FINANCIAL ACCOUNTING 4.0 by mooc sas

FINACC4 FINANCIAL ACCOUNTING 4 FOR POLYTECHNIC STUDENTS

Wan Zuraida Wan Yusoff Tg Besaruddin Sh Tg Yaakob Asmelinda Ismail

FINACC4 FINANCIAL ACCOUNTING 4 FOR POLYTECHNICS STUDENTS Published by: POLITEKNIK SULTAN HAJI AHMAD SHAH 25350 KUANTAN, PAHANG DARUL MAKMUR COPYRIGHTÂ©2020, Politeknik Sultan Haji Ahmad Shah Perpustakaan Negara Malaysia Data Pengkatalogan-dalamPenerbitan Wan Zuraida Wan Yusoff, 1972Financial Accounting 4 / WAN ZURAIDA WAN YUSOFF, ASMELINDA ISMAIL, TG BESARUDDIN SH TG YAAKOB. Mode of access: Internet eISBN 978-967-0778-65-5 1. Accounting. 2. Financial statements. 3. Government publications--Malaysia. 4. Electronic books. I. Asmelinda Ismail, 1977-. II. Tg. Besaruddin Sh. Tg. Yaakob, 1966-. III. Judul. 657 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: Xtreme Techno Trading No.6, Kg. Selamat Baru, Bangunan LKNP 25050 Kuantan Pahang Darul Makmur

Table of Contents PREFACE ..................................................................................................................... 1 Topic 1 Joint Venture ............................................................................................... 1 1.1 Definition .............................................................................................................. 1 1.2 Accounting for Joint Ventures. ........................................................................ 2 1.21 Accounting for Joint Ventures - No separate books are kept to record the transaction. Excerpt from MPERS

2 7

Topic 2 Financial Statement .................................................................................. 10 2.1 MFRS 101 Presentation of Financial Statements .......................................... 10 2.2 The Company Act 2016 ................................................................................... 11 Excerpt from MFRS Topic 3 Cash Flow Statement ................................................................................ 21 3.1 MFRS 107 ............................................................................................................ 21 3.2 Benefit of Cash Flow ........................................................................................ 21 3.3 Definition. ........................................................................................................... 21 3.4 Operating Activities ......................................................................................... 22 3.5 Investing Activities ............................................................................................ 23 3.6 Financing Activities .......................................................................................... 24 3.7 Presentation of the Cash Flow Statement .................................................... 24 3.8 Preparing a Statement of Cash Flows. .......................................................... 25 Topic 4 Accounting Theories................................................................................. 30 4.1 The purposes of accounting theory .............................................................. 30 4.2 The accounting bodies that regulate the accounting standards in Malaysia. .......................................................................................................... 30 4.3 The uses of accounting information .............................................................. 30 4.4 The internal users (Primary Users) of the financial statement. ................... 31 4.5 The external users (Secondary Users) of the financial statement. ............ 31

4.6 The Nature and purposes of the conceptual framework .......................... 32 4.7 The accounting framework. ........................................................................... 33 The accounting framework consists of 3 main components: ......................... 33 4.71 The objectives of financial reporting

4.72 Qualitative characteristics and constraints of financial reporting information. 34 4.73 Recognition and measurement of elements of a financial statement.

4.8 Accounting concept and conventions. ...................................................... 36 Topic 5 Basic of Group Accounts ......................................................................... 42 5.1 What is a group account? .............................................................................. 42 5.2 Business combination ....................................................................................... 42 5.3 Prepare the consolidated financial statement ........................................... 43 5.4 Definition of â&#x20AC;&#x153;subsidiary and holding companyâ&#x20AC;? ........................................ 44 5.5 Purposes of Consolidated Financial Statement .......................................... 45 5.6 Group Account/Consolidated Account ...................................................... 46 5.7 What is the Consolidated Statement of Financial Position? ...................... 46 5.8 Accounting Treatment of NCI ........................................................................ 47 Topic 6 Intra Group Transactions .......................................................................... 54 6.1 Intra group balances and transaction ......................................................... 54 6.11 Intra group transaction for owing money and balances

6.12 Current Account and item in transit

6.13 Trade receivables/ Trade payables

6.14 Bills Receivable/ Payables

6.15 The intra-group transactions for the sale of trading inventories

6.16 The Intra-Group Transactions for Dividends Income Received by the Holding from The Subsidiary 63 6.17 The intra-group transactions for the sale of non-current assets

6.18 The intra-group transactions for revaluation of non-current assets 66

List of Figures: Figure 1: Type of Joint Venture

Figure 2: Summary of Accounting Framework

Figure 3: Business Combination

Figure 4: Types of profit in intra group

Figure 5: Calculation of provision unrealised profit.

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 Malaysia polytechnic curriculum. It is based on the FINACC4 apps which are developed by authors. 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)

Asmelinda Ismail B. in Accountancy (Hons) (UUM), M. Ed (UTHM)

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

Topic 1 Joint Venture 1.1 Definition MPERS (Section 15) Paragraph 15.3 - A Joint Venture (JV) is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Joint ventures can take the form of jointly controlled operations, jointly controlled assets or jointly controlled entities. Simple Definition of a Joint Venture - is a business agreement between two or more businesses to carry out a business temporarily. Profit or losses will be divided according to an agreed ratio between the parties involved.

Type of Joint Venture

Jointly controlled operations

involves the use of the assets and other resources of the venturers instead of the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. (not establishment of corporation)

Jointly controlled assets or Jointly controlled entities

involves the establishment of a corporation, partnership or other entity in which each venturer has an interest (establishment of corporation)

Figure 1: Type of Joint Venture

1.2 Accounting for Joint Ventures. 1) No separate books are kept to record the transaction (Which will be discussed further in this chapter) ● Jointly controlled operations 2)

Separate books are kept to record the transactions ● Suitable for large Joint Venture. ● Jointly controlled entities

1.21 Accounting for Joint Ventures - No separate books are kept to record the transaction. Each venturer uses its property, plant and equipment and carries its inventories. It also incurs its expenses and liabilities and raises its finance, which represents its obligations. The joint venture activities may be carried out by the venturer’s employees alongside the venturer’s similar activities. The joint venture agreement usually provides a means by which the revenue from the sale of the joint product and any expenses incurred in common are shared among the venturers. Section 15 MPERS (Paragraph15.5) - In respect of its interests in jointly controlled operations, a venturer shall recognize in its financial statements: a) The assets that it controls and the liabilities that it incurs; and b) The expenses that it incurs and its share of the income that it earns from the sale of goods or services by the joint venture.

In this topic, we will prepare a Joint Venture Accounts and Outline a Memorandum of Joint Venture. Step 1: Prepare the Joint Venture Accounts Step 2: Prepare the Memorandum of Joint Venture Step 3: Transfer the profit to the Joint Venture Accounts.

Step 1: Prepare the Joint Venture Accounts Joint-Venture Accounts Each venturer keeps their transaction related to them in a Joint Venture Account. For example, Venturers A and B. 1) 2)

A’s book: Joint Venture Account with B B’s book: Joint Venture Account with A

In A’s Book Joint Venture with B Account RM Item incurred for business Item was taken out from (expenses, purchases, etc.) XX business (sales, drawings, etc.)

RM XX

In B’s Book Joint Venture with A Account RM Item incurred for business Item was taken out from (expenses, purchases, etc.) XX business (sales, drawings, etc.)

RM XX

Step 2: Prepare the Memorandum of Joint Venture Account A and B Memorandum of Joint Venture RM Item incurred for business Item was taken out from (expenses, purchases, etc.) X business (sales, drawings, etc.) Net Profit: A (1/2) B (1/2)

The ratio depends on agreement between both venturer

X X

RM XX

X XX

Step 3: Transfer the profit to the JV account.

In A’s Book Joint Venture with B Account RM Item incurred for business Item was taken out from (expenses, purchases, etc.) business. (sales, drawings, etc.) Profit from joint venture

X X

Settlement from B

X X

B’s Book Joint Venture with A Account RM Item incurred for business X Item was taken out from (expenses, purchases, etc.) business. (sales, drawings, etc.) Profit from joint venture Settlement to A

X X XX

RM XX

Examples of the double-entry account records for each venturer. BIL

Transactions

In Firm A’s book

Firm A made cash purchases.

Dr JV with B Acc. Cr Cash

No Entry

Goods supplied for the joint venture by firm A from its stock

Dr JV with B Ac. Cr Purchases

No Entry

Firm A made credit purchases

Dr JV with B Acc. Cr Creditors

No Entry

Returns outwards made by Firm A

Dr Creditors Cr JV with B Acc.

No Entry No Entry

Firm A purchases goods and settled by accepting bill.

Dr JV with B Acc. Cr Bills Payable

Bills accepted by Firm A on behalf of the joint venture and paid by Firm B.

Dr Bills Payable Cr JV with B Acc.

Firm A received discounts from joint venture suppliers.

Dr Creditors Cr JV with B Acc.

In Firm B’s book

Dr JV with A Acc. Cr Cash No Entry 4

BIL

Transactions

In Firm Aâ&#x20AC;&#x2122;s book

In Firm Bâ&#x20AC;&#x2122;s book

Expenses incurred by Firm A on behalf of the joint venture.

Dr JV with B Acc. Cr Cash

No Entry

Firm A received or was entitled commissions of any kind.

Dr JV with B Acc. Cr Commission receivable/ P&L

No Entry

Firm A made cash sales

Dr Cash Cr JV with B Acc.

No Entry

Firm A made credit sales.

Dr Debtors Cr JV with B Acc.

No Entry

Firm A made credit sales and settled by receiving acceptance of a bill.

Dr Bill Receivable Cr JV with B Acc.

No Entry

Joint venture customers returned goods to Firm A

Dr JV with B Acc. Cr Debtors

No Entry

Discount allowed to joint venture customers by Firm A

Dr JV with B Acc. Cr Debtors

No Entry

Bad debts incurred from joint ventures sales made by Firm A

Dr JV with B Acc. Cr Debtors

No Entry

Bad debts incurred by Firm B as it had received a commission (del credere commission for which it agreed to accept all losses from bad debts incurred by itself and the other party to the JV.)

Bad debts incurred and Firm A, but borne by Firm B ( Firm B had received a commission for which it agreed to accept all losses from bad debts incurred by itself and the other party to the JV.)

Dr JV with B Acc. Cr Debtors

Dr Bad Debts Cr JV with A Acc.

Firm A sent a cheque to Firm B to finance the joint venture.

Dr JV with B Acc. Cr Bank

Dr Bank Cr JV with A Acc.

Firm A purchased goods on behalf of the joint venture and sent them to Firm B.

Dr JV with B Acc. Cr Cash

Firm A sent some goods or assets of the joint venture to Firm B.

No entry

Dr Bad Debts Cr Debtors

No Entry

No Entry 5

BIL

Transactions

In Firm A’s book

In Firm B’s book

Assets took for personal use by Firm A.

Dr Drawings Cr JV with B Acc.

No Entry

The unsold stock was taken over by Firm A

Dr Stock Cr JV with B Acc.

No Entry

Share of the profit (Reverse the entries if there is a loss).

Dr JV with B Acc. Cr P &L

Dr P &L Cr JV with A Acc.

Settlement due to Firm B

Dr JV with B Acc. Cr Bank (Reverse the entries if payment is due from Firm B)

Dr Bank Cr JV with A Acc.

Excerpt from MPERS SECTION 15 MPERS - Investments in Joint Ventures This section applies to account for joint ventures in consolidated financial statements and in the financial statements of an investor that is not a parent but that has a venturerâ&#x20AC;&#x2122;s interest in one or more joint ventures. Paragraph 9.26 establishes the requirements for accounting for a venturerâ&#x20AC;&#x2122;s interest in a joint venture in separate financial statements.

Section 9 MPERS 9.26 When a parent, an investor in an associate or a venturer with an interest in a jointly controlled entity prepares separate financial statements and describes them as conforming to the MPERS, those statements shall comply with all of the requirements of this Standard except as follows. The entity shall adopt a policy of accounting for its investments in subsidiaries, associates and jointly controlled entities in its separate financial statements either: At cost less impairment; At fair value with changes in fair value recognised in profit or loss; or Using the equity method following the procedures in paragraph 14.8. The entity shall apply the same accounting policy for all investments in a single class (subsidiaries, associates or jointly controlled entities), but it can elect different policies for different classes.

JOINT VENTURES DEFINED 15.2 Joint control is the contractually agreed sharing of control over economic activity and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). 15.3 A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Joint ventures can take the form of jointly controlled operations, jointly controlled assets or jointly controlled entities. JOINTLY CONTROLLED OPERATIONS 15.4 The operation of some joint ventures involves the use of the assets and other resources of the venturers instead of the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer uses its property, plant and equipment and carries its inventories. It also incurs its expenses and liabilities and raises its finance, which represents its obligations. The joint venture activities may be carried out by 7

the venturer’s employees alongside the venturer’s similar activities. The joint venture agreement usually provides a means by which the revenue from the sale of the joint product and any expenses incurred in common are shared among the venturers. 15.5 In respect of its interests in jointly controlled operations, a venturer shall recognize in its financial statements: a) The assets that it controls and the liabilities that it incurs; and b) The expenses that it incurs and its share of the income that it earns from the sale of goods or services by the joint venture. JOINTLY CONTROLLED ENTITIES 15.8 A jointly controlled entity is a joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The entity operates in the same way as other entities, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity. Measurement—accounting policy election 15.9 A venturer shall account for all of its interests in jointly controlled entities using one of the following: The cost model.

The equity method.

The fair value model.

15.10 A venturer shall measure its investments in jointly controlled entities, other than those for which there is a published price quotation at cost less any accumulated impairment losses recognised in accordance with Section 27 Impairment of Assets.

15.13 A venturer shall measure its investments in jointly controlled entities by the equity method using the procedures in paragraph 14.8 (substituting ‘joint control’ where that paragraph refers to ‘significant influence’).

15.14 When an investment in a jointly controlled entity is recognised initially, a venturer shall measure it at transaction price. Transaction price excludes transaction costs.

15.11 The venturer shall recognise distributions received from the investment as income without regard to whether the distributions are from accumulated profits of the jointly controlled entity arising before or after the date of acquisition. 15.12 A venturer shall measure its investments in jointly controlled entities for which there is a published price quotation using the fair value model (see paragraph 15.14).

15.15 At each reporting date, a venturer shall measure its investments in jointly controlled entities at fair value, with changes in fair value recognised in profit or loss, using the fair value measurement guidance in paragraphs 11.27-11.32. A venturer using the fair value model shall use the cost model for any investment in a jointly controlled entity for which fair value cannot be measured reliably without undue cost or effort.

TRANSACTIONS BETWEEN A VENTURER AND A JOINT VENTURE 15.16 When a venturer contributes or sells assets to a joint venture, recognition of any portion of a gain or loss from the transaction shall reflect the substance of the transaction. While the assets are retained by the joint venture and provided the venturer has transferred the significant risks and rewards of ownership, the venturer shall recognize only that portion of the gain or loss that is attributable to the interests of the other venturers. The venturer shall recognize the full amount of any loss when the contribution or sale provides evidence of an impairment loss. 15.17 When a venturer purchases assets from a joint venture, the venturer shall not recognize its share of the profits of the joint venture from the transaction until it resells the assets to an independent party. A venturer shall recognize its share of the losses resulting from these transactions in the same way as profits except that losses shall be recognized immediately when they represent an impairment loss.

Topic 2 Financial Statement 2.1 MFRS 101 Presentation of Financial Statements Purpose of financial statements: Financial statements are a structured representation of the financial position and financial performance of an entity. The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management’s stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s: a. b. c. d. e. f.

Assets Liabilities; Equity; Income and expenses, including gains and losses; Contributions by and distributions to owners in their capacity as owners; Cash flows.

This information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows and, in particular, their timing and certainty. Complete set of financial statements. A complete set of financial statements comprises: a. A statement of financial position as at the end of the period; b. A statement of profit or loss and other comprehensive income for the period; MFRS 101 © IFRS Foundation 955 c. A statement of changes in equity for the period; d. A statement of cash flows for the period; e. Notes, comprising significant accounting policies and other explanatory information;

2.2 The Company Act 2016 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 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.’

EXAMPLE Below is the Trial Balance of Tempoyak Bhd as at 31 December 2019: RM RM Ordinary Shares @ RM1.00 180,000 General Reserve 70,500 Profit and Loss Account 40,500 Freehold Assets at cost 270,000 Vehicle at cost 90,000 Accumulated Depreciation – Vehicle 37,500 8% Debenture 30,000 Sales 421,500 Purchases 228,750 Return Inward 5,250 Return Outward 2,250 Carriage Inward 1,500 Carriage Outward 4,500 Inventories (1 January 2019) 42,000 11

Salary Insurance Electricity Advertisement Directorâ&#x20AC;&#x2122;s Emolument Debenture Interest Trade Receivable Trade Payable Interim Dividend Bank Cash Audit Fees

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) Inventories on 31 December 2019 at a cost of RM45,000. 2) Accrued Insurance at RM300 3) Depreciation on the vehicle at 20% on cost. 4) Company tax is 25% 5) 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 31st December 2019 b) Prepare the Statement of Changes in Equity for the year ended 31st December 2019. c) Prepare the table of Plant, Property and Equipment (PPE). d) Prepare the statement of financial position as at 31st December 2019.

Solution: a

Tempoyak Bhd Statement of Comprehensive Income for the year ended 31st December 2019 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 Carriage Outward Electricity Insurance Advertisement Directorâ&#x20AC;&#x2122;s Emolument Debenture Interest Audit Fee Depreciation â&#x20AC;&#x201C; Vehicle (20% X 90,000)

39,000 4,500 6,450 9300 7,500 18,000 2,400 4,500 18,000 (109,650) 81,600 (20400) 61,200

Profit Before Taxation Tax (25% x 81,600) Profit After Taxation

Tempoyak Bhd

Balance b/f Profit for the year Appropriation: General Reserves Dividends Interim Dividends Proposed

Statement of Changes in Equity for the year ended 31st December 2019 Ordinary Shares General Reserve RM RM 180,000 70,500 7,500 180,000

78,000

Retained Earnings RM 40,500 61,200 (7,500) (18,000) (18,000) 58,200 13

c. Note 1: Property, plant and equipment

I January 2019 Purchases/Valuation 31 December 2019 Acc. Depreciation I January 2019 Charge for the year 31 December 2019

Freehold Land RM 270,000 270,000

Carrying amount

Vehicle RM 90,000 90,000

Total RM 360,000 360,000

37,500 18,000 55,500

270,000

34,500

304,500

Tempoyak Bhd.

Statement of Financial Position as at 31 December 2019 Notes

Capital and Reserves Ordinary shares of RM1 each General Reserve Retain Earning Equity is attributable to equity holders of the company. Non-current liabilities 10% debentures

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

30,000

Current liabilities Trade payables Accrued Insurance Interest payable Dividend payable Tax payable Non-current assets Property, plant and equipment Current assets Inventory Trade receivables Cash and Bank

25,500 300 900 18,000 20,400

65,100 411,300 304,500

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

Excerpt from MFRS Malaysian Financial Reporting Standard 101 Presentation of Financial Statements Objective 1. This Standard prescribes the basis for the presentation of general purpose financial statements to ensure comparability both with the entityâ&#x20AC;&#x2122;s financial statements of previous periods and with the financial statements of other entities. It sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. Scope 2. An entity shall apply this Standard in preparing and presenting general purpose financial statements in accordance with Malaysian Financial Reporting Standards (MFRSs). 3. Other MFRSs set out the recognition, measurement and disclosure requirements for specific transactions and other events. 4. This Standard does not apply to the structure and content of condensed interim financial statements prepared in accordance with MFRS 134 Interim Financial Reporting. However, paragraphs 15â&#x20AC;&#x201C;35 apply to such financial statements. This Standard applies equally to all entities, including those that present consolidated financial statements in accordance with MFRS 10 Consolidated Financial Statements and those that present separate financial statements in accordance with MFRS 127 Separate Financial Statements. 5. This Standard uses terminology that is suitable for profit-oriented entities, including public sector business entities. If entities with not-for-profit activities in the private sector or the public sector apply this Standard, they may need to amend the descriptions used for particular line items in the financial statements and the financial statements themselves. 6. Similarly, entities that do not have equity as defined in MFRS 132 Financial Instruments: Presentation (eg. some mutual funds) and entities whose share 15

capital is not equity (eg some co-operative entities) may need to adapt the financial statement presentation of members’ or unitholders’ interests. Definitions 7. The following terms are used in this Standard with the meanings specified: General-purpose financial statements (referred to as ‘financial statements’) - are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs. Impracticable - Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. International Financial Reporting Standards (IFRSs) - are Standards and Interpretations issued by the International Accounting Standards Board (IASB). They comprise: (a) International Financial Reporting Standards; (b) International Accounting Standards; (c) IFRIC Interpretations; (d) SIC Interpretations. Malaysian Financial Reporting Standards (MFRSs) - are Standards and Interpretations adopted by the Malaysian Accounting Standards Board (MASB). They comprise: (a) Malaysian Financial Reporting Standards; and (b) IC Interpretations. Material Omissions or misstatements of items - are material if they could, individually or collectively, influence the economic decisions that users make based on the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor. Assessing whether an omission or misstatement could influence the economic decisions of users, and so be material, requires consideration of the characteristics of those users. Users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. Therefore, the assessment needs to take into account how users with such attributes could reasonably be expected to be influenced in making economic decisions. 16

Notes - contain information in addition to that presented in the statement of financial position, statement(s) of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows. Notes provide narrative descriptions or disaggregationâ&#x20AC;&#x2122;s of items presented in those statements and information about items that do not qualify for recognition in those statements. Other comprehensive income comprises items of income and expense (including reclassification adjustments) that - are not recognized in profit or loss as required or permitted by other MFRSs. The components of other comprehensive income include: (a) changes in revaluation surplus (see MFRS 116 Property, Plant and Equipment and MFRS 138 Intangible Assets); (b) remeasurements of defined benefit plans (see MFRS 119 Employee Benefits); (c) gains and losses arising from translating the financial statements of a foreign operation (see MFRS 121 The Effects of Changes in Foreign Exchange Rates); (d) gains and losses from investments in equity instruments designated at fair value through other comprehensive income in accordance with paragraph 5.7.5 of MFRS 9 Financial Instruments; (da)gains and losses on financial assets measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A of MFRS 9. (e) the effective portion of gains and losses on hedging instruments in a cash flow hedge and the gains and losses on hedging instruments that hedge investments in equity instruments measured at fair value through other comprehensive income in accordance with paragraph 5.7.5 of MFRS 9 (see Chapter 6 of MFRS 9); (f) for particular liabilities designated as at fair value through profit or loss, the amount of the change in fair value that is attributable to changes in the liabilityâ&#x20AC;&#x2122;s credit risk (see paragraph 5.7.7 of MFRS 9); (g) changes in the value of the time value of options when separating the intrinsic value and time value of an option contract and designating as the hedging instrument only the changes in the intrinsic value (see Chapter 6 of MFRS 9); and (h) changes in the value of the forward elements of forwarding contracts when separating the forward element and spot element of a forward 17

contract and designating as the hedging instrument only the changes in the spot element and changes in the value of the foreign currency basis spread of a financial instrument when excluding it from the designation of that financial instrument as the hedging instrument (see Chapter 6 of MFRS 9). Owners - are holders of instruments classified as equity. Profit or loss - is the total of income fewer expenses, excluding the components of other comprehensive income. Reclassification adjustments - are amounts reclassified to profit or loss in the current period that were recognized in other comprehensive income in the current or previous periods. Total comprehensive income - is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income comprises all components of ‘profit or loss’ and of ‘other comprehensive income’. 8. Although this Standard uses the terms ‘other comprehensive income’, ‘profit or loss’ and ‘total comprehensive income’, an entity may use other terms to describe the totals as long as the meaning is clear. For example, an entity may use the term ‘net income’ to describe profit or loss. 8A The following terms are described in MFRS 132 Financial Instruments: Presentation and are used in this Standard with the meaning specified in MFRS 132: (a) puttable financial instrument classified as an equity instrument (described in paragraphs 16A and 16B of MFRS 132) (b) an instrument that imposes on the entity an obligation to deliver to another party a pro-rata share of the net assets of the entity only on liquidation and is classified as an equity instrument (described in paragraphs 16C and 16D of MFRS 132).

Purpose of financial statements 9. Financial statements are a structured representation of the financial position and financial performance of an entity. The objective of financial 18

statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management’s stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s: a) assets; b) liabilities; c) equity; d) income and expenses, including gains and losses; e) contributions by and distributions to owners in their capacity as owners; f) cash flows. This information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows and, in particular, their timing and certainty. Complete set of financial statements 10. A complete set of financial statements comprises: iii. a statement of financial position as at the end of the period; (b) a statement of profit or loss and other comprehensive income for the period; b) MFRS 101 c) © IFRS Foundation 955 d) (c) a statement of changes in equity for the period; (d) a statement of cash flows for the period; (e) notes, comprising significant accounting policies and other explanatory information; (ea) comparative information in respect of the preceding period as specified in paragraphs 38 and 38A; and (f) a statement of financial position as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements in accordance with paragraphs 40A–40D. e) An entity may use titles for the statements other than those used in this Standard. For example, an entity may use the title ‘statement of 19

g) h) i)

comprehensive income’ instead of ‘statement of profit or loss and other comprehensive income’. 10A An entity may present a single statement of profit or loss and other comprehensive income, with profit or loss and other comprehensive income presented in two sections. The sections shall be presented together, with the profit or loss section presented first followed directly by the other comprehensive income section. An entity may present the profit or loss section in a separate statement of profit or loss. If so, the separate statement of profit or loss shall immediately precede the statement presenting comprehensive income, which shall begin with profit or loss. 11 An entity shall present with equal prominence all of the financial statements in a complete set of financial statements. 12 [Deleted by IASB] 13 Many entities present, outside the financial statements, a financial review by management that describes and explains the main features of the entity’s financial performance and financial position, and the principal uncertainties it faces. Such a report may include a review of: (a) the main factors and influences determining financial performance, including changes in the environment in which the entity operates, the entity’s response to those changes and their effect, and the entity’s policy for investment to maintain and enhance financial performance, including its dividend policy; (b) the entity’s sources of funding and its targeted ratio of liabilities to equity; and (c) the entity’s resources not recognized in the statement of financial position in accordance with MFRSs. 14 Many entities also present, outside the financial statements, reports and statements such as environmental reports and value-added statements, particularly in industries in which environmental factors are significant and when employees are regarded as an important user group. Reports and statements presented outside financial statements are outside the scope of MFRSs.

Topic 3 Cash Flow Statement 3.1 MFRS 107 Require companies to prepare and present a cash flow statement. Information about the cash flows 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. The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities.

3.2 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.

3.3 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. 21

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.

3.4 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)

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;

cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities;

cash receipts and payments from contracts held for dealing or trading purposes.

3.5 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);

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.

3.6 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;

cash payments to owners to acquire or redeem the entity’s shares;

cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-term borrowings;

cash repayments of amounts borrowed;

cash payments by a lessee for the reduction of the outstanding liability relating to a lease.

3.7 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.

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 24

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 receivables and payables;

inventories

and

operating

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.

3.8 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. EY Bhd. Statement of Comprehensive Income for the year ended 31 Dec 2019. RM

Sales

220,000

Cost of sales

(98,000) 122,000

Selling and distribution costs

25,000

Administrative costs

15,000

Depreciation Profit on sale of plant

2,000 (2,000)

(40,000) 82,000

Interest expense Investment income

(6,000) 1,000 25

Gain on sale of investment

2,000

Profit before tax

79,000

Tax

(22,000)

Profit for the year

57,000

Extract of changes in equity:

Balance 1 /1/2019

Ordinary Shares RM 100,000

Retained Profit RM 50,000

Profit for the year

57,000

Dividends Issue of Shares Balance 31/12/2019

(17,000) 30000 140,000

EY Bhd. Statement of Financial Position. as on 31 December 2019. 2019 RM Ordinary shares if RM1 each 140,000 Retained profit 90,000 Non-current liabilities 10% convertible debentures 50,000 Bank Loan 23,000 Current liabilities Accrued selling expenses 2,500 Trade payables 12,500 Tax payable 2,000 320,000 Non-current assets Land 200,000 Plant and machinery (cost) 30,000 Accumulated depreciation â&#x20AC;&#x201C; motor vehicles (5,000) Motor vehicles (cost) 20,000

90,000

2018 RM 100,000 50,000 60,000 33,000 1,000 15,000 1.000 260,000 140,000 40,000 (6,000) 20,000 26

Accumulated depreciation â&#x20AC;&#x201C; plant & machinery Investments Current assets Inventories Trade receivables Cash in hand

(3,000) 30,000

(2,000) 40,000

7,000 20,000 21,000 320,000

5,000 17,000 6,000 260,000

Additional information; 1) The increase in the issued share capital is due to the issue of shares for cash. 2) Sale of Plant and machinery was for cash. There was no purchase of plant and machinery during the year. 3) 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) 27

Income taxes paid (22,000 â&#x20AC;&#x201C; 1,000) Net cash flow operating activities 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 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

(21,000) 49,000

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

30,000 (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

79,000 2,000 (2,000) (2,000) (1,000) 6,000 82,000 28

Increase in receivables Increase in inventories Decrease in payables Increase in Accrued selling expenses Interest paid Income taxes paid (22,000 â&#x20AC;&#x201C; 1,000) Net cash flow operating activities

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 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

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

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

30,000 (10,000) (17,000) 3,000 15,000 6,000 21,000

Topic 4 Accounting Theories 4.1 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.

4.2 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.

4.3 The uses 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 30

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. 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.

4.4 The internal users (Primary Users) of the financial statement. â&#x161;Ť Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. â&#x161;Ť Employees: for assessing a company's profitability and its consequence on their future remuneration and job security. â&#x161;Ť 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.

4.5 The external users (Secondary 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).

4.6 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).

4.7 The accounting framework. The accounting framework consists of 3 main components: 1. The objectives of financial reporting 2. Qualitative characteristics information.

and

constraints

financial

reporting

3. Recognition and measurement of elements of a financial statement.

4.71 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. 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. 33

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.

4.72 Qualitative characteristics and constraints of financial reporting information. The framework lists four 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 34

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. 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.

4.73 Recognition and measurement of elements of a financial statement. The element of financial statement: a)

Assets

Liability

Equity

Income

Expenses 35

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.

4.8 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. 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 36

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. 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 Tradingâ&#x20AC;&#x2122;sâ&#x20AC;&#x2122; 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. Although it doesn't seem very prudent, because Jo Blogs will continue to trade and the machine will therefore be used in the business. It is the "Going Concern" concept that allows the higher valuation. 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. 37

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.

Framework

Financial statement Objectives

Element s

Qualitative characteristics

User

Internal User

External user

Principal

Others principal

Figure 2: Summary of Accounting Framework

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 has 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 overstated 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.

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.

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.

Topic 5 Basic of Group Accounts 5.1 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.

5.2 Business combination Acquisition

Purchase net assets (Acquire assets and liabilities)

Amalgamation

Absorption

Acquire control (Acquire share capital)

Parent and subsidiary

Figure 3: 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 42

dividend from the subsidiary company which will be treated as investment income. Subsidiary Company â&#x20AC;˘

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).

â&#x20AC;˘

Meanwhile, 100% owned means that all the shares belong to the parent company and NCI does not exist.

â&#x20AC;˘

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.

5.3 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: (i) 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; (ii)

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);

(iii)

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

(iv) it's ultimate or any intermediate parent produces consolidated financial statements that are available for public use and comply with International Financial Reporting Standards.

5.4 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) (ii) (iii)

(b)

controls the composition of the board of directors of the corporation, controls more than half of the voting power of the corporation; 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

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) (b)

A person cannot be appointed as a director without the exercise of such a power in his favor by that other corporation; or A person’s appointment as a director follows necessarily from his being a director or other officer of that other corporation.

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.

5.5 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.

5.6 Group Account/Consolidated Account Consist of several accounts: i.

Consolidated statement of comprehensive income (Consolidated Retained profit)

ii.

Consolidated Revaluation Reserves

iii. Consolidated General Reserves iv. Consolidated Balance Sheet / Statement of Financial Position

5.7 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. Example The Groupâ&#x20AC;&#x2122;s Account when the Holding Acquired the Ordinary Shares in Subsidiary. Holding acquires (50% < Acquire in shares <100% shares) On 1.1.2019, 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 31.12.2019: Equity:

Holding(H)

Ordinary shares @RM1

Subsidiary(S)

RM 450,000

RM 200,000

Retained Profit

50,000

20,000

Revaluation Reserve

20,000

15,000

Sundry assets i.

400,000

75,000

H acquired 160,000 units ordinary shares of S on 1.1.2019 when the balances in Sâ&#x20AC;&#x2122;s account were: Revaluation reserve RM10,000 Retained profit RM10,000 46

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

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

290,000 44,000

RM Ordinary shares SOCI

10,000

Revaluation Reserve

10,000

Goodwill 334,000

200,000

114,000 334,000

Non-controlling Interest Account (NCI) RM To CSoFP

57,000

RM Adjustment

44,000

Retained Profit(postacquisition) (2000010000)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

RM Balance

15,000

Consolidated Statement of Comprehensive Income (CSOCI) RM To CSoFP

58,000

RM Balance SOCI Subsidiary

58,000

50,000 8,000 58,000 48

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 2019. RM RM Goodwill 114,000 Sundry assets 475,000 589,000 Shareholdersâ&#x20AC;&#x2122; fund Ordinary shares RM1 each Statement of Comprehensive Income Revaluation Reserve Non-controlling interest

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

Exercise Statement of Financial Position of H and its subsidiary S as of 31 December 2019. Holding Subsidiar RM y 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: i.

Adjustment Account

ii.

Preference Share Account

iii.

NCI Account

iv.

Statement of Comprehensive Income

Consolidated Statement of Comprehensive Income

vi.

Revaluation Reserve

vii.

Consolidated Revaluation Reserve

viii.

Consolidated Statement of financial position (extract)

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

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

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

Shareholdersâ&#x20AC;&#x2122; 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

Topic 6 Intra Group Transactions 6.1 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

6.11 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 holdingâ&#x20AC;&#x2122;s book (H) As a liability in the subsidiaryâ&#x20AC;&#x2122;s book (S) 54

Accounting Treatment for preparing the 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 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

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

Journal entries Dt. Loan from holding (S)

12,000

Dt. Cash in transit (H)

8,000

Cr Loan to subsidiary (H)

20,000

6.12 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 (CSoFP) 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. 55

Example 2 Statement of Financial Position (extract) as at 31.12.2019 Holding (RM‘000) Current assets: Inventories Trade receivables Current account – subsidiary Bank Current liabilities: Current account- holding Trade payables

210 200 35 65

130

Subsidiary (RM‘000) 160 50 80

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 Current liabilities: Trade payables

(RM ‘000) 370 250 145

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. Example 3 Statement of Financial Position (extract) as at 31.12.2019 Holding RM

Subsidiary RM

Trade receivables

30,000

5,000

Inventory

50,000

20,000

Trade payables

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

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

10,00 0

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

25,000 72,500

Current liability Trade payables (20+30-7.5)

42,500

6.13 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 Holding Subsidiary Trade Receivables Trade Payables

40,000 50,000

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 58

Solution: Journal entry Dt.

Trade payable Cr.

6000

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

6.14 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. 59

Example 4 Statement of Financial Position (extract) as at 31.12.2019

Bills receivables Bills payable

Holding RM 110,000 80,000

Subsidiary RM 90,000 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

Solution; RM25, 000

RM10, 000 – factored (liability) RM15, 000 - unfactored (Intra-group transaction & eliminated)

Journal entry Dt.

Bills payable Cr.

Bills receivables

15,000 15,00 0

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

185,000

Current liability Bills payables (80+40-15)

105,000

6.15 The intra-group 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) Thus, the remaining inventory in the group is considered as unrealized profit.

Profit from selling goods/assets among holding and subsidiary

Unrealized profit Realized profit

Figure 4: 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 5: 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 parent will affect the realized profits in the subsidiary’s books. The realized profits must be adjusted to determine unrealized profits.

6.16 The Intra-Group 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 subsidiaryâ&#x20AC;&#x2122;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. 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

Both subsidiary and dividend/interest

holding

company

have

not

recorded

the

post

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

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.

CSOCI

3,000 3,000

6.17 The intra-group 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. 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 65

6.18 The intra-group 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 take-over, amalgamation or insolvency. There are two conditions of revaluation of non-current assets: 1. Pre-acquisition 2. Post-acquisition 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) Ordinary shares @RM1 each

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 â&#x20AC;&#x201C; OS at cost

750,000

Current assets

150,000

30,000

1,500,000

630,000 66

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. 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

Depreciation expense Additional depreciation (increase)

Fair value (RM) 1.1.2019

Carrying value (RM) 1.1.2019

500,000/16 = 31250

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

Percentage acquired: Ordinary share - 450,000/500,000 X 100% = 90% Adjustment Account RM Investment (Ordinary share) NCI (710,000x10%)

750,000

Ordinary shares

500,000

71,000

Retained Profit

10,000

Revaluation Reserve Land

20,000

Revaluation Reserve Building

180,000

Goodwill

111,000

821,000

Non-controlling Interest Account (NCI) RM To CSoFP

79,875

RM Adjustment

71,000

Retained Profit 79,875

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

Building

20,000 180,000

180,000 200,000

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

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 69

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. 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 31st 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. Solution; Adjustment Account RM 600,000 Ordinary share 140,000 Retain profit Share premium Goodwill 740,000

Investment NCI

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

Subsidiary Retain Profit Account RM Adjustment Provision for unrealized profit- Land NCI Consolidated retain Profit

RM 200,000 Balance

400,000

20,000 36,000 144,000 400,000

400,000

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

To CSFP

RM 140,000 36,000 176,000

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

RM 540,000 144,000

707,000 Div. receivable 716,000

32,000 716,000

Consolidated Statement of Financial position of Twilight Bhd and Raibow D Bhd Bhd as at 31st December 2019 RM Non-Current Assets Land and Building Plant and machinery Motor vehicle Goodwill 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

830,000 450,000 380,000 36,000

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 72

INDEX A Accounting Framework, iii, 38 Accrual, 37, 39 Assets, 5, 9, 10, 16, 35, 40, 53, 63, 64, 69, 71

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

C CA 2016, 9, 10, 44 Cash equivalents, 21 Cash flows, 9, 21, 22, 27, 28 Company Act 2016, 9 Comparability, 34 Completeness, 35 Consistency, 37, 40 Consolidated Financial Statements, 14 CSoFP, 47, 48, 50, 51, 52, 53, 54, 59, 62, 67, 68

D Depreciation, 10, 11, 12, 13, 25, 28, 66 direct method, 24 dividend, 20, 43, 61, 62, 63, 69, 71

E Equity, 9, 11, 12, 13, 35, 46 EY Bhd., 25, 26, 27, 28

Financing activities, 22

G Going Concerned, 36 group account, ii, 42

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

I IFRSs, 15 indirect method, 24 interest, 6, 7, 24, 43, 47, 49, 52, 62, 68, 71 internal users, i, 31 International Financial Reporting Standards, 15, 44 Intra group balances, ii, 53 inventories, ii, 2, 7, 24, 28, 59, 60, 63, 69, 70 Inventories, 10, 11, 26, 55, 56, 69, 71 Investing Activities, 22

J Joint Venture, i, iii, 1, 2, 3, 4 JOINTLY CONTROLLED ENTITIES, 7 JOINTLY CONTROLLED OPERATIONS, 6

L Liabilities, 9, 65

F Financial Reporting Standard 101, 14 73

M Malaysian Financial Reporting Standards, 14, 15 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 MFRS 127, 14 MFRS 132, 15, 18 MFRS 134, 14 MFRS 138, 16 MFRS 9, 16, 17 MFRSs, 14, 15, 16, 20 misstatements of items, 16

N Non-depreciable assets, 63

O Operating Activities, i, 22

P Periodicity, 37 Post-acquisition, 64, 68 Pre-acquisition, 64 Presentation of Financial Statements, i, 9, 14, 32

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 Revaluation Reserve, 46, 47, 48, 49, 50, 51, 52, 64, 67, 68 revaluation surplus, 16

S Separate Entity, 36 SHARE CAPITAL, 10 Subsidiary, ii, 43, 46, 48, 49, 51, 52, 55, 56, 57, 58, 61, 68, 70

T Timeliness, 34

U Understandability, 33 unrealised profit, iii, 60

V venturer, 2, 3, 4, 6, 7, 8 Verifiability, 34