Topic 1 – part 2

The Accounting Areas and Professional Bodies

Accounting Standards, Principles, Concepts and Conventions.

Two areas of accounting

Financial Accounting & Management Accounting

Financial Accounting

Provision of financial information on a business’s recent financial performance targeted at external users such as shareholders

Double-entry bookkeeping

Profit and loss account, balance sheet and cash flow statement

Management Accounting

Internal needs of business

Unlike financial accounting, not required by law

Management accounting can be split into cost accounting and decision-making

What are the Reports produced by each area?

Management AccountingInternal Reports

Financial AccountingExternal Reports

Management

LendersInvestors

Suppliers/CustomersEmployees

CompetitorsGovernment Agencies

The Press

What Are Accounting Reports Used For?

Used by management for

• planning• implementing plans• controlling costs• making decisions

Used by external parties who have an economic interest in the firm.

• Balance sheet• Income statement• Statement of cash flows

A regulatory body formed in 1969 under Sec 23 Accountant Act 1967.Functions :

• To oversee development and growth of the accounting bodies.

• Sole body where the accountants must register.

• Conducts training and courses for members to ensure they remain with developments in the profession.

• http://www.mia.org.my

MIA - Malaysian Institute of Accountants

• Established in 1965 under Company Act 1965.• Sole professional accounting body in Malaysia.• Function :

• Provides training and sets professional examinations.

• To become a member :• must pass all the examinations set by the body.• has relevant working experiences.• (http://www.micpa.com.my)

MICPA

What is a CPA?

CPA: Certified Public Accountant

• Has taken a minimum number of college-level accounting classes.

• Has passed the exam administered by the MICPA.• Has met other requirements set by his/her state.

MICPA: Malaysian Institute of Certified Public Accountants

• The national organization of CPAs in the Malaysia.• Not a government agency.

• A statutory body established under the Financial Reporting Act 1997.

• Functions :• To issue accounting standards.• To issue statements of principles for financial

reporting.• To review or to adopt existing accounting standards.• To issue technical pronouncements.• To develop conceptual framework.• To change the structure or contents of proposed

accounting standards.• (http://www.masb.org.my)

MASB

ACCOUNTING STANDARDS, PRINCIPLES, CONCEPTS AND CONVENTIONS.

Accounting StandardAccounting Standard is a set of rules to guide the application of accounting principles in a specific situation while preparing the financial statement.

Purpose:1. A guideline in preparing the

financial statements.2. To improve the quality of

financial reporting3. Define and explain the concept

of reporting entity; which should be reported and which is not.

4. Identifying the common information needs of the various users of financial reports.

5. Determine a qualitative characteristics of financial information.

The Development of Accounting Standard and Bodies Involved

Refer forward to MASB Standards figure 2 pg 10. (para 21 – 25):

Identification and review of emerging issues-MASB initiates project

Fact Finding – identification and discussion ofBy WG appointed by MASB. Discussion paperprepared if deemed necessary

Consideration of draft Discussion Submission of draft MASB ED

paper by MASB to FRF for review (14-days period)

Refinement of draft Discussion Commentspaper by MASB

Discussion paper issued General distribution & media released

for comment

Analysis of comments & development ofComments

Draft statement of Principles (DSOP) by WG

Consideration of DSOP by MSAB Submission of DSOP to FRF

review (14 days period)

Refinement of DSOP by MASBComments

DSOP issued for comment General distribution & media released

Analysis of comments and developmentComments

ED by WG

Same due process for consideration ofMASB Exposure Draft is followed

MASB Standard approved for publication

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OVERALL CONSIDERATION IN PREPARING FINANCIAL STATEMENT:

1. Fair presentation and compliance with MASB Standards.- Fair presentation – presentation fairly the financial position, performance and cash flows of an enterprise by application of appropriate MASB Standards.- Compliance with MASB – comply with all the MASB Standard and other technical pronouncements issued by MASB.- If departure from requirements to achieve fair presentation, an enterprise should disclose the four reasons outlined by MASB (refer MASB 1 page 7 para 14).

a) that management has concluded that the FS fairly present the enterprise’s financial position, financial performance and cash flows;

b) that it has complied in all material respects with applicable MASB Standards except that it has departed from a Standard in order to achieve a fair presentation;c) the Standard from which the enterprise has departed, the nature of departure, including the treatment that the Standard would require, the reason why the treatment would misleading in the circumstances and the treatment adopted; andd) the financial impact of the departure on the enterprise’s net profit or loss, assets, liabilities, equity and cash flows for each period presented.

2. Accounting Policies

- Management should select and apply an enterprise’s accounting policies so that it’s comply with MASB Standards.- Definition:

Accounting policies are the specific principles, bases, convention, rules and practices adopted by the enterprise in preparing financial statements.

If there is no specific requirement management should develop policies to ensure the financial statement is;

a) Relevantb) Reliable – represent

faithfully, neutral, free of bias, prudent and complete.

Conventions, concepts & principles

Conventions are derived from theories and accounting practices at some point in time. On the other hand, procedures are practices to be followed in an accounting processing activity.

Concepts are assumptions in accounting, which cover several situations in a wider scope. On the other hand, principles are more like rules that relate to a certain topic.

Concepts …..Entity Concept

a. Each and every economic entity stands apart from other organizations and individuals as a separate economic unit.

b. Preparation of financial statements for each business entity must be made so as not to include those transactions that do not belong to the entity.

Going Concern Concepta. Based upon the notion that businesses today are formed

without deciding as to the particular time it will cease.b. The accounting records are prepared with the assumption

that there are no signs or indication that the entity will cease operation in the foreseeable future.

c. This concept gives priority to the use of historical cost in the preparation of financial statements.

The Stable-Monetary-Unit Concepta. Unit of measure commonly used and in

Malaysia, the currency used is ringgit and sen.

b. By using ringgit as a medium of exchange the users of financial statements are able to determine the performance and financial position of a company.

c. Financial statements are still prepared based upon the concept that the value of ringgit is stable and any changes in the value of ringgit is assumed insignificant.

The Accounting Period Concepta. In accounting the assumption is that an entity has

a life span that cannot be determined unless there are clear indications that the entity will not be operating in the foreseeable future.

b. In the interest of producing accounting information, which is timely and in order to measure an entity’s

performance it is thus necessary for the measurement to be done within fairly rigid specified periods of time, usually a year.

Principles……..Disclosure principle

a. This principle requires all material information to be disclosed or published.

Materiality principlea. Places importance on that information which will affect one’s

ability in making decisions.b. Information, which will affect one’s ability in making decision,

is known as material information.c. The materiality level really depends on judgment and not on

any fixed rules.d. The general guideline on materiality is that if an item is

important enough in terms of decision-making then it is to be considered material.

Objectivity principlea. This principle places importance in disclosing

objective information in the financial statements. Objective information means information, which is true and can be verified by another party.

Cost principlea. According to this principle, assets, which are

acquired by a business, must be recorded at the price paid in the transaction. Even though the market value or the economic value of the asset, which is in a business, fluctuates but the value that is recorded remains unchanged.

b. The value reflected in the balance sheet is not current value.

Consistency principlea. This principle requires each entity to use the same

accounting methods over consecutive time periodsi.e. with no changes from year to year.

Conservatism principlea. In valuing assets such as debts and inventory the

lower cost must be opted for.b. Must not overstate profits or assets.

Matching principlea. Expenses of a business must be recognized when

the revenue related to the said expense is recognized.

Accrual Basis of Accounting

transaction and events are recognized when they occurred (not based on cash received or paid) recorded in the accounting record and reported in financial statements of the period to which the transactions are related.Expenses are recognized on direct association basis between cost and income (matching).

Identify the accounting concepts /conventions/principles for each situation:

a. Farhan owns a small business in Shah Alam. He prepared the accounts of the business showing profit of RM25,000. With this situation, he has no intention to sell off the business.b. Farhan only takes into account all the transaction that relate to his business, ignoring transaction made for himself.c. Farhan’s business made credit sales to Irfan Bhd amounted RM7,000 in July 1997. Irfan Bhd only paid RM3,000 in September that year; the balance will be paid early next year. Farhan still takes into account the RM4,000.