topic 4 financial statements
DESCRIPTION
TRANSCRIPT
TOPIC 4 :
Financial Statements
Learning OutcomeStudent will be able to understand :
1. Companies Act 19562. Financial Reporting Act 19973. Listing Requirement4. Annual Report5. The framework for preparation and presentation
of financial statement6. FRS 101 and financial statement7. Illustration and preparation of financial
statement
COMPANIES ACT 1965• Sets out the requirements as to records to be
maintained, returns to be submitted and financial statements to be presented and other matters governing share capital.
• The requirements sets out by the CA 1965 are as follows :a) Accounting and other recordsb) Capital contributedc) Borrowingsd) Financial information
COMPANIES ACT 1965Accounting and Other Records• Section 167 – Every co. and its directors and
managers shall kept accounting and other records as it will explain the transactions and financial position and enable the preparation of fin. statements and documents to be prepared from time to time which will be true and fair.
• All accounting and transactions should be recorded within 60 days of occurrence of the transactions and co. should retain the records for 7 years.
COMPANIES ACT 1965Accounting and Other Records• Co. are also required to maintain other important
books and registers. • Some of the registers which are required to be
kept in the office of the co. are :-a) Register of Membersb) Register of Substantial Shareholdersc) Register of Directors’ Shareholdingd) Register of Debenture Holders and copies of the Trust Deed.
COMPANIES ACT 1965Capital Contributed• Capital contributed by the shareholders and the
other changes to the shareholder’s equity arising from trading and non-trading activities be recorded separately.
Borrowings• Only public co. can borrow from the public by
issuing loan stocks and debentures/bonds.
COMPANIES ACT 1965Financial Information• Financial info. that co. are required to disclose are
mainly through the directors’ report and financial statements.a) Directors’ Report – Section 169 set out the information to be disclosed in the directors’ report and financial statements presented to the shareholders. b) Other Matters – The directors have to attach to
the statement of comprehensive income and statement of fin. position a statement signed by 2 directors on behalf of the directors stating in their opinion as to whether the both statement are drawn up to give a true and fair view.
COMPANIES ACT 1965Financial Information
c) Financial Statements – CA 1965 requires the audited fin. Statements to be prepared every calendar year, at intervals of not more than 15 months, and to lay before the co. at its AGM the statement of comprehensive income and the statement of fin. Position made up to a date not more than 6 months before the date of the meeting.
- Minimum information to be disclosed are :- i) Statement of comprehensive income ii) Statement of financial position iii) Statement of changes in financial
position
FINANCIAL REPORTING ACT 1997• Under FRA 1997, the Malaysian Accounting
Standards Board (MASB) was set up to issue accounting standards as approved standards, among other functions. It also reviews, revises or adopts as approved existing accounting standards.
• MASB issued a number of accounting standards called Malaysian Financial Reporting Standards (MFRS) which are similar to the International Financial Reporting Standards (IFRS) and some of the Malaysian Standards.
• MFRS – Public Entities• Private Entity Reporting Standards (PERS) – Private Entities
BURSA MALAYSIA SECURITIES BERHAD (KUALA LUMPUR STOCK EXCHANGE)
REQUIREMENTS
•Co. are required to make a preliminary statement of results within 6 months following the end of the financial year.
•The listed co. are also required to issue half-yearly reports regarding their performance within the 3 months following the end of the half-year.
ANNUAL REPORT• The annual report is a compilation of the
reports and financial statements required by law or otherwise to be sent to the shareholders 14 days before the AGM.
• The annual report may comprise :a) The chairman’s statementb) Corporate governance statementc) The audit committee reportd) Statement on internal controle) Social responsibility statementf) Financial statements
THE FRAMEWORK FOR THE PREPARATION & PRESENTATION
OF FINANCIAL STATEMENTS• The frameworks covers :-
Qualitative characteristics of
financial information
Objective of financial
statements
Elements of financial
statements
Recognition and measurement of the elements of
financial statements
FRS 101 & FINANCIAL STATEMENT
• FRS 101 Presentation of Financial Statements deals with the presentation of general purpose financial statements.
• The following comprise a complete set of financial statements:a) Statement of financial position at the end of the periodb) Statement of comprehensive income for the periodc) Statement of changes in equityd) Statement of cash flowse) Notes, comprising a summary of significant accounting policies and other explanatory notes
PREPARATION OF FINANCIAL STATEMENTS
•For the statement of comprehensive income, the following are to be considered :-a) Profit or loss for the periodb) Exceptional itemsc) Taxationd) Deferred taxatione) Other Comprehensive Incomef) Tax Effects
Profit or Loss for the Period
Profit or Loss for
the Period
Revenue (Turnover /
Sales)
Cost of Sales
Other operating
income
Operating expenses
Finance cost
Investment income
Exceptional Items• FRS 108 requires separate disclosure for such
items and include :-a) the write-down of stock in trade to net realisable, non-current assets to recoverable amounts.b) restructuring costsc) disposal of non-current assets and long-term investmentsd) discontinued operationse) litigation settlementsf) other reversals of provisions
Taxation• Income tax rate for co. at present is 25%.• Income tax is paid in the year the income is earned.
Therefore, at the beginning of the period co. estimate the amount of tax they will be liable to pay.
• Usually monthly or half year co. needs to review amount tax payable.
• When adjusting finalised co. may compare the amount that was paid during the period and the amount they actually needs to pay.
• If tax needs to pay more than amount paid, then a current liability, TAX PAYABLE will be accounted for.
• If tax needs to pay less than amount paid, then a current asset, TAX RECOVERABLE.
Deferred Taxation (DT)• DT arises because tax payable as calculated in
current year according to tax rules is different from tax payable calculated according to accounting rules.
• Among the reasons :-a) Certain income and expenses recognised in the current year in co’s account may only be recognised for tax purposes at a different amount at the earlier or later date.
Eg: co. uses accrual concept and accrues interest expenses but the tax authorities will allow interest expenses as an allowable deduction on cash basis, in this case the taxable and accounting profit will be different.
Deferred Taxation (DT)b) Amount allowed as expenses for certain expenses by taxes rules might differ from the amount charged in the accounting of company. Eg: company may depreciate it plant and machinery over 10 years while the tax rules disallow depreciation charge but provide capital allowance of 20%. These are called temporary differences.
• Under FRS 112 Income Taxes, full provision is made for all timing differences using the statement of financial position (SOFP) approach, where the amount of DT liability to be disclosed in the year end SOFP is calculated.
• The difference between opening and closing balances of DT will be disclosed in the statement of comprehensive income either as “addition” or “deduction” to the tax payable.
Example 1 (pg 136)
A Sdn Bhd purchased a plant costing RM 100,000
in Year 1 and depreciates it over 5 years. Tax payable for 3 years was RM 60,000, RM 65,000 and RM 67,000 respectively.
Tax rate = 25 % Capital allowance = 50%
Required : Calculate the deferred tax liability that will disclosed in the statement of financial position.
Accounting Rule Tax Rule
Plant value = RM 100,000Depreciation = 5 years = 100,000 / 5 = RM 20,000Carrying amount= 100,000 – 20,000= 80,000
Plant value = RM 100,000Capital allowance = 50 % = 50% x 100,000 = 50,000Tax base= 100,000 – 50,000= 50,000
The difference between the carrying amount and tax base is called taxable timing difference.
Taxable timing difference = 80,000 – 50,000 = 30,000
Deferred tax = 30,000 x 25% = RM 7,500
Journal entriesRM RM
Years 1-2 (Being increase in deferred liability)
Dr SOCI 7,500 Cr Deferred tax liability 7,500
Years 3-5 (Being reduction of deferred liability)
Dr Deferred tax liability 5,000 Cr SOCI 5,000
Extract of the Statement of Comprehensive
Income for Year 1 and Year 5
Example 2 (pg 138)Deer Bhd has a reported profit before tax of RM 4,500,000. During the year x3, the co.
had paid income tax of RM 1,500,000. The tax
consultant has calculated the tax expense to be RM
1,750,000 inclusive of increase in deferred tax liability
of RM 100,000.
Assume that the deferred tax liability bf is RM
460,000.
Required : Show the SOCI and ledger
Extract of the Statement of Comprehensive Income
RM ‘000
Profit before tax 4,500
Income tax expense (1,750)
Profit after tax from ordinary activities 2,750
Tax expense of RM 1,750,000 consists of 2 components :
Deer already paid RM 1,500,000, so it has a liability of
RM 150,000 (1,650,000 – 1,500,000).
Deferred tax = RM
100,000
Tax payable (bal) = RM 1,650,000
Statement of Changes in Equity
• Disclosed all components of equity showing in detail the:a) Opening balanceb) Increase and decrease in closing balance.
• Equity comprises share capital and reserves such as:a) Share capital (equity)b) Share premiumc) Revaluation reserved) Translation reserve of foreign operationse) Available-for-sale financial asset reservef) Non-controlling interest
Statement of Changes in Equity
• Increases & decreases to retained profit not disclosed in the other comprehensive income include :a) Prior year adjustmentsb) Dividendsc) Transfers between reserves
Prior Year Adjustments•Retained profits from the previous period
may be adjusted for material errors & change in accounting policies.
•A co. is required to adjust retained profits b/f as well as to adjust its prior year’s profits when it changes its accounting policy.
•The adjustment should reflect the tax effect.
IllustrationWhen the accounts of Reed Bhd. Were being finalised for the year x4, it was discovered
that the closing inventory for year x3 was understated
by RM 400,000. The retained earnings b/f were RM
3 mil. Tax rate is 25%.
Required : Show the extract of the retained earnings.
Extract of the Retained Earnings in the Statement of Changes in Equity
RM ‘000
Retained earnings b/f 3,000Prior year adjustment (net of tax) 300(75% x 400,000)Adjusted 3,300Net profit for the year 5,000Profit available for distribution 8,300
The overall effect is that the retained profit b/f will increase by RM 300,000.
Dividends• Dividends are the distribution of profit to the
shareholders.• Not all retained profit is distributed.• Paid based on nominal value of shares.• Dividends can be in cash, bonus shares or non-
cash assets.• Became payable when it declared.• Article allowed declares interim dividend
(dividend paid in the middle of year)• Final dividend is dividend paid in the end of the
year, the amount recommended by directors and endorsed by shareholder at the AGM.
• The amount dividend paid should not exceed amount recommended by directors, the amount of dividend paid is the discretion of directors.
• For preference dividends, co. not compulsory to declare/ pay preference dividends.a) Directors need to declare first before payable.b) Dividend is limited to rate prescribed.
• For redeemable preference shares, dividends paid / payable are accrued and disclosed as finance cost and are not distribution of profits. This is because redeemable preference shares are liability.
Proposed dividends•Dividends declared after the financial
year-end are not to be accrued.•For e.g:If the accounts for year x7 are
finalised in March year x8 and subsequently the directors propose to pay dividend, this dividend will not be shown as a current liability.
•Proposed dividend shows in notes to FS.
Transfer to/from reserves• Recognise in other comprehensive income
and disclosed separately as reserve:• Transfer from reserves to retained profits
or SOCI is required when it recognised as income or gain.
• Revaluation surplus on depreciable non-current asset is recognised in other comprehensive income and credited to the revaluation reserve.
• If the asset were to be sold before it was fully depreciated, the remaining balance on the revaluation reserve is transferred to retained earnings.
Example
Beginning 20x6 – co. bought asset RM100,000. Useful life is 5 Years. On 1 Jan 20x8 revalued to RM120,000. It is expected useful life remain unchanged – 3 yrs to 2010.
Show account for revaluation.
Answer1 Jan 20x8Dr Asset value 60,000
Cr Revaluation surplus 60,000(100,000/5 = 20,000 x 3 remaining years = 60,000)
Depreciation after revalue Original depreciation120,000/3 = 40,000 100,000/5 = 20,000
1 Jan 20x8Dr Revaluation surplus 20,000 (40,000 – 20,000)
Cr Revaluation reserve 20,000
Inventories
•Inventories are required to be stated at the lower of cost and net realisable value (NRV).
•NRV – estimated selling price less the estimated cost of completion & the estimated costs necessary to make the sale.
•Any write-down to NRV should be recognised as an expenses.
Earnings Per Share (EPS)• Co. requires to disclose the basic EPS.• EPS is to be calculated for :
a) continuing operations. (if presented separately)b) the parent for a group entity.
• Formulaprofit after tax less preference dividends = xx sen weighted average for no. of ordinary shares
• Earnings: The earnings attributable to equity share = the net profit after tax less preference dividends
Partly Paid-up Shares• If OS in issue are not fully paid up, the
calculation of EPS is based on the rights to receive dividends.
ExampleCo. has in issue 100,000 OS of RM 1 each paid up
to 75 sen only. AOA specify that dividends be paid on
paid-up capital only.
Number of shares ranking for dividends = 75% x 100,000
= 75,000
Example 7 (pg 173)The following is the Statement of Changes in
Equity for the year ended 31 December x2 :OS of RM1
7.2% Cumulative PS
Retained Earnings
Total
RM RM RM RM1.1.x2 500,000 400,000 250,000 1,150,000
Profit for the year 200,000 200,000Interim dividends
Preference (14,400) (14,400)Ordinary (36,000) (36,000)
500,000 400,000 399,600 1,299,600
The co. has in issue 10% convertible debentures of RM 100,000 which may be convertible beginning x9 into 100,000 OS.Required :Calculate the EPS
If the preference shares were cumulative, the EPS
will be := RM 200,000 – RM 28,800 500,000 shares= 34 sen per share
If the preference shares were non-cumulative, the EPS
will be := RM 200,000 – RM 14,400 500,000 shares= 37 sen per share
14,400 + 14,400 = 28,800
If the co. has issued bonus shares, the bonus shares should be included in the calculation of EPS.
Example 8Facts are as in Example 7, except that the co.
declared a bonus issue of 100,000 OS on 1.12.x2.
AnswerThe bonus issue increases the issued OS to 600,000 (500,000 + 100,000).
The EPS will be = 200,000 – 28,800 600,000
= 28.53 sen per share
Where OS are issued for cash or other consideration at market price during the year (not right issue), the EPS
is calculated on the WEIGHTED AVERAGE number of shares in issue ranking for dividends.
EXAMPLE 9Facts are as in Example 7, except that the co. issued 100,000 OS at RM 2.00 per share on 1.10.x2.
AnswerShares in issue:1.1.x2 – 30.9.x2 500,000 x 9/12 375,0001.10.x2 – 31.12.x2 600,000 x 3/12
150,000Weighted average no. of shares 525,000
The EPS will be = 200,000 – 28,800525,000
= 32.6 sen per share
Adjustments to the EarningsThe earnings are adjusted for interest saved (less tax effect) if there are convertible debentures and preference dividends that need not be paid if there are redeemable PS.
Example 10 (pg 175)Facts are as Example 7 above.Assume that all debentures will be converted at the earliest date at the given rate of conversion. If conversion takes place, the co. will not incur
interest expenses on the debentures.
Answer
Interest on debentures = 10% x 100,000= RM 10,000
Interest saved = 10,000 less tax of 25%
= RM 7,500.OS = 500,000 + 100,000 (convertible)
= 600,000 shares
EPS = 171,200 + 7,500 600,000
= 29.78 sen per share
FRS 137 – Provisions, Contingent Liabilities and Contingent Assets
Provisions
• A provision is to be recognised, and only if a present obligation has arisen as a result of a past event, payment is probable and the amount can be estimated reliably.
• A possible obligation is disclosed but not accrued. However, disclosure is not required if payment is remote.
Measurement
• The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation.
• Provisions for restructuring, environmental clean-up, settlement of a lawsuit and other one-off events are measured at the most likely amount.
• Provisions for large items such as warranties and customer refunds are measured at a probability-weighted expected value.
Reimbursement
• Recognised as a reduction of the required provision when, and only when, it is virtually certain that reimbursement will be received.
Contingent Liabilities
• Contingent liabilities that are probable and the amount can be measured reliably are accrued.
Contingent Assets
• Contingent assets that are virtually certain are assets and should be recognised as such.
• Possible ones are to be disclosed in the notes and remote ones ignored.
Example 3 (pg 144)Debit Credit
RM'000 RM'000
Sales 4,000
Cost of Sales 1,000
Inventory 200
Administrative expenses 800
Distribution expenses 600
Dividends received 50
Interest expenses 40
Tax paid 440
10% debentures (secured on land) 300
Short-term loans 100
Cash at bank 35
Trade receivables 150
Trade payables 140
Land (cost) 1,000
Property (cost) 2,000
Plant and machinery (cost) 500
Equipment (cost) 400
Accumulated depreciation 31 December Year 2
Property 400
Plant and machinery 300
Equipment 100
Intangibles 100
Ordinary shares of RM 1 each 1,000
7.2% preference shares of RM1 each 600
Share premium 100
Retained profit 1 January Year 2 1,482.60
Investment in quoted equity shares (available-for-sale) at cost 1,250
Interim dividends
Preference 21.6
Ordinary 36
8,572.6 8,572.6
Additional information:a) Administration and distribution expenses include:
RM’000Directors’ remuneration 200Audit fees 100Depreciation
Property 50Plant
100Equipment 50
b) Interest expenses are made up of:Debenture interest 30Interest on short-term loans 10
c) Tax expense for the year is RM 510,000.
d) The directors declared the final dividends on 15.2 Year 3 of:PreferenceOrdinary 7.2%The financial statements were approved for issue on 15.3 Year 3.
e) On 31.12 Year 2, land was revalued to RM 3,000,000. The directors want to incorporate this value in the accounts.
f) The market value of the quoted shares at 31.12 Year 2 was RM 1,500,000.
Required:Prepare the statement of comprehensive income for the
year ended 31.12 Year 2 and the statement of financial position
as at 31.12 Year 2.
RM'000 RM'000
Sales 4,000
Cost of sales (1,000)
Gross profit 3,000
Administrative expenses 800
Distribution expenses 600 (1,400)
Operating profit 1,600
Finance cost (40)
Dividend income 50
Profit before tax 1,610
Taxation (510)
Profit after tax 1,100
Other comprehensive income
Surplus on revaluation of land (3,000 - 1,000) 2,000
Fair value gain on investments (1,500 - 1,250) 250
Other comprehensive income for the year 2,250
Total comprehensive income for the year 3,350
Basic earnings per share (sen) 108
(1,100 - 21.6) / 1,000
Mountain Bhd
Statement of Comprehensive Income
For the year ended 31 December Year 2
Share capital
Share premium
Revaluation Reserve
Investment reserve
Retained earnings
Total
RM'000 RM'000 RM'000 RM'000 RM'000 RM'000
Bal b/ d 1,600 100 Nil 1,482.60 3,182.60Profit for the year 1,100 1,100
Other comprehensive income
2,000 250
Dividends paid :
Preference (21.6) (21.6)
Ordinary (36) (36)
Bal c/ d 1,600 100 2,000 250 2,525 6,475
Mountain Bhd.
Statement of Changes in Equity
For the year ended 31 December Year 2
RM'000 RM'000
Non-current assets
Land 3,000
Property (2,000 - 350 - 50) 1,600
Plant (500 - 200 - 100) 200
Equipment (400 - 50 - 50) 300
Intangibles 100
Investment 1,500
6,700
Current assets
Inventory 200
Trade receivables 150
Bank 35
385
7,085
Mountain Bhd.
Statement of Financial Position as at 31 December Year 2
Capital and Reserves
Share capital
Ordinary shares of RM 1.00 each 1,000
7.2% preference shares of RM 1.00 each 600
Share premium 100
Revaluation reserve (3,000 - 1,000) 2,000
Investment reserve (1,500 - 1,250) 250
Retained earnings 2,525
6,475
Non-current liabilities
10% debentures 300
Current liabilities
Trade payables 140
Tax payable (510 - 440) 70
Short-term loans 100
310
7,085
Example 4 (150)
Distribution Administrative Finance
RM'000 RM'000 RM'000
As per trial balance 750 1050
Auditors' fees 50
Retirement benefits 10
Interest paid on debentures 100
Preference dividend 144
(7.2% x 2,000)
750 1,110 244
RM'000 RM'000
Sales 7,000
Cost of sales (4,200 - 200) (4,000)
Gross profit 3,000
Distribution expenses 750
Administrative expenses 1,110
Operating profit (1,860)
Finance cost (244)
Interest income 30
Dividend income 200
Profit before tax 1,126
Taxation (360)
Profit after tax 766
Other comprehensive income
Available-for-sale investments (240 - 170) + (800 - 550) 320
Gain on revaluation of land (14,000 - 11,000) 3,000
Total comprehensive income 4,086
EPS (766 / 10,000) RM0.077
Pleated Rosed Bhd.
Statement of Comprehensive Income
For the year ended 31 December x8
Ordinary shares
Share Premium
Revaluation Reserve
AFS Reserve
Retained Profits
Total
RM '000 RM'000 RM'000 RM'000 RM'000 RM'000
Bal b/ d 10,000 150 nil nil 1,039 11,189
Prior year adjustment
(200) (200)
Bal as adjusted 10,000 150 nil nil 839 10,989
Profit after tax 766 766
Other comprehensive income
3,000 320
Dividends paid (144) (144)
10,000 150 3,000 320 1,461 14,931
Pleated Roses Bhd.
Statement of Changes in Equity
For the year ended 31 December x8
RM'000 RM'000
Non-current assets
Land 14,000
Building (2,500 - 500) 2,000
Plant and machinery (1,000 - 300) 700
Investment (240 + 800 + 130) 1,170
17,870
Current assets
Inventory 200
Trade receivables 450
Bank 139
789
18,659
Pleated Roses Bhd.
Statement of Financial Position
As at 31 December x8
Share capital
Ordinary shares of RM 1 each 10,000
Share premium 150
Revaluation reserve 3,000
AFS reserve 320
Retained profits 1,461
14,931
Non-current liabilities
7.2% redeemable preference shares 2,000
10% debentures 950
Retirement benefits (200 +10) 210
Deferred taxation (100 + 30) 130
3,290
Current liabilities
Trade payables and accrual (186 + 50) 236
Tax payable (330 - 250) 80
Preference dividend payable (144 - 72) 72
10% debentures 50
438
18,659