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ACT 3127: ADVANCED FINANCIAL REPORTING II

ACT 3127: ADVANCED FINANCIAL REPORTING II. INTRODUCTION. COURSE NAME : ADVANCED FINANCIAL ACCCOUNTING II COURSE CODE : ACT 3127 CREDIT HOURS : 3 (3+0) PREREQUISITE : ACT 3126 LECTURE HOURS : 3 HOURS LECTURE PER WEEK

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ACT 3127: ADVANCED FINANCIAL REPORTING II

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  1. ACT 3127: ADVANCED FINANCIAL REPORTING II INTRODUCTION

  2. COURSE NAME: ADVANCED FINANCIAL ACCCOUNTING II • COURSE CODE: ACT 3127 • CREDIT HOURS: 3 (3+0) • PREREQUISITE: ACT 3126 • LECTURE HOURS: 3 HOURS LECTURE PER WEEK • CONSULTATION HOURS: Friday 10am-12p.m. • EMAIL: mohdsaatn@econ.upm.edu.my • Office Tel.: 89467786 • Lecturer: Dr. Nur Ashikin Mohd Saat • Learning Outcomes • At the end of this course, students should be able to: • Prepare group accounts and consolidated financial statements for a complex group structure in accordance with the framework of financial reporting requirements (C3, P4) • Make decisions on the optimum accounting treatments and account for advanced issues related to assets, liability, equity, income and expenses in accordance with the framework of financial reporting requirements (C6, A3) • Prepare group reports on certain topics by working in teams within a given time period. • Synopsis • This course examines advanced financial reporting of the consolidation of accounts under more complex group structure including the disposal of subsidiaries. The course also addresses the issues of deferred taxation, the calculation of earnings per share and the requirements for both interim and segmental reporting. COURSE OUTLINES

  3. COURSE CONTENTS (1) ADVANCED CONSOLIDATION (CO ACT 1965, FRS 3, 127 & RELEVANT FRS) • Complex Group Structure • Multiple Direct Subsidiaries • Indirect Subsidiaries • Piecemeal Acquisitions • Disposal of Subsidiaries and Associates (2) ACCOUNTING & REPORTING FOR FINANCIAL INSTRUMENTS (FRS 132, 139) • Definition • Presentation & Disclosure • Recognition & Measurement (3) EARNINGS PER SHARE (EPS) – FRS 133 • Basic EPS • Diluted EPS • Presentation & Disclosure (4) DEFERRED TAXATION - FRS112 • Concepts • Basis of Provisions • Methods of Calculation • Presentation & Disclosure

  4. Continue… (5) SHARE-BASED PAYMENTS – FRS 2 • Concepts and Definition • Types of Transactions • Presentation & Disclosure (6) ASSETS IMPAIRMENT, HELD FOR SALE & DISCONTINUED OPERATIONS – (FRS 136, 5) • Impairment of Assets • Measurement (Recoverable Amount) • Cash Generating Unit & Goodwill • Long-lived Assets Held for Sale • Discontinued Operations (7) SEGMENTAL REPORTING / OPERATING SEGMENTS (FRS 8) • Concepts, Issues & Definition • Business & Geographical Segments • Presentation & Disclosure

  5. Assessment and References Mid Term Exams: Wk 5 (3/8/09; 8-10 a.m ; Venue KIV) 25% Group assignment: Wk 3 – Wk 12 (20/ 7/09 - 7/10/09) 25% Final exam: Wk 15 -17; Date to be announced 50% 100% References: (1) Companies Act 1965 and All Approved Accounting Standards, Issued by the Malaysian Accounting Standards Board (MASB), including exposure drafts*. (2) Jane Lazar, Huang Ching Choo & Roshayani Arshad, (2008), Financial Reporting Standards for Malaysia, 2nd. Ed, McGraw Hill. (3) Jane Lazar & Tan Lay Leng, (2007), Company Accounts and Reporting, 6th. Ed., Prentice Hall (4) Ng Eng Juan, (2006), A Practical Guide to Financial Reporting Standards(Malaysia), Kuala Lumpur: CCH Asia. (5) Tan Liong Tong, (2008), Consolidated Financial Statements, 5th Ed., Kuala Lumpur: PAAC. Notes *Downloadable at: http://www.ssm.com.my/en/acts/fscommand/a125.htm and http://www.masb.org.my/index.php?option=com_content&view=article&id=11&Itemid=14 Starting from January 2005, ALL standards issued by MASB are called FRS and renumbered to match the number assigned by IAS such IAS 1 is referred as FRS 101 by MASB. New Standards produced by IASB were identified as IFRS 1, 2, 3 or referred by MASB as FRS 1, 2, 3.

  6. REVISION BUSINESS COMBINATION PARENT-SUBSIDIARY RELATIONSHIPS FINANCIAL REPORTING CONSOLIDATED FINANCIAL STATEMENT

  7. Identification of Subsidiary Companies Act 1965: Section 5 (1)Section 5(1)(a), X corp is deemed subsidiary of Y corp if (i)Y Controls the composition of BOD of X OR (ii)Y Controls > 50% of voting power in X OR (iii)Y holds > 50% of issued OSC in X HOWEVER, Companies Act 1965 Para 5(9) of 9th Schedule FURTHER STATED, PARENT CO produce CFS only for subsidiary arising from shareholding [Section 5(1)(a)(iii)].

  8. Continue….. (2)Section 5(1)(b), X is legally a subsidiary of Z corp, if X is a subsidiary of Y and Y is a subsidiary of Z. Example: Because of Y is subsidiary of Z, any subsidiary of Y is also subsidiary of Z Z (Parent/Holdings Co) 80% Y (Subsidiary) 60% X (Sub-subsidiary)

  9. Continue…. (3)Section 5(3)(b)(ii) – Any shares held by Y corp in X corp, shall be treated as held by Z corp ( Shares held by subsidiary treated as held by the Parent/Holdings company) Example: Z holds 70% interest in Y and 25% interest in X. Further, Y holds 27% interest in X. As a result, X is a subsidiary of Z, via holdings of 27% interest in X via Y and deemed to have in total 52% [27% +25%] interest in X. Z 25%70% X Y 27%

  10. Continue… FRS STIPULATIONS ON PARENT-SUB R/SHIP? FRS 127: Consolidated and Separate Financial Statements (i) Para 9- Parent/Holding prepares and presents consolidated fin stat (ii) Para 4 - Control: Power to govern financial and operating policies of an entity so as to benefit from its activities; FURTHER Para 13, Eventhough Parent > 50% voting power unless it can be Clearly demonstrated, such ownership not constitute control E.g: Govt. control co by virtue of holding of one “golden share” in co

  11. Continue Para 13 - If parent holds 50% or less voting power in the entity, control also exists if the parent has power: • Over > 50% of the voting rights of the entity by virtue of agreement with other investors; • To govern fin. & opertg policies of the entity under statue/agreement; • To appoint/remove majority of the BOD/ equivalent governing body, provided the BOD/body control the entity; • To cast majority of votes at meetings of BOD/ equivalent governing body, provided the BOD/body control the entity;

  12. Continue… Para 14 & 15: If the entity owns instruments that have potential if exercised/converted to give the entity voting power over fin. and opertg policies of another entity (potential voting rights, warrants, options and convertible securities). The existence & effect of potential voting rights exercisable/convertible should be considered in assessing status of subsidiary. WITHfurther consideration of Para 23: When potential voting rights exists, proportion of profit or loss and changes in equity allocated to parent and MI are determined based on present ownership interest – such do not reflect possible exercise or conversion of potential voting rights [See further FRS 3, Para 19]

  13. (1) WHO IS PARENT/HOLDING CO? (2) WHO PREPARE CONSOLIDATED FINANCIAL STATMENT? PARENT: CO WHICH HAS “CONTROL” OVER OTHER CO [ Refer CO ACTS 1965, SECTION 5 + 9th SCHEDULE; FRS 127] GROUP : PARENT + ALL ITS SUBSIDIARIES CFS PREPARATION: • Companies Act 1965 & FRS – PARENT CO REQUIRED to prepare 2 sets of financial statements: WHAT ARE THEY? (1) Consolidated Fin. Stat. of the Group (To show the parent and subsidiary as one entity) (a) Consolidated Bal. Sheet, (b) Consolidated Income Stat., (c) Consolidated Cash Flow Stat. and (d) Consolidated Stat of Changes in Equity (2) Parent Fin. Stat. (To show the parent as separate entity)

  14. CONTINUE ….. PARENT CO EXEMPTED FROM PREPARING CFS WHEN IT IS : (1) WHOLLY-OWNED SUBSIDIARY of another parent incorporated in Malaysia [Companies Act 1965: 9th Schedule Para 4 (a); FRS 127, Para 10 (a)] Example: [ B Bhd Parent of C Bhd and wholly-owned subsidiary of A Bhd. Hence A prepares CFS ] (2) Parent Co. - a partially owned subsidiary, INFORMED owners DONT object no CFS (3) Parent’s debt or equity instruments NOT traded in public market FRS 127 (not a listed entity) Para 10(a) (4) Parent co NOT in process filing Fin Stat with Sec Com or other regulatory organizations to issue any class of instruments in a public market (5) The ultimate / intermediate parent incorporated in Malaysia produces CFS. s A B C 100% 90%

  15. WHY DO WE NEED TO ACCOUNT BOTH THE REQUIREMENT OF CO ACT AND FRS WHEN PREPARING & PRESENTING FINL REPORT? FRS STIPULATIONS OVERIDE COMPANIES ACT’S [CO ACTS 1965, Section 166A, Para 6]

  16. APPLICATION OF PURCHASE METHOD FRS 3: Para16 • Acquirer • Cost of Business Combination • At date of Acquisition, (b) + FV Identifiable assets and Liabilities & Contingent Liabilities Assumed Para 17-23: ACQUIRER • Entity obtained Ctrl from bus comb Para 24-35: Cost of Bus Comb • FV at acq date of Assets, Liabilities incurred and assumed, Equity instruments issued by Acquirer to ctrl acquiree • Cost Directly Attributable to Bus Comb.

  17. Continue…. Para 36-60 – At Acquisition date, Allocate Cost of Business Comb to Acquiree’s FV Identifiable Assets, Liabilities and Contingent Liabilities Assumed [FRS 137 2004 (Restructuring) + FRS 1372006]

  18. Purchase Method For CFS • FIN STATS of PARENT & SUBSIDIARY Combined on Line by Line basis like items (1) Consolidated Balance Sheet (CBS) +Parent’s & Sub’s Assets, Liab, Equity, (2)Consolidated Income Statement (CIS) +Parent’s and Sub’s Revenue and Expenses (3) Investment Account EliminatedAgainst Pre-Acq Equity to avoid double counting; Goodwill Accounted (4) < 100% Acq , Record Minority Interest of Profit & Loss (in CIS) and Equity Interest (CBS) (5) Intra group/Inter Comps Transactions Eliminated - Profit/Loss arising UNREALISED from GROUP view

  19. What is Goodwill? • FRS 3: Para 51-57 • Excess = Cost of Business Comb – Net FV [IA-(L+CL)] • Recognise as an ASSET at date of acquisition-INITIAL RECOGNITION • Payment made by Acquirer in Anticipation of Future Economic Benefits from assets not capable of individually identified and separately recognised • Following Initial Recog, Cost – Impairment Loss

  20. Continue…… If FV of Net [IA-(L+CL)] > Cost of Bus Comb? Very rare occasion • Reassess the Identification and Measurement of the FV of Acquiree’s Net Asssets and Cost of Bus Comb • Following (a) (i) Recognise the excess (Negative goodwill) immediately in P&L on acq. date and attr. to the acquirer only (errors, possible future cost assoc. with CL, specific actg std req for actg treatment of IA) (See Also Para 81) OR (ii) Bargain Purchase – Gain recognised P&L –IFRS 3

  21. Goodwill Calculation: FRS 3 Para 51-57 Cost of Investment : Aggregate of - Cash FV of consideration (i.e. Assets given, equity or debt instruments issued) XX Incidental Cost incurred Less: Net FV of Identifiable Assets, Liabilities and Contingent Liabilities (XX) Goodwill amount as at acquisition dateXX Identifiable Assets : FRS 3 Para 37 (a) and (c), Para 41-46 (i) Asset other than Intangible: (1) Probable that future economic benefits flow to the acquirer + its FV can be measured reliably; (2) FRS 5 Non Assets Held for Sale - Value Recognised = FV LESS Selling Cost (ii) Intangibles: Their FV can be measured reliably (FRS 138 Intangible Assets) Identifiable Liabilities: FRS 3 Para 37 (b) and (c), Para 47-50 (i) Liability other than Intangible: Probable that outflow of resources economic benefits will be required to settle obligation + its FV can be measured reliably (ii) Contingent liability: Its FV can be measured reliably

  22. Take Home Notes • Who is SUBSIDIARY CO? • Who is PARENT CO - When prepares CFS • 2 SETS of FINL STATS prepared by PARENT Co? - CFS - Parent Fin Stat • PURCHASE METHOD: -Consolidation for Bus Comb: Parent-SUB - Control Acquired? Interest in Net Assets of Sub - Actg Treatment: *Line by line basis for like items * Goodwill * MI *Relevant Adjustments, Revaluation

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