FINANCIAL REPORTING by mooc sas

FINANCIAL REPORTING

Wan Zuraida Wan Yusoff Zulia Khamzani Zuhidin Tg Besaruddin Sh Tg Yaakob

FINANCIAL REPORTING Published by: POLITEKNIK SULTAN HAJI AHMAD SHAH 25350 KUANTAN, PAHANG DARUL MAKMUR COPYRIGHT©2021, Politeknik Sultan Haji Ahmad Shah Perpustakaan Negara Malaysia Cataloguing-in-Publication Data Wan Zuraida Wan Yusoff, 1972FINANCIAL REPORTING / Wan Zuraida Wan Yusoff, Zulia Khamzani Zuhidin, Tg Besaruddin Sh Tg Yaakob. Mode of access: Internet eISBN 978-967-0778-82-2 1. Financial statements. 2. Cash flow. 3. Accounting. 4. Government publications--Malaysia. 5. Electronic books. I. Zulia Khamzani Zuhidin, 1974-. II. Tg Besaruddin Sh Tg Yaakob, 1966-. III. Title. 657.3

Materials published in this book is under the copyright of Politeknik Sultan Haji Ahmad Shah. All rights reserved. No part of this publication may be reproduced or distributed in any form by means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publisher. Printed in Malaysia by: kuBiGs Creation Ent. No.6, Kg. Selamat Baru, Bangunan LKNP 25050 Kuantan Pahang Darul Makmur

Preface This book is written for the accounting students and lecturers to empower their knowledge and to aid lecturers and students to master the subject matter. The contents of this book are referred to the Malaysia Polytechnic Curriculum. This book will help you to have a clear exposition of the accounting principles of preparing and presenting financial statements and all aspects of company and group reporting within the Malaysian reporting environment. The texts are all based on the latest versions of the Malaysia Financial Reporting Standards (MFRS) and Malaysian Private Entities Reporting Standards (MPERS). Wan Zuraida Wan Yusoff B. in Accountancy (Hons) (UPM), M. Ed (Technical) (UTM)

Zulia Khamzani Zuhidin B. in Accountancy (Hons) (UiTM)

Tengku Besaruddin Shah Tengku Yaakob Dip.Mech Eng (UTM), B. Eng (Hons)Mech (UiTM)

“Learning is an experience. Everything else is just information” – Albert Einstein

Table of Contents Preface ................................................................................................................................................................................. 2 Table of Contents ....................................................................................................................................................... 1

Topic 1 ................................................................................................... 1 Financial Statement .......................................................................... 1 Topic Overview .................................................................................. 2 Topic Overview .................................................................................. 2 1.1 Presentation of Financial Statements ................................................................................................. 3 1.2 Share Capital ....................................................................................................................................................... 4 1.3 The Statement of Financial Position .................................................................................................... 4 1.4 The Statement of Profit or Loss and other comprehensive income. .......................... 6 1.5 The Statement of Changes in Equity ................................................................................................. 7 1.6 Notes to the Accounts ................................................................................................................................... 8

Topic 2 ................................................................................................ 21 Cash Flow Statement ..................................................................... 21 Topic Overview ................................................................................ 22 2.1 The purpose of cash flow .........................................................................................................................23 2.2 Benefit of Cash Flow .....................................................................................................................................23 2.3 Definition. ................................................................................................................................................................23 2.4 Operating Activities .....................................................................................................................................24 2.5 Investing Activities ..........................................................................................................................................24 2.6 Financing Activities ........................................................................................................................................25 2.7 Presentation of the Cash Flow Statement ...................................................................................25

Topic 3 ................................................................................................. 36 Accounting Theories ....................................................................... 36 Topic Overview ................................................................................ 37 3.1 The Purposes of Accounting Theory ................................................................................................38 3.2 The Accounting Bodies that Regulate the Accounting Standards in Malaysia. ......................................................................................................................................................................................38 3.3 The Use of Accounting Information ..................................................................................................38 3.4 The Internal Users of the Financial statement. .........................................................................39 3.5 The External Users of the Financial Statement. .......................................................................39 3.6 The Nature and Purposes of the Conceptual Framework .............................................40 3.7 The Accounting Framework. ....................................................................................................................40 3.7.1 The Objectives of Financial Reporting

3.7.2 Qualitative Characteristics and Constraints of Financial Reporting Information. 41 3.7.3 Recognition and Measurement of Elements of a Financial Statement. 43 3.8 Accounting Concept and Conventions. .....................................................................................43

Topic 4 ................................................................................................ 51 Basic of Group Accounts ............................................................. 51 Topic Overview ................................................................................ 52 4.1 What is a Group Account? .....................................................................................................................53 4.2 Business Combination ..................................................................................................................................53 4.3 Prepare the Consolidated Financial Statement ....................................................................53 4.4 Definition of “Subsidiary and Holding Company” ..................................................................54 4.5 Purposes of Consolidated Financial Statement .....................................................................55 4.6 Group Account/Consolidated Account ......................................................................................55

4.7 What is the Consolidated Statement of Financial Position? ........................................56 4.8 Accounting Treatment of NCI ...............................................................................................................60

Topic 5 ................................................................................................. 67 Intra Group Transactions .............................................................. 67 Topic Overview ................................................................................ 68 5.1 Intra Group Balances and Transaction ........................................................................................68 5.1 Intra Group Balances and Transaction ........................................................................................69 5.1.1 Intra Group Transaction for Owing Money and Balances

5.1.2 Current Account and Item in Transit

5.1.3 Trade Receivables/ Trade Payables

5.1.4 Bills Receivable/ Payables

5.15 The Intragroup Transactions for the Sale of Trading Inventories

5.16 The Intragroup Transactions for Dividends Income Received by the Holding from The Subsidiary 77 5.1.7 The Intragroup Transactions for the Sale of Non-current Assets

5.1.8 The Intragroup Transactions for Revaluation of Non-current Assets 79

Topic 6 ................................................................................................. 90 Internal Reconstruction .................................................................. 90 Topic Overview ................................................................................91 6.1 The Purpose of Reconstruction ............................................................................................................92 6.2 What is capital reconstruction? ..........................................................................................................92 6.3 The statutory requirements as set out in the companies Act 2016. .....................93 6.3.1 Reduce or write off the uncalled capital on company’s shares

6.3.2 Refund of the surplus capital.

6.3.3 Capital is not represented by available assets (lost capital)

6.4 Accounting Entries..........................................................................................................................................95

TOPIC 7.............................................................................................101 Issues in Financial Accounting and Reporting..................101 Topic Overview ............................................................................. 102 7.1 Events After the Reporting Period ................................................................................................. 103 7.2 Date When the Financial Statements Are Authorised for Issue ............................... 103 7.3 Adjusting Events ........................................................................................................................................... 103 7.4 Non-Adjusting Events ............................................................................................................................... 106 7.5 Dividends and Going Concern Status ...................................................................................... 108

REFERENCES ..................................................................................... 109

Topic 1 Financial Statement

Learning Outcomes: At the end of this topic, students should be able to: 1. Understand various types of financial statements 2. Illustrate the format of financial statements 3. Identify the disclosures of financial statements

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Topic Overview Financial Statements

A complete set of financial statements comprises: Statement of Financial Position

statement of profit or loss

statement of changes in equity

Equities

statement of cash flows (Topic 2)

Notes to the account

Operating Activities

Assets

Income

Liabilities

Expenses

Investing Activities

Equity

Profit/Loss

Financing Activities

This topic is discussing the presentation of Financial statement and focus on 4 statements in financial statement which are statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity and notes to the accounts. Statement of cash flow will be discussing in topic 2. This topic gave a few samples of company statement. Some examples how to prepare the statement is also given.

Topic Overview

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1.1 Presentation of Financial Statements Accounting Tools (2021) defined Financial statements are a collection of summary-level reports about an organization's financial results, financial position, and cash flows. They include the income statement, statement of financial position, and statement of cash flows. Section 259 CA 2016 requires a company to lodge its financial statements and reports (collectively called ‘the accounts’) with the ROC. For a private company, it must be done within 30 days from the day the accounts are circulated to the members (s259(1)(a)). The accounts must be circulated to the members within six months from the end of its financial year (section 258). In the case of a public company, the accounts must be lodged with the ROC within 30 days from its annual general meeting (‘AGM’). However, s. 68 requires the company to lodge its annual return with the ROC every calendar year within 30 days from the anniversary of its incorporation date. Thus, whilst the submission of the accounts is referenced to the company’s financial year-end, the submission of its annual return is linked to the anniversary date of its incorporation MFRS 101 indicates the 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 and also show the results of the management’s stewardship of the resources entrusted to it. In general, the Financial Statements are useful for the following reasons: a. To determine the ability of a business to generate cash, and the sources and uses of that cash. b. To determine whether a business has the capability to pay back its debts. c. To track financial performance. d. To derive financial ratios from the statements that can indicate the condition of the business. e. To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements. f. To use as the basis for an annual report, which is distributed to a company’s investors and the potential investors. To meet this objective, financial statements provide information about an entity’s: a. Assets b. Liabilities c. Equity d. Income and expenses e. Contributions by and distributions to owners in their capacity as owners f. Cash flows.

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A complete set of financial statements comprises: a. b. c. d. e.

A statement of financial position as at the end of the period A statement of profit or loss and other comprehensive income for the period A statement of changes in equity for the period A statement of cash flows for the period Notes, comprising significant accounting policies and other explanatory information

1.2 Share Capital With effect from 31 January 2017, all companies with share capital migrated to no par value regime. It is immaterial that the company was incorporated under the CA 1965 or any previous enactment. Section 74 CA 2016 reads, ‘All shares issued before or upon the commencement of this Act shall have no par or nominal value.’

1.3 The Statement of Financial Position The statement of financial position is another name for the balance sheet. It is one of the main financial statements. Accounting Coach (2021) defined the statement of financial position reports an entity's assets, liabilities, and the difference in their totals as of the final moment of an accounting period. The structure of the statement of financial position is similar to the basic accounting equation. For a corporation the format will be: Assets = Liabilities + Stockholders' Equity. A nonprofit organization's format will be: Assets = Liabilities + Net Assets. The statement of financial position must reflect the basic accounting principles and guidelines such as the cost, matching, and full disclosure principle to name a few. Accordingly, the statement of financial position is more meaningful when it is prepared under the accrual method of accounting.

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Sample the statement of financial position of Petroliam Nasional Berhad’s.

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1.4 The Statement of Profit or Loss and other comprehensive income. The statement of Profit or Loss is another name for the Income statement is a financial report that provides a summary of company’s revenue, expenses and profit/loss for the period. It shows the results of an entity's operations and financial activities for the reporting period. The statement provided the information about the company’s ability to generate sales, manage the expenses and produce profits. The statements prepared based on accounting principles that include revenue recognition, matching and accrual concept. Sample of the statement of profit or loss and other comprehensive income of Petroliam Nasional Berhad.

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1.5 The Statement of Changes in Equity The change in owners’ equity over an accounting period by presenting the movement in reserves comprising the shareholders’ equity. Movement in shareholders’ equity over an accounting period comprises the following elements:  Net profit or loss during the accounting period attributable to shareholders  Increase or decrease in share capital reserves  Dividend payments to shareholders  Gains and losses recognized directly in equity  Effect of changes in accounting policies  Effect of correction of prior period error Sample of the statement of Changes in Equity of Petroliam Nasional Berhad

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1.6 Notes to the Accounts Notes to financial statements is the another name for the notes to accounts. Notes to the accounts are supporting information that is usually provided along with a company’s final accounts or financial statements. Its disclose the detail assumptions made by accountants when preparing financial statements. Many such notes are required to be provided by law, including details related to provisions, reserves, depreciation, investments, inventory, share capital, employee benefits, contingencies, etc. Sample a few Notes to the Accounts extract from Petroliam Nasional Berhad financial statement.

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EXAMPLE Below is the Trial Balance of Tempoyak Bhd as at 31 December 2020: RM 180,000 units Ordinary Shares General Reserve Profit and Loss Account Freehold Assets at cost Vehicle at cost Accumulated Depreciation – Vehicle 8% Debenture Sales Purchases Return Inward Return Outward Carriage Inward Carriage Outward Inventories (1 January 2020) Salary Insurance Electricity Advertisement Director’s Emolument Debenture Interest Trade Receivable Trade Payable Interim Dividend Bank Cash Audit Fees

RM 180,000 70,500 40,500

270,000 90,000 37,500 30,000 421,500 228,750 5,250 2,250 1,500 4,500 42,000 39,000 9,000 6,450 7,500 18,000 1,500 31,500 25,500 18,000 28,500 1,800 4,500 807,750

807,750

Additional information: 1) 2) 3) 4) 5)

Inventories on 31 December 2020 at a cost of RM45,000. Accrued Insurance at RM300 Depreciation on the vehicle at 20% on cost. Company tax is 25% The board of directors proposed: i. Transfer to general reserved of RM7,500. ii. Final ordinary shares dividends of 10%

You are required to: a) Construct the Statement of Comprehensive Income for the year ended 31 st December 2020 14

FINANCIAL REPORTING

b) Prepare the Statement of Changes in Equity for the year ended 31 st December 2020. c) Prepare the table of Plant, Property and Equipment (PPE). d) Prepare the statement of financial position as at 31 st December 2020.

SOLUTION: a. Tempoyak Bhd Statement of Comprehensive Income for the year ended 31st December 2020 RM RM Sales 421,500 (-) Return Inwards (5,250) Net Sales 416,250 Cost of sale Opening Inventory 42,000 Purchase 228,750 (-) Return outward (2,250) Net Purchase 268,500 Carriage Inward 1,500 Closing Inventory (45,000) Cost of Sale (225,000) Gross Profit 191,250 Less: Expenses Salary 39,000 Carriage Outward 4,500 Electricity 6,450 Insurance 9300 Advertisement 7,500 Director’s Emolument 18,000 Debenture Interest 2,400 Audit Fee 4,500 Depreciation – Vehicle (20% X 90,000) 18,000 (109,650) Profit Before Taxation Tax (25% x 81,600) Profit After Taxation

81,600 (20400) 61,200

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b. Tempoyak Bhd Statement of Changes in Equity for the year ended 31st December 2020 Ordinary Shares General Retained RM Reserve Earnings RM RM Balance b/f 180,000 70,500 40,500 Profit for the year 61,200 Appropriation: General Reserves 7,500 (7,500) Dividends Interim (18,000) Dividends Proposed (18,000) 180,000 78,000 58,200 c. Note 1: Property, plant and equipment Freehold Land RM 270,000 I January 2020 Purchases/Valuation 31 December 2020 270,000 Acc. Depreciation I January 2020 Charge for the year 31 December 2020 Carrying amount

270,000

Vehicle RM 90,000 90,000

Total RM 360,000 360,000

37,500 18,000 55,500

34,500

304,500

d. Tempoyak Bhd Statement of Financial Position as at 31 December 2020 Notes RM Capital and Reserves Ordinary shares of RM1 each General Reserve Retain Earning Equity is attributable to equity holders of the company. Non-current liabilities 8% debentures Current liabilities Trade payables Accrued Insurance

RM 180,000 78,000 58,200 316,200

30,000 25,500 300 16

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Interest payable Dividend payable Tax payable

900 18,000 20,400

Non-current assets Property, plant and equipment Current assets Inventory Trade receivables Cash and Bank

65,100 411,300 304,500

45,000 31,500 30,300 106,800 411,300

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QUESTION Question 1 Given below is the trial balance of Bonjour Sdn Bhd as at 31 December 2020.

Purchases and Sales Inventory – 31 Dec 2019 Administrative expenses Distribution expenses Directors’ remuneration Auditors’ fee Depreciation: Property Plant Equipment Dividends received Interest expenses: Debenture Interest 10% Debentures Cash at Bank Trade receivables Trade payables Land (at cost) Property (at cost) Plant & machinery (at cost) Equipment (at cost) Accumulated depreciation at 31 Dec 2020: Property Plant & machinery Equipment Goodwill 1,000,000 ordinary shares fully paid up 600,000 5% preference shares Retained profits at 1 January 2020 Investment (at cost) Interim dividends paid: Preference Ordinary Tax Paid

Debit RM 1,000,000 300,000 500,000 494,000 600,000 700,000

Credit RM 4,055,000

50,000 100,000 50,000 50,000 20,000 300,000 30,000 150,000 140,000 1,000,000 2,000,000 500,000 400,000 400,000 300,000 100,000 100,000 1,000,000 600,000 1,800,000 600,000 15,000 36,000 100,000

8,845,000.00

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Additional information: a. Closing inventories as at 31 Dec 2020 was RM200,000 b. The tax expenses for this year is estimated at RM340,000. c. The directors declared the final dividends: i. Preference Second half year. ii. Ordinary 8 sen per share. Required; a. To classify the statement and information above by preparing the statements of: b. Statement of Profit or Loss and others Comprehensive Income for the year ended 31 December 2020. c. Changes in Equity for the year ended 31 December 2020. d. The Statement of Financial Position as at 31 December 2020. e. Note 1- Table of PPE. Question 2 Below is the Trial Balance of Kuning Bhd as at 31 December 2020: Debit RM

200,000-unit Ordinary Shares General Reserve Profit and Loss Account Freehold Assets at cost Vehicle at cost Accumulated Depreciation – Vehicle 8% Debenture Sales Purchases Return Inward Return Outward Inventories (1 January 2020) Salary Insurance Electricity Advertisement Director’s Emolument Debenture Interest Trade Receivable Trade Payable Interim Dividend Cash Audit Fees

Credit RM

200,000 52,500 40,000 290,000 90,000 37,500 30,000 440,000 238,750 5,000 2,000 42,000 39,000 9,000 6,450 7,500 18,000 1,500 31,500 25,000 42,500 1,800 4,000 827,000

827,000 19

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Additional information: 1. 2. 3. 4.

Inventories on 31 December 2020 at cost of RM45,000. Depreciation on vehicle at 20% on cost. Company tax is 25% The board of directors proposed: i. Transfer to general reserved of RM5,000 ii. Final ordinary shares dividends of 12%

You are required to: a. Construct the Statement of Comprehensive Income for the year ended 31st December 2020 b. Prepare the Statement of Changes in Equity for the year ended 31 st December 2020. c. Prepare the table of PPE d. Prepare of statement of financial position as at 31 st December 2020

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Topic 2 Cash Flow Statement Learning Outcomes: At the end of this topic, students should be able to: 1. Explain the nature of cash and cash equivalent 2. Construct the Statement of Cash Flow

FINANCIAL REPORTING

Topic Overview cash flow’s Activities

Operating activities

Investing activities

Financing activities

2 Method of reporting cash flows from operating activities

Direct

major classes of gross cash receipts and gross cash payments are disclosed

Indirect

profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments.

This topic is discussing cash inflow and outflow from 3 activities of company. This topic considers 2 methods in preparing the statement which are Direct method and Indirect Method. This topic gave sample of company cash flow statement. Some examples how to prepare the cash flow statement from both methods is also given.

FINANCIAL REPORTING

2.1 The purpose of cash flow MFRS 107 Require companies to prepare and present a cash flow statement. The cash flows statement of an entity is useful in providing users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilize those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an entity to generate cash and cash equivalents and the timing and certainty of their generation.

2.2 Benefit of Cash Flow A statement of cash flows, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in net assets of an entity, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different entities. Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices.

2.3 Definition. Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash flows are inflows and outflows of cash and cash equivalents. Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

FINANCIAL REPORTING

2.4 Operating Activities Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity. Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss. Examples of cash flows from operating activities are: a. b. c. d. e.

cash receipts from the sale of goods and the rendering of services; cash receipts from royalties, fees, commissions and other revenue; cash payments to suppliers for goods and services; cash payments to and on behalf of employees; cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits; f. cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; g. cash receipts and payments from contracts held for dealing or trading purposes.

2.5 Investing Activities The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Only expenditures that result in a recognized asset in the statement of financial position are eligible for classification as investing activities. Examples of cash flows arising from investing activities are: a. cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalized development costs and self-constructed property, plant and equipment; b. cash receipts from sales of property, plant and equipment, intangibles and other long-term assets; c. cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes); d. cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes); e. cash advances and loans made to other parties (other than advances and loans made by a financial institution); f. cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial institution);

FINANCIAL REPORTING

g. cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; h. cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes or the receipts are classified as financing activities.

2.6 Financing Activities The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the entity. Examples of cash flows arising from financing activities are: a. cash proceeds from issuing shares or other equity instruments; b. cash payments to owners to acquire or redeem the entity’s shares; c. cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-term borrowings; d. cash repayments of amounts borrowed; e. cash payments by a lessee for the reduction of the outstanding liability relating to a lease.

2.7 Presentation of the Cash Flow Statement An entity shall report cash flows from operating activities using either: a) The direct method Whereby major classes of gross cash receipts and gross cash payments are disclosed; Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either: 1. from the accounting records of the entity; 2. by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial institution) and other items in the statement of comprehensive income for:  changes during the period in inventories and operating receivables and payables;  other non-cash items; and  other items for which the cash effects are investing or financing cash flows.

FINANCIAL REPORTING

b) The indirect method Whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows. Under the indirect method, the net cash flow from operating activities is determined by adjusting profit or loss for the effects of: 1. changes during the period in inventories and operating receivables and payables; 2. non-cash items such as depreciation, provisions, deferred taxes, unrealized foreign currency gains and losses, and undistributed profits of associates; 3. All other items. Sample the cash flows statement extract from Petroliam Nasional Berhad financial statement.

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2.8 Preparing a Statement of Cash Flows. A Statement of cash flows is prepared by analyzing and classifying the changes for each item appearing in the statements of financial position between one financial year and another. Example: From the information given below to prepare the statement of cash flow for the year ended 31 December 2019. Extract of changes in equity:

Balance 1 /1/2019 Profit for the year Dividends Issue of Shares Balance 31/12/2019

Ordinary Shares 100,000 RM

30000 140,000

Retained Profit RM 50,000 57,000 (17,000) 90,000 28

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EY Bhd. Statement of Comprehensive Income for the year ended 31 Dec 2019. RM RM Sales 220,000 Cost of sales (98,000) 122,000 Selling and distribution costs 25,000 Administrative costs 15,000 Depreciation 2,000 Profit on sale of plant (2,000) (40,000) 82,000 Interest expense (6,000) Investment income 1,000 Gain on sale of investment 2,000 79,000 Profit before tax Tax (22,000) 57,000 Profit for the year EY Bhd. Statement of Financial Position as on 31 December 2019. 2019(RM) 2018 (RM) RM RM Ordinary share+s if RM1 each 140,000 100,000 Retained profit 90,000 50,000 Non-current liabilities 10% convertible debentures 50,000 60,000 Bank Loan 23,000 33,000 Current liabilities Accrued selling expenses 2,500 1,000 Trade payables 12,500 15,000 Tax payable 2,000 1.000 320,000 260,000 Non-current assets Land 200,000 140,000 Plant and machinery (cost) 30,000 40,000 Accumulated depreciation – (5,000) (6,000) motor vehicles Motor vehicles (cost) 20,000 20,000 Accumulated depreciation – (3,000) (2,000) plant & machinery Investments 30,000 40,000 Current assets Inventories 7,000 5,000 Trade receivables 20,000 17,000 Cash in hand 21,000 6,000 320,000 260,000 29

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Additional information; 1) 2) 3)

The increase in the issued share capital is due to the issue of shares for cash. Sale of Plant and machinery was for cash. There was no purchase of plant and machinery during the year. The land was purchase for the cash.

You are required to prepare Cash Flow Statement by using Direct Method and Indirect Method. SOLUTION: Direct method. EY Bhd. Statement of Cash Flows for the year ended 31 December 2019 RM Cash flows from operating activities: Cash receipts from customers: Sales 220,000 Increase Trade receivables (3,000) Cash paid to suppliers and employees: Cost of sales (98,000) The decrease in trade payables (2,500) Increase Inventory (2,000) Increase Accrued selling expenses 1,500 Selling and distribution costs (25,000) Administrative costs (15,000) Interest paid (6,000) Income taxes paid (22,000 – 1,000) (21,000) Net cash flow operating activities 49,000 Cash flows from investing activities: Purchase of land Proceeds from the disposal of plant and machinery Proceeds from the disposal of investments Investment income received Net cash outflow from investing activities Cash Flows from Financing Activities: Issue of share capital

(60,000) 10,000 12,000 1,000 (37,000)

30,000 30

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Repayment of bank loan Dividends paid Net cash outflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period

(10,000) (17,000) 3,000 15,000 6,000 21,000

Indirect method. EY Bhd. Statement of Cash Flows for the year ended 31 December 2019 RM Cash flows from operating activities: Profit before tax Adjustments for: Depreciation Gain on sale of PPE Gain on sale of investments Investment income Interest expenses Operating income before changes to working capital Increase in receivables Increase in inventories Decrease in payables Increase in Accrued selling expenses Interest paid Income taxes paid (22,000 – 1,000) Net cash flow operating activities

79,000 2,000 (2,000) (2,000) (1,000) 6,000 82,000 (3,000) (2,000) (2,500) 1,500 (6,000) (21,000) 49,000

Cash flows from investing activities: Purchase of land Proceeds from the disposal of plant and machinery Proceeds from the disposal of investments Investment income received Net cash outflow from investing activities

(60,000) 10,000 12,000 1,000 (37,000)

Cash Flows from Financing Activities: Issue of share capital Repayment of bank loan

30,000 (10,000) 31

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Dividends paid Net cash outflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period

(17,000) 3,000 15,000 6,000 21,000

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QUESTION Question 1 Statement of cash flow is a financial statement that shows the effectiveness of management to utilize and provide cash and cash equivalent during the accounting period. Classify the following activities according to suitable cash flow activities. Cash flow activities No Transaction (Operating/Financing/Investing) 1 A company received cash on sales of investment 2 A company received cash from disposal of plant & machinery 3 A company repaid its long-term borrowings by cash. 4 A company received cash on commission income 5 A company received cash from issuance of shares. Question 2 Discuss what are some of the cash flow from operating activities, investing activities and financing activities? Question 3 Discuss with your group can the incomes from investing activities be classified as part of operating activities? Question 4 Taxation expenses for the year was RM10,000. Taxation paid was RM5,000 at current year. _______________ will be disclosed as an _______________ activity in cash flow statement. Question 5 Company purchase the vehicle with the price RM50,000 in current and fully paid. _______________ will be disclosed as an _______________ activity in cash flow statement.

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Question 6 The summarised Statement of Financial Position of Moonlight Berhad are as follows: 31/12/2018 31/12/2019 RM RM Freehold Properties (at cost) 250,000 294,000 Plant and Machinery (at cost) 240,000 302,000 (-) provision for depreciation (90,000) (108,000) Fixture and fittings (at cost) 48,000 58,000 (-) provision for depreciation (26,000) (30,000) Inventory 74,000 104,000 Bank 32,000 Trade Receivable 86,000 88,000 582,000 740,000 Financed by Ordinary share capital @ RM2.00 each 200,000 300,000 General Reserve 30,000 70,000 Accumulated profits 86,000 170,000 6% Debenture 140,000 60,000 Bank (Overdraft) 28,000 Trade Payable 68,000 96,000 Proposed Dividends 30,000 40,000 Tax Payable nil 4,000 582,000 740,000 Additional information; 1. Freehold property costing RM70,000 was sold for RM80,000. 2. Plant and machinery were cost of RM18,000 with accumulated depreciation of RM4,000 had been sold for RM12,000. 3. Fixtures and fittings which had cost RM12,000 and written down to RM8,000 were sold for RM4,000. 4. During the year 2019 dividends of RM16,000 was paid. 5. 50,000 units of ordinary shares were issued during the year 2019 at 40% premium. 6. Tax expenses charged in the statement of comprehensive income was RM9000 7. Part of the debenture was redeemed at a par. 8. Gross profit for current year is 145,000. From the following information, you are required to: 34

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a) Calculate the profit before tax. b) Construct the statement of cash Flow for the year ended 31/12/2019 for moonlight Berhad: i. ii.

Direct Method Indirect Method

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Topic 3 Accounting Theories

Learning Outcomes: At the end of this topic, students should be able to: 1. Describe the definition of accounting theory. 2. Illustrate the categories of the users of the financial statement. 3. Explain the conceptual framework for the presentation of financial statements. 4. Explain the accounting concepts and conventions. 5. Illustrate the qualitative characteristics for the conceptual accounting framework for the presentation of financial statements. 6.

Illustrate the presentation of financial statements.

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Topic Overview Framework

Financial statement

Objectives

Elements

Qualitative characteristics

User

Internal User

External user

Principle

Other principles

This topic reviews the financial information in term of framework, objective, users & principles. Some example cases are given to show how the accounting principles is applying.

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3.1 The Purposes of Accounting Theory 



Helps to evaluate existing practice. E.g., are methods and techniques used by accountants valid or correct in terms of what it should be? This is to eliminate unnecessary diversities in accounting treatment for similar items. From the evaluation of existing practices, reasons for diversity that cannot be eliminated may be discovered and explained. This will enhance our understanding of the current practice and facilitate in regulating the profession by policymakers. The theory also assists in the development of future practice where it serves as the basis in the development of accounting standards. As business practices become more sophisticated, new accounting problems may arise that require the development of new techniques and procedures. The goal of the theory is to provide a coherent set of logical principles that form the general frame of reference for evaluating and developing new accounting practices.

3.2 The Accounting Bodies that Regulate the Accounting Standards in Malaysia. Malaysian Accounting Standards Board (MASB) was set up to issue new standards, review or adopts existing accounting standards, issue statements of principles and to develop a conceptual framework. MASB has also adopted some of the IASs as extant standards. As the relevant standards are issued and adopted, the extant IASs will be superseded by these standards.

3.3 The Use of Accounting Information 1. Determine how liquid your business is. By calculating a few ratios, you can determine if you have enough current assets to pay your current debts. This is particularly important if you have one or more customers who are slow to pay you and you are anxiously awaiting their payments. 2. Assess your long-term solvency. Solvency is the ability to pay your long-term debts. If you are short on cash, will you be able to pay your long-term obligations? Even if you have good cash flow today, is there any possibility this may change? We need to think long-term so that our business can continue to operate effectively. 3. Provide a snapshot of how well, i.e., efficiently, your business is running. The income statement is a good place to see how well, or poorly, operations are generating revenues and managing expenses. 4. Obtain outside financing. A banker or investor will want to review your financial statements and perform their analysis on the numbers. Your ability to obtain financing will be based on those results. 38

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5. Make purchasing decisions, such as a new truck or equipment, or other business decisions such as moving to a bigger (or smaller) location. 6. Accounting information helps users to make better financial decisions. Users of financial information may be both internal and external to the organization.

3.4 The Internal Users of the Financial statement.   

Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. Employees: for assessing a company's profitability and its consequence on their future remuneration and job security. Owners: for analyzing the viability and profitability of their investment and determining any future course of action.

Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements.

3.5 The External Users of the Financial Statement. Creditors: for determining the creditworthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. Tax Authorities: for determining the credibility of the tax returns filed on behalf of the company. Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set to protect the interests of the stakeholders who rely on such information in forming their decisions. External users have communicated accounting information usually in the form of financial statements. The purpose of financial statements is: a) to cater to the needs of such diverse users of accounting information to assist them in making sound financial decisions b) To provide information about the financial position, performance and changes in the financial position of an enterprise that is useful to a wide range of users in making economic decisions (IASB Framework).

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3.6 The Nature and Purposes of the Conceptual Framework 



 

An accounting conceptual framework can be defined as: “a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statements.” (AT Foulks Lynch, 1998) A conceptual framework guides the body responsible for establishing accounting standards and ensures that standards are based on fundamental principles; it provides a frame of reference for resolving accounting questions in the absence of a specific promulgated standard. It also determines bounds for judgment in preparing financial statements; it increases financial statement user’s understanding of, and confidence in, financial statements and enhances comparability (Elliott & Elliott,2009) MASB has issued a guideline called the framework for the Presentation of Financial Statements. The importance of the framework is that in the absence or lack of a reporting standard, the preparers of financial statements are to apply the requirements of the framework. Some of the areas the framework covers are the qualitative characteristics of financial statements, and the recognition and measurement of the elements of financial statements. The objectives of a conceptual framework are: to ensure statements are convergent leading to a single set of high-level global accounting standards, to identify the users and provide them with the information that is most useful to them, to solve accounting disputes, to define the objectives of financial statements and to define fundamental principles which they do not have to be repeated in accounting standards (Soumis par dauphalex, janvier 2011).

3.7 The Accounting Framework. The accounting framework consists of 3 main components: 1. The objectives of financial reporting 2. Qualitative characteristics and constraints of financial reporting information. 3. Recognition and measurement of elements of a financial statement.

3.7.1 The Objectives of Financial Reporting Financial reporting should accomplish the following: a) Provide information useful for making rational investment and credit decisions. b) Provide information to help current and potential investors and creditors assess the amount, timing and uncertainty of future cash flows.

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c) Provide information about the economic resources of a firm and claims on those resources. d) Provide information about a firm’s operating performance during a period. e) Provide information about how an enterprise obtains and uses cash. f) Provide information about how management has discharged its stewardship responsibility to owners. g) Include explanation and interpretations to help understand the financial information provided.

3.7.2 Qualitative Characteristics Financial Reporting Information.

and

Constraints

Qualitative characteristic of Financial Information

Fundamental characteristic

Relevant

Enhancing Characteristic

Faithful representation

Comparability

Predictive value

Complete

Verifiability

Confirmatory value

Neutrality

Timeliness

Free from error

Understandability

Reliable Figure 1: Qualitative characteristic of Financial Information

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Principal qualitative characteristics of useful financial information. a) Understandability There are many different users and decisions makers. The level of accounting and business knowledge they possess, the methods of decision-making they already possess and their ability to obtain additional information differ among various decision-makers. It is assumed that users of financial information have a reasonable knowledge of business, accounting and economic activities and, with due diligence, will be able to analyses the information provided. b) Relevance Information can influence the economic decision of users. By evaluating past, present and future events, useful information can be derived. For information to be useful, it has to be relevant to the decisions that are being made. For information to be relevant, it must assist users in making and evaluating decisions. c) Reliability Financial information is reliable if it is free from error and bias, and represents faithfully the events and transactions that have occurred. Reliable information reflects the events or transactions that have taken place. If the financial statements are prepared under conditions of uncertainty, then caution is advised in exercising judgment and in making any estimates. In other words, prudence is to be applied. d) Comparability In order to make decisions, users need to compare information between entities and over some time. The information from different entities is comparable if there is consistency in the accounting treatment of the economic events and transactions over time and in the disclosure of accounting policies. e) Timeliness If there is a delay in supplying the information, the information may be relevant in a limited manner even though it may be reliable. Therefore, entities have to find a balance between providing timely information which is relevant and reliable. More of one may mean less of the other. f) Verifiability Information is reliable if it can be verified by various means. Transactions are always recorded by examining source documents that will form the evidence for the transactions. g) Faithful representation Information provided should represent the transactions and events that have taken place as to the recognition, measurement and presentation of these transactions and events. Absence of faithful representation will make information unreliable. 42

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However, sometimes there may be difficulty in identifying the transaction or event or even in measuring an item. For example, where a loan for three months in renewed constantly, it may not be a current liability but long-term liability. h) Completeness Information in the financial statements has to be complete; otherwise, it will not be reliable and relevant.

3.7.3 Recognition and Measurement of Elements of a Financial Statement. The element of financial statement: a) b) c) d) e)

Assets Liability Equity Income Expenses

Recognition criteria a) Any future economic benefit associated with the item will probably flow to from the entity. b) The item has a cost or value that can be measured reliably. Measurement If the time value of money is significant, the entity can disclose the carrying amount of the assets and liabilities discounted at present value.

3.8 Accounting Concept and Conventions. a) Historical cost Assets are recorded at the amount of cash or cash equivalent paid or the fair value of the consideration given to acquire them. b) Monetary measurement Accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc.

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c) Separate Entity This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business. d) Realization With this convention, accounts recognize transactions (and any profits arising from them) at the point of sale or transfer of legal ownership - rather than just when cash changes hands. For example, a company that makes a sale to a customer can recognize that sale when the transaction is legal - at the point of contract. The actual payment due from the customer may not arise until several weeks (or months) later - if the customer has been granted some credit terms. e) Materiality An important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgment. Where decisions are required about the appropriateness of a particular accounting judgment, the "materiality" convention suggests that this should only be an issue if the judgment is "significant" or "material" to a user of the accounts. The concept of "materiality" is an important issue for auditors of financial accounts. f) Going Concerned This concept simply implies that the business will continue to operate for the foreseeable future and that it isn't suddenly going to cease trading. The significance of this concept is that the assets of the business are not valued at their "break-up" value. The concept assumes that the owners of a company intend to continue its trading over the long term (at least 12 more months). It that is not the case, they will need to disclose that fact and present slightly different financial statements.

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For example:

Suppose Melor Trading acquired a machine at RM100,000 and this machine has an estimated life of 5 years. Let us also assume that the machine has no other use outside Melor Trading’s business and could only be sold for scrap at RM15,000 after one year. It is normal to write-off the cost of this asset to the profit and loss account, over this timeframe. That is, depreciation of RM20,000 per annum would be charged to the profit and loss account. So, at the end of the first year, the value of the machine in the books would be RM80,000, rather than the RM15,000 scrap value. g) Consistency Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change. h) Prudence A company should not recognize an asset at a value that is higher than the amount which is expected to be recovered from its sale or use. Conversely, liabilities of an entity should not be presented below the amount that is likely to be paid in its respect in the future. I) Matching Income should be properly "matched" with the expenses of a given accounting period. j) Accrual Under the accrual basis, transactions and events are recognized when they occur and are recorded and reported in the financial statements in the period to which they relate irrespective of whether cash was received or paid. k) Periodicity This principle entails a business to complete the whole accounting process of a business over a specific operating period. It may be monthly, quarterly or annually. For the annual accounting period, it may follow a Calendar or Fiscal Year.

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EXERCISE Exercise 1 Mars Sdn Bhd has invested in shares of Mybank Bhd through Bursa Malaysia amounting of RM150,000 in the last five years. Recently, the shares of Mybank have increased, and the value of the investment is RM450,000. Mars Sdn Bhd recorded RM150,000 as investment cost in Syarikat Mybank. ● Accept/Appropriate ● Prudence Concept ● The investment must be recorded at the amount whichever lower between the cost and the market value. According to the Conservative concept/ prudent concept, the accountant should aware of recognizing the gain or losses from the transactions. If we expected losses, we should provide an estimation of losses in accounts, however, if we expected the gain from such transactions, we should not recognize it till we receive it. So the profit or loss of the company may not under-stated or over-stated due to the above matter.

Exercise 2 Mars Sdn. Bhd. has decided to promote product ‘X’ through mass-media and other printing- media. Product ‘X’ is expected to be in the market in the next ten (10) months, starting from January 2021. RM500,000 has been spent in August 2019 for advertising and promotion purposes. Mars Sdn. Bhd. has recorded RM500,000 as promotion and advertising expenses in Profit and Loss Account for the year ended 31 December 2019.    

Not Accept/ Not Appropriate Accrual Concept RM500,000 should be recorded as Prepaid Expenses. The prepaid expenses should be excluded from the current expenses but shown as a current liability in the balance sheet. The current expenses are expenses incurred in the current year.

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Exercise 3 Mars Sdn Bhd bought 100 units of computer amounting of RM200,000 which have a useful life of 5 years. The Directors of the company had proposed RM200,000 to be charged as expenses for the current accounting period due to the rapid changes in Information Technology Systems and those computers may not be in use in the future.   

 

Not Accept/ Not Appropriate Matching Concept RM200,000 cannot be classified as revenue expenses. It should be classified as capital expenses. Thus, it cannot be eliminated against current profit, the assets should be depreciated annually and the annual depreciation should be charged to Profit and Loss Account. Or Historical Cost Concept In addition, according to the Historical Concept, RM200,000 was selected due to the objectivity of the transactions and it should be shown in the balance sheet as Non-Current Assets.

Exercise 4 Twilight Sdn Bhd placed an order worth RM35,000 for product ‘Y’ on 1 October 2020 to Syarikat Gamma. Twilight has paid a deposit of RM 7,000 on the same date. Product ’Y’ is expected to be ready by 15 February 2021. However, Mars Sdn Bhd has recorded RM35,000 as revenue on 1 October 2020. (5 marks)  Not Accept/ Not Appropriate  Realization Concept  According to the Realization concept, Mars Sdn Bhd should recognize the sales on 15 February 2021 when the product is transferred to Syarikat Citrus. The selling should be recognized at the selling date when the seller transfers the title to the buyer. According to this case, the selling date was 15 February 2021 when the product is ready and been transfer to the Syarikat Citrus.  The number of sales should be recorded is RM35,000 on 15 February 2021.

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Exercise 5 Equipment and Motor Vehicles of Mars Sdn Bhd are being depreciated by 15% and 20% respectively on a straight-line basis. The Directors of Mars Sdn Bhd has proposed to reduce the rate of depreciation for both assets to 10% and 15%. As a result, total expenses can be cut down by RM25,000 per annum.  Not Accept/ Not Appropriate  Consistency Concept  According to the Consistency Concept, the rate of depreciation cannot be changed. It must use the same rate annually so that the company can measure the performance and financial status yearly.  However, if the directors want to change the rate of depreciation, it must discuss in meeting and have to take all the effect of the changes to the account and the appropriate disclosure and presentation should be made in the notes to the accounts.

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QUESTION Question 1 Describe the meaning for the doctrine below: Reliability Consistency Prudence

Question 2 Explain four (4) principals of qualitative characteristics.

Question 3 Based on the following cases, you are required to analyze each situation according to the concept and generally accepted accounting principles. Give your reasons. Orchid Sdn Bhd bought Plant and Machinery with a cost of RM1,500,000 in 2020. The building depreciated at 25% annually. In order to reduce the company tax, the company increased the depreciation to 30% this year. Melor Enterprise accepted an order to supply wall decorations to a customer is on 1st December 2020 and received full payment of RM10,000. The wall decoration was completed on 3rd January 2021. Melor Enterprise recorded the transaction as a sale on 1st December 2020. The year-end Melor Enterprise is at 31st December every year. Tengku Shah is the owner of Harum Manis enterprise which is located in Beseri, Perlis. On 3rd Feb 2020, he traveled for holiday to New Zealand and recorded all the expenses in the company ledger. Inventory dated on 1.1.2020 amounted RM100,000 has increased to RM150,000 on 31.12.2020. The company management has acknowledged this increment as a current profit yield from other operations.

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Question 4 a) Based on the three (3) below discuss whether the action taken by the company was right or not. Give your reason based on the proper accounting treatment. b) Inventory cost RM45 000, has market valued RM30 000. The company recommends that inventory be recorded in the amount of RM30 000. c) Mekar Bhd purchased a machine at cost RM250 000 on 1 January 2002. The estimated economic life for the machine was 15 years. However, in year 2008, the company will liquidate and the management has agreed to reduce the economic life for the machine for 7 years only. d) Machine at cost RM65 000 have depreciation RM20 000 with fair value RM80 000. The company recommended that the machine recorded at the amount of RM80 000 and the surplus will show at Income Statements. e) As a token of appreciation to all employees, the management has held an annual dinner costing of RM50, 000 including meals and souvenirs. RM15,000 is a deposit for the annual dinner and had been paid in the current year. The balance of RM35,000 is still due. Both amounts are charged into entertainment expenditure account in Profit and Loss Account.

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Topic 4 Basic of Group Accounts

Learning Outcomes: At the end of this topic, students should be able to: 1. Explain the basic element definition in group accounting 2. Explain the procedures in preparing the group’s account

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Topic Overview Acquisition

Purchase net assets (Acquire assets and liabilities)

Amalgamation

Absorption

Acquire control (Acquire share capital)

Parent and subsidiary

This topic discussing the business combination arise from one entity acquires share capital of another entity. This topic focus on parent company preparing the consolidated financial statements. A few examples are given how to make the adjustment record in preparing consolidated financial statement.

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4.1 What is a Group Account? A group account is derived from the business combination. While business combination arises when one entity acquires other company by acquiring its net assets or share capital. For this topic, we only focus on the acquisition of purchasing the shares capital.

4.2 Business Combination Holding Company • • • •

A holding company is an acquirer company or parent company which owned more than 50% of the share capital of an investee company. It also means that the holding company has control of the subsidiary company. If the investor hold 100% share capital means that the investee company becomes the wholly-owned company to the investor. The holding company will record this acquisition in its account as an asset – investment. From time to time, the holding company will receive a dividend from the subsidiary company which will be treated as investment income.

Subsidiary Company •

• •

Yearly, a subsidiary company has to pay dividends to a parent company. In the case of a parent owned more than 50% but less than 100%, shares capital of a subsidiary company has to divide into holding company and non-controlling interest (minority interest). Meanwhile, 100% owned means that all the shares belong to the parent company and NCI does not exist. A financial statement of the subsidiary company will be combined with the parent company to present the whole performance of a group company.

Control Control is the power to govern the financial and operating policies of an entity and benefit from its activities.

4.3 Prepare the Consolidated Financial Statement MFRS 10 requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements; An entity that is a parent shall present consolidated financial statements. This MFRS applies to all entities, except as follows: a parent need not present consolidated financial statements if it meets all the following conditions: 53

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(i)

(ii) (iii) (iv)

it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements; its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization to issue any class of instruments in a public market; and it's ultimate or any intermediate parent produces consolidated financial statements that are available for public use and comply with International Financial Reporting Standards.

4.4 Definition of “Subsidiary and Holding Company” Sec 4 (1) CA 2016 A corporation shall be deemed to be a subsidiary of another corporation, but only if: (a) The other corporation: (i) controls the composition of the board of directors of the corporation, (ii) controls more than half of the voting power of the corporation; (iii) holds more than half of the issued share capital of the corporation, excluding any part of the share capital which consists of preference shares; or (b) The corporation is a subsidiary of any corporation which is that other corporation’s subsidiary. Sec 4 (2) Company Act 2016 For the purposes of subparagraph (1)(a)(i), the composition of a corporation’s board of directors shall be deemed to be controlled by another corporation if that other corporation can appoint or remove all or a majority of the directors and for the purposes of this provision, the holding company shall be deemed to have the power to make such an appointment if: (a) A person cannot be appointed as a director without the exercise of such a power in his favor by that other corporation; or (b) A person’s appointment as a director follows necessarily from his being a director or other officer of that other corporation.

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Sec 4 (3) Company Act 2016 In determining whether one corporation is a subsidiary of another corporation: any shares held or power exercisable by that other corporation in a fiduciary capacity shall be treated as not held or exercisable by it; subject to paragraphs (c) and (d), any shares held or power exercisable by any person as a nominee for that other corporation, except where that other corporation is concerned only in a fiduciary capacity; or by, or by a nominee for, a subsidiary of that other corporation, not being a subsidiary which is concerned only in a fiduciary capacity, shall be treated as held or exercisable by that other corporation; (a) (b)

any shares held or power exercisable by any person by virtue of the provisions of any debentures of the corporation or of a trust deed for securing any issue of such debentures shall be disregarded; and any shares held or power exercisable by, or by a nominee for, that other corporation or its subsidiary, not being held or exercisable as mentioned in paragraph (c), shall be treated as not held or exercisable by that other corporation if the ordinary business of that other corporation or its subsidiary, as the case may be, includes the lending of money and the shares are held or power is exercisable as aforesaid by way of security only for the purposes of a transaction entered into in the ordinary course of that business.

Sec 4 (4) Company Act 2016 A reference in this Act to the holding company of a company or other corporation shall be read as a reference to a corporation of which that company or corporation is a subsidiary.

4.5 Purposes of Consolidated Financial Statement Providing the shareholders of the parent company the whole picture performances of the group and the efficiency of the directors and management in managing the resources under their direct and indirect control.

4.6 Group Account/Consolidated Account Consist of several accounts: i. ii. iii. iv.

Consolidated statement of comprehensive income (Consolidated Retained profit) Consolidated Revaluation Reserves Consolidated General Reserves Consolidated Balance Sheet / Statement of Financial Position

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4.7 What is the Consolidated Statement of Financial Position? A combination of asset, liabilities & equities in holding and subsidiary/s companies and eliminate the intragroup transactions.

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Example The Group’s Account when the Holding Acquired the Ordinary Shares in Subsidiary. Holding acquires (50% < Acquire in shares <100% shares) On 1.1.2020, holding acquired 80% of the ordinary shares in the subsidiary at cost RM290,000. Below was the Statement of Financial Position (extract) of a subsidiary and holding at 31.12.2020: Equity: Holding(H) Ordinary shares @RM1 Retained Profit Revaluation Reserve Sundry assets

RM 450,000 50,000 20,000 400,000

Subsidiary(S) RM 200,000 20,000 15,000 75,000

H acquired 160,000 unit ordinary shares of S on 1.1.2020 when the balances in S’s account were: Revaluation reserve: RM10,000 Retained profit: RM10,000

ii.

H’s policy to measure Non-Controlling Interest (NCI) equal to its proportionate share of the net asset of the subsidiary.

You are required to prepare the consolidated statement of financial position.

SOLUTION • •

Controlling power is 80% by holding (160,000/200,000-unit shares) and 20% by Non-Controlling Interest Accounts to be prepared: – Adjustment Account – Non-controlling Interest Account (NCI) – Consolidated Retained Profit Account – Consolidated Revaluation Reserves – Consolidated Statement of Financial Position

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Adjustment Account RM Investment (Ordinary share) NCI (220,000x20%)

290,000 44,000

RM Ordinary shares

200,000

SOCI

10,000

Revaluation Reserve

10,000

Goodwill 334,000

114,000 334,000

Non-controlling Interest Account (NCI) RM To CSoFP

57,000

RM Adjustment

44,000

Retained Profit(postacquisition) (20000-10000) x20%

2,000

Revaluation Reserve (postacquisition) (15,00010,000) X20%

1,000

57,000

Statement of Comprehensive Income (SOCI) RM Adjustment

10,000

NCI

2,000

To CSOCI

8,000

RM Balance

20,000

Revaluation Reserve (RR) RM Adjustment

10,000

NCI

1,000

To CRR

4,000 15,000

RM Balance

15,000

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Consolidated Statement of Comprehensive Income (CSOCI) RM To CSoFP

58,000

RM Balance SOCI Subsidiary

58,000

50,000 8,000 58,000

Consolidated Revaluation Reserve (CRR) RM To CSoFP

24,000

RM Balance RR Subsidiary

24,000

20,000 4,000 24,000

Consolidated Statement of Financial Position of H and its subsidiary S as at 31 December 2020. RM RM Goodwill 114,000 Sundry assets 475,000 589,000 Shareholders’ fund Ordinary shares RM1 each Statement of Comprehensive Income Revaluation Reserve Non-controlling interest

450,000 58,000 24,000 57,000 589,000

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4.8 Accounting Treatment of NCI In the consolidated statement of financial position, the NCI shareholders’ interest is treated as equity but presented separately from the parents’ equity. Exercise: Statement of Financial Position of H and its subsidiary S as of 31 December 2019. Holding Subsidiary RM RM Non-Current assets 200,000 150,000 Current assets 75,000 195,000 Investment in subsidiary at cost: 160,000 ordinary shares@RM1/each 50,000 Preference Shares@RM1/each Financed by: Ordinary shares RM1 each Preference shares@RM1/each Retained Profits Revaluation Reserve

290,000 50,000 615,000

345,000

400,000 150,000 40,000 25,000 615,000

200,000 100,000 30,000 15,000 345,000

H acquired the capital shares of S on 1.1.2019 when the balances of S were; ● Statement of Comprehensive Income ● Revaluation reserve ● Impairment loss of goodwill was

RM20,000 RM10,000 RM2,000

You are required to prepare: a) b) c) d) e) f) g) h)

Adjustment Account Preference Share Account NCI Account Statement of Comprehensive Income Consolidated Statement of Comprehensive Income Revaluation Reserve Consolidated Revaluation Reserve Consolidated Statement of financial position (extract)

FINANCIAL REPORTING

SOLUTION: Percentage acquired: Ordinary share - 160,000/200,000 X 100% = 80% Preference share - 50,000/100,000 X 100% = 50% Adjustment Account RM Investment (Ordinary share)

290,000

NCI (230,000x20%)

46,000

RM Ordinary shares

200,000

SOCI

20,000

Revaluation Reserve

10,000

Goodwill 336,000

106,000 336,000

Preference share RM Investment (Preference share)

50,000

NCI (100,000x50%)

50,000

RM Balance

100,000

Non-controlling Interest Account (NCI) RM To CSoFP

99,000

RM Adjustment

46,000

Preference share

50,000

SOCI

2,000

1,000 99,000

FINANCIAL REPORTING

Statement of Comprehensive Income (SOCI) RM Adjustment

20,000

NCI

2,000

To CSOCI

8,000

RM Balance

30,000

Revaluation Reserve (RR) RM Adjustment

10,000

NCI

1,000

To CRR

4,000

RM Balance

15,000

Consolidated Statement of Comprehensive Income (CSOCI) RM To CSoFP

46,000

Goodwill Impairment

2,000

RM Balance SOCI Subsidiary

48,000

40,000 8,000 48,000

Consolidated Revaluation Reserve (CRR) RM To CSoFP

29,000

RM Balance RR Subsidiary

29,000

25,000 4,000 29,000

FINANCIAL REPORTING

Consolidated Statement of Financial Position of H and its subsidiary S as of 31 December 2019. RM

Non-current assets

350,000

Goodwill

104,000

Sundry assets

270,000 724,000

Shareholders’ fund Ordinary shares RM1 each

400,000

Preference share RM1 each

150,000

Statement of Comprehensive Income

46,000

Revaluation Reserve

29,000

Non-controlling interest

99,000 724,000

FINANCIAL REPORTING

Question Question 1 Explain the purposes of Consolidated Financial Statement Question 2 What is a group account? Question 3 Why need to prepared consolidated financial statements. Question 4 The following are the Statement of Financial Position of Mercu Bhd and Perdana Sdn Bhd as at 31st December 2020. Mercu Bhd Perdana Sdn Bhd. RM RM Non-Current Assets Land and Building 500,000 350,000 Plant and Machinery 220,000 350,000 Motor Vehicles 300,000 100,000 Investment: Perdana Sdn Bhd (400 600,000 000 units) Current Assets Bank Trade Receivables Inventories

Financed by: Ordinary shares@RM1 each Retained profit General reserve Trade payables Dividend payable

150,000 70,000 50,000 1,890,000

200,000 100,000 60,000 1160,000

900,000

500,000

500,000 300,000 100,000 90,000 1,890,000

420,000 160,000 80,000 1160,000

FINANCIAL REPORTING

Additional information: 1) Mercu Bhd. acquire the ordinary shares of Perdana Sdn. Bhd. on 31 st December 2020 when the balance of the following accounts are as follows: Retained Profit RM120,000 General Reserve RM100,000 You are required to illustrate: a) Adjustment Account b) Subsidiary Retain profit. c) General reserve Account d) Consolidated General Reserve Account e) Non-controlling Interest Account. f) Consolidated profit and loss account. g) Consolidated Statement of Financial Position as at 31st December 2020. Question 5 Given below are the statements of Financial Position of Mountain Bhd and Hill Sdn Bhd as at 30 June 2020. Mountain RM Non-Current Assets Land Building Investment at cost in Hill 180,000 ordinary shares RM40,000 12% Debentures Current Assets: Inventory Trade receivables Cash at Bank Equity: Ordinary shares of RM2 each Preference shares General Reserve Retained profit 12% Debenture Liabilities

300,000 360,000

Hill RM 250,000 300,000

500,000 40,000 50,000 40,000 30,000 1,320,000

40,000 35,000 30,000 655,000

700,000 300,000 160,000 70,000 90,000 1,270,000

400,000 100,000 40,000 100,000 15,000 655,000 65

FINANCIAL REPORTING

Additional information; Mountain purchased 160,000 ordinary shares and 12% debentures in Hill on 1 July 2019 when the balances in Hill Sdn. Bhd. account was; General Reserve RM80,000 Retain Profit RM20,000 The fair value of land of Hills on 1 July 2013 was RM300,000. Hill did not incorporate this value in its accounts. You are required to prepare; 1) Adjustment a/c. 2) Retain profit of Hill Sdn. Bhd. 3) General Reserve 4) Group General Reserve 5) Non-controlling Interest. 6) Consolidated Statement of Comprehensive Income. 7)

Consolidated Statement of Financial Position as at 31 Dec 2020.

FINANCIAL REPORTING

Topic 5 Intra Group Transactions Learning Outcomes: At the end of this topic, students should be able to: 1. Explain the intra group transactions for owing money and balances. 2. Explain the intra group transaction for sale of trading inventories. 3. Identify the intra group transaction for dividends income received by the holding from the subsidiary 4. Identify the intra group transactions for interest income received by the holding from the subsidiary. 5. Explain the intra groups transactions for sale of noncurrent assets. 6. Explain the intra group transactions for revaluation of non-current assets. 7. Prepare worksheet based on intra group transactions.

FINANCIAL REPORTING

Topic Overview Transaction between the companies in the group need to be eliminated or suitable adjustments must be made. Intra Group Transaction

eliminated by debit payable and eliminated by credit receivable credited the assets and debited the Receivable/payable liabilities. Both subsidiary and holding company have recorded the dividen/interest

Loan

Debit Int/Div payable Credit Int/Div receivable

3 situations Interest (divedend) payable/receivable Both subsidiary and holding company have not record the dividen/interest Debit Soci Credit Csoci

Sale of Assets

The subsidiary has record the div/Int but the holding not record yet. Debit Int/Div payable Credit Int/Div receivable

Credit Div/Int Payable

Sale of assets

Non-Current Assets

Non depreciation assets

Depreciation assets

Current Assets

Dr. PURP (Soci)

Cr. Inventory Dr. Soci Cr. Assets

Dr. Soci Cr. Assets

This topic discussing the intra group transaction arise from business combination. This topic focus on parent company preparing an adjustment on intra group transaction. A few examples are given how to make the adjustment record in preparing consolidated financial statement.

5.1 Intra Group Balances and Transaction

FINANCIAL REPORTING

5.1 Intra Group Balances and Transaction (a) Loans (b) Receivables/payables (c) Current accounts (d) Interest payable/receivable (e) Dividends payable/receivable. (f) Intra group Sale of Assets (i) Current assets (ii) Non-current assets

5.1.1 Intra Group Transaction for Owing Money and Balances Intra group transaction is also known as intercompany transaction. Dictionary of accounting defines intra group transaction as transactions between the companies in a group. These may be in the form of charges or the transfer of goods or services. In the preparation of consolidated financial statements that such transactions are eliminated or suitable adjustments must be made. Loans to and from the holding Loans to the holding from the subsidiary or loans from the holding to the subsidiary are considered as intra group transaction.

A loan from the holding As an asset in the holding’s book (H) As a liability in the subsidiary’s book (S) Accounting Treatment for preparing the Consolidated Statement of Financial Position (CSoFP): A loan from the holding to the subsidiary is an intra-group transaction and must be eliminated by credited the asset and debited the liability.

FINANCIAL REPORTING

Example 1- Loan from the holding to the subsidiary The parent has lent RM20, 000 to the subsidiary. In the current year, the subsidiary has remitted RM8, 000 to the parent but it was not still received at the date of balance sheet. Show the journal entry in the books of holding. Loan from parent (-) cash payment Balance debt Journal entries Dt. Loan from holding (S) Dt. Cash in transit (H) Cr Loan to subsidiary (H)

RM RM 20,000 8,000 (cash in transit) 12,000 12,000 8,000 20,000

5.1.2 Current Account and Item in Transit In preparing the consolidated financial statement, all the intra-group balances such as an item in transit and current account between holding and subsidiary have to be eliminated. i) Current account There is another way to record intra company transactions by recording them in the current account. Holding and the subsidiary company will open their own current accounts. The balances as at the Statement of financial position date are classified as intra company transaction and must be cancelled off. Thus, there is no current account in the consolidated statement of financial position. However, in a certain situation, the balances are differing from each other. So, you are required to do some adjustment before cancelled of the current account in the CSoFP.

FINANCIAL REPORTING

Example 2 Statement of Financial Position (extract) as at 31.12.2019 Holding Subsidiary (RM ‘000) (RM ‘000) Current assets: Inventories 210 160 Trade receivables 200 50 Current account – subsidiary 35 Bank 65 80 Current liabilities: Current account- holding Trade payables

130

35 100

You are required to prepare the consolidated statement of financial position (extract) as at 31.12.2019

SOLUTION: Consolidated Statement of Financial Position (extract) as at 31.12.2019 Current assets: Inventories Trade receivables Bank

(RM ‘000) 370 250 145

Current liabilities: Trade payables

230

ii)

Item in Transit

Item or inventory in transit occurs when a member group has sent the inventory to other members of the group but those members have not received yet the inventory on the balance sheet date. The item in transit must be cancelled against the amount shown in the relevant account of holding or subsidiary.

FINANCIAL REPORTING

Example 3 Statement of Financial Position (extract) as at 31.12.2019 Holding Trade receivables Inventory Trade payables

Subsidiary

RM 30,000 50,000 20,000

RM 5,000 20,000 30,000

Additional information: Trade receivables of holding include RM10, 000 from Subsidiary. From this amount, RM2, 500 inventory already sent by holding to the subsidiary on 31.12.2019 but it is only received by Subsidiary on 10.1.2020. You are required to prepare: a. Journal entry for the elimination of intra company transaction b. Consolidated Statement of Financial Position (extract) as at 31.12.2019

Solution: Journal entry Dt.

Trade payable of subsidiary

7500

Dt.

inventory in transit

2500

Cr.

Trade receivables of holding

10,000

Consolidated Statement of financial position Current assets: Trade receivables (30+5-10) Inventory (50+20+2.5)

RM 25,000 72,500

Current liability: Trade payables (20+30-7.5)

42,500

FINANCIAL REPORTING

5.1.3 Trade Receivables/ Trade Payables Inventories sold which are not paid yet will be classified as trade receivables for seller and trade payables for the buyer. This transaction is known as intra company transaction because the transaction is between holding and subsidiary and it must be eliminated. Example 3 Statement of Financial Position (extract) as at 31.12.2019

Trade Receivables Trade Payables

Holding RM 40,000 50,000

Subsidiary RM 50,000 20,000

Additional information: Include in the trade receivables of holding is RM6, 000 due from subsidiary. You are required to prepare: a. Journal entry for the elimination of intra company transaction b. Consolidated Statement of financial position (extract) as at 31.12.2019 Solution: Journal entry

Dt.

6000

Trade payable Cr.

Trade receivables

6000

Consolidated Statement of Financial Position (extract) as at 31.12.2019 Current assets: Trade receivables (40+50-6)

84,000

Current liability: Trade payables (50+20-6)

64,000

FINANCIAL REPORTING

5.1.4 Bills Receivable/ Payables Bills receivables and payables are one of the financial instruments which can be transferred to another party. Bills receivables and payables could be issued when one member of the group borrow money from another member of the group. For instance, holding may issue a bill once the subsidiary owes money from the holding. This bill can be transferred to the third party who is outside of the group such as bank and financial institutions. It can be factored or discounted. The amount which is factored or discounted is a liability and the remaining balances are considered as intra company transaction. Factoring bills receivables at a discount In certain situation, it is needed for a holder of bills receivables to sell its bills to financial institutions and banks to get immediate money. This is known as factoring and normally a bill is factored at a discount such as a factoring company will purchase bills for up to 90% of the total amount. The main reason to used Factoring instrument is to obtain cash when the available cash balance held by the firm is insufficient to meet current obligations. Once the bill sold, a factoring company will take on the risk of collecting the payments. At times, subsidiary who owed money from holding must settle its debts to the factoring company, not to the holding. Example 4 Statement of Financial Position (extract) as at 31.12.2019 Holding Bills receivables Bills payable

Subsidiary

RM 110,000

RM 90,000

80,000

40,000

Additional information: The bills receivable of RM25, 000 are due to the subsidiary. The parent has factored RM10,000. You are required to prepare: Journal entry for the elimination of intra group transaction Consolidated Statement of Financial Position (extract) as at 31.12.2019

FINANCIAL REPORTING

Solution: RM25, 000

RM10, 000 – factored (liability)

RM15, 000 - unfactored (Intra-group transaction & eliminated) Journal entry Dt.

Bills payable Cr.

RM 15,000

Bills receivables

15,000

Consolidated Statement of Financial Position (extract) as at 31.12.2019 RM Current assets: Bills receivables (110+90-15)

185,000

Current liability Bills payables (80+40-15)

105,000

5.15 The Intragroup Transactions for the Sale of Trading Inventories In some circumstances, there is a need to buy stocks from members of the group (such as parent to a subsidiary, subsidiary to parent or subsidiary to a subsidiary) due to the low price offered. The price may be at a cost, net book value or a price plus profit. There are two types of sales, which are: • •

Downstream sales – parent sold inventory to a subsidiary Upstream sales – subsidiary sold inventory to parent

Inventory sold at a cost price plus profit between members of the group is known as transferred profit. In preparing the CSoFP, the transferred profit only becomes realized profits if the inventory is already sold to the customers which outside of the group (complying the principles of realization)

FINANCIAL REPORTING

Thus, the remaining inventory in the group is considered as unrealized profit.

Unrealized profit

Profit from selling goods/assets among holding and subsidiary Realized profit Figure 2: Types of profit in intra group

Calculation of Provision unrealized profit Provision Unrealized profit (PURP) = percentage of unsold inventories (ending inventories) x transferred profit (selling price – cost price) Figure 3: Calculation of provision unrealized profit.

The accounting treatment for the unrealized profit In preparing the consolidated balance sheet, the unrealized profits must be eliminated and the value of the inventories will be reduced. Down Stream Sale An adjustment of transferred profits must be made in the parent’s book. The adjustment is to recognize only the realized profits from the actual sales is recorded in the Consolidated Statement of Financial Position, while the unrealized profits are eliminated. Up-stream sale An up-stream sale occurs if the subsidiary sells inventories to parent. Initially, a subsidiary will record the profits which arise from selling inventories to parent in the subsidiary’s books. As at the balance sheet date, any unsold inventories in the 76

FINANCIAL REPORTING

parent will affect the realized profits in the subsidiary’s books. The realized profits must be adjusted to determine unrealized profits.

5.16 The Intragroup Transactions for Dividends Income Received by the Holding from The Subsidiary Once, the holding company invest equity in the subsidiary from time to time the holding company will receive dividends on the issued shares. The payment of dividends on preference shares and ordinary shares is an appropriation of profits after all expenses are deducted. At the holding company view, dividend receivables are recognized as income. However, in the subsidiary’s books, this provision of dividend is classified as a liability. In preparing the consolidated statement of financial position, dividend receivables and dividend payables are intra group transactions must be cancelled off. The intra-group transactions for dividends income received by the holding from the subsidiary There are three situations arise; 1) Both subsidiary and holding company have recorded the dividend. 2) Both subsidiary and holding company have not recorded the dividend. 3) The subsidiary has recorded the dividends payables but the holding company has not taken credit for its share of dividend receivables. 1) Both subsidiary and holding company have recorded the post dividend In this situation, both subsidiary and the holding company already recorded their dividend receivables or payables in their books. How do you know? Just refer to your statement of financial position. If dividend receivables and dividend payables are stated in the SoFP, meaning that both companies have recorded the dividend. Thus, this intra company transaction must be eliminated and adjustments are only made in the CSoFP. Adjustment: Journal entry Dt. Interest payable

5,000

Cr.

Interest receivable

3,000

Cr.

CSoFP- Interest payable to others

2,000

FINANCIAL REPORTING

2) Both subsidiary and holding company have not recorded the post dividend/interest How do you know? Just refer to your statement of financial position. If dividend receivables and dividend payables are not stated in the SoFP, indicate that both companies have not recorded the interest and dividend. Adjustment: Journal entry Dt. SOCI

5,000

Cr.

CSOCI

3,000

Cr.

CSoFP- Interest payable to others

2,000

3) The subsidiary has recorded the dividend/ interest payables but the holding company has not taken credit for its share of dividend/interest receivables. How do you know? Just refer to your statement of financial position. If dividend payables are stated in the SoFP and not for dividend receivables, it signifies that holding company has not recorded the dividend in its book Adjustment: Journal entry Dt. Dividend payable Cr.

3,000

CSOCI

3,000

5.1.7 The Intragroup Transactions for the Sale of Non-current Assets There are two types of non-current assets: 1. Non-depreciable assets – such as land 2. Depreciable assets- such as Property, Plant & Equipment.

FINANCIAL REPORTING

Non-Depreciable Asset The land is one of the non-depreciable assets. Transferred profit arises if the selling price of this asset exceeds than carrying value (cost or net book value). The unrealized profit should be recognized in the seller’s books if inventories remain unsold at the balance sheet date in the buyer’s book. The provision of unrealized profits on the sale of land will be recorded at the debit side of P&L and the carrying value of this asset is shown in the consolidated balance sheet. Sale of Depreciable Assets Most of the depreciable assets are in the group of property, plant and equipment. Profits (transferred profits) arise if these assets sold above the carrying value and it can be realized in the seller’s books. However, in preparing the consolidated statement of financial position, the transfer profit will be eliminated and the total of the assets will be reduced to reflect its book value. Also, an adjustment of depreciation is needed in the buyer’s books. Adjustments for Sale of Depreciable Assets TYPE OF SALE

S’s BOOKS

H’s BOOKS

Downstream

Adjustment for accumulated depreciation in PL

PURP in CPL

Up Stream

PURP in PL

Adjustment for accumulated depreciation in CPL

5.1.8 The Intragroup Transactions for Revaluation of Noncurrent Assets Revaluation of non-current asset is needed when one company desire to arrive at a fair price or to acquire other company or to liquidate the company due to takeover, amalgamation or insolvency. There are two conditions of revaluation of noncurrent assets: 1. Pre-acquisition 2. Post-acquisition

FINANCIAL REPORTING

Pre-acquisition Revaluation Reserve Revaluation reserve may surplus or deficit if the fair value differs from the carrying value. If the accounts of the acquired entity are not adjusted, adjustments have to be made in the consolidated financial statements to reflect the value of the assets. The accounting treatment for revaluation reserve should be same as other preacquisition reserves (included in Adjustment Account) Example 5 Given below is the Statement of financial position of Moon Sdn Bhd and Earth Sdn Bhd as at 31.12.2019. Moon (RM)

Earth (RM)

1,000,000

500,000

Retained Profit

400,000

110,000

Current Liabilities

100,000

20,000

1,500,000

630,000

Land

100,000

Building (NBV/ Carrying amount)

400,000

300,000

Other non-current assets

100,000

200,000

Investment in Earth – OS at cost

750,000

Current assets

150,000

30,000

1,500,000

630,000

Ordinary shares @RM1 each

Additional information: 1. Moon Sdn Bhd acquired 450,000 ordinary shares of Earth Sdn Bhd on 1.1.2019 when the retained profit of Earth had a credit balance of RM10, 000. 2. On the date of acquisition of Earth Sdn Bhd, the fair value of land and building were RM120, 000 and RM500, 000 respectively. Earth Sdn Bhd did not adjust its financial statements to reflect the new values. The remaining life of building on 1.1.2018 was 16 years and the carrying value was RM320, 000.

FINANCIAL REPORTING

3. Depreciation policy of the group is to depreciate buildings on a straightline basis. The carrying amount of RM300, 000 is after depreciation charging for the year 2019. You are required to prepare the Consolidated Statement of Financial Position of Moon Sdn Bhd and Earth Sdn Bhd as at 31.12.2019. SOLUTION: Calculate revaluation reserve (pre-acquisition) Land (RM)

Building (RM)

Fair value on 1.1.2019

120,000

500,000

Carrying value on 1.1.2019

100,000

320,000

20,000

180,000

surplus Calculate depreciation adjustments Fair value (RM) 1.1.2019 Depreciation expense

Carrying value (RM) 1.1.2019

500,000/16 = 31250

Additional depreciation (increase)

320,000/16 =20,000 11,250

Percentage acquired: Ordinary share - 450,000/500,000 X 100% = 90% Adjustment Account RM

Investment (Ordinary share)

750,000

Ordinary shares

NCI (710,000x10 %)

71,000

Retained Profit

10,000

Revaluation Reserve Land Revaluation Reserve Building Goodwill

20,000

821,000

500,000

180,000 111,000 821,000

FINANCIAL REPORTING

Non-controlling Interest Account (NCI) RM To CSoFP

79,875

RM Adjustment

71,000

Retained Profit

8,875

79,875

Statement of Comprehensive Income (SOCI)/Retained Profit RM Adjustment

10,000

Additional depreciation

11,250

NCI (110,000–10,000 – 11,250)X 10% To CSOCI

RM Balance

110,000

8,875 79,875 110,000

110,000

Revaluation Reserve (RR) RM Adjustment:

RM Land

Land

20,000

Building

180,000

Building

200,000

20,000 180,000 200,000

Consolidated Statement of Comprehensive Income (CSOCI) RM To CSoFP

479,875

RM Balance SOCI Subsidiary

479,875

400,000 79,875 479,875

FINANCIAL REPORTING

Consolidated Statement of Financial Position of Moon Sdn Bhd and its subsidiary Earth Sdn Bhd as at 31 December 2019. RM RM Non-current assets Land 220,000 Building 868,750 Other non-current assets (400,000+500,000300,000 31,250) Goodwill 111,000 Current assets Shareholders’ fund Ordinary shares RM1 each Retained profits Non-controlling interest Current liabilities

180,000 1,679,750 1,000,000 479,875 79,875 120,000 1,679,750

Post-acquisition Revaluation Reserve Post-acquisition revaluation reserve of non-current assets happens when there are changes in the fair value after the date of acquisition. The NCI interest will include its shares of post-acquisition reserves.

FINANCIAL REPORTING

EXERCISE The following are the Statement of Financial Position of Twilight Bhd and Rainbow Sdn Bhd as at 31st December 2019. Twilight Bhd RM Non-Current Assets Land and Building Plant and Machinery Motor Vehicles Investment: Merah Sdn Bhd (320 000 units) Current Assets Bank Trade Receivables Inventories

Financed by: Ordinary shares@RM1 each General reserve Retained profit Trade payables Ordinary share dividend payables

Rainbow Bhd. RM

500,000 200,000 280,000 600,000

350,000 250,000 100,000

150,000 60,000 50,000 1,840,000

140,000 100,000 60,000 1,000,000

900,000 210,000 540,000 100,000 90,000 1,840,000

400,000 100,000 400,000 60,000 40,000 1,000,000

Additional information: 1. Twilight Bhd. acquired the ordinary shares of Rainbow. Bhd. on 31 st December 2017 when the balance of the following accounts is as follows: Retained Profit RM200, 000 General reserve RM100, 000 2. Included in the trade receivables of Red is RM10, 000 due from Rainbow Bhd. 3. During the current year, Twilight Bhd sold inventories of sales value RM60, 000 to Raibow Bhd. Twilight Bhd sold these goods to Raibow Bhd at cost plus 20%. Raibow Bhd has not sold 50% of these goods yet. 4. On 1 June 2019, Raibow Bhd sold a piece of land costing RM30,000 for RM50,000 to Twilight Bhd. 5. Twilight Bhd has not taken credit for its share of dividend from Raibow Bhd. 6. Goodwill is impaired by 10%. You are required to prepare: a) Adjustment Account b) Subsidiary Retain profit. c) Non-controlling Interest Account. d) Consolidated profit and loss account. e) Consolidated Statement of Financial Position as at 31st December 2019. 84

FINANCIAL REPORTING

SOLUTION:

Investment NCI

Adjustment Account RM 600,000 Ordinary share 140,000 Retain profit Share premium Goodwill 740,000

Subsidiary Retain Profit Account RM Adjustment 200,000 Balance Provision for unrealized profit20,000 Land NCI 36,000 Consolidated retain Profit 144,000 400,000

To CSFP

Non-Controlling Interest RM 176,000 Adjustment Retain profit 176,000

Consolidated Retain Profit Account RM RM Provision for unrealized profitBalance inventories 5,000 Impairment of Goodwill 4,000 Retain profit To CSFP

707,000 Div. receivable 716,000

RM 400,000 200,000 100,000 40,000 740,000

RM 400,000

400,000

RM 140,000 36,000 176,000

540,000 144,000 32,000 716,000

FINANCIAL REPORTING

Consolidated Statement of Financial position of Twilight Bhd and Rainbow Bhd as at 31st December 2019 RM Non-Current Assets Land and Building 830,000 Plant and machinery 450,000 Motor vehicle 380,000 Goodwill 36,000 Current Assets Bank Trade receivable Inventories Financed by; Ordinary share General reserve Retained profit Non-controlling interest (NCI) Dividend to NCI Trade payables Ordinary share dividend payables

290,000 150,000 105,000 2,241,000 900,000 210,000 707,000 176,000 8,000 150,000 90,000 2,241,000

FINANCIAL REPORTING

QUESTIONS Question 1 The following are the Statement of Financial Position of Mercu Bhd and Perdana Sdn Bhd as at 31st December 2020. Mercu Bhd RM Non-Current Assets Land and Building Plant and Machinery Motor Vehicles Investment: Perdana Sdn Bhd (400 000 units) Current Assets Bank Trade Receivables Inventories

Financed by: Ordinary shares@RM1 each Retained profit General reserve Trade payables Dividend payable

500,000 220,000 300,000

Perdana Sdn Bhd. RM 350,000 350,000 100,000

600,000 150,000 70,000 50,000 1,890,000

200,000 100,000 60,000 1160,000

900,000 500,000 300,000 100,000 90,000 1,890,000

500,000 420,000 160,000 80,000 1160,000

Additional information: 1. Mercu Bhd. acquire the ordinary shares of Perdana Sdn. Bhd. on 31st December 2019 when the balance of the following accounts are as follows: i. Retained Profit RM120,000 ii. General Reserve RM100,000 2. RM20,000 in Trade receivable of Mercu Bhd is due from Perdana Sdn. Bhd. 3. 30% of inventories in Perdana Sdn. Bhd were purchased from Mercu Bhd which was invoiced at cost plus 20%. 4. On 31st December 2020, 10% dividend on ordinary share of Perdana Sdn Bhd has been declare and still not recorded by both companies.

FINANCIAL REPORTING

You are required to illustrate: a. Adjustment Account b. Subsidiary Retain profit. c. General reserve Account d. Consolidated General reserve Account e. Non-controlling Interest Account. f. Consolidated profit and loss account. g. Consolidated Statement of Financial Position as at 31st December 2020.

Question 2 The following are the Statement of Financial Position of Dedaun Bhd and Hijau Sdn Bhd as at 31st December 2020. Dedaun Bhd RM Non-Current Assets Land Plant and Machinery Motor Vehicles Investment in Hijau Sdn Bhd : Ordinary share (400 000 units) Debenture RM100,000 Current Assets Bank Trade Receivables Debenture Interest Receivable Inventories Financed by: Ordinary shares@RM1 each General Reserve Retained profit 10% Debenture Trade payables Interest Debenture payable Dividend Ordinary payable

500,000 825,000 700,000

Hijau Sdn Bhd. RM 380,000 560,000 600,000

650,000 200,000 150,000 100,000 15,000 60,000 3,200,000

100,000 110,000 50,000 1,800,000

1,000,000 300,000 955,000 500,000 340,000 25,000 80,000 3,200,000

500,000 120,000 600,000 300,000 160,000 30,000 50,000 1,800,000

FINANCIAL REPORTING

Additional information: 1. Dedaun Bhd. acquired the ordinary shares and debenture of Hijau Sdn. Bhd. on 31st December 2019 when the balance of the following accounts are as follows: i. Retained Profit RM150,000 ii. General reserve RM100,000 2. Included in the trade receivables of Dedaun is RM100,000 due from Hijau. 3. During the current year Dedaun sold inventories of sales value RM60,000 to Hijau. Dedaun sold these inventories to Hijau at cost plus 20%. Hijau has not sold 50% of these inventories yet. 4. On 31st December 2020, 10% dividend on ordinary share of Hijau Sdn Bhd has been declared and still not recorded by Dedaun Bhd. You are required to: a. Prepare: a) Adjustment Account b) Subsidiary Retain profit. c) Subsidiary Debenture d) Subsidiary General Reserve e) Consolidate General Reserve f) Non-controlling Interest Account. g) Consolidated profit and loss account. b. Illustrate the Consolidated Statement of Financial Position as at 31 st December 2020.

FINANCIAL REPORTING

Topic 6 Internal Reconstruction Learning Outcomes: At the end of this topic, students should be able to: 1. Outline the concept of capital reduction or internal reconstruction in the accordance of Companies Act 2016.Demonstrate the consideration transferred (purchase price). 2. Determine the factors to be considered in determining the amount of capital reduction. 3. Illustrate the accounting entries in capital reduction and internal reconstruction.

FINANCIAL REPORTING

Topic Overview COMPANY RECONSTRUCTION

INTERNAL RECONSTRUCTION

EXTERNAL RECONSTRUCTION

(Topic 6)

(Topic 7)

CAPITAL REDUCTION - No new company is form

A new company is formed

The statutory requirements -Section 116 of the Companies Act 2016

This topic discussing the statutory requirement and account treatment after capital reduction. A few examples are given how to make the adjustment record in preparing financial statement after capital reduction.

FINANCIAL REPORTING

6.1 The Purpose of Reconstruction The purpose of reconstruction is to improve the financial structure of the company. They focus on rationalizing the amount of liabilities of the company as well as revisiting the valuation of its assets. If reconstruction is not undertaken in a timely manner for companies that are in severe financial trouble, they may end up becoming bankrupt under the burden of discharging high liabilities that they cannot afford. There are two types of reconstruction: i. ii.

Internal reconstruction – capital reduction scheme External Reconstruction – selling the ailing company to another company

The purpose of both internal and external reconstruction is thus to protect the company from bankruptcy and rationalize its financial structure, giving it a better chance to perform better in the years to come. The company has to fulfill the statutory requirements as set out in the companies Act 2016. DIFFERENCES Internal reconstruction External reconstruction No new company is formed and the existing company continues as a going concern. The ailing company will not give into liquidation under the capital reduction scheme, and

A new company is formed by the existing shareholder of the old company to take over assets and liabilities. The ailing company goes to liquidation

Involves complying the requirements under the Companies Act

6.2 What is capital reconstruction? Capital reduction or internal reconstruction happen when the company has surplus capital or whose capital was eroded by trading losses. Can be defined as a drastic formal change in a company’s capital structure as a result of certain circumstances. Reconstruction will be undertaken only when the company has evidence that it can make profits in the near future and able to pay dividends to its shareholders.

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6.3 The statutory requirements as set out in the companies Act 2016. Company Act 2016 A company can reduce its share capital in one of two ways: 1) By a special resolution and confirm by the court. 2) By a special resolution supported by a solvency statement.

Section 116 of the Companies Act 2016 The court allows a company to reduce its capital in any of the three situations: 1) To reduce or write off the uncalled on its shares 2) Cancel any paid-up capital which is lost and unrepresented by available assets. 3) To refund any surplus capital which is excess of the needs of the company. The act protects the interest of creditors, they have right to object the proposed capital reduction scheme. The court will confirm the capital reduction only after the creditors are satisfied.

6.3.1 Reduce or write off the uncalled capital on company’s shares Uncalled capital is an amount of the money on the issued capital that has not been called up due to the sufficient capital. Under this situation, the uncalled capital can be reduced or write off. Accounting treatment – no accounting transaction for uncalled capital but a memorandum entry is made to recognise the change in the paid-up value of the shares .

6.3.2 Refund of the surplus capital. company being in excess financial resources when in the Financial Position Statements shows high cash balances and low return capital (dividend). Under the company reconstruction, any surplus must be refunded to the shareholders via reducing its paid-up value of the share.

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The accounting entries are: Debit Ordinary share capital Credit Bank

RMXX RMXX

6.3.3 Capital is not represented by available assets (lost capital) The situation where a company’s capital is eroded is when the company has incurred heavy losses and unable to pay dividends to its shareholders for a number of years. The company in this situation has 2 choices which are liquidated or reconstructed. Liquidation of the company involves the disposal of assets, settlement of the liabilities and distribution of the remaining assets to the shareholders. The objective of the reconstruction is to save the company from liquidated but reconstruction will only can be done if the company can prove that it can make profits in the near future. The accumulated trading loses will be written off and the carrying amount of the assets will be adjusted based on reduction scheme. Example 1 RT Sdn Bhd Statement of Financial Position as at 31.12.2020 Non-current assets Current assets Financed by: Ordinary shares @ RM1 Accumulated loss Net equity Current liabilities

150,000 40,000 190,000 300,000 (180,000) 120,000 70,000 190,000

In this situation, 1) The accumulated losses of RM180,000 have eroded the paid-up capital. So, the value of capital becomes RM120,000 and it is not same as invested. 2) There is also a cash flow problem as there is negative working capital. In such situation the company can; 1) Continue to be in business and face further erosion of capital. 2) Wind up its business 3) Reconstruction. 94

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In addition, loss of capital (paid up capital – net assets) is RM 180,000 [300,000(190,000-70,000)]. Meaning that the share capital is reduced by RM180,000 or RM0.60 per share. RM180,000 also known as the capital paid up which is not represented by available assets. Devising a Scheme of Capital Reduction The capital reduction scheme will be devised to ensure that the capital that is LOST is written off. 1) RM180,000 must be cancelled via reducing its share price from RM1 to RM0.40 each. 2) The company will also advice to eliminate the accumulated losses and adjust the assets value to reflect current values, if needed. 3) Due to cash flow problem (negative working capital), it is suggested to raise any fund such as issue additional shares.

6.4 Accounting Entries The accounting entries is to record the assets at fair values, writing off the accumulated losses and reducing the share capital with the lost capital. The capital reduction account is opened to record any decreasing or increasing of assets, any written off of accumulated losses, intangible assets, tangible assets, liabilities and reducing of share capital. Normally, there is no remaining balance in capital reduction account. However, if total amount in the credit side is more than total amount in the debit side, the difference will transfer to a capital reserve account. On the other hand, a debit balance will be considered as loss on reorganization and must be deducted from the income statement as reorganization expenses. Capital Reduction Account Total reducing value of tangible assets

Total increment value of tangible assets

Written off accumulated loss & intangible assets

Total reducing value of shares

Contingent liability

Written off liabilities

Reorganization expenses

Loss on reorganization

TOTAL

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Example 2 Given below is the statement of financial position of Rugi Sdn Bhd as at 31 Dec 2020 RM 60,000 220,000 150,000 430,000

Goodwill Non-Current Assets Current assets 500, 000 Ordinary shares Accumulated loss Loan from directors Current Liabilities

500,000 (220,000) 50,000 100,000 430,000

A capital reduction scheme approved by court was set out as follows: a) Ordinary shares were reduced to RM0.40 each fully paid and existing shareholder will agree to subscribe one fully paid ordinary share of RM0.40. b) The accumulated loss and goodwill are to be written off. c) Non-current assets were revalued to RM200,000. d) The directors agreed to accept ordinary shares in place of their loans. You are required to prepare journal entries. Suggestion answer: Description

Debit

Dr ordinary shares Cr capital reduction (Being ordinary shares written off RM0.60 per share capital)

300,000

Dr bank Cr ordinary shares (Being cash received for 500,000 ordinary share issues of RM0.40 each fully paid)

200,000

Dr capital reduction Cr Accumulated losses Cr goodwill (Being written off accumulated losses & Intangible asset)

280,000

Dr Capital reduction Cr non-current assets (Being assets written down to current values)

Credit 300,000

200,000

20,000

220,000 60,000

20,000

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Dr loan from directors Cr ordinary shares (Being replaced the loans by issuing ordinary share)

Non-current assets Accumulated losses Goodwill

CAPITAL REDUCTION ACCOUNT RM 20,000 Ordinary Share 220,000 60,000 300,000

50,000 50,000

RM 300,000 300,000

Statement of financial position immediately after the capital reduction. Rugi Sdn Bhd Statement of Financial Position as at 31 December 2020 Non-Current Assets 200,000 Current assets 350,000 550,000 1,125, 000 Ordinary shares 450,000 Current Liabilities 100,000 550,000

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QUESTION Question 1 The following are Statement of Financial Position Lara Corporation Sdn. Bhd. as at 31 December 2020. RM Authorized Share Capital 300 000 (5% Cumulative Preference Share) 1 500 000 Ordinary share Issued Share Capital 200 000 5% Preference Share 600 000 Ordinary share Accumulated losses 8% debenture Current liabilities: Trade payables Bank overdraft Goodwill Land and building Plant and Machine Trade receivables Inventories Cash in hand

300 000 1 500 000 1 800 000 200 000 600 000 (375 000) 50,000 150 000 20 000 685,000 65 000 228 000 200 000 125 000 65 000 2 000 685,000

Notes: Arrears on preference dividends were RM20 000. A capital reduction scheme duly approved by the court was set out as follows: 1. The ordinary share to be reduced to RM0.25 per share and the preference shares reduced to RM0.75 per share. 2. The preference share holders to receive one ordinary share of RM0.25 each for every preference dividend in arrears. 3. The Intangible Assets and accumulated losses are to be written off. 4. Assets were revalued as follows: a. Land and building RM248 000 b. Plant and mechine RM150 000 c. Trade receivables RM100 000 d. Inventories RM 25 000 5. The trade payables agreed to accept ordinary shares in place of their debt, and also agreed to subscribe for RM50,000 in ordinary shares.

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You are required to prepare: a. The journal entries to record the capital reduction. b. Capital Reduction Account. c. Statement of financial position after the scheme completely imposed. Question 2 Black Bhd. Faced difficulties in business and made a decision to restructure the company’s financial. The following is the statement of financial position as at 31 st December 2020. Black Bhd. RM Non-Current Assets Land and Building Plant and Machinery Research & Development Goodwill Current Assets Trade Receivables Inventories Financed by: Ordinary shares Preference shares Profit and loss Trade payables Rent payables

150,000 150,000 50,000 30,000 90,000 50,000 520,000 300,000 200,000 (320,000) 240,000 100,000 520,000

FINANCIAL REPORTING

Notes: Arrears on preference dividends were RM50 000. A capital reduction scheme duly approved by the court was set out as follows: 1. The ordinary share to be reduced to RM0.20 per share and the preference shares reduced to RM0.70 per share. 2. The preference share holders to receive one ordinary share of RM0.20 each for every RM of preference dividend in arrears. 3. The Intangible Assets and accumulated losses are to be written off. 4. Assets were revalued as follows: i. Land and building RM250,000 ii. Plant and Machinery RM110,000 iii. Inventories RM 30 000 5. 200,000 ordinary share is issued at par value to gain cash and fully paid. You are required to; i. ii. iii.

Write journal entry for the transaction above. Prepare capital reduction account. Prepare Statement of Financial Position on 31st December 2020 after the capital reduction plans has been completed

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TOPIC 7 Issues in Financial Accounting and Reporting Learning Outcomes: At the end of this topic, students should be able to: Determine measurement and disclosure of Events after the Reporting Period (MFRS 110).

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Topic Overview

EVENTS AFTER THE REPORTING PERIOD

Date When the Financial Statements Are Authorised for Issue

Adjusting Events

Non-Adjusting Events

This topic discussing events after the reporting date which is the events that occur between the end of the reporting period and the date when the financial statements are authorised for issue. A few examples are given to show the condition of the events occured.

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7.1 Events After the Reporting Period MFRS 110 defines events after the reporting date as those events, both favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. The standard has identified two types of events. They are: a. Those events that provide further evidence of conditions that at the end of the reporting period (adjusting events)- material event, and b. Those that are indicative of conditions that arose after the end of the reporting period (non-adjusting events) non-material but significant.

7.2 Date When the Financial Statements Are Authorised for Issue The date on which the financial statements are authorised for issue depends on the management structure, statutory requirements and procedures followed by each entity in preparing and finalizing the financial statements. Example Company A’s draft financial statements for the year ended 31 December 2020 was completed on 28/2/2021. The board of directors reviewed the financial on 20/3/2021 and authorized them for issue. Company A released its profits and other selected financial information to the public on 21/3/2021. However, the financial statements were only made available to the shareholders 30/3/2021. The shareholders approved the financial statements at the annual meeting on 10/5/2021. The post reporting period is between the year-end date, 31 December 2020 and 20/3/2021, the date the directors authorized the financial statements.

7.3 Adjusting Events Adjusting events affect the financial position and performance measurement of the entity even though they occurred between the reporting date and the date the financial statements were authorized for issue. Are the events that provide evidence of conditions which existed at the end of reporting period. The accounting treatment is to adjust the elements of financial statements affected by these events. 103

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      

Measurement of bad and doubtful Determining the net realizable value of inventory Court case Impairment of assets Cost of assets purchased or proceeds from disposal of assets Profit sharing or bonus Fraud

Measurement of Bad and Doubtful Debts The entity normally provides for doubtful debts from the past experience. Events after the reporting period may indicate that the amount has to be adjusted. The bankruptcy of a customer after the reporting period gives further evidence of the loss already existing on the reporting period on a trade receivable. Therefore, the entity needs to adjust the carrying amount of the trade receivable. Example 1 The entity makes a provision for doubtful debts of 10% on all its trade receivables. After the end of the financial year, a customer who owed the entity RM2million was declared a bankrupt. Answer At the reporting period the customer may have been solvent but events after that date indicate that the estimated provision has to revised. The 10% provision on the debts has to revised. If the entity determines that the customer would not be able to pay any amount, then the full amount of the debt has to be written off. The additional loss of RM1.8 million has to recognised. It is an adjusting event.

Determining the net realisable value of inventory At the end of the financial year, the carrying value of inventory is compared with its net realisable value. Net realisable value is the estimated selling price less costs necessary to make the sale. The measurement of net realisable value is estimate. The sale of the inventory after the reporting period gives further evidence of the selling price of the inventory at the reporting period.

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Example 2 At the reporting period, the carrying value of inventory of ROY was RM43,000 and the net realizable value was RM52,000. The inventory was sold after the year-end but before the financial statements were authorized for issue, at RM 42,000. Answer The actual sale price gives evidence that the carrying value has to be adjusted to RM42,000. The loss of RM1,000 is recognised in the current year.

Court case There is a litigation, if the amount of payment cannot be determined the entity has to disclose the fact that there is a contingent liability. If the amount can be measured it has to be based on the best estimate. Example 3 Client sue the entity for RM500,000 for pain and agony caused by consuming the product sold by the entity. The entity made a provision for liability of RM100,000. The court case pending at the end of the year. A month after the financial year- end but before the financial statement authorized for issue, the case came to court and the judgment was in favour of the client awarding RM400,000. Answer This is an adjusting event after the financial reporting period. The additional loss and a corresponding liability of RM300,000 have to be recognized.

Impairment of assets Assets are reviewed for impairment at the reporting period. There could be indications of impairment or of no impairment. If the entity obtains information after the reporting period indicating that an asset is impaired at the reporting period, or that the amount of a previously recognised impairment loss for that asset needs to be adjusted, then the entity is required to make the appropriate adjustments. 105

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Acquisition cost or proceeds on disposal of assets The determination after the reporting period of the cost of assets purchased, or the proceeds from the assets sold, before the reporting period are adjusting events.

Profit sharing or bonus If the entity had a present legal or constructive obligation at the reporting period to make such payments as a result of events before that date and the amount was determined after the reporting period, the amount of profit sharing or bonus is to be recognised for the year. The accounts have to be adjusted.

7.4 Non-Adjusting Events Events that are indicative of conditions that arise after the reporting period which no adjustments are made but the following disclosure should be provided: (Do not affect the financial performance or position)  

the nature of the event, and the estimate of the financial effect, or a statement that such an estimate cannot be made.

The accounting treatment is not to adjust the elements of financial statements. Examples of non-adjusting events:           

Decline in the market value of investments after the reporting date A major business combination after the reporting date Announcing a plan to discontinue an operation, disposing of assets etc. Major purchases and disposals of assets or expropriation of major assets by government. Destruction of a major production plant by a fire after the balance sheet date. A major restructuring Major ordinary share transactions Abnormally large changes after the reporting period in asset prices or foreign exchange rates Changes in tax rates or tax laws Entering into significant commitments or contingent liabilities Commencing major litigation arising solely out of events that occurred after the reporting date.

In each of the above examples, an entity is required to disclose the nature of the events, an estimate of its financial effects, or a statement that such an estimate cannot be made. 106

FINANCIAL REPORTING

Example 1 Super Bhd’s current year financial statements end 31 March 2020. On 16 April 2020, the board of directors agreed to sell a subsidiary called Lily Bhd for RM2.5 million. The directors authorized the financial statements for issue on 30 August 20x0. Identify and explain the nature of the above event and the appropriate accounting treatment. Answer The event on 16 April 2020 occurred between the reporting period and the date the financial statements were authorized for issue. The event was indicative of conditions that arouse after the reporting period. Therefore, it is a non-adjusting post-balance event of RM2.5 million. Notes to Financial Statements:  Subsequent to the reporting period, the company decided to sell Lily Bhd for a cash consideration of RM2.5 million.

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7.5 Dividends and Going Concern Status Dividends Proposed Dividends are not present obligations and are not to be recognised as liabilities. A disclosure is required. Going Concern Status Where the management determines after the reporting date that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so, then the going concern assumption used in preparing the financial statements may no longer be appropriate. Financial statements are to be prepared on a liquidation basis. Disclosure 1 The date when the financial statements were authorised for issue and who gave that authorisation. If entity’s owners or others have the power to amend the financial statements after issue, the entity shall disclose that fact. Disclosure 2 The information received after the reporting period about conditions that existed at the reporting period. This information needs to be disclosed even if it does not affect the amounts recognised in the financial statements.

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REFERENCES 1. Accounting Tools, Financial Statement Definitions. https://www.accountingtools.com/articles/2017/5/10/financial-statements (2021) 2. Accounting Coach. What is the Statement of Financial Position. https://www.accountingcoach.com/blog/what-is-the-statement-of-financialposition. (2021). 3. Akmalia M.A, Ervina A, Mazni A, Noor Sharoja S, Sherliza P. N & Mohamad H.R. Financial Accounting and Reporting 2. ISBN 978 983 47 29820. Oxford University Press (2019). 4. Foulks Lynch. Financial Accounting Fundamentals. ISBN-10: 0748338055 ACCA Textbook 4th edition (1998).

5. Barry Elliott and Jamie Elliott. Financial Accounting and Reporting Thirteenth Edition 2009 ISBN: 978-0-273-72332-5 Pearson Education Limited (2009) 6. Accounting Capital. What are Notes to Accounts? https://www.accountingcapital.com/other-topics/notes-to-accounts/ 7. CFI, Profit and Loss Statement. https://corporatefinanceinstitute.com/resources/knowledge/accounting/profi t-and-loss-statement-pl/ (2021). 8. Jane Lazar. Company & Group Financial Reporting Ninth Edition. ISBN: 978967-349-753-9 Pearson Malaysia Sdn. Bhd. (2018). 9. Mary M.F, Noraini M.N, Roshayani A, Ooi C.K, Mohamad H.R, Wong T.K, Mara Ridhuan C.A.R & Hafiz-Majdi A.R. Financial Accounting and Reporting 3. ISBN: 978 983 47 24122 Oxford Fajar Sdn. Bhd (2018). 10. Petrolium Nasional Berhad (PETRONAS). Financial Report 2020. 11. Sayantan Mukhopadhyay & Dheeraj Vaidya, Share Capital. https://www.wallstreetmojo.com/share-capital/

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INDEX

EY Bhd., 25, 26, 27, 28

Accounting Framework, iii, 38

Financial Reporting Standard 101, 14

Accrual, 37, 39

Financing activities, 22

Assets, 5, 9, 10, 16, 35, 40, 53, 63, 64, 69, 71

B Bills Receivable, ii, 57 Business combination, ii, 42

Going Concerned, 36 group account, ii, 42 H

holding company, ii, 42, 43, 44, 45, 61, 62, 63

CA 2016, 9, 10, 44

Cash equivalents, 21

IFRSs, 15

Cash flows, 9, 21, 22, 27, 28

indirect method, 24

Company Act 2016, 9

interest, 6, 7, 24, 43, 47, 49, 52, 62, 68, 71

Comparability, 34 Completeness, 35

internal users, i, 31

Consistency, 37, 40

International Financial Standards, 15, 44

Consolidated Financial Statements, 14

Intra group balances, ii, 53

CSoFP, 47, 48, 50, 51, 52, 53, 54, 59, 62, 67, 68 D Depreciation, 10, 11, 12, 13, 25, 28, 66

Reporting

inventories, ii, 2, 7, 24, 28, 59, 60, 63, 69, 70 Inventories, 10, 11, 26, 55, 56, 69, 71 Investing Activities, 22 J

direct method, 24

Joint Venture, i, iii, 1, 2, 3, 4

dividend, 20, 43, 61, 62, 63, 69, 71

JOINTLY CONTROLLED ENTITIES, 7

JOINTLY CONTROLLED OPERATIONS, 6

Equity, 9, 11, 12, 13, 35, 46

FINANCIAL REPORTING

Pre-acquisition, 64

Liabilities, 9, 65

Presentation of Financial Statements, i, 9, 14, 32

M Malaysian Financial Standards, 14, 15

Reporting

MASB, 15, 30, 32 Matching, 37, 39 Materiality, 16, 36 measurement, ii, 14, 32, 33, 34, 35 Measurement, 35 MFRS 10, 14, 43 MFRS 107, 21 MFRS 119, 16

Profit, 1, 3, 4, 10, 12, 13, 17, 25, 26, 28, 39, 40, 46, 47, 50, 65, 67, 69, 70 Prudence, 37, 38 purchase, 27, 58 R Realisation, 36 recognition, 8, 14, 16, 32, 34, 36 Recognition, ii, 33, 35 Relevance, 34 Reliability, 34

MFRS 127, 14

Revaluation Reserve, 46, 47, 48, 49, 50, 51, 52, 64, 67, 68

MFRS 132, 15, 18

revaluation surplus, 16

MFRS 134, 14

MFRS 138, 16

Separate Entity, 36

MFRS 9, 16, 17

SHARE CAPITAL, 10

MFRSs, 14, 15, 16, 20

Subsidiary, ii, 43, 46, 48, 49, 51, 52, 55, 56, 57, 58, 61, 68, 70

misstatements of items, 16 N

Non-depreciable assets, 63

Timeliness, 34

Operating Activities, i, 22

Understandability, 33

unrealised profit, iii, 60

Periodicity, 37

Post-acquisition, 64, 68

venturer, 2, 3, 4, 6, 7, 8 Verifiability, 3

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FINANCIAL REPORTING

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Topic 3 Accounting Theories