BBAW2103 Financial Accounting

BBAW2103FINANCIAL ACCOUNTING

BBAW2103

FINANCIAL ACCOUNTING

1.0 Introduction

1.1 Company’s Descriptions

As cited from the Emerging Markets Information Service:

Company Name : Teck Guan Perdana Berhad

Status : Listed

Legal Form : Public Limited Company

Operational Status : Operational

ISIN CODE : MYL7439OO002

Financial Auditors : Ernst & Young (2011)

Incorporation Date : July 11, 1993

Total Employees : 432

Teck Guan is a Malaysia-based diversified multinational founded by the late Datuk Seri

Panglima Hong Teck Guan in 1935. It has core businesses in plantations, industrial including oleo-

chemicals, trading as well as other businesses.

With an annual turnover of around USD 1 billion and growing, Teck Guan is committed to

excellence in all areas be it in businesses, environment and corporate social responsibility. It has

well over 7,000 employees in over several countries. With its headquarters in the state of Sabah, in

East Malaysia, Teck Guan has currently more than 80 companies.

The corporate logo signifies the planet earth sustaining all forms of life by the Sun which is

a non-mankind, non-earth provider of wealth. Since the source of wealth is identified, Teck Guan’s

mission is therefore to develop hardware and software to harness this abundant free wealth, with a

firm commitment to be a big global leader in making a sustainable prosperous society.

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1.2 Vision

Craving to serve humanity.

1.3 Mission

To harness abundant wealth from non-earth resource.

1.4 Core Values

To conduct mutually beneficial and ethical relationship on the principles of honesty,

integrity and sustainability.

1.5 Financial Highlights

As cited in the EMIS, Teck Guan Perdana Berhad’s financial status for the current year

could be explained as the following. According to the Consolidated - Non-Audited financial

statement for the first three cumulated quarters of 2013, total net operating revenues increased with

4.17%, from RM 129,051 thousands to RM 134,438 thousands. Operating Results decreased from

RM 5,642 thousands to RM -8,326 thousands. The results of the period reached RM -11,283

thousands at the end of the period against RM 2,147 thousands last year. Return on equity (Net

income/Total equity) went from 3.99% to -25.56%, the Return On Asset (Net income / Total Asset)

went from 1.65% to -8.76% and the Net Profit Margin (Net Income/Net Sales) went from 1.66% to

-8.39% when compared to the same period of last year. The Debt to Equity Ratio (Total

Liabilities/Equity) was 191.71% compared to 141.92% of last year. Finally, the Current Ratio

(Current Assets/Current Liabilities) went from 3.00 to 1.44 when compared to the previous year.

2.0 Accounting Information:

There is general agreement that, before it can be regarded as useful in satisfying the needs of

various user groups, accounting information should satisfy the following criteria:

i. Understandability:

This implies the expression, with clarity, of accounting information in such a way that it will

be understandable to users - who are generally assumed to have a reasonable knowledge of business

and economic activities

ii. Relevance

This implies that, to be useful, accounting information must assist a user to form, confirm or

maybe revise a view - usually in the context of making a decision.

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iii. Consistency

This implies consistent treatment of similar items and application of accounting policies

iv. Comparability

This implies the ability for users to be able to compare similar companies in the same industry

group and to make comparisons of performance over time. Much of the work that goes into setting

accounting standards is based around the need for comparability.

v. Reliability

This implies that the accounting information that is presented is truthful, accurate, complete

(nothing significant missed out) and capable of being verified (e.g. by a potential investor).

vi. Objectivity

This implies that accounting information is prepared and reported in a "neutral" way. In other

words, it is not biased towards a particular user group or vested interest

2.1 Teck Guan’s Accounting Information

Teck Guan Group is well-known for its quality and reliability in products and services. Its

well-established wide distribution network enables it to provide timely deliveries, thereby allowing

its customers to achieve savings in both time and costs.

The accounting information for this company can be obtained from:

i. Director’s Report and Audited Financial Statements (Published annually)

ii. Unaudited Interim Financial Statements (Published Quarterly)

3.0 Reliability Characteristics:

The FASB was the first standard setter to define the term reliability. In terms of the FASB

Concepts Statement No. 2 (FASB, 1980: 28) the reliability of a measure rests on the faithfulness

with which it represents what it purports to present (representation faithfulness), coupled with an

assurance for the user, which comes through verification, that it has that representational quality

(verifiability). Further, neutrality of information interacts with the first two characteristics to affect

its usefulness (FASB, 1980: 28).

Reliable information explains things that have already happened and can predict the

outcome of things that have not yet happened. This is important because if a piece of information

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cannot explain both past and future events, the information is either incomplete. For example, if we

do not understand the context in which it is true or inaccurate thus the information cannot be relied

upon.

Reliable information can also be used to elucidate new information when unexpected results

arise. This is important because if something unexpected happens, reliable information can be used

to exclude things that are not the origin of the unexpected results and enables focusing of efforts

and resources on other areas.

There are three characteristics of reliable information. There are:

i. Verifiability:

Verifiability implies a consensus among different measurers. For example, the historical

cost of a piece of land to be reported in the balance sheet of a company is usually highly verifiable.

The cost can be traced to an exchange transaction, the purchase of the land. However, the market

value of that land is much more difficult to verify. Appraisers could differ in their assessment of

market value. The term objectivity often is linked to verifiability. The historical cost of the land is

objective but the land’s market value is subjective, influenced by the measurer’s past experience

and prejudices. A measurement that is subjective is difficult to verify, which makes it more difficult

for users to rely on.

ii. Neutrality:

Information contained in the financial statements must be free from bias. It should reflect a

balanced view of the affairs of the company without attempting to present them in a favored light.

Information may be deliberately biased or systematically biased.

iii. Representational Faithfulness:

This exists when there is agreement between a measure or description and the phenomenon

it purports to represent. For example, assume that the term inventory in a balance sheet of a retail

company is understood by external users to represent items that are intended for sale in the ordinary

course of business. If inventory includes, say, machines used to produce inventory, then it lacks

representational faithfulness.

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3.1 Teck Guan’s Reliable Characteristics:

The reliability principle is the concept of only recording those transactions in the accounting

system that users can verify with objective evidence. In this case, the evidence is referred to as the

Teck Guan’s ‘Directors Report and Audited Financial Statements Ended 31 January 2012’. End

users of accounting information are commonly referred to as internal and external users. Internal

users include business owners, managers and employees. External users include lenders, investors

and the general public. External users use relevant accounting information to make financing

decisions for small business loans. The company’s reliability characteristics can be explained as

follow.

3.1.1 Verifiability:

In my opinion, the verifiability of the company’s financial status could be drawn in a few

facts. The first one is the declaration made by the directors at the time when the financial report is

issued. For example:

In these excerpts, the verifiability of the financial statements could also be seen in the

detailed reports presented from page 9 – 79. Here are some excerpts taken from the mentioned

financial statement ended 31 January 2012.

Excerpt 1: Statement of Comprehensive Income

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From this statement, the income of the company is stated clearly for two years which gives

the user some insights about future investment in the company. Here, it shows the company gross

profits on 31 January 2012 are RM 534, 864 while in 2011 they made RM 551,758. Both of this

information could be verified by looking at the revenue stated prior to the figures given which also

shows a slight difference in the cost of sales.

Therefore, by using this information the external users, such as the investors, creditors as

well as customers could evaluate the company’s performance and also to decide the best investment

for them in the future.

Excerpt 2: Consolidated Statement of Changes in Equity

For this excerpt, the financial statement has also included three years of financial balance

starting from 2010 until 2012. The users could clearly see the difference in the Equity whereby it is

clearly stated that each year the company is progressing. In 2010 their equity is RM 45, 366, 224

while in 2011 is RM 51, 653, 310 and finally in 2012 they have made RM 55, 432, 083. These

figures are verifiable and thus help the users to decide for their future investments.

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3.1.2 Neutrality:

Neutrality emphasize on the accuracy of the information given by the company. The content

of the company financial statement must be bias free and thus allowing the users both internal and

external to accept the information as true. The neutrality in the Teck Guan financial statement in my

opinion could be seen as the following:

Excerpt 3: Statement by Directors

Excerpt 4: Statutory Declaration

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These two excerpts guarantee that all information in the financial statement is true upon

presentation and does not favour any individuals or the company itself.

3.1.3 Representational Faithfulness:

Excerpt 5: Statements of Cash Flows

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In this excerpt, the cash flow of the company is listed in detail with particulars that clearly

describe how the money is spent. This manner in which the spending is described guarantees the

representational faithfulness of the company.

3.2 The Importance of Reliability Characteristics

Reliability in short is a quality of information that assures decision makers that the

information represented in the financial records and financial statements captures the actual

conditions and events of the reported entity. The first concept of verifiability implies that different

knowledgeable and independent observers would generally reach consensus, although not

necessarily complete agreement (IASB, 2006b:51).

Verification should be reached on two aspects, which are: first, that the information

represents the economic phenomena that it purports to represent without material error or bias and

second, that the chosen recognition or measurement method has been applied without error or bias.

Neutrality aims at strengthening the integrity of the standard-setting and financial reporting

process (IASB, 2006:53). By focusing faithful representation on the economic phenomena it

purports and the link to the resources and obligations, and by classifying the components of faithful

representation the application of this concept as a replacement for reliability should enhance the

application of the qualitative characteristics.

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4.0 Relevance Characteristics:

For information to be relevant the ASOBAT requires that “the information must bear upon

or be useful associated with the action it is designed to facilitate or the result it is desired to

produce” (AAA, 1966:9). Further, either the information or the act of communicating must

influence or have the potential to influence the designed actions (AAA, 1966:9). This indicates that

accounting information provides a necessary benefit for the end user. End users of accounting

information are commonly referred to as internal and external users. Internal users include business

owners, managers and employees. External users include lenders, investors and the general public.

External users use relevant accounting information to make financing decisions for small business

loans.

There are three characteristics of relevance. They are:

i. Predictive Value and Feedback Value:

Relevant accounting information is capable of making a difference in a decision by helping

users to form predictions about the outcomes of past, present, and future events or to confirm or

correct prior expectations. Information can make a difference to decisions by improving decision

makers' capacities to predict or by providing feedback on earlier expectations. Usually, information

does both at once, because knowledge about the outcomes of actions already taken will generally

improve decision makers' abilities to predict the results of similar future actions. Without

knowledge of the past, the basis for a prediction will usually be lacking. Without an interest in the

future, knowledge of the past is sterile.

ii. Timeliness:

Timeliness, that is, having information available to decision makers before it loses its

capacity to influence decisions, is an ancillary aspect of relevance. If information is not available

when it is needed or becomes available so long after the reported events that it has no value for

future action, it lacks relevance and is of little or no use. Timeliness alone cannot make information

relevant, but a lack of timeliness can rob information of relevance it might otherwise have had.

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4.1 Relevance Characteristics:

Excerpt 6: Summary of Significant Accounting Policies

Based on the excerpt above, I believe that the company has taken a lot of decision making in order

to increase their profits. These decision making are done based on the predictions that certain steps

need to be undertaken before a certain time frame so that they could generate profits and at the same

time to decrease the amount of money they could potentially loss.

Excerpt 7: Summary of Significant Accounting Policies

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In excerpt 7, Teck Guan Perdana Berhad had justified their reasons for decision making

based on the predictions and at the same time disclosed the feedback value from their decision.

4.2 The Importance of Relevance

A company discloses an increase in Earnings Per Share (EPS) from $5 to $6 since the last

reporting period. The information is relevant to investors as it may assist them in confirming their

past predictions regarding the profitability of the company and will also help them in forecasting

future trend in the earnings of the company.

Relevance is affected by the materiality of information contained in the financial statements

because only material information influences the economic decisions of its users.

5.0 Summary

As Teck Guan Perdana Berhad is one of the most recognized business entities in Malaysia

and is also listed in the Bursa Malaysia their financial information is no confidential from public

view. This could ensure continuous public investment nationwide that could help them generate

more profits in the future.

In this assignment, the discussion has been made upon Teck Guan Perdana Berhad

accounting information. The information is undeniably valuable for both internal and external users.

It is with this information that users could predict the business growth and finally deciding whether

or not to invest in the company.

The reliability of the company is characterized in three respective areas which are

verifiability, neutrality and representational faithfulness. These elements are crucial due to the fact

that regardless of how the accounting is done, by far the most vital issue is for it to become

trustworthy. With out accounting reliability, the company will endure loss and discourages further

investment from external users.

Apart from reliability, another important element in accounting is relevance. The progress of

a company is affected by the relevance of the decision making. Relevance requires predictive value,

feedback value and timeliness. Upon information towards what the company needs in accordance to

the current situation, decisions must be made in a specific amount of time so that the changes are

beneficial for the company.

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All in all, reliability and relevance are two of the four key qualitative characteristics of

financial accounting information. Reliability requires that the information should be accurate and

true and fair whereas relevance requires that the financial accounting information should be such

that the users need it and it is expected to affect their decisions. Relevance and reliability are both

critical for the quality of the financial information, but both are related in ensuring the development

of any company.

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REFERENCE:

AAA (American Accounting Association) (1966). A Statement of Basic Accounting Theory. Evanston, Illinois: AAA.

Director’s Report and Audited Financial Statements Ended on 31 January 2012.

Emerging Markets Information Services (EMIS). Accessed on May 30, 2013. http://www.securities.com/

FASB & IASB (International Accounting Standards Board) (2007). Project Update: Conceptual Framework: Summary of Tentative Decisions (Updated through October 9, 2007). [Online]. Accessed on May 31, 2013. Available: http://www.fasb.org/project/cf_summary-of-decisions.shtml.

FASB (Financial Accounting Standards Board) (1980). Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information.

IASB (2007a). Phase A: Objective of Financial Reporting and Qualitative Characteristics-Comment Letter Summary. Information to observers: Board meeting 20 February 2007. June 1, 2013.

Unaudited Interim Financial Statements for the Fourth Quarter Ended 31 January 2011

http://www.teckguan.com/TGP/

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http://www.teckguan.com/TGP/

http://www.fasb.org/project/cf_summary-of-decisions

http://www.fasb.org/project/cf_summary-of-decisions

http://www.securities.com/

BBAW2103 Financial Accounting

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