FINANCIAL STATEMENTS

Chapter 4

Companies Act 1965 vs

Financial Reporting Act 1997
Co. Act 1965 sets out the requirements as to the

records to be maintained (Register of members,

substantial shareholders, directors shareholdings and
debenture holders and copies of the Trust Deed),
returns to be submitted and financial statements to be
presented and other matters governing share capital
Under the Financial Reporting Act 1997, the Malaysian
Accounting Standards Board (MASB) was set up to issue
accounting standards, among other functions. It also
reviews, revises or adopts as approved existing
accounting standards
2

 Chairmans statement background to the present position of the

Bursa
Malaysia
Securities
Berhad
company
Corporate governance
statement Composition
the Board, Board
(KLSE)
Requirements
ofAnnual
meetings including attendance, Directors remuneration and training etc
Report
toreport
be directors
sentandto
the senior management
Audit Committee
independent
executives
shareholders
14 days before AGM
Statement on internal control
Social responsibility statement and
Financial statements
Directors report
Auditors report
Financial statements
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Presentation of Financial Statements

(FRS 101)
FRS 101 is an accounting standard adopted in Malaysia
when preparing financial statements of an enterprise.
It prescribes the basis for presentation of general
purpose financial statements of an enterprise
It aims to ensure comparability both with entitys
financial statement of previous periods and with the
financial statements of other entities

Objectives
general purpose of financial statements is to

provide information about the financial

position, financial performance and cash flows
of an entity that is useful to a wide range of
users in making economic decisions
financial statements also show the results of
managements stewardship of the resources
entrusted to it

Components of Financial
Statements
Statement of financial position
Statement of comprehensive income
Statement of changes in equity
Statement of cash flows
Notes, comprising a summary of significant

accounting policies and other explanatory notes

A statement of financial position at the beginning of
the earliest comparative period when the entity
makes retrospective adjustments to items in the
financial statements or reclassifies them
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Approved accounting standards

Companies Act 1965 stipulates that companies

have to apply all approved financial accounting

reporting standards (FRSs) in the preparation and
presentation of the financial statements
Ninth Schedule of the Companies Act 1965 and
the various FRSs specify the minimum information
to be disclosed in the annual financial statements
of companies presented to external users

Statement of Comprehensive
Income
Revenue
Finance costs
Share of profit and loss of associates and joint ventures

accounted for using the equity method

Tax expense
A single item comprising post-tax profit or loss of
discontinued operations plus the post-tax gain or loss on
measurement to fair value less costs to sell or on the
disposal of the assets or disposal group(s) of the
discontinued operation; and
Profit or loss profit or loss attributable to minority
interest; and profit or loss attributable to equity holders
of the parent
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Expenses they can be presented using

either one of the following methods:
Nature of expense method e.g. depreciation,

staff costs, purchases of materials, transport

costs, employee benefits and advertising costs
Function of expense or Cost of sales method e.g.
expenses classified into cost of sales,
administrative or distribution activities etcIf
method (b) is applied, additional information on
the nature of expenses must be disclosed

Statement of Financial Position

Property,plant and equipment
Investment property
Intangible assets
Financial assets
Investments accounted for using the equity method
Biological assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets classified as held for sale and assets included in disposal

group
Trade and other payables
Provisions
Financial liabilities
Tax liabilities and tax assets
Deferred tax liabilities and deferred tax assets
Liabilities included in disposal group
Non controlling interest included in equity
Issued capital and reserves

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Statement of Changes in Equity

Total comprehensive income for the period showing

separately:
Profit or loss for the period
Each item of other comprehensive income
The total amount attributable to the owners of the parent

and non-controlling interest

For each component of equity, the effects of changes in

accounting policies and corrections of errors recognised

accordance with FRS 108
For each component of equity the opening, increases or
decreases during the period and the closing amount
Contributions and distribution from and to equity owners
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Preparation of Financial Statements

- Taxation
Companies pay taxes on their income and the

current rate in Malaysia is 25%

From year 2000, Malaysian tax assessment
system is based on current basis whereby taxes
are paid in the year profits/income are earned.
At the beginning of the period, companies will
estimate the amount of tax they liable to pay for
that period based on estimated taxable income.

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Taxation (continued)
Tax paid is based on the estimated taxable profits.
Tax paid < actual tax liability (tax payable)
Tax paid > actual tax liability (tax recoverable)
Beside providing for tax charge, the company has to

provide for deferred taxation

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Deferred tax
Arise because the tax payable as computed for the
current year according to tax rules is different from the
tax payable calculated according to accounting rules
Reasons:

Certain income and expenses recognised in the current years

financial statements may only be recognised for tax purposes
at a later date or vice versa. For example, companies use
accrual concept and therefore accrue interest. However, the
tax authorities adopt cash basis and thus allow for interest
that has been paid.
The amount allowed as expenses for certain expenses by tax
rules might differ from the amount charged in the accountd for
the year. Other example is depreciation vs capital allowance

They originate in one period and reverse in one or

more subsequent periods
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Deferred tax (continued)

Example 1:
A plant costing RM100,000 was purchased in Year 1
Method of depreciation = straight line method over 5 years
Tax payable for three years was RM60,000, RM65,000 and
RM67,000 respectively. Tax rate is 25%. Capital
allowance is assumed to be 50%.
Under FRS 112 Income Taxes, full provision is made for all
timing differences using the balance sheet approach
where the amount of deferred tax liability will be
disclosed in the year end statement of financial position.
The difference between the opening and closing balances
will be disclosed in the statement of comprehensive
income either as deduction or addition to the tax payable
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Deferred tax (continued)

Example 2

Dee Berhad has reported profit before tax of

RM4,500,000. During the year x3, the company
has paid income tax of RM1,500,000. The tax
consultant has calculated the tax expense to be
RM1,750,000 inclusive of increase in deferred tax
liability of RM100,000. Assume that deferred tax
liability brought forward is RM460,000

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MFRS 112 Income Taxes

Cover the accounting aspects of income taxes and

focuses on accounting and presenting deferred

taxation.
Tax expense as charged in the statement of
comprehensive income for Malaysian companies
comprises tax payable computed according to tax
rules and deferred tax charges

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Other Comprehensive Income

Changes in revaluation surplus of non current

tangible and intangible assets

Actuarial gains and losses on defined benefit
plans
Gains and losses on translating the financial
statements of foreign operations
Gains and losses on remeasuring available for
sale financial assets
Gains and losses on hedging
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Dividends
Dividends are the distribution of profits to the

shareholders. Not all retained profits are distributed.

Losses are not distributed.
Dividends are paid based on nominal value of the
shares.
Dividends can be in cash, the most common form, or
in kind, in specie, such as bonus shares.
Dividends become payable when they are declared.
The articles of the company usually permit the
directors to declare interim dividends and then final
dividend.
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Dividends, continued
Proposed dividends are not to be accrued if

declared after the financial year end. This is in line

with FRS 110: Events after the reporting period
For example, if the accounts for year x7 are
finalised in March x8 and subsequently the
directors decided to propose a dividend then this
dividend will not be shown as current liability
Only shown in the notes to the financial
statements
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Prior year Adjustments

Retained profits from the previous period may be

adjusted for material errors and changes in

accounting policies only.
Material errors are material errors discovered in
the current period that are of such significance
that the financial statements of one or more prior
periods can no longer be considered to have been
reliable in the date of issue MFRS 108

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Example

When the accounts of Reed Berhad were being

finalised for the year x4, it was discovered that
the closing inventory for year x3 was understated
by RM400,000. The retained earnings brought
forward were RM3,000,000. Tax rate is 25%.

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Summary of Selected FRSs

MFRS 101 Presentation of Financial Statements
MFRS 5 Non current Assets Held for Sale and

Discontinued Operations
MFRS 102 Inventories
MFRS 108 Accounting Policies. Changes in
Accounting Estimates and Errors
MFRS 110 Events after the Reporting Period
MFRS 111 Construction Contracts
MFRS 112 Income Taxes
MFRS 8 Operating Segments
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Summary of Selected FRSs,

continued
MFRS 118 Revenue
MFRS 124 Related Party Disclosure
MFRS 133 Earnings per Share
MFRS 137 Provisions, Contingent Liabilities and

Contingent Assets

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MFRS 102 Inventories

Inventories are required to be stated at the lower of

cost and net realisable value (NRV).

NRV is the estimated selling price in the ordinary
course of business less the estimated cost of
completion and the costs necessary to make the sale.
Any write-down to NRV should be recognised as
expense in the period in which the write down occurs
Methods of valuation
Standard cost and retail methods
Specific costs
FIFO
Weighted average
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MFRS 108 - Accounting Policies,

Changes in Accounting Estimates and
FRS 108 prescribes the criteria for selecting
Errors

and changing accounting policies, together with

the accounting treatment and disclosure of
changes in accounting policies, changes in
accounting estimates and correction of errors
to enhance comparability of the entitys
financial statements with previous years and
other similar enterprises and enhance the
relevance and reliability of the financial
statements
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Accounting Policies
The specific principles, bases, conventions, rules

and practices adopted by an entity in preparing

and presenting financial statements
Example, using FIFO method to value inventory
An entity is required to apply relevant standards
or interpretations in applying accounting policies
to transactions and events (relevant and reliable)

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Changes in Accounting Policies

circumstances identified by FRS 108
1.a change is required by standard or an

interpretation
2.a change will result in the financial statements
providing reliable and more relevant information
about the effects of transactions, other events or
conditions on the entitys financial position,
financial performance or cash flows

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Changes in Accounting Policies

(continued)
An entity is required to apply the change in
accounting policy retrospectively
Retrospective application is where an entity adjusts
the opening balance of each affected component
of equity for the earliest prior period presented
and the other comparative amounts disclosed for
each prior period presented as if the new
accounting policy had always been applied

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Changes in Accounting Estimates

An adjustment of the carrying amount of an asset or

liability, or the amount of the periodic consumption of

an asset, that results from the assessment of the
present status of, and expected future benefits and
obligations associated with, assets and liabilities
The effect of the changes should be included
prospectively in the determination of the net profit or
loss in the period of the change as well as future
periods (if changes will also affect subsequent periods)
Example: estimates of provision for doubtful debts,
economic life of fixed assets, provision for stock
obsolescence and warranty obligations
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Disclosure requirement
Nature and amount of a change in accounting

estimate that has an effect in the current period or

is expected to have an effect in future periods
If it is impractical to quantify the effect in future
periods, this fact should be disclosed
A change in accounting estimate should not be
accounted as a prior period adjustment

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Errors
Prior period errors is defined as omissions from,

and misstatements in, the entitys financial

statements for one or more prior periods arising
from a failure to use, or misuse of, reliable
information
These errors could include mathematical
mistakes, mistakes in applying accounting
policies, oversights or misinterpretation of facts
and fraud
To correct the material error retrospectively

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MFRS 110 - Events after the

Reporting Period

1.
-

Events after the reporting period are those events

favourable and unfavourable, that occur between
the reporting date and the date when the financial
statements are approved by board of directors and
authorized for issue
The events can be classified as follows:Adjusting events
an event that provides additional evidence to
condition existing at the reporting date
the event, if material requires changes to be made
in the financial statement

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2. Non-adjusting Event
- an event that arises after the reporting date and
concerns conditions which do not exist at the
reporting date
- no changes to be made in the financial statement
- if material, disclosed in the notes to account

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Example
Companys B draft financial statements for the year
ended 31 December 2005 was completed 28
February 2006.The board of directors reviewed the
financial statements 20 March 2006 and authorised
them for issue to the audit committee of the
company. The audit committee approves the
financial statements on 21 March 20o6.The
financial statements were only made available to
the shareholders on 30 March 2006.The
shareholders approved the financial statements at
the annual meeting on 10 May 2006
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MFRS 133 - Earnings per share

Requires companies incorporated in Malaysia and

listed on a recognised stock exchange to disclose

earnings per share
EPS assists users in analysing performance of
different entities in the same reporting period and
between different reporting periods for the same
entity
Disclosed for public listed companies only
Represent earnings attributable to equity
(ordinary) shares
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Computation of EPS
Basic EPS

= Profit after tax Pref. dividend

Weighted average number of equity shares in issue
Example:
The called up capital of ABC Bhd at 1.1.X7 consisted of:400,000 10% Pref. shares of RM1 each
4,000,000 Ordinary shares of RM1 each
Profit after tax for X7 was RM428,000
Tax rate is 28%
There was no change to the share capital during the
year.
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Weighted Average Number of

Shares
To calculate basic EPS, the profit or loss after tax is divided

by the weighted average number of ordinary shares

outstanding during the period. For example is a company
has RM1,000,000 ordinary share capital of 50 sen per
share, then the shares in issue will be 2 million shares
If the shares are not fully paid up, the articles of the
company allows dividends to be paid based on the paid up
capital only, then the shares in issue will be equivalent
fully paid up shares.
Example, if a company has 4,000,000 ordinary shares in
issue, par value RM1 each but paid to 75 sen, then the
equivalent number of shares will be ?????

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Changes in capital structure

Bonus issue
The bonus shares should be included in the
calculation of EPS as if the bonus issue had
occurred at the beginning of the earliest period
reported
Previous years basic EPS should also be adjusted
for the bonus issue (comparative basic EPS for the
previous period)

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Changes in capital structure

(continued)
Example:Issue bonus shares on 30 June 2002 for ordinary
share held at 30 June 2002 = 5:1
Ordinary shares as at 30 June 2002 = 500
Profit attributable to ordinary shareholders
2001
2002
Profit at 31 Dec
RM1,600
RM2,000
Required: Compute EPS for the year 2002 and
adjusted EPS for 2001
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Diluted EPS
If there is a possibility of dilution in earnings as a
result of potential increases in the share capital
due to present obligations
Dilution is defined as a reduction in EPS or an
increase in loss per share resulting from the
assumption that convertible instruments are
converted, that options or warrants are exercised,
or that ordinary shares are issued upon the
satisfaction of specified conditions

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Diluted EPS (continued)

Illustration:-

100,000 Ordinary Shares of RM1 each

40,000 15% Convertible debentures, convertible in
2 years time (beginning of the year)
Basis of conversion = 4 OSC for every RM5 of
debentures
Profit before tax = RM200,000
Assume tax rate = 28%
Required: Compute diluted EPS
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Disclosure Requirements
Basic and diluted EPS should be presented on the

face of the income statement for each class of

ordinary shares with different rights
The figures should be disclosed even if the
amounts are negative (the amounts used as the
numerators and the weighted average number of
ordinary shares used as the denominator in
calculating basic EPS and diluted EPS)
The basis of calculations must be disclosed
The diluted EPS must be disclosed regardless of
the extent of its differences from the basic EPS

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FRS 137 - Provisions, Contingent

Liabilities & Contingent Assets
Contingency is defined as a condition or situation

existed at the reporting date (i.e. before or on the

BS date), where the outcome will be confirmed
only on the occurrence or non-occurrence of one
or more uncertain future events
Example:- a company received a notice of litigation
from an ex-employees for wrongful dismissal

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Accounting treatment
1. Contingent gain should not be accounted for

(recorded) in the financial statements

prudence concept. If there is a probable
chance that a company will gain, then disclose
it in the notes to account.
2. Contingent loss should be provided for
(accrued) if:the amount of loss can be estimated with
reasonable accuracy
there is a probable chance the company is
going to lose
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Journal entry
DR Contingent Loss
CR Provision for Contingent Loss
A note must be disclosed in the notes to account

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Summary: Accounting for

Contingency
Contingent
Loss/Liabilities

Contingent
Gain/Assets

1. Event is probable
quantifiable

Accrue (provision)
Disclosures

Disclosures

2. Event is possible

Disclosures

Ignore

3. Event is remote

Ignore

Ignore

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Accounting for Commitments

commitment is a promise/an undertaking to

deploy money or other financial resources for a

particular purpose
if the commitment is supported with a legal
contract/promise, an enterprise has an obligation
to it. Eg. Commitment for lease rental
the transaction should be disclosed in the notes to
account as per 9th Schedule in Company Act up
to the amount approved by the director
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