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Financial Reporting lecture note chapter 4
1. AKN 3831 – Business Accounting
December 2005/06
FINANCIAL
REPORTING
Chapter
4
2. AKN 3831 – Business Accounting
December 2005/06
Learning Objectives
After studying this chapter, you should be able
to:
1. Explain the meaning of financial reporting.
2. Explain an objectives of financial reporting.
3. Describe the statutory and regulatory
requirements showing the provision of the acts,
regulations and guidelines for financial reporting
practices in Malaysia.
4. Differentiate between the financial report and the
company annual report.
5. Describe the elements of financial statements.
3. AKN 3831 – Business Accounting
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Introduction to Financial Reporting
Financial report is a formal business document
that reports on a business in monetary
amounts, providing information to help people
make informed business decisions.
It is the important of communicating
accounting information to users such as
investors, potential investors, creditors,
analysts, government regulatory agencies,
taxing authorities, non-profit organizations, and
other users to help them make decision.
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Structure of Financial Reporting
Requirements
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Objectives of Financial Reporting
1) To provide information that is useful to
existing and potential investors, creditors and
other users in making rational investment,
credit and similar decisions.
2) To provide information that is useful to
existing and potential investors, creditors and
other users in assessing the amounts, timing
and uncertainty of prospective cash receipts
from dividends or interest and the proceeds
from the sale, redemptions, or maturity of
securities or loans.
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3) To provide information about the economic
resources of an entity, the claims to those
resources, and the effects of transactions,
events, and circumstances that change its
resources and claims to those resources.
It can be concluded that financial reporting:
• Should provide information about an entity’s past
performance as a basis for prediction of future
business performance,
• Focus on earnings and its components, despite
the emphasis in the objectives on cash flow (base
on an accrual basis)
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• Does not seek to measure the value of business
but to provide information that may be useful for
doing so,
• Does not seek to evaluate management’s
performance, predict earnings, assess risk, or
estimate earning power, but should provide
information to persons who wish to do so.
The accounting information in the financial
report can be useful in decision-making only if
it is relevant, reliable, and comparable and
consistent.
8. AKN 3831 – Business Accounting
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Statutory and Regulatory Framework of
Financial Accounting and Reporting
The comprehensive annual financial report
(CAFR) includes at least two sets of financial
statements, along with their notes and any
additional data.
In preparing and presenting financial
statements, companies in Malaysia are to
comply with:
• Company Act 1965
• Financial Reporting Standards
• Financial Reporting Act 1997
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• Securities Commissions Revamped Requirement
1995
• Bursa Malaysia Listing Requirement
• Industries Securities Regulation 1999
• Income Tax Act 1967
• Bank Negara Malaysia (only for Financial inst.)
Company Act 1965 – the principle legislation
governing the formation & operation of
companies in M’sia. It repealed the earlier
ordinances & provides formal rules on
accounting & requirement for true & fair view
reporting.
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Financial Reporting Standards – with the
enactment of the Financial Reporting Act 1997,
it is a statutory requirement for companies to
comply with the approved accounting
standards issued by the MASB in the
preparation and presentation of financial
statements known as Financial Reporting
Standards
Financial Reporting Act 1997 – under the
provision of this act, two bodies (FRF &
MASB) were formed to be responsible for the
setting of accounting standard in M’sia.
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Guidelines of Securities Commission – to
promote & maintain efficient, secure &
transparent securities and future market, the
guidelines include chapters on Corporate
Disclosure Policy, Post-listing Obligations &
Accounting Standards and Valuation and/or
Revaluation of Assets.
Bursa Malaysia Listing Requirement – under
the clause 335 of BMLRs manual, company
annual audited accounts are to be prepared in
accordance with the approved accounting
standards & pronouncement of the Ninth
Schedule of the Company Act 1965.
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Industry Securities Regulation 1999 – requires
all listed companies to prepare accounts in line
with the standards issued by MASB.
Income Tax Act 1967 – mainly concerned with
ascertaining of chargeable income and tax
payable under the act.
Bank Negara M’sia – issues guidelines on
financial reporting practices for banking &
financial institutions established under the
Banking & Finance Act 1989 (BAFIA).
13. AKN 3831 – Business Accounting
December 2005/06
Financial Report
Basically, financial report includes the items
as stated in Part VI: Accounts and Audit,
Company Act 1965. The items are as follows:
• Director’s Report – [Sec 169 (5), CA 1965],
report regarding the company’s profit & loss and
well-being & the subsidiaries at the end of every
financial year.
• Auditor’s Report – [Sec 174 (1), CA 1965]
include auditor’s opinion on the sufficiency of
financial records to the stated act & comply the
approved accounting standards.
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• Balance Sheet, Income Statement, Statement
of Changes in Equity, Cash Flow Statement
and Notes to Accounts – both IS & BS must be
prepared according to the provision under
Schedule Nine (9), Company Act 1965 & FRS
101 (Presentation of Financial Statements)
• Director’s Statement – [Sec. 169 (15) CA 1965],
two company directors must be signed the
statement to approved that the IS & BS
reflected a true & fair view about the business
operating revenue & the company and
subsidiaries financial well-being.
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• Statutory Declaration – [Sec. 169 (16), CA
1965], must be signed by two company
directors that are not involved in the company’s
financial management to state their opinion that
the financial report was prepared correctly.
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Company Annual Report
Financial report will be presented in the annual
report of a company that issued once every
financial year.
The director of the company must make sure
the report comply with Section 169, CA 1965.
• Notice of Annual General Meeting
• Corporate Information and Structure
• Chairman’s Statement – the overall company’s
performance, financial performance for the current
year, dividend paid, important corporate events and
forecast of the company’s future prospect and
achievements.
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• Important financial information – in the form of
comparative statement between the current
year and previous years.
• Important events calendar and corporate
activities.
• Financial reporting – as stated in Part VI:
Accounts and Audit, Company Act 1965.
• Statement on corporate governance – that the
company uses the Malaysian Code of
Corporate Governance and had followed the
principles and practice outlined by the referred
code.
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• Shareholding Analysis – disclosed the statistic
of shareholding of the company or group of
companies.
• List of Company Properties – information on
properties owned by the company or group of
companies.
• Proxy form – a document enabling a
shareholder to elect a representative to attend
a meeting and vote on his behalf if he is not
able to attend the annual general meeting. The
representative might not be a member of the
company.
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Elements of Financial Statements
A complete set of financial statements
includes the following components:
a. Balance sheet;
b. Income statement;
c. A statement showing either:
i. All changes in equity; or
ii. Changes in equity other than those arising from
capital transactions with owners and distribution to
owners;
d. Cash flow statement; and
e. Accounting policies and explanatory notes.
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Continue…Balance Sheet
As a minimum, the face of the balance sheet
should include line items which present the
following amounts:
o Property, plant and equipment;
o Intangible assets; financial assets [excluding
amounts shown under (d), (f) and (g)];
o Investments;
o Inventories;
o Trade and other receivables;
o Cash and cash equivalents;
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Continue…Balance Sheet
o Trade and other payables;
o Tax liabilities and tax assets;
o Provisions;
o Non-current interest-bearing liabilities;
o Minority interest; and
o Issued capital and reserves.
Additional line items, headings and sub-totals
should be presented on the face of the balance
sheet when a Financial Reporting Standard
requires it, or when such presentation is
necessary to present fairly the enterprise’s
financial position.
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Continue…Income Statement
As a minimum, the face of the income
statement should include line items which
present the following amounts:
o Revenue;
o The results of operating activities;
o Finance costs;
o Share of profits and losses of associates and joint
ventures;
o Tax expense;
o Profit or loss from ordinary activities;
o Extraordinary items;
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Continue…Income Statement
o Minority interest; and
o Net profit or loss for the period.
Additional line items, headings and sub-totals
should be presented on the face of the income
statement when required by
An enterprise should present, either on the
face of the income statement or in the notes to
the income statement, an analysis of expenses
using a classification based on either the
nature of expenses or their function within the
enterprise
24. AKN 3831 – Business Accounting
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Continue…Accounting Policies
Management should select and apply an
enterprise’s accounting policies so that financial
statements comply with all Financial
Reporting Standards and any other technical
pronouncements issued by the MASB.
Where there is no specific requirement,
management should develop policies to ensure
that the financial statements provide information
that is:
• Relevant to the decision-making needs of users; and
• Reliable in that they:
i. Represent faithfully the results and financial
position of the enterprise;
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Continue…Accounting Policies
ii. Reflect the economic substance of events and
transactions and not merely the legal form;
iii. Are neutral, that is free from bias;
iv. Are prudent; and
v. Are complete in all material respects.
The accounting policies section of the notes to
the financial statements should describe the
following:
• The measurement basis (or bases) used in preparing
the financial statements; and
• Each specific accounting policy that is necessary for
a proper understanding of the financial statements.
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Continue…Notes to the Financial Statements
Structure - the notes to the financial
statements of an enterprise should:
Present the information about the basis of
preparation of the financial statements and the
specific accounting policies selected and
applied for significant transactions and events;
Disclose the information required by Financial
Reporting Standards that is not presented
elsewhere in the financial statements; and
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Continue…Notes to the Financial Statements
Provide additional information which is not
presented on the face of the financial
statements but that is necessary for a fair
presentation.
Notes to the financial statements should be
presented in a systematic manner. Each item
on the face of the balance sheet, income
statement and cash flow statement should be
cross-referenced to any related information in
the notes.
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End of Chapter 4