accounting - Malaysian Institute of Accountants

accounting
Public Practice
concerns
Public practitioners
were exposed to the
latest issues at the
recent inaugural MIA
Public Practitioners
Seminar 2012, and
invited to air their concerns at the Members’
Engagement Forum
which capped the event.
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accountants today | MAY / JUNE 2012
T
o connect with members
and surface the latest
issues in public practice,
the Institute recently organised the inaugural Public
Practitioners Seminar 2012 – Facing
the Changing Practice Landscape.
This one-day seminar for public
practitioners is an initiative to keep
members updated with the latest technical updates and information regarding the most current developments in
the accountancy profession regionally
and globally.
The seminar focused on the current challenges faced by small and
medium practitioners in Malaysia
and other ASEAN regions, the latest
developments on tax-related issues,
company law changes and their implications, insolvency and restructuring issues affecting public practice,
issues on the relevance of the future
of audit as envisaged by the European
Commission and how it might affect
Malaysia, and new insights and
knowledge on how practitioners can
best enhance their practice management skills.
Speakers present at the event
included Alex Khaw, Partner, KPMG
Malaysia; Theresa Goh, Tax Partner,
Deloitte Kassim Chan Tax Services
Sdn Bhd.; C.K. Ooi, Senior Partner,
Public Practice Concerns
MIA President Datuk Mohd Nasir
Ahmad officiated the event.
Folks DFK & Co. and Azman, Wong,
Salleh & Co.; Chiew Chun Wee, Head
of Policy, Asia Pacific, ACCA; Heng
Chiang Pooh, Partner, Friendbond
Group of Companies; and Andrew
Heng, Executive Partner of Baker
Tilly Monteiro Heng. Below are some
highlights and takeaways from the
Public Practitioners Seminar 2012:
MFRS for SMEs
There was concern that the impending adoption of MFRS for SMEs might
impose a further reporting burden on
SMEs. In his presentation on MFRS
for SMEs, Alex Khaw, partner of
KPMG Malaysia, said that Malaysia
was among the countries planning
to require the use of IFRS for SMEs
within three years. IFRS for SMEs is
identical with MASB ED 72, Financial
Reporting Standard for Small and
Medium-sized Entities which was
issued in March 2010.
The definition of SMEs under ED72
MFRS for SMEs refers to entities that
do not have public accountability and
prepare general purpose financial statements for external users. In a nutshell,
MFRS for SMEs are a “self-contained
standard tailored for the needs and
capabilities of smaller businesses,”
noted Khaw. It has simplified some of
the principles in full MFRS for recognising and measuring assets, liabilities,
income and expenses; omitted topics
not relevant to SMEs and reduced the
number of required disclosures.
There will be key challenges in the
transition, said Khaw. These include
processes and systems changes, additional training costs incurred by preparers and auditors of financial statements, and increased complexities
compared to PERs. “Private entities
might not be keen on the transition if
they know the challenges,” said Khaw.
Are there alternative models? Khaw
cited the case of Australia, which
wants to use the full IFRS framework for all companies but will apply
the Reduced Disclosure Requirement
(RDR) to lessen the burden on its
SMEs. “Using the RDR, private entities disclose less because they don’t
have as many types of instruments as
a sophisticated entity.”
The hitch is that while ED 74
Amendments to Financial Reporting
Standards Arising From Reduce
Disclosure Requirements will allow
subsidiaries of parents with public
accountability and private entities
to use RDR, these companies must
adopt IFRS first.
Tax Challenges
Meanwhile, Theresa Goh, Executive
Director, Deloitte Malaysia, touched
on transfer pricing challenges facing
practitioners. She said that formal
transfer pricing (TP) and Advanced
Pricing Arrangement (APA) legislation effective 1 January 2009 required
contemporaneous TP documentation. Malaysia signed its first APA in
January 2011.
Tax risks are among the biggest
problems in TP. “Auditors need to
be aware of TP risks and clients need
to prepare TP documentation and
ensure arms-length pricing. It’s also
necessary to ensure that tax provisions are high enough, since TP tax
risk could be much bigger than corporate tax risk,” warned Goh. Some
of the red flags to look out for in TP
are intercompany agreements where
management fees can be one of the
biggest issues.
Goh noted that the only “answer to
solving the TP nightmare is to enter an
APA agreement with the tax authorities for future years.” The agreement
can run for a specified period, enables
you to avoid double taxation and there
is no risk and no worry about updating TP documentation.
Members’ Engagement Forum
The recent inaugural MIA Public Practitioners Seminar 2012 also featured a Members Engagement Forum (picture on page
18) for practitioners to voice out their concerns and to give their opinions relating to public practice issues. The forum
was moderated by Dato’ Narendra Kumar Jasani, Chairman, MIA Public Practice Committee (centre). Panellists included
(left - right) Subramaniam A. V. Sankar, Chairman, MIA Insolvency Practice Subcommittee; Dato’ Raymond Liew Lee Leong,
Chairman, MIA Audit Practice Subcommittee; Beh Tok Koay, Chairman, MIA Taxation Committee and Peter Lim Thiam Kee,
Chairman, MIA Taxation Practice Subcommittee.
MAY / JUNE 2012 | accountants today
19
Public Practice Concerns
Below are some of the key points
from the MEF discussion:
Audit Under Fire
Chiew Chun Wee, Head of Policy,
Asia Pacific, ACCA spoke on the EU’s
audit reform proposals to improve
audit quality and corporate governance in Audit Under Fire. Some of
the proposals include a six-year cap,
whereby auditors can’t ser ve for
more than six years and recommends
a whole firm rotation instead of merely a partner or auditor rotation. There
is a call for ‘pure audit’ firms, where
all non-audit ser vices must be car ved
out and restrictions on added ser vices. Other elements include prohibition of ‘Big-4 only’ clauses, stricter
rules on appointment and audit committee composition. Of par ticular
interest was the ‘small companies’
exemption from audits, where audits
are waived for small companies with
an annual turnover below the threshold of 10 million euros. The reforms
also call for scaled audits for SMEs
which would see the “proportionate
application of auditing standards”.
The issue here is that EU is delegating this to member states; the end
result would “perhaps be multiple
interpretations of how to do SME
audits,” said Chew.
The pros of these reforms would
include auditors being freed from man-
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accountants today | MAY / JUNE 2012
agement pressure and a fresh look at
financial reporting. “If auditors do not
have a fixed term, they may be inclined
to be accommodating to clients and
the borders blur between management
and auditors,” said Chew.
Cons include a significant cost
increase; there is opposition from auditors as well as businesses. Plus, would
these reforms significantly improve
audit quality?
During the Q&A session, Chew
was asked regarding the impact of
small company audit abolishment in
Singapore. In his opinion, the impact
of audit exemption has been positive.
“Since SMEs don’t need audit, they get
SMPs to do their accounting, and they
don’t need to worry about regulators
coming in.”
Elsewhere, C.K. Ooi, Senior Partner,
Folks DFK & Co. and Azman, Wong,
Salleh & Co updated practitioners on
the requirements and results to date
of MIA’s Practice Review. Chartered
Secretary Heng Chiang Pooh presented a quick review on the recent
Companies (Amendment) Act 2007
and the impact on officers implicated.
Meanwhile, Andrew Heng, Executive
Partner of Baker Tilly Monteiro Heng,
spoke on insolvency and restructuring
issues affecting practitioners.
• Unlicensed Audit Services
Council members were asked about
the protocol for reporting non-licensed
firms carrying out audits. A participant
pointed out that this practice of private
limited companies or sendirian berhads
offering and conducting audits was
quite rampant.
Peter Lim noted that this was a
“very tricky situation to resolve.”
According to protocol, complainants
need to file a statutory declaration
and the complainant must be present
during the investigation and can be
held liable, “unless it can be proven
that the firm is encroaching into an
area where the license to practise is
required,” explained Dato’ Raymond
Liew. Although the Council Members
could offer no quick answer for resolution, they unanimously agreed that the
Investigation Committee is aware that
numerous secretarial firms are guilty
of offering unlicensed audit services,
and that fast appropriate action must
be taken.
• Anti-Competition
Liew noted that the implementation of
the Malaysian Competition Act 2010,
which took effect on 1 January 2012
will worsen the audit fee situation.
“MIA will be looking into the impact of
the Competition Act 2010 and will take
this up with the relevant competition
authorities,” he remarked. The suggested imposition of tariffs to prevent
undercutting and ensure feasible audit
fees might be considered price-fixing
which would go against the substance
of the Act.
Liew also noted the need to promote the value of audit instead of
merely focusing on the compliance
aspect alone. “Although compliance
and time costs have gone up, the audit
fee in Malaysia remains one of the
lowest in the region, even lower than
in the Philippines. The impression is
that audit may be a sunset industry
Public Practice Concerns
or no longer a lucrative profession.
Therefore, the authorities should not
merely emphasise the need for compliance alone but also to promote the
value of audit per se to all stakeholders. The question is: How can MIA
assist members to promote the value
of audit?”
He also reprimanded firms for being
their own worst enemy. “Member firms
shouldn’t be undercutting one another
and competing on fees. On a serious
note, we should relook at our own
practices in terms of efficiency and
cost efficacy.”
To enhance the strength and viability of smaller accounting firms, Liew
urged member firms to merge or be
globally affiliated. He mentioned that
the government has recently allocated a grant to MIA for its Merger &
Affiliation (M&A) initiatives. A series
of M&A seminars will be organised in
seven states to promote the awareness
of these M&A initiatives within the
next couple of months.
• FRS and Taxation
Will Malaysia eventually see convergence between FRS and tax statements?
J. Selvarajah, Partner with Omar Arif,
noted that there was a wide divergence between FRS and the Income
Tax Act, which results in numerous
adjustments between tax computation
and FRS accounts. He pointed out
that the New Zealand, Singapore and
Hong Kong Inland Revenue Boards
had acceded to using IFRS, while keeping capital and revenue bases intact.
Beh Tok Koay replied that a joint tax
working group was set up to consider
the matter, and had gone through more
than ten discussion papers. “There
are revenue issues related to timing.
Ultimately, change to bring about convergence is a policy decision which can
have an impact on revenue.”
• Limited Liability Partnerships (LLPs)
There is an urgent need to assess
the impact of impending LLPs on
There is a call for ‘pure audit’ firms, where all non-audit
services must be carved out and restrictions on added
services. Other elements include prohibition of ‘Big-4
only’ clauses, stricter rules on appointment and audit
committee composition. Of particular interest was the
‘small companies’ exemption from audits, where audits
are waived for small companies with an annual turnover
below the threshold of 10 million euros.
the profession and SMPs, said panellists. Peter Lim talked at length
about the impact of the LLP Act,
which was gazetted on February 2012,
although the effective date is yet to
be announced. He noted that MIA is
involved in LLP dialogues with the
government and a memorandum on
the tax treatment has been submitted to the Companies Commission
of Malaysia to be forwarded to the
Inland Revenue Board (IRB) for consideration.
“The main point to note is that LLP
is a new business vehicle, a hybrid that
is meant to protect limited liabilities.
However, there is a very onerous burden on the LLP’s compliance officers.
Although LLP accounts need not be
audited, if anything is wrong with these
accounts, the compliance officer will
be held responsible.”
Citing Singapore as an example,
Peter Lim said that the LLP format may
also be undersubscribed because the
non-requirement for statutory audits
can trigger tax audits. “Singapore introduced LLPs a couple of years ago
and companies with a paid up of less
than SGD5 million will no longer need
audits. The issue is that if LLPs need
not be audited, then the tax man will
pay a visit. As a result, the LLP is not
so popular because companies prefer
to audit themselves rather than submit
to a government audit.”
Taxation Challenges
Beh Tok Koay warned public practitioners to prepare for a more stringent
taxation environment, where heavy
penalty issues are just one example
of the fast-changing landscape they
face. “The authorities are working to
enhance tax collection and this places
stress on us of meeting high standards
of compliance.” He singled out transfer pricing as one of the key taxation
targets for tax authorities which generates a lot of tax revenue, and accountants need to be experts in this area
to serve their clients well and reduce
their tax burden from TP. Accountants
need to also prepare for new indirect
taxes like GST.
“Despite the challenging environment, there are plenty of opportunities to look at,” urged Beh. He recommended that accountants and firms
invest in specialised training in transfer
pricing, tax audits and GST. “Since this
needs a lot of investment, the pooling of
resources may be necessary,” said Beh,
which ties in with the Institute’s aim
of driving mergers and acquisitions to
strengthen public practice.
Firms will also face huge human
resource challenges in this regard.
“There will be problems retaining quality and competent staff, so firms must
ensure that their staff can visualise a
good career path within their firm to
induce them to stay on.” n
MAY / JUNE 2012 | accountants today
21
accounting
MIA Surveillance and Enforcement
Upholding Financial
Reporting Quality
To encourage quality financial reporting, MIA’s FINANCIAL STATEMENTS REVIEW
COMMITTEE (FSRC) has released its common findings based on reviews during
the financial year July 2010 – June 2011.
T
here have been many changes in financial reporting
in recent years. In line with full convergence with
IFRS in 2012, Malaysian Accounting Standards Board
(MASB) had, in November 2011, issued the Malaysian
Financial Reporting Standards (MFRS) framework
which is effective for annual periods beginning on or after 1
January 2012.
Amongst the benefits of full convergence with IFRS is improved
credibility and transparency to financial reporting, which will
help incorporate better practices within corporate Malaysia by
adopting international standards.
Despite the full convergence with IFRS, users of existing
Financial Reporting Standards (FRS) and Interpretations continue to strive in interpreting and applying these standards.
In order to ensure that the profession adopts and complies
fully with the relevant standards, the Malaysian Institute of
Accountants’ Financial Statements Review (FSR) function serves
to ensure that the quality of financial information presented within financial reporting meets the required standards. The review
of financial statements of selected listed companies is carried out
by a committee known as the FSR Committee (FSRC).
The primary objective of the FSRC is to monitor the quality of
financial statements and the auditors’ reports that are prepared
by or are the responsibility of members of MIA, for the purpose
of determining compliance with statutory and other requirements, approved accounting standards and approved auditing
standards in Malaysia.
OBSERVATIONS
For the period from July 2010 to June 2011, FSRC reviewed several financial statements of listed companies. The FSRC wishes
to share some of the common findings identified during the
review process for the period from July 2010 to June 2011, as
shown in Table A.
The FSRC draws particular attention to the following, which
continue to be the areas of deficiencies found in the financial
statements since the past reviews:
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accountants today | MAY / JUNE 2012
1. GOING CONCERN
The going concern assumption is a fundamental principle in the
preparation of financial statements. Under the going concern
assumption, an entity is normally viewed as continuing in business for the foreseeable future with neither the intention nor the
necessity of liquidation, ceasing trading or seeking protection
from creditors pursuant to laws or regulations.
The management and directors are required to satisfy themselves that the going concern assumption used as the basis in the
preparation of the financial statements is appropriate. Under FRS
101 “Presentation of Financial Statements”, the management of
an entity is explicitly required to make an assessment of the
entity’s ability to continue as a going concern. Management’s
assessment of the entity’s ability to continue as a going concern
involves making a judgement, about inherently uncertain future
outcomes of events and conditions.
In this connection, the FSRC have raised queries to the preparers whether the required assessment has been made by management on the appropriateness of the use of the going concern
assumption in the preparation of the financial statements when
the financial statements showed signs of deteriorating financial
position.
Paragraph 25 of FRS 101 “Presentation of Financial
Statements” requires that when preparing financial statements,
management shall make an assessment of an entity’s ability
to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management
either intends to liquidate the entity or cease trading, or has no
realistic alternative but to do so. When management is aware,
in making its assessment, of material uncertainties related to
events or conditions that may cast significant doubt upon the
entity’s ability to continue as a going concern, the entity shall
disclose those uncertainties. When an entity does not prepare
financial statements on a going concern basis, it shall disclose
that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded
as going concern.
Upholding Financial Reporting Quality
In the event that the use of going concern assumption is appropriate but a material uncertainty exists, Paragraph 19 of ISA 570
states that if adequate disclosure is made in the financial statements, the auditor should express an unmodified opinion but
include an emphasis of matter paragraph in the auditor’s report
that highlights the existence of a material uncertainty relating
to the event or condition that may cast significant doubt on the
entity’s ability to continue as a going concern and draws attention to the note in the financial statements that discloses the matters. Paragraph 20 of ISA 570 states that if adequate disclosure is
not made in the financial statements, the auditor should express
a qualified or adverse opinion, as appropriate, in accordance
with ISA 705 “Modifications to the opinion in the Independent
Auditors’ Report”.
What is considered as “adequate disclosure”, to be disclosed in
the financial statements is clearly spelt out in paragraph 18 of ISA
570, where it states that financial statements should:
a) Adequately describe the principal events or conditions that
may cast significant doubt on the entity’s ability to continue
as a going concern and management’s plans to deal with
these events or conditions; and
b) Disclose clearly that there is a material uncertainty related
to events or conditions that may cast significant doubt on
the entity’s ability to continue as a going concern and,
therefore, that it may be unable to realise its assets and
discharge its liabilities in the normal course of business.
The review findings noted that some financial statements have
not adequately disclosed the material uncertainties related to
events or conditions that may cast significant doubt upon the
entity’s ability to continue as a going concern. Examples of events
and conditions that are commonly noted amongst others, are net
liability or net current liability position, substantial operating
losses, negative operating cash flows, indication of withdrawal
of financial support by lenders, e.g. breach of loan covenants,
defaulted bank loans; and adverse key financial ratios.
The auditors’ responsibility is to obtain sufficient appropriate
audit evidence about the appropriateness of the management’s
use of the going concern assumption in the preparation and
presentation of the financial statements and to conclude whether
there is a material uncertainty about the entity’s ability to continue as a going concern.
In relation to the auditors, queries were raised as to whether
the requirements of ISA 570 “Going Concern” have been complied with. ISA 570 stipulates the procedures that the auditors
will evaluate the appropriateness of the management’s use of the
going concern assumption, and to consider whether there are
material uncertainties about the entity’s ability to continue as a
going concern. ISA 570 also provides examples of indicators, i.e.
the events or conditions that may cast significant doubt upon the
entity’s ability to continue as a going concern.
The FSRC findings also include instances where auditors:
a) Expressed an unmodified opinion with an emphasis of
matter paragraphs in the auditor’s report when there were
no disclosures in the financial statements of the principal
events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern; and
b) Expressed an unmodified opinion with an emphasis of
matter paragraph in the auditor’s report when a material uncertainty exists and the financial statements did not
make any disclosure of the management’s plan to deal with
the principal events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern.
2. IMPAIRMENT OF ASSETS
The previous year has been marked by increased volatility in the
global markets. The economic slowdown in many countries may
worsen as the financial crisis continues. This widespread slowdown means that assets in many industries will generate lower
cash flows than originally expected. This inevitably increases the
probability that assets may be impaired.
As much as the industry is concerned over the likelihood of
impairment of assets, the FSRC review findings noted that there
were indications where some preparers may have chosen to
ignore the fact that carrying values of certain of their assets may
be impaired.
MAY / JUNE 2012 | accountants today
23
Upholding Financial Reporting Quality
Paragraph 9 of FRS 136 “Impairment of Assets” states that an
entity shall assess at the end of each reporting period whether
there is any indication that an asset may be impaired, such as
deteriorating financial position. If any such indication exists, the
entity shall estimate the recoverable amount of the asset.
FRS 136 also describes the indications that an entity shall
consider in the assessment of an impairment loss that may have
occurred. The FSRC review findings noted some clear indications of impairment of certain assets in financial statements
but without evidence of impairment testing being performed.
Indications of impairment noted include:
a) Negative gross profits (gross loss)
b) Significant shareholders’ deficit balance
c) Significant continuous after tax losses
d) Significant net current liabilities position
e) Default in repayment of loan obligations
f) Increase in unit sales but increase in loss incurred
g) Continuous increased in negative operating cash flow
h) Restructuring exercise undertaken on loan obligations
i) Significant delay in commencement of property development activities
j) Impairment recognised for investment in subsidiaries but
no impairment recognised on amount due from the same
subsidiaries
k) Impairment recognised by a subsidiary on the only significant asset of the subsidiary but no impairment recognised
on the parent’s cost of investment in the subsidiary
The FSRC also noted situations where material impairment
loss was recognised during the year or where there was material reversal of impairment loss recognised during the year, but
without making the necessary disclosures required by FRS 136.
Some of the disclosures required by FRS 136 include disclosure
of events leading to recognition/ reversal of impairment loss,
whether recoverable amount is fair value less cost to sell or
value in use; the basis for determining fair value less cost to sell;
and, the discount rate used in determining value in use. For a
cash-generating unit, FRS 136 requires the disclosure of the
following:
a) A description of the cash-generating unit (such as whether
it is a product line, a plant, a business operation, a geographical area, or a reportable segment as defined in FRS
8);
b) The amount of the impairment loss recognised or reversed
by class of assets and, if the entity reports segment information in accordance with FRS 8, by reportable segment;
and
c) If the aggregation of assets for identifying the cash-generating unit has changed since the previous estimate of
the cash-generating unit’s recoverable amount (if any), a
description of the current and former way of aggregating
assets and the reasons for changing the way the cashgenerating unit is identified.
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accountants today | MAY / JUNE 2012
In light of ever-changing economic conditions,
these are definitely challenging times for those
involved in the financial reporting process.We
wish to remind that the Board of Directors owns
the responsibility in the preparation of financial
statements under the Companies Act, 1965,
whilst, the Audit Committee plays an important
role in the financial reporting process.The Audit
Committee should strive to achieve optimal
governance through monitoring the compliance
of financial reporting and other regulation.
Paragraph 130 and 131 of FRS 136 clearly states the disclosure
requirement for each material impairment loss recognised or
reversed during the period for an individual asset, including
goodwill, or a cash-generating unit.
Paragraph 134 and 135 of FRS 136 require further disclosures
on the recoverable amount for goodwill or intangible assets with
indefinitely useful lives allocated to that unit (group of units).
3. FINANCIAL STATEMENTS PRESENTATION
The objective of financial statements is to provide information in
relation to the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making
economic decisions.
As such, apart from compliance, preparers of financial statements should strive to provide relevant information to users.
FRS 101 “Presentation of Financial Statements” provides clear
guidance on this. The objective of this Standard is to prescribe
the basis for presentation of financial statements to ensure comparability both with the entity’s financial statements of previous
periods and with the financial statements of other entities.
The FSRC noted a few common review findings that relate to the
presentation of financial statements:
3.1 Nature of expenses not adequately analysed, particularly the expenses included in the cost of sales.
• Paragraph 29 of FRS 101 requires that an entity shall
present separately each material class of similar items.
An entity shall present separately items of dissimilar
nature or function unless they are immaterial.
• When items of income or expenses are material, an
entity shall disclose their nature and amount separately
as required by Paragraph 97 of FRS 101.
• An entity should present the analysis of expenses recognised in profit or loss using classification based on
either their nature or their function within the entity.
The selection of the method by “nature of expenses” or
Upholding Financial Reporting Quality
“function of expenses” is judgemental. The entity should
choose a method whichever provides information that is
reliable and more relevant according to the activities and
operations of the entity.
• Paragraph 104 of FRS 101 requires an entity to disclose
additional information on the nature of expenses if the
entity is classifying the expenses by function.
3.2 Major components included within other receivables
and other payables were not disclosed.
• Paragraph 77 of FRS 101 states that an entity shall disclose,
either in the statement of financial position or in the notes,
further sub classifications of the line items presented, classified in a manner appropriate to the entity’s operations.
For example, receivables are disaggregated into amounts
receivable from trade customers, receivables from related
parties, prepayments and other amounts.
3.3 Nature and purpose of each reser ve within equity
were not disclosed.
• Paragraph 79 of FRS 101 states that an entity shall disclose
a description of the nature and purpose of each reserve
within equity, either in the statement of financial position
or the statement of changes in equity, or in the notes.
3.4 Term loans classified as non-current when it should
be classified as current.
• The above wrong classification normally happens in
situations where a company has breached certain term
loan covenants before the reporting date, but there was
no evidence of the lender’s demand for immediate settlement of the outstanding term loan liability either before
the reporting date or after the reporting date.
• However, in accordance to FRS 101, an entity shall classify a liability as current when (amongst others), the
entity “does not have an unconditional right to defer
settlement of the liability for at least twelve months after
the reporting period.”
• In the above circumstances, because of the breach of
certain loan covenants before the reporting date, the
lender has the contractual right to demand immediate
settlement of the loan. If such is the contractual position,
it would mean the company does not have an unconditional right to defer settlement of the loan for at least
twelve months after the reporting period. Accordingly,
such loan should have been classified as current
4. STATEMENT OF CASH FLOWS
The most common review findings noted on the statement of
cash flows is the inappropriate classification of cash flow items
of operating, investing and financing activities. Classification
by activity provides information that allows users to assess the
impact of those activities on the financial position of the entity
and the amount of its cash and cash equivalents.
The FSRC noted that movement in advances to/ from subsidiaries disclosed as “operating cash flow” in the parent’s cash flow
statement instead of “investing/financing cash flow”.
The nature of the amount due from/ to subsidiaries or other
related companies should be analysed from the company’s
perspective and not how the other entity utilises the advances
given.
If the transaction is non-trade in nature, then the cash movement should be reflected as investing or financing activities
accordingly in the cash flow statements of the parent, instead of
reporting the net movement as working capital changes.
Similarly, in the respective financial statements of the subsidiaries, the advances from/ to the parent or related company should
be evaluated from the subsidiaries’ perspective in determining
the classification in the subsidiaries’ cash flow statements.
Paragraph 6 of FRS 107 “Statement of Cash Flows” defines the
activities as follows:
~
Operating activities - the principal revenue-producing activities of the entity and other activities that are not investing
or financing activities.
~
Investing activities - the acquisition and disposal of longterm assets and other investments not included in cash
equivalents.
~
Financing activities - activities that result in changes in the
size and composition of the contributed equity and borrowings of the entity.
Paragraph 14, 16 and 17 state the examples of cash flows from
operating activities, investing activities and financing activities
respectively.
The entity should evaluate the cash flows carefully and classify
to the appropriate activities in accordance with FRS 107.
CONCLUSION
In light of ever-changing economic conditions, these are definitely
challenging times for those involved in the financial reporting
process. We wish to remind that the Board of Directors owns the
responsibility in the preparation of financial statements under the
Companies Act, 1965, whilst, the Audit Committee plays an important role in the financial reporting process. The Audit Committee
should strive to achieve optimal governance through monitoring
the compliance of financial reporting and other regulation.
Meanwhile, the auditors’ role is important to enhance the
credibility of financial statements. An auditor will conduct an
audit in accordance with the approved standards on auditing and
should be able to obtain reasonable assurance that the financial
statements are free of material misstatement.
Compliance with financial reporting standards should not be
a burden to those involved in the financial reporting process.
In line with their respective responsibilities, they should work
hand in hand to improve the quality of financial reporting and to
provide the users with comprehensive and credible information
on the financials of an entity. It is important that members continuously uphold the quality of financial reporting. n
MAY / JUNE 2012 | accountants today
25
Upholding Financial Reporting Quality
Table A: Common Findings of FSRC for Review Period from July 2010 to June 2011
NO
26
AREAS FOR IMPROVEMENT
FINDINGS NOTED
1
Going Concern
• Inadequate disclosure on management’s plan in dealing with material uncertainty
on going concern. (FRS 101.23)
• Queries were raised on whether going concern assumption has been considered
by the management when the financial statements showed signs of deteriorating
financial position; and, whether the auditors have evaluated the appropriateness of the management’s use of the going concern assumption, and to consider
whether there are material uncertainties about the entity’s ability to continue as a
going concern. (FRS 101.23 and ISA 570)
2
Judgements in applying accounting • Keys sources of estimation uncertainty are not presented in a manner that helps
users of financial statements to understand the judgements management makes,
policy and key sources of estimation
e.g. sensitivity analysis not provided; the expected resolution of an uncertainty
uncertainty
and the range of reasonably possible outcomes within the next financial year in
respect of the carrying amounts of the assets and liabilities affected are not stated,
etc. (FRS 101.120)
3
Impairment of investments in subsidiary • Inadequate disclosures when there is material impairment loss recognised. E.g.
non-disclosure of whether the recoverable amount is fair value less costs to sell
company/associated company/ good(FVLCTS) or value in use (VIU), basis of determining FVLCTS, discount rate(s) used
will/intangible assets
in determining VIU. (FRS 136.130 (d) – (g))
• Cost of investment in subsidiary company or associated company was impaired,
but recoverability of amounts due from these companies not carefully evaluated.
Queries were made on whether impairment testing had been performed on property, plant and equipment and investment in subsidiaries, given deteriorating
financial position, which is one of several impairment indicatiors.
4
Deferred Taxation
• Non-disclosure of deductible temporary differences, unused tax losses and unused
tax credits of which no deferred assets are being recognised. (FRS 112.81(e))
• Non–disclosure of nature of evidence supporting recognition of deferred tax
assets. (FRS 112.82)
• Deferred tax assets is deemed probable to realise in spite of the company having
financial distress, e.g. - Net Current Liabilities position
5
Cash flow statements
• Inappropriate cash flow classifications/ movement in advances to/ from subsidiaries disclosed as “operating cash flow” in the parent’s cash flow statement, instead
of “investing/financing cash flow”. (FRS 107.6, FRS 107.16 & FRS 107.17)
• Non-disclosure of major classes of gross cash receipts and gross cash payments
separately that arose from investing and financing activities. (FRS 107.21)
6
Staff Cost
• Non-disclosure on staff cost (FRS 119.6)
7
Profit/(Loss) Before Taxation
• Inadequacy of disclosure on nature of expenses of the Group (FRS 101.93/94)
• Non-separate disclosure on the nature and amount when items of income and
expense are material. (FRS 101.86)
• Non-full elimination of unrealised profits from intercompany transactions (FRS
127.24)
8
Significant accounting policies Investment Property
• The fair value of investment property shall reflect market conditions at the end
of the reporting period. Example of error made, i.e. adopted fair value policy but
used the revaluation value in 2007 to reflect current market condition (2008) (FRS
140.38)
• Amortisation was done on straight line method, although adopted fair value
policy. (FRS 140.33)
• Non-disclosure on direct operating expenses arising from repair & maintenance of
investment property (FRS 140.75 (f )(ii)- (iii))
accountants today | MAY / JUNE 2012
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accounting
NACRA 2012
How to create a winning
Annual Report
The National Annual Corporate Report Awards (NACRA) are a benchmark
for quality financial reporting. Adjudicators and a past NACRA winner
– Telekom Malaysia - tell aspirants what it takes to produce an awardwinning financial report.
Majella Gomes
E
ven seasoned shareholders
shudder at the thought of
hard-to-read annual reports,
but what exactly differentiates the merely good from
the outstanding? The experts insist that
many elements from both the standard
regulatory requirements and characteristics peculiar to the respective company
must successfully combine, before an
annual report reaches a certain level
of acceptance, and the indication that
it has indeed attained stellar levels, is
when the company becomes a recipient
of the National Annual Corporate Report
Awards (NACRA). NACRA is already
two decades old, and has become pretty
much the acknowledged benchmark for
Malaysian annual reports.
Pushing for standards
The joint organisers of NACRA 2012,
the Malaysian Institute of Accountants
(MIA), Bursa Malaysia and the
Malaysian Institute of Certified Public
Accountants (MICPA) recently launched
the event in Bursa Malaysia. Winners of
this year’s Awards will be announced
on 1 November 2012. The theme for
NACRA 2012 is “Towards Accountability
& Excellence.”
Speaking at the launch, NACRA 2012
Organising Committee Chairman Ng
28
accountants today | MAY / JUNE 2012
How to Create A Winning Annual Report
Kim Tuck said that the Awards were
being increasingly viewed as prestigious
by many corporations in Malaysia, and
competition had stiffened in recent years.
Viewing it as a positive development, he
said that it had spurred submission of
reports of better quality for adjudication.
“NACRA is aimed at promoting greater,
more effective communication of financial and other information by organisations to their stakeholders through the
publication of timely, informative, factual and reader-friendly reports,” he said.
“The Awards also aim to cultivate a spirit
of competitiveness among Malaysian
organisations in striving for excellence in
corporate reporting.”
Adding that the theme of this year’s
Awards emphasised the vital role played
by annual reports in advocating more
transparency and enhancing the integrity
of the capital market, he said that the reliability and sufficiency of information contained in corporate reports were crucial
to decision-making. “High- quality annual
reports may be equated with high-quality
management,” he said. “But there must
also be assurance as to the reliability
and sufficiency of the information presented. When adequate, accurate information is presented, market regulators
and players will acknowledge its veracity.
Ultimately, the movement in the capital
market revolves around clear, concise
information.”
“NACRA is aimed at promoting greater, more
effective communication of financial and other
information by organisations to their stakeholders
through the publication of timely, informative,
factual and reader-friendly reports.”
Ng Kim Tuck
Chairman, NACRA 2012 Organising Committee
Left to right: Ch’ng Boon Huat,Head, Corporate Surveillance & Investigation,
Regulation, Bursa Malaysia Berhad with Ng Kim Tuck and Stephen Oong
MAY / JUNE 2012 | accountants today
29
How to Create A Winning Annual Report
“Annual reports should scrutinise policies and how decisions are
made.They should state what the company stands for. For instance,
what is its policy concerning bribery and corruption? If it talks
about health and safety in the work place, quality of life or work-life
balance, what are its targets and how will these targets be met?
These should be clear.”
Ng Kean Kok
Faculty of Accountancy and Management, Universiti Tunku Abdul Rahman (UTAR)
Constantly pushing
boundaries
Pointing out that the criteria for NACRA
are reviewed and enhanced each year to
boost the quality of the reports prepared,
he confirmed that the major objective –
that of recognising and highlighting the
importance of good financial reporting
to effectively serve the capital market –
remained the same. NACRA essentially
comprises five categories of Awards: namely the Overall Excellence Awards; Industry
Excellence Awards for Listed Companies;
Presentation Awards; Corporate Social
Responsibility Awards; and a Special
Award for non-listed Organisations.
In his speech, Stephen KL Oong,
Chairman of the NACRA Adjudication
Committee said NACRA is open to all
companies incorporated or registered in
Malaysia as well as the public sector and
other organisations established in Malaysia.
The adjudication process, he said, comprised of two stages undertaken by a panel
of adjudicators from various commercial
and industrial backgrounds, public accounting, academia, advertising and public relations. “In stage one, the annual reports will
be examined and scored within industry
groups,” he continued. “The annual report
which receives the highest level of overall
excellence in the industry group will be
considered for the Industry Excellence
Award. In stage two, shortlisted reports for
the Overall Excellence and Presentation
Awards will be subjected to a second round
of adjudication.”
The official launch of NACRA by Ng,
Oong and Chief Regulatory Officer of Bursa
Malaysia Selvarany Rasiah was followed by
30
accountants today | MAY / JUNE 2012
short presentations from four speakers
who each gave insights on what constituted good annual reports, from the adjudicators’ perspectives. Audrey Chan, Audit
Partner of BDO spoke about the financial
statement component. “Good reports share
significant events during the year,” she
said. “Financial statements are a regulatory
requirement, so avoid basic errors, like figures that don’t add up and typos. Your notes
should be clear, and all policies should
be disclosed. Sometimes reports lack disclosure of accounting policy, or adopt the
wrong policy. If there are comparative notes
or changes, there should be explanations
as to why this was done. Cross-referencing
is very important. Voluntary disclosure
always adds value to the report, as do
major analysis of expenses and expanded
narrative disclosure on financial information. Companies are always encouraged to
disclose as much as possible.”
Audrey Chan, Audit Partner of BDO
Ranjit Singh, Managing Director of
Columbus Advisory
Relevant perspectives
She added, however, that presentation of
accounting information was very subjective, and adjudicators tend to fall back on
experience when it comes to this area.
“Marks are allocated but will be deducted if
standards are not met,” she concluded. “As
adjudicators, you know when you are reading a good report, and when you are not.”
Chan’s presentation was followed by
that of Ranjit Singh, Managing Director of
Columbus Advisory, which covered the key
evaluation areas of corporate information.
Agreeing with Chan that voluntary disclosure does carry a lot of weight, he pointed
out that companies would do well to provide industry analysis in their reports, so
Ng Kean Kok from the Faculty of
Accountancy and Management, Universiti
Tunku Abdul Rahman (UTAR)
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that stakeholders could obtain an improved understanding
of that particular company’s standing within its own industry. “Investors want to see what a company’s prospects are,”
he said. “They want to see its policy guidelines, and where it
stands on issues like communication and investor relations.
Good reports should have clearly delineated policies for HR,
R&D, management structure, and internal audit, among others. They should also be able to offer concise explanations of
the basis for nomination of directors, for instance, and details
of remuneration procedures.”
He urged companies to ensure consistency of information across all channels, including the information posted
on official websites, and suggested that stakeholders pay
closer attention to how companies identify and manage
risk. Speaking on the Corporate Social Responsibility
aspect of annual reports, Ng Kean Kok from the Faculty
of Accountancy and Management, Universiti Tunku Abdul
Rahman (UTAR), confirmed that the area of coverage of
CSR had expanded considerably since the philosophy of
CSR first started permeating the corporate world. Today, it
includes corporate governance, stakeholder engagement,
procurement policies and product responsibility. “Annual
reports should scrutinise policies and how decisions are
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How to Create A Winning Annual Report
made,” he said. “They should state what
the company stands for. For instance, what
is its policy concerning bribery and corruption? If it talks about health and safety
in the work place, quality of life or worklife balance, what are its targets and how
will these targets be met? These should
be clear.”
With regards to the environment within the CSR context, annual reports could
also try showcasing initiatives to monitor
greenhouse gas or carbon emissions,
energy use, waste and water management. “Reduction measurements, carbon reporting and other efforts should
show that business is being aligned to
achieving environmentally-friendly outcomes,” Ng continued. “There should
also be community investments, such as
efforts to achieve the UN’s Millennium
Development Goals, for example. Of
course, there are underlying concerns as
to the credibility of such information but
companies should consider the annual
report as their opportunity to explain in
detail what the company is doing. The five
main things to remember when putting
together an annual report are content,
communication, credibility, commitment
and comparability. You should engage
your reader; make use of multimedia –
have a good website, videos, podcasts,
slide shows, animation and any other
innovative feature that will boost interaction. Above all, present complex issues in
a simple, uncomplicated manner.”
On what constitutes good design,
Ghazali Abdullah, Chief Executive of GRA
Communications Sdn Bhd conceded that
judges look for “drop-dead presentation
that makes you feel good. Firstly, always
explain your cover design rationale, and
ensure that the cover, content, layout and
design all complement each other. All this
is taken into consideration, in adjudica-
tion,” he said. “Make it reader-friendly.
It should be uncluttered. Too much text
is overwhelming. And use good pictures.
Judges always look out for original photos,
and outstanding photography. Innovative
concepts will definitely capture their attention. They usually prefer matt art paper, not
gloss, which tends to be a bit distracting.
Use tasteful colours for graphs and charts,
and an appropriate font size – the report
should be as easy to read as a good novel!”
How Winners do it
NACRA 2011 winner Telekom Malaysia
got started on its annual report about two
months before the end of the company’s
financial year, divulged Datuk Bazlan
Osman, Group Chief Financial Officer of
Telekom Malaysia Berhad. “At that point,
we already have an idea of how we have
performed over three quarters – but the
project must be supported by senior management,” he said. Adding that there were
initiatives to improve the annual report
every year, he commented that the annual
report team innovated with box articles
that gave readers some idea of the changes and progress experienced by the company. “The annual report follows a theme
based on our business direction. There is
additional disclosure as well, much more
than was mandatory, and the pictures are
carefully chosen to dovetail with the story
line. The Board of Directors read it, and
give constructive criticism,” he said.
For annual reports, more than other
publications, the devil must surely be
in the details. Datuk Bazlan said that
Telekom’s annual report comply strictly
with all standards, place accuracy and consistency at the highest level, and ensure
financial information is correct. Spelling
and information errors are regarded seriously, and frowned upon. “Many pairs of
eyes look over the annual report before it
Ghazali Abdullah, Chief Executive of
GRA Communications Sdn Bhd
Datuk Bazlan Osman, Group Chief
Financial Officer of Telekom Malaysia
Berhad.
goes to print,” he confirmed. “There is no
repetition or duplication of information;
there are visuals of very high quality, and
every effort is made to ensure that the
publication is attractive and fresh, easy on
the eye, and reader-friendly. Proofreading
and cross-checking is robust, to put it
mildly, and we are strict about meeting
deadlines and following timelines. Above
all, it is a matter of teamwork and collaboration.” n
Public-listed companies are invited to submit their
Q
2011 annual reports to NACRA for adjudication. The deadline for submission is 30 June
2012 and entrants can find out more at www.mia.org.my or write to [email protected]
32
accountants today | MAY / JUNE 2012