s own accounts and is material from the Point of view of its members. (The auditors report shall be shown under separate headings inthe balance sheet of every subsidiary apurbany the extent ofits holding of shares in the holding company and in othe related corporations (g) The total amount paid to or receivable by the auditors as remuneration for their services as auditor, inclusive ofall fees, percentages or other payments or consideration given by or from the company o by of from any subsidiary of the company. @ 1,9 Management Commentary and Business Review 1.9.1 Management Commentary In February 2013, the MASB issued SOP 3 Management Commer -ntary which is based on the IFRS Practice Statement on the same subject. The IFRS Practice Statement (th he Guidance) is a broad, non-binding 19 2019 Commerce Clearing House (Malaysia) Sdn Bhd er 1: An Overview of the Financial Reporting in Malaysia 27 chap srk for the presentation of management commentary that relates to financial statements that have been fram in accordance With IFRSs, This Guidance is not an IFRS and hence compliance is not mandatory pre i pecifcally tequited by Tocal regulations ole A management commentary is @ narrative report that relates to financial statements that have been «in accordance with MERSs. It provides users with historical explanations of the amounts presented see anancial statement, specially the entty’s financial position, financial performance and cash ows woe Muvides COMMENLATY of a entity’s prospects and ather information not presented in the financial pe Itthus serves as a basis for’ understanding management's objectives and its strategies for achieving those objectives Public listed companies in Malaysia have been providing information of this nature (often termed as snanagement discussion and analysis or MD&A) in their annual reports although the form and content vary among companies and there is no standard format in the reporting. This Guidance will provide a standard format forthe reporting of management commentary. The Guidance requires that management should present commentary that is consistent with the following principles (2) to provide management's view of the entity’s performance, position and progress: and (6). t supplement and complement information presented in the financial statements. The Guidance clarifies that a management commentary should include information that is essential to an understanding of the following elements: (a) the nature of the business; (b) management objectives and its strategies for meeting those objectives; (©). the entity's most significant resources, risks and relationships; (@)_ the results of operations and prospects; and (2) the eritical performance measures and indicators that management uses to evaluate the entity's performance against stated objectives. These elements are interrelated and should not be presented in isolation. Management provides its Perspective on the business and its analysis of the interaction of the elements to help users to understand the

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