TUTORIAL 1:

FINANCIAL REPORTING REGULATORY FRAMEWORK

1. Explain the roles of regulatory bodies with reference to accounting practice.

FRF’s functions:
 to provide views to MASB concerning the issuance, review or development of accounting
standards.
 to review the performance of the MASB.
 responsible for the financing arrangements of the MASB.
 to perform other functions as prescribed by the Minister of Finance.

MASB’s functions:
 to issue new accounting standards;
 to review, revise or adopt existing accounting standards;
 to issue statements of principles for financial reporting;
 to sponsor or undertake development of possible accounting standards;
 to conduct public consultation;
 to develop a conceptual framework for the purpose of evaluating;
proposed accounting standards;
 to make changes to the form and content of proposed accounting standards;
 to perform other functions as prescribed by the Minister of Finance;
 develop and promote high quality accounting and reporting standards that are consistent
with international best practice for the benefit of users, preparers, auditors and the public
in Malaysia.
- Have committee with various background in order to come up with high accounting
standards to be used in Malaysia. Make sure standards in Malaysia is consistent with
international standards (IFRS)

SC’s regulatory functions are:

 Supervising exchanges, clearing houses and central depositories;
 Registering authority for prospectuses of corporations other than unlisted recreational
clubs;
 Approving authority for corporate bond issues;
 Regulating all matters relating to securities and derivatives contract;
 Regulating the take-over and mergers of companies;
 Regulating all matters relating to unit trust schemes;

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 Licensing and supervising all licensed persons;
 Encouraging self-regulation;
 Ensuring proper conduct of market institutions and licensed persons.
promoting the development of capital market in Malaysia (securities and derivatives
market).
 Under the Capital Market and Services Act 2007, SC is responsible for supervising and
regulating activities of market institutions and persons licensed under this Act
oversees the development and administration of the Islamic capital market, reviewing
auditors of the public company practices under its Audit Oversight Board, financial market
infrastructure and companies, and corporate governance practices under the MCCG 2012
 promote and maintain fair, efficient, secure, and transparent securities and derivatives
market, and to facilitate the orderly development of innovative and competitive capital
market
- make sure that listed companies follow all standards when preparing their financial
statements. They require all listed companies to submit their audited info to them
within 3 months. After that information must be submitted to Bursa Malaysia for
them to review and make sure all info is accordance to MASB. If company is found to
have not follow MASB standards, company will be delisted from bursa Malaysia.

BNM’s function :
 practicing prudent monetary policy to ensure low and stable inflation rate and sustaining
the purchasing power of the Malaysian Ringgit.
 establishing a resilient financial system in Malaysia by providing efficient and secured
payment systems and institutions in the economy.
 being the banker, financial and economic adviser to the Malaysian government, and the
sole authority for issuing ringgit currency and managing international’s reserves.

BURSA MALAYSIA’s function :

 as a capital market regulator, responsible for ensuring orderly, transparent and
systematic administration of securities and derivatives markets traded in the Exchange.

COMPANIES COMMISSION OF MALAYSIA (CCM)’s function :

 regulates and administers the Registrar of Companies (ROC) and the Registrar of Business
(ROB) in Malaysia
 to serve as an agency to incorporate companies and register businesses.
 to govern the business information provided by companies to the public.
 to be a leading authority for the improvement of corporate governance practices in
Malaysia.

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 responsible for the administration and enforcement of the following legislation:
Companies Act 1965;
Registration of Business act 1956;
Trust Companies act 1949;
Kootu Funds (prohibition) Act 1971;
Limited Liability Partnership act 2012;
Any subsidiary legislation made under the Acts specified above such as
Companies Regulations 1966;
Registration of Business Rules 1957.

ACCOUNTANT GENERAL’S DEPARTMENT OF MALAYSIA’s functions :

 manages the nation’s accounting and financial reporting aspects in accordance with the
Financial Procedure’s Act 1057, Unclaimed Monies Act 1965, and the Pension Fund Act
1991.
 To enhance the accountability and transparency of the Federal Government's accounting
management;
 To enhance the accounting and financial management system of Government agencies;
 To assist the Government in making effective decisions;
 To develop and implement the human resource management system for accounting
services;
 To enhance the enforcement of the Unclaimed Monies Act 1965.

MALAYSIAN INSTITUTE OF ACCOUNTANTS (MIA)’s functions :

 regulate and develop the accountancy profession in Malaysia.
 education and quality assurance and enforcement which are carried out to ensure that
credibility of the profession is maintained and public interest is continuously upheld.
 monitor international and local accounting trends and developments, and consults
regularly with the government and regulatory bodies
- Agency that will make sure credibility of accountancy in Malaysia. Provide training and
education programs to accountants.

MALAYSIAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS AND OTHER PROFESSIONAL

BODIES’s functions :
 introducing the Articleship Programme as part of the training for the certified accountant
qualification membership.
 aims to contribute to the protection of public interest, and advancement of the
accounting profession, business economies and capital market, both local and
internationally.

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2. Identify three regulatory bodies and explain their roles with regard to financial reporting
practice in Malaysia.

3. Explain the significant role played by professional accountants in Malaysia in ensuring market
integrity and confidence on business conducts.
 Professional accountants in business often find themselves being at the frontline of
safeguarding the integrity of financial reporting
 Come up with pragmatic and objective approach to solving issues
 Assist with corporate strategy, provide advice and help businesses to reduce costs,
improve their top line and mitigate risks
 Represent the interest of the owners of the company (i.e., shareholders in a public
company)
 Governing the organization (such as, approving annual budgets and accounting to the
stakeholders for the company’s performance); appointing the chief executive; and
determining management’s compensation
 As internal auditors, professional accountants provide independent assurance to
management that the organization’s risk management, governance and internal control
processes are operating effectively
 Offer advice on areas for enhancements
 Professional accountants in government shape fiscal policies that had far-reaching
impacts on the lives of many

4. Identify and explain the differences in the monitoring roles played by regulatory bodies and
professional accounting bodies.
Professional Accounting Bodies
 A professional accounting body is an organization or association of accountants in a
particular jurisdiction. Usually a person needs to be a member of such professional body
to hold out to the public of the jurisdiction as an accountant. The designations for
qualified accountants vary from jurisdiction to jurisdiction.
 Whilst qualified accountants are under no legal obligation to register with one of these
bodies, being a member means an accountant has met certain eligibility requirements put
in position by their member organization and they therefore must abide by a code of
ethics and complaints procedure.
 All professional bodies will have their own set of entry requirements for membership; in
most cases proof of a relevant qualification/training and evidence of experience within
the field are required.

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  The majority of professional accountancy bodies will also require their members to
undertake what is known as 'Continuing Professional Development' (CPD), which simply
explained is additional learning, training or experience that will help already qualified
accountants to safeguard their skills and develop their expertise.
 CPD helps professionals to keep up to date with any industry developments and ensures
that members continue to practice to the highest standards - all of which helps to reassure
individuals and companies who are seeking their services that they are more than capable
of undertaking their professional and technical duties.
 Other professional bodies provide a number of membership categories, to differentiate
between members who are qualified to different levels (e.g. Associate Member, Member
etc).
 Examples of Professional Accounting Bodies
- Chartered Institute of Management Accountants (CIMA)
- The Chartered Institute of Public Finance and Accountancy (CIPFA)
- The Institute of Chartered Accountants in England and Wales (ICAEW)
- The Association of Accounting Technicians (AAT)
- The Institute of Financial Accountants (IFA)
- Certified Public Accountant Association (CPAA)
- Association of Chartered Certified Accountants (ACCA)

5. Explain the importance of the information about business entities and the environment they
are operating in to the users of financial statements.

 Managers require Financial Statements to manage the affairs of the company by assessing
its financial performance and position and taking important business decisions.
 Shareholders use Financial Statements to assess the risk and return of their investment
in the company and take investment decisions based on their analysis.
 Prospective Investors need Financial Statements to assess the viability of investing in a
company. Investors may predict future dividends based on the profits disclosed in the
Financial Statements. Furthermore, risks associated with the investment may be gauged
from the Financial Statements. For instance, fluctuating profits indicate higher risk.
Therefore, Financial Statements provide a basis for the investment decisions of potential
investors.
 Financial Institutions (e.g. banks) use Financial Statements to decide whether to grant a
loan or credit to a business. Financial institutions assess the financial health of a business
to determine the probability of a bad loan. Any decision to lend must be supported by a
sufficient asset base and liquidity.

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  Suppliers need Financial Statements to assess the credit worthiness of a business and
ascertain whether to supply goods on credit. Suppliers need to know if they will be repaid.
Terms of credit are set according to the assessment of their customers' financial health.
 Customers use Financial Statements to assess whether a supplier has the resources to
ensure the steady supply of goods in the future. This is especially vital where a customer
is dependant on a supplier for a specialized component.
 Employees use Financial Statements for assessing the company's profitability and its
consequence on their future remuneration and job security.
 Competitors compare their performance with rival companies to learn and develop
strategies to improve their competitiveness.
 General Public may be interested in the effects of a company on the economy,
environment and the local community.
 Government agencies (IRB- inland revenue board) require Financial Statements to
determine the correctness of tax declared in the tax returns and revenue. Government
also keeps track of economic progress through analysis of Financial Statements of
businesses from different sectors of the economy.

6. Edry holds a Diploma in Food Technology. He is thinking of starting a catering and delivery
business. For a start, he plans to operate from his mother’s kitchen with the help of his
siblings. He plans to use his own savings as capital. However, should the money fall short,
Edry plans to either borrow from his uncle or invite his uncle to invest in his business.
Required:
Advise Edry on the most suitable form of business for his purpose. Explain, by stating the
advantages and disadvantages of each form of business.

 Sole Proprietorship
A sole proprietorship is the common business structure. It makes sense if you're in a business
where personal liability is not a concern. From a legal standpoint, the owner and the
proprietorship are the same.

Advantages

It's the easiest to set up because it doesn't require the filing of any papers.
States do not require the registration of proprietorships.
Profits are only taxed once on the owner's personal tax returns and will not be shared.
The owner has complete control of the business and makes all the decisions.
No corporate tax (25%).
Assets are easy to liquidate upon the death of owner.

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Disadvantages

The owner is exposed to unlimited legal liabilities. If you lose a lawsuit, you could lose your
home, car and other personal assets.
Proprietorships cannot accept capital from outside investors.
Borrowing money is more difficult. Banks are reluctant to make business loans to sole
proprietorships. You will have to rely on savings, home equity loans or loans from family
members.
Business will be liquidated when owner passes away.

 Partnerships
A partnership is a sole proprietorship that allows the business to have more than one owner.

Advantages

They're easy to form.

A partnership can bring together a group of individuals with different talents to share in the
responsibilities of running a business.
If the partnership agreement permits, a partnership could continue to exist if one of the
partners dies.

Disadvantages

Partners are exposed to unlimited liabilities.

Owners will not always agree on decisions. This could lead to management conflicts.
Partners share in the profits of the business, but will not always feel they are being adequately
compensated for their contributions and services.

 Limited Liability Companies

A limited liability company is a corporate structure whereby the members of the company
are not personally liable for the company's debts or liabilities

Advantages

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The owners have limited liability. The owner's personal assets are protected from judgments
and defaults on company debts.
Owners can choose how the business pay taxes. It could be a proprietorship, a partnership or
a corporation.
Most states don't require LLCs to have annual meetings.
An LLC is not required to have a board of directors.
The number of shareholders is unlimited.
Disadvantages

Legal and accounting costs are higher than proprietorships.

LLCs must file articles of incorporation with the state of domicile.
Owners must create an operating agreement that defines management authority and limits
to making decisions.
In some cases, an LLC will cease to exist upon the death of a member, unless otherwise
specified in the operating agreement.
Suppose your business is growing and you need to attract more lender and investors. A C
Corporation may be necessary.

 C Corporations
A corporation is a legal entity that's completely separate from the shareholders who own
stock in the company. It has the authority to enter into contracts and buy and sell property.
A corporation can sue other parties but can also be sued.

Advantages

Owners do not have personal liability for debts of the corporation. A shareholder only risks
the amount of the investment in the company.
Has more access to financial resources. A corporation can sell stock to raise capital, obtain
bank loans or issue bonds for long-term financing.
Corporations are better able to attract more talented and skilled employees than
proprietorships.
The corporations continues to exist separately from the lives of its stockholders.

Disadvantages

A C Corp is the most complex business structure and requires a lawyer to set up.
Earnings could be subject to double taxation.
If you font want to pay taxes twice with a C Corp consider an S Corp.

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  S Corporations
S Corporations combine the tax benefits of proprietorships and LLCs with the liability
protection of C Corps.

Advantages

Avoids double taxation by passing income through to the owners.

The structure of an S Corp protects the personal assets of the shareholders.
Lenders are more willing to make loans to S Corps.

Disadvantages

Articles of incorporation must be filed with the state.

An S Corp is limited to 100 shareholders.
It can only have one class of stock.
Fringe benefits provided by the company to shareholder-employees are taxable as
compensation.
The choice of which business structure to use demands thought about your type of business
and what you want it to look like. If the business is just yourself, a sole proprietorship could
be enough. But, if you're worried about personal liability and risking personal assets and
taxes, consider an LLC, a C Corp or an S Corp.

THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

1. What is the Conceptual Framework for Financial Reporting?

It sets out concepts that underlie the preparation and presentation of general purpose of
financial statements

2. What is the underlying assumption in preparing financial reporting information?

Accrual Basis
Under the accrual basis, the effects of transactions and other events are recognized when
they occur, and not as cash is received or paid. Under the accruals basis, events are recorded
in the accounting records and reported in the financial statements of the periods to which
they relate.
Financial statements prepared on the accrual basis inform users not only to past transactions
when cash was paid or received but also of obligations to pay cash in the future and of cash
or its equivalents to be received in the future.

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 Going Concern Basis
The going concern basis of accounting is the assumption in preparing the financial statements
that an entity will continue in operation for the foreseeable future and does not plan to go
into liquidation, and will not be forced into liquidation or to curtail its operations.
If such an intention or need exists, the financial statements may have to be prepared on a
different basis and, if so, the basis used is disclosed. The going concern assumption is very
important for the valuation of assets, as they may require valuation on a break-up basis if the
company will cease trading. It is important because it has to use historical cost to determine
long useful life. This assumption will also convince potential investor to invest in the company
because they want to invest in long term investment to get consistent dividend.

3. What are the two primary qualities that make financial information useful for decision-
making?

Relevance
Information that is capable of changing the decision made by users if it has predictive value,
confirmatory value or both. Information that is relevant is material.

Faithful Representative
Information should be complete, neutral and free from error.

4. Explain why the Conceptual framework is needed even though there are financial reporting
standards to guide financial reporting practice?
 Assist the standard setters in the development of future accounting standards and in
reviewing the standards.;
 Assist preparers of financial statements in applying the accounting standards and in
dealing with topics that have yet to be addressed by the accounting standards;
 Assist auditors in forming an opinion on whether financial statements comply with the
accounting standards;
 Assist users of financial statements in interpreting the information contained in financial
statements prepared in compliance with the accounting standards;
 Provide those who are interested in the work of the standard setters such as IASB and
MASB with information about its approach to the formulation of accounting standards.

5. For each of the following situation, identify the qualitative characteristics that may not be
present, by providing appropriate justification for your answers:

a) Syarikat Permata has decided to issue the first quarter financial report only after the
second quarter report has been prepared, in an effort to ensure that there are no long
intervals in between the issuance of the reports.
Timeliness – Info presented fulfills characteristics of timeliness. Company doesn’t wait till
end of year to publish financial report. To make sure that public will get updated financial
info about the company. Will enable public to make proper investment decision
concerning the company.
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b) Guna Industries switched from weighted average method to FIFO in 2013, and switched
back from FIFO to weighted average method in 2014 for inventories.
Comparability - Information was not consistently presented from year to year. Switching
from FIFO to AVCO method in the year 2013 and 2014 would not give a consistent
information about the company. Difficult for user to make comparison of financial info
from this year and previous year because it gives different output of value of inventory.
Items affected will be net profit, COGS and income tax and current asset.

c) Normad Construction entered into several transactions for the purpose of hedging in the
current period. However, no disclosure were made with regard to these transactions to
avoid confusion amongst users of financial statements as the transactions involved were
complex.
Understandability – if company doesn’t disclose complete information public will not be
able to understand information.

d) Mewah Industries has decided to report its head office building at fair value as at the end
of the current reporting period. Three different appraisers have arrived at substantially
different amounts for its fair value. The board has decided to use the middle range value
for financial reporting purposes so as to not overstate or understate the fair value of the
building.
Verifiability – if company uses 3 appraises, they should come up with the same result.
Then report can be considered as verifiable report.

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