FAR670 Financial Statement Analysis

Topic 1

Regulatory and Statutory Requirements

of Financial Reporting
Current Financial Reporting Regime
• In December 1996, Malaysian Government announced its
intention to establish a new financial accounting and reporting
regime
• This intention was subsequently endorsed in Parliament when
the Financial Reporting Act 1997 (FRA 1997) was passed and
gazetted on 6 March 1997
• Two bodies were formed under this Act:
 Financial Reporting Foundation (FRF)
 Malaysian Accounting Standard Board (MASB)

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Current Financial Reporting Regime
• These two bodies are backed by FRA 1997 to ensure smooth
conduct of the functions of FRF and MASB
• FRA 1997 also provides regulatory support for both FRF and
MASB in the conduct of their functions
• With the introduction of FRA 1997, compliance with MASB
approved accounting standards were made MANDATORY on
companies for financial reporting purposes

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Financial Reporting Foundation
• The FRF comprises twelve (12) members who are appointed by
the Minister of Finance
• Eight (8) of the members are ex-officio representing the
Minister of Finance, the Central Bank, the Securities
Commission, the Audit Oversight Board, the CCM, the Bursa
Malaysia Berhad, the MIA and the MASB
• The four (4) other members who possess knowledge and
experience in matters of financial accounting and in one or
more of the following fields; accountancy, law, business, or
finance

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The Functions of Financial Reporting Foundation
• To provide its views to the MASB on any matters which the
MASB seeks to undertake or implement
• To review the performance of MASB
• To be responsible for all financing arrangements for the
operations of MASB including approving the budget for MASB
• To perform such other functions as the Minister of Finance may
prescribe by order published in the Gazette

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The Functions of Malaysian Accounting Standard Board
• To issue new accounting standards
• To review, revise or adopt existing standards
• To issue the statements of principles for financial reporting
• To sponsor or undertake the development of possible
accounting standards
• To conduct public consultation
• To develop conceptual framework
• To perform such other functions as the Minister of Finance may
prescribe by order published in the Gazette

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Regulatory Bodies over Companies
• Companies Commission of Malaysia (16/4/2002)
• Lembaga Hasil Dalam Negeri (Inland Revenue Board)
• Securities Commission of Malaysia
• Bursa Malaysia Berhad
• Bank Negara Malaysia

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Regulatory Bodies over Accountant
• Malaysian Institute of Accountants (MIA)
• Malaysian Institute of Certified Public Accountants (MICPA)

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Regulatory Body over Public Entities’ Auditor
• Audit Oversight Board (AOB)

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Statutory Regulations
1. Companies Act 1965 (CA 1965) replaced by Companies Act
2016 (CA 2016)
2. Income Tax Act 1967 (ITA 1967)
3. Financial Reporting Act 1997 (FRA 1997)
4. Securities Commission’s Guidelines
5. Bursa Malaysia Listing Requirements
6. Bank Negara Malaysia’s Guidelines

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1. Companies Act 1965 (CA 1965) Replaced by CA 2016
• The principle legislation governing the formation and operation
of companies in Malaysia
• It provides formal rules on accounting and requirement for true
and fair view reporting
• The provision under the act protects the right and interest of
shareholders in particular and investors in general
• The Company Commission of Malaysia (CCM) enforces and
administers the Companies Act
• In 2016, CA 1965 was replaced by CA 2016

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The Requirements of Company Act 2016 in Relation to
Financial Accounting and Reporting
• Every company must keep proper accounting records to enable
a true and fair view of the business operation
• All accounts must be recorded and kept to enable them to be
properly audited
• All accounts must be recorded within 60 days of completion of
transactions and be kept for 7 years after the completion of
such transactions
• Audited accounts must be presented by the directors to the
shareholders in the company’s annual general meeting

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The Provision under CA 2016 in Relation to Compliance
with the Approved Accounting Standards
• The Act requires that the financial statements of a company or
the consolidated financial statements of a holding company
must comply with the approved accounting standards issued by
MASB to achieve true and fair view

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The Requirements of CA 2016 with Regards to Systems of
Internal Control
• The directors of a public company or subsidiary of a public
company shall have in place a system of internal control that
provides reasonable assurance that:
 The assets of the company are safeguarded against loss from
unauthorized use or disposal and to give a proper account of
the asset
 All transactions are properly authorized and that the
transactions are recorded as necessary to enable
preparation of a true and fair view of the financial
statements

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2. Income Tax Act 1967 (ITA 1967)
• LHDN (IRBM) was established on 1 Mac 1996
• Mainly concerned with ascertaining of chargeable income and
tax payable under the Act
• As taxation is a business expense that needs to be reflected in
the SOPL, compliance with ITA 1967 is legally enforceable
• The Act requires every person carrying on any trade or business
must keep sufficient records to enable income or loss from the
business for the basis period for any year of assessments to be
readily ascertained by Director General of the Inland Revenue
or an authorized officer

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3. Financial Reporting Act 1997 (FRA 1997)
• FRA 1997 was passed and gazetted on 6 March 1997
• Section 27 deals with compliance with approved accounting
standards (AAS) of Malaysian Accounting Standards Board
(MASB)
• Basically, FRA 1997 provides the enforcement authority to the
standards issued by MASB

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4. The Securities Commission’s Guidelines
• The Securities Commission (SC) is a self-funding public sector
statutory body which reports to Minister of Finance
• Established on 1 March 1993 under the Securities Commission
Act 1993
• SC’s ultimate responsibility is protecting the investor
• SC encourages and promotes the development of the securities
and futures markets in Malaysia
• The SC requirements are focused on public companies
• SC discharges many regulatory functions
• Please refer to www.sc.com.my for details

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Securities Commission's Objectives
• To promote and maintain fair, efficient, secure and transparent
securities and futures markets
• To facilitate and promote the overall development of an
innovative and competitive capital market through the
regulation and enforcement of all matters relating to the
securities industry

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Securities Commission's Regulatory Functions
• To encourage and promote the development of capital market
in Malaysia through the regulation and enforcement of all
matters relating to securities market
• To regulate issue of securities and designation of future
contracts
• To regulate all matters relating to unit trust schemes
• To regulate take over and mergers of company

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Areas Addressed by the Securities Commission
• Corporate Disclosure Policy:
 requires companies to maintain a high level of disclosure
• Post-Listing Obligations:
 requires companies to submit reports such as annual
reports, interim reports and related party transactions
• Accounting Standards and Valuation of Assets:
 requires public company to comply with the statutory and
regulatory framework of accounting (AAS, Companies Act
and SC’s revaluation rules)

• Hence, it has statutory power to enforce compliance

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5. The Bursa Malaysia Listing Requirements
• The Bursa Malaysia (formerly known as Kuala Lumpur Stock
Exchange) is an exchange holding company incorporated under
Section 15 of the CMSA 2007 to regulate companies listed on
its Exchange
• Bursa Malaysia requirements apply only to public listed
companies
• Unlike the Companies Commission, the Securities Commission
or Bank Negara Malaysia, the Bursa Malaysia does not have the
legal power to enforce compliance
• It can, however, rely on the power it has to delist, suspend or
publicly reprimand errant listed companies for any non-
compliance with its regulations

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The Requirements
• Companies listed on the exchange are required to report and
submit to the Exchange/Bursa Malaysia the annual report
which consists of audited account together with the directors’
report
• Public listed companies are required to file quarterly report to
the Exchange/Bursa Malaysia not later than two months after
the end of each quarter of a financial year

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Bursa Malaysia Reporting Requirements
• Annual Reports prepared in accordance with Malaysian
Financial Reporting Standards (MFRS) and requirements of CA
2016
• Auditors’ and directors’ reports are to be submitted to the
Bursa Malaysia 4 months from the year end
• The printed annual report shall be issued to shareholders
within a period not exceeding 6 months from the year end
• For interim reporting, comply with quarterly reporting
requirement

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6. Bank Negara Malaysia’s Guidelines
• Bank Negara Malaysia is a statutory body which started
operations on 26 Jan 1959
• Now is governed by the Central Bank of Malaysia Act 2009
• The current governor is Datuk Nor Shamsiah Mohd Yunus
(1/7/2018)
• The role is to promote monetary and financial stability
• Bank Negara Malaysia issued two sets of guidelines on financial
reporting practices of financial institutions established under
the Banking and Financial Institutions Act 1989 (BAFIA 1989)
• They are as follows:
• BNM/GP3: Classification of Non-Performing Loans and
Provision for Substandard, Bad and Doubtful Debts
• BNM/GP8: Guidelines on Financial Reporting for Licensed
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Malaysian Institute of Accountants (MIA)
• The principle objective is to regulate the practice of the
accountancy profession and to promote the interest of the
profession in Malaysia
• In charge of the registration of accountants in Malaysia
• To monitor the international and local accounting trends and
developments
• To consult regularly with the government and regulatory body
• Jointly issued accounting standard with MICPA before 1997

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The Audit Oversight Board (AOB)’s Mission
• The AOB was established under Part 111A of the Securities
Commission Act 1993
• Part 111A was incorporated in the Securities Commission Act
by the Amendment in 2010 and the Act comes into force on 1
April 2010
• The AOB’s mission is to assist the Securities Commission in
overseeing the auditors of public interest entities and to
protect the interests of investors by promoting confidence in
the quality and reliability of audited financial statements of
public interest entities

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The Audit Oversight Board (AOB)’s Power and Function
• The AOB requires all auditors of public interest entities to be
registered
• The AOB has statutory power to conduct inspections and
monitor programmes on registered auditors to assess the
extent of their compliance with recognized auditing and ethical
standards, including compliance with accounting standards
• The AOB is also empowered by Securities Commission Act to
sanction any registered auditors for failure to comply with any
provisions on Part 111A of the Act, notices or guidelines issued
by the SC

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Accounting Standard Pronouncements in Malaysia
• 1978 - 1997  First adoption of IAS under MIA/MICPA
• 1997 - 2005  Renamed the standards as MAS
• 2005 - 2012  MASB renamed the standards as FRS (Malaysia
GAAP)
• 2012  Convergence with IFRS = MFRS

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Malaysian Private Entities Reporting Standard (MPERS)
for SMEs
• The MPERS is based on the IASB’s International Financial
Reporting Standard for Small and Medium-sized Entities (IFRS
for SMEs) issued in 1/1/2016
• Private entities have the option to apply in its entirety either:
a. the MPERS, or
b. the MFRSs

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Malaysian Private Entities Reporting Standard (MPERS)
for SMEs
• A private entity is a private company incorporated under the
Companies Act 1965 that:
i. is not itself required to prepare or lodge any financial
statements under any law administered by the Securities
Commission or the Bank Negara Malaysia; and
ii. is not a subsidiary or associate of, or jointly controlled by,
an entity which is required to prepare or lodge any
financial statements under any law administered by the
Securities Commission or the Bank Negara Malaysia

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Role of International Accounting Standards Board (IASB)
• The International Accounting Standards Board (IASB) is the
independent, accounting standard setting body of the IFRS
Foundation
• IASB was founded on 1 April 2001 as the successor to the
International Accounting Standards Committee (IASC)
• It is responsible for developing International Financial
Reporting Standards (IFRSs), the new name for International
Accounting Standards (IASs) issued after 2001, and promoting
the use and application of these standards

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Application of IFRS as Financial Reporting Standards
• After being admitted as a member of the International
Accounting Standard Board (IASB), the Malaysian Accounting
Standard Board (MASB) began convergence work in 2004 to
align its standards with those of the IASB
• In 2006, as a first step towards the convergence, the then single
set of MASB Standards was separated into two reporting
frameworks:
1. Financial Reporting Standards (FRSs) framework for public
entities
2. Private Entity Reporting Standards (PERs) framework for
private entities
• The convergence process ended in year 2012
• Since then, MFRSs are word-for-word IFRSs issued by the IASB
except for the nomenclatures
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Benefits of Convergence
• Global investors would have better understanding of financial
statements prepared by companies in Malaysia, allowing for
better comparison between companies
• Help to enhance national reputation as Malaysian Standards
are in compliance with international accounting standard and
comparable within IFRS jurisdiction
• Provide greater credibility and transparency as financial
statements prepared are understood by global investors
• Malaysia multinational companies benefit from reduced
translation risk when consolidating international subsidiaries
into single set of consolidation accounts

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Definition of Accounting Conceptual Framework
• An accounting conceptual framework can be described as

“a structured or coherent system of inter-related objectives,

fundamental characteristics and concepts that lead to
formulation of high quality and consistent reporting standards
to prescribe the nature, function and limits of financial
accounting and reporting.”

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The MASB Conceptual Framework for Financial Reporting
• July 1998 – MASB issued a discussion paper MASB DP1,
Framework for the Preparation and Presentation of Financial
Statements
• July 2007 – The above discussion paper was finalized as the
MASB’s Framework
• The MASB is currently in the process of updating its conceptual
framework
• Conceptual Framework is not a MFRS/FRS and hence does not
define standards for any particular measurement or disclosure
issue
• If there is a conflict between Conceptual Framework and
MFRS/FRS, the requirements of the MFRS/FRS prevail

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The MASB Conceptual Framework for Financial Reporting
• The Conceptual Framework was first issued by the MASB in
November 2011
• It was then revised in 2018
• The Conceptual Framework is applicable for the preparation
and presentation of financial statements in accordance with
the MFRS Framework or the Financial Reporting Standards
(FRS) Framework
• The Conceptual Framework is equivalent to The Conceptual
Framework for Financial Reporting as issued by the IASB

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The Scope of Conceptual Framework
The Conceptual Framework document comes in 4 chapters:
• Chapter 1 – The objective of general purpose financial
reporting
• Chapter 2 – The reporting entity
• Chapter 3 – Qualitative characteristics of useful financial
information
• Chapter 4 – The assumption, elements, recognition and
measurement of the elements from which financial statements
are constructed; and concepts of capital and capital
maintenance

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The Purpose of Conceptual Framework
• To assist the MASB in the development of future MFRS and in
its review of existing MFRS
• To assist the preparers of financial statements in applying MFRS
and in dealing with topics that has yet to form the subject of an
MFRS
• To assist auditors in forming an opinion as to whether financial
statements comply with MFRS
• To assist users of financial statements in interpreting the
information contained in financial statements prepared in
compliance with MFRS
• To provide those who are interested in the work of MASB with
information about its approach to the formulation of MFRS

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Reasons for Developing the Framework
• To identify a foundation for financial reporting
• To identify the objective of financial statements
• To identify the desirable qualitative characteristics of financial
information
• To provide a basis for setting of high-quality and consistent
reporting standards
• To serve as a reference point for resolving accounting issues
and disputes

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