ACT 4191 ADOPTING AN ACCOUNTING PERSPECTIVES

1. ACT 4191ADOPTING AN ACCOUNTING PERSPECTIVES GROUP 2 Afizah Binti Razif 123136 Nur Azureen Binti Zainal125021 Siti Nor Aisah Sarbini 125065 Ernie Suriati Mokhtar 132004

2. DEFINITIONS • Accounting • AICPA; “the art of recording, classifying, and summarizing in a significant manner and in term of money, transactions, and events which are, in part at least, of financial character, and interpreting the result thereof.” • AAA (1966) ; “The process of identifying, measuring, and communicating economic information to permit informed judgement and decision by users of information”

3. DEFINITIONS • Accounting theory ‘logical reasoning in the form of a set of broad principles that providing a general framework of reference by which accounting practice can be evaluated and guiding the development of new practices and procedure. It logically derived description, explanation, prediction or prescription of accounting practices’

4. ACCOUNTING VIEWPOINTS • Existence is due to commercial and transaction based activities of economies and individual entities that make up the markets and private also public sectors of a defined geographical boundary • Factors • history and culture, societal values, and the nature of economic activities • objective of those who prepare, interpret, and apply accounting information • influenced by the numerous potential users of accounting information which have variety points of perspectives

5. ACCOUNTING VIEWPOINTS • The established and the main objective of accounting are measurement and reporting of the economic activities of the entity • The organisations nowadays has considering more than the economic transactions and perceived value of assets and liabilities thus this will results to significant changes on reporting for both private and public sectors.

6. THE BOUNDARY ASSUMPTION • Accounting suffered from a common factor which is; “a set of assumption or principles about the boundaries of entity are required” • Boundaries; “the activities to be measured and reported and the accounting or measurement assumptions adopted to report information within the constraints of accepted boundaries”

7. THE BOUNDARY ASSUMPTION • Hines, in 1980s • “accounting perspectives are basically a process of creating a reality that suits the views of their proponents. Because accounting is a human construct and requires human interpretations, all manner of perspectives, assumption and behaviour drive the alternative viewpoints” • Dr Ian Ball,1988 • argued that despites the importance of the reporting entity concept there have been a limited debate concerning the definitions and characteristics of reporting entities • also proposed a universal definition of the reporting entity in which his main concerned was the boundaries of identified reporting entities may be defined by reference to ownership or control, where controls relates to the ‘ability to directly deploy scarce resource’.

8. THE BOUNDARYASSUMPTION • SAC 1 Definition of Reporting Entity, 1990 • defines reporting entities as “all entities in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information which will be useful for them in making and evaluating decisions about the allocation of scarce resource” Even within the definitions given by both Ball and SAC 1 or others adopted by the companies codes of countries and states, organizations often redefines the boundaries in making it suitable with the organizational or external pressures.

9. THE BOUNDARY ASSUMPTION • Growing support for an extension of reporting boundaries to incorporate the information needs of a broad range of stakeholders, not only for financial information, but also for qualitative information concerning the impact of an entity’s activities on the community and environment • Leads to ‘triple bottom-line reporting’ - developed by John Elkington (1999)

10. PROPRIETARY THEORY “purpose of the firm, nature of capital and the meaning of the accounts from the owner’s viewpoint.” The proprietor, the owner, is the centre of attention in which all accounting concepts, procedures, and rules are formulated with the owner’s interest in mind – to increase their wealth.

11. PROPRIETARY THEORY • Goldberg; • argues that there are instances where the double-entry system is used and the measurement of profit from an owner’s perspective is not the underlying objective of accounting and reporting • such examples ‘do not necessarily or completely vitiate Professor Littleton’s point of view, they do raise doubt as to whether the most significant feature of accounting is the emphasis upon proprietorship’

12. PROPRIETARY THEORY • Balance Sheet accounts • A – L = P • P, proprietorship, represents the net worth of the owner in the business • Sprague states; • “The balance sheet of proprietorship is a summing-up at some particular time of all the elements which constitute the wealth of some person or collection of persons...the whole purpose of the business struggle is increase of wealth, that is, increase of proprietorship”

13. PROPRIETARY THEORY • Income • Vatter explains: • “The theory of double-entry is based on the idea that expense and revenue accounts have the same algebraic characteristics as “net worth”, in which accounts tending to increase net worth are increased by credits, accounts tending to decrease net worth are handled in reverse order” • Profit the increase in the wealth of the owner from business operation during a given period

14. PROPRIETARY THEORY • Effect on Practice • Dividends are considered a distribution of profits rather than expenses because they are payments to owners • Consolidating financial statement  the parent company method is based on the proprietary theory where parent company is seen as ‘owning’ the subsidiary • Financial Capital Concept • financial capital emphasises the financial investment of the owner • physical capital focuses on the firm’s ability to maintain its physical operating level without any regard to ownership claims

15. Limitations By law, the corporation is a separate entity from the owners and it has its own rights - takes possession of the asset and assumes the obligations of the business, not the shareholder PROPRIETARY THEORY

16. ENTITY THEORY Separate entity between business and the owner Martin outlined the two related assumptions: - separation - viewpoint The entity theory is suitable in any kind of business type Paton argues “the entity is not a person and cannot act of its own accord” Triple bottom-line approach

17. TWO VIEWS OF ENTITY The traditional version: - the business firm operates for the benefit of the equity holders - equity holders as ‘associates’ in business The newer interpretation: -sees the entity as in business for itself and interested in its own survival - equity holders as ‘outsiders’ in business

18. BALANCE SHEET The proprietary theory vs The entity theory The assets belong to the firm and the liabilities are the obligations of the firm, not the owners. Shareholders have no claim to any particular assets and dividends

19. PROFIT The income statement is more relevant rather than the balance sheet Stressed for two reasons: - equity holders are mainly interested in profit - the firm’s existence is to make a profit Income - the inflow of assets & creates more assets Expense - the cost of the assets and other services & reduce assets. Interest charges, dividends and income tax are expenses of the business No double taxation

20. EFFECT ON PRACTICE Changes in the value of liabilities would not be regarded as a holding gain/loss, only changes in the cost of assets Can be used in consolidating financial statements Outside equity interests will be treated no differently from holding company interest in subsidiary.

21. PHYSICAL CAPITAL CONCEPT Focuses on the capability of the firm to generate goods and services. Profit is earned only after the firm’s ability to replace its opening assets has been maintained

22. FUND THEORY/CASH FLOWS • Focuses on an impersonal ‘fund’ rather than a personality • Liabilities represent future payments and not present claims on the assets • Owners’ equity, represents a final restriction on the assets and establishes the equality of assets and equities. • The balance sheet is considered an ‘inventory statement’ of assets and those restrictions applicable to the assets

23. Cont.. • Income represents an increase in assets in the fund • Expenses represent the discharge of services for designated purposes specified in the objective of the fund. • Information is reported in a way that users needs • Provides the frame of reference for government and not-for-profit organizations

24. Cont.. • Contributed to the underlying theoretical framework for the introduction of the cash flow statement • shows how funds were applied to generate alternative funds • It generally has two components: • source of funds • application of funds

25. COMMANDER THEORY • Notice to the function of control, which can only be exercised by people • Financial statements are reports by commanders to commanders • The balance sheet is a statement that shows the sources from which the commander has received resources and the applications of the resources • The income statement is an explanation of the results of activities in a given period initiated by the commander and his or her team

26. INVESTOR THEORY Staubus - accounting functions and financial statement should take the point of the view of investors Asset = Specific E + Residual E Liabilities + P. Share S/holder Equity

27. FUTURE CASH RECEIPT OF INVESTOR IS DEPEND ON The firm monetary capacity to disburse cash The management willingness to pay investor The legal priority of investor’s claims. S/ holder as investor has a little power to determine the company goal and move. S/ holder only can rely on the Financial Statement.

28. ENTERPRISE THEORY Suojanen-Enterprise as a social institution, any decision will affect the interested parties ; s/ holder, creditors, customer, government agencies and the public (society) Broader the Entity concept. Management also responsible for survival and growth, not only taking of s/ holders. It is about corporate socialresponsibility.

29. ENTERPRISE THEORY Value – added profits Implication Deprival value Concept The lower of The Higher of Replacement cost NPV NRV

30. VALUE – ADDED PROFITS As an output of the contribution to the society. Value added is a performance measure, a measure of a value or wealth created by the enterprise in a given period. Morley- Value added concept will becoming important because it reflect the social change.

31. But, how should the value- added be calculated? • Economist v/s Accountant • Not follow the GAAP. • Sales cannot show the value added- not entirely from the enterprise. • Depreciation is excluded. • Value-added Statement

32. IMPLICATION Become the forerunner of social accounting concept. If the government, labor, shareholder, creditors and management were concern about enterprise theory, so it will change dramatically the relationship of interactive parties.

33. DEPRIVAL VALUE CONCEPT Assets are valued at amount that represents the loss that might be expected to be incurred by an entity if that entity were deprived of the service potential or future economic benefits of those asset at reporting date. The lower of replacement cost and the higher of NPV or NRV.

34. DEPRIVAL VALUE CONCEPT • In most cases, use replacement cost as deprival value. • Use NPV if assets unintentionally to be sold or NRV for subsequent disposal of asset, which ever is higher. • More useful than historical cost.

35. THE REPORTING ENTITY CONCEPT A reporting Entity is defined in IFRS 3/ FRS 3 Business combination as: “An entity in making respect of which is reasonable to expect the existence of users who rely on the entity general purpose financial report for information that will be useful to them for making and evaluating decisions about the allocation of resources. A reporting entity can be single entity or a group comprising a parent and all its subsidiaries”.

36. A summary of all theories Table

37. PRACTICE IN MALAYSIA • Statutes • PRACTICE IN MALAYSIA Companies Act 1965 • Income Tax Act 1967 • Accounting and Regulatory Institutions: • a) MASB • b) MIA • c) MICPA • d) IASB • Approved Accounting Standards: • - FRS – Financial Reporting Standards.

38. ISSUE 1 • INCOME DISTRIBUTIONS FOR TWO HWANGDBS FUNDS • Published: 2008/01/10 New Strait Times • HWANGDBS Investment Management Bhd has declared interim and annual income distributions for two of its fixed income funds - the HwangDBS Select Bond Fund (SBoF) and HwangDBS Select Income Fund (SIF), respectively. • In a statement yesterday, HwangDBS said SBoF would get a gross interim income distribution of one sen for the financial year ending June 30, 2008. • “The distribution will translate into a 1.86 per cent return on the net asset value per unit (NAV/unit). Unit holders registered as at January 7, 2008 are eligible to receive the income allotment,” it said. • For SIF, it declared a final gross annual income distribution of two sen for the financial year ended December 31, 2007. • “The distribution translates into a 3.72 per cent return on the NAV/unit. All unit holdersregistered as at December 27, 2007 are eligible to receive the income allotment,” it said. — Bernama

39. Creditors and shareholders have a right to declare the dividend or the total of the asset at the end period. • Income statement is more relevant rather than the balance sheet because the shareholder is interested to know Company profit. • This amount indicates the result of their investment for the period as dividend. • They reduce the amount of equity the entity has in it.

40. ISSUE 2 PETRONAS GAS Q2 PRE-TAX PROFIT RISES TO RM780M THE INCREASE IS MAINLY DUE TO HIGHER REVENUE AND SHARE OF PROFIT FROM ASSOCIATE AND JOINTLY-CONTROLLED ENTITY, THE COMPANY SAYS Published: 2007/11/14 New Strait Times • PETRONAS Gas Bhd pre-tax profit for the second quarter ended November 30, 2007 rose to RM323.131 million from RM273.168 million in the corresponding period last year. • In a statement to Bursa Malaysia, Petronas Gas said the increase was mainly due to higher revenue and share of profit from associate and jointly-controlled entity. • The revenue surged to RM780.129 million from RM749.371 million previously due to higher throughput revenue and higher utilities sales. • The company said revenue from utilities business were expected to increase as a result of higher sales. • “Revenue prospect for gas processing and transmission business will continue to be dependent on upstream gas production levels. • “However, the operating costs are expected to register an increase which will impact overall performance for the year,” it said. — Bernama

41. no double taxation because the company separate entity from shareholders. • Company should pay income tax on its own profits. • Income Tax Act 1967

42. ISSUE 3 03 Januari, 2008 17:19 PM ( Utusan Melayu) Juruaudit: Penyata Diaudit Megan Media Akan Siap Menjelang Akhir Januari • KUALA LUMPUR, 3 Jan (Bernama) -- Penyata kewangan diaudit Megan Media Holdings Bhd, yang melaporkan penipuan perakaunan dalam anak syarikatnya, dijangka siap menjelang akhir bulan ini, kata juru audit barunya, SJ Grant Thornton (SJGT) hari ini.Rakan kongsi pengurusan SJGT Datuk N.K. Jasani berkata syarikat itu dijangka menghabiskan pengauditannya ke atas laporan diaudit Megan Media menjelang akhir bulan ini. • "Kemudian, ia terserah kepada pengarah syarikat untuk menimbangkan akaun diaudit kami. Bila mereka fikir mereka bersedia, mereka boleh memanggil mesyuarat agung tahunan untuk meluluskan akaun diaudit itu," katanya kepada pemberita di sini hari ini, • Jasani berkata pengauditan SJGT itu dilaksanakan dengan sewajarnya."Tetapi, cabaran kami ialah memastikan pengurusan telah menyelesaikan semua transaksi, jika tidak kami terpaksa menjelaskannya di dalam laporan kami.”Megan Media, pembuat cakera, awal minggu ini mengumumkan bahawa ia gagal mengemukakan akaun diaudit tahunanya dan laporan tahunan bagi tahun kewangan berakhir 30 April, 2007 kepada Bursa Malaysia Securities Bhd bagi siaran umum di dalam jangka masaditetapkan. • Syarikat itu mengaitkan kelewatannya mengemukakan laporan akaun yang diaudit dan laporan tahunan, masing-masing pada 31 Ogos, 2007 dan 31 Oktober, 2007 kerana peletakan jawatan juruaudit sebelumnya, KPMG. • Berikutan kegagalannya mengemukakan laporannya mengikut masa, sahamnya digantung pada 3 Disember, 2007. Ia kali akhir diniagakan pada harga empat sen.

43. Commander Theory & The Reporting Entity Concept. • Commander Theory - accounting records are kept, financial statements are prepared and reports are analyzed by people on behalf of people for the benefit of people. • The reporting entity concept must be applied to prepare the financial statement or Company Audit Report. • In Malaysia, the company must be required to comply with more regulations and rules in the presentation of financial statements. • Section 167, Companies Act 1965 - as to the accounting records to be kept and the annual reports and financial statements prepared by the directors and managers.

44. Section 169, Companies Act 1965 - requires the audited profit and loss account and the balance sheet of the company prepared every calendar year. • The Ninth Schedule of the Companies Act, 1965 - lists out the information to be disclosed in the financial statement. • Section 166 (A) - requires companies to comply with the accounting standards that have been adopted in Malaysia. • Financial Reporting Standard (FRS) is must be comply effective as at 1 January 2006.

45. ISSUE 4 PRIME UTILITIES SUMMONED FOR DEFAULTS BY SUBSIDIARIES PRIME UTILITIES' UNITS, LBCN DEVELOPMENT AND VEGA BUILDERS, FAILED TO SETTLE MONEY OWED TO MAYBANK By Sharen Kaur Published: 2007/12/14 • PROPERTY developer Prime Utilities Bhd (PUB) said it has been slapped with two summons from Malayan Banking Bhd (Maybank) for claims made by its subsidiary companies. • PUB said the first is for its wholly-owned unit LBCN Development Sdn Bhd for failing to settle RM65 million in principal and interest collectively. • The company said LBCN owes Maybank RM32.1 million in principal and interest, and a further interest on RM26.74 million and RM5.35 million at a rate of 2.75 per cent per annum above base lending rate, on quarterly basis from April 9 2007 up to full settlement. • "The solicitors of PUB are in the midst of taking necessary steps to defend the claim. LBCN will also be negotiating with Maybank to resolve the matter amicably," the company said in a statement issued to Bursa Malaysia Bhd yesterday. • PUB said it will not incur any expected losses from the above summon as the amount has been reflected in the latest announced quarterly financial results. • The second summon was served on PUB, being a corporate guarantor for loans granted to its former subsidiary, Vega Builders Sdn Bhd, prior to its disposal. • The claim is for RM79 million in principal and interest. • "We are not able to determine the exact quantum as Vega, the principal borrower, is negotiating with Maybank for amicable settlement," PUB said. • The company added it was unable to determine the financial and operational impact and also the expected losses from the second summon at this point of time.

46. Companies Act, 1965 – being a separate legal entity, the Company has perpetual existence. • A Company is able to sue or be sued. • Hold a limited liability.

47. ISSUE 5 TA ENTERPRISE LOOKING TO BUY TECH FIRM THE COMPANY IS NOW IN THE FINAL STAGE OF THE ACQUISITION, SAYS ITS CHIEF EXECUTIVE OFFICER Published: 2007/11/23 • TA Enterprise Bhd is looking to acquire a local technology company within six months as part of its expansion programme, managing director and chief executive officer Datin Alicia Tiah said today. • “We are now in the final stage (of the acquisition) as we see the industry as very interesting. Technology will help to develop our group as it is a fast-growing business,” she told reporters after launching the “TA Community Care” programme here. • On the company’s plan to buy Vietnamese stockbroker company Orient Securities Co Ltd, Tiah said the acquisition is expected to be finalised by mid-January next year. • “We want to take as much as possible but like I said, they may not sell too much to us because it’s very valuable and we have no plan to control it. I think maybe at least 30 per cent (stake) but it all depends because we still have not finalised it,” she said. — Bernama

48. FRS 127 – Requires a parent which issues consolidated financial statement to consolidate all subsidiaries. • FRS 3 – provides that the acquirer in a business combination is the combining entity that obtains control of the other combining entities.

49. Conclusion • Theory is a set of ideas used to explain real world observation. • Accounting theory is a logical reasoning in the of broad principle that provides: • - General framework of reference by which accounting practice can be evaluated. • - Guide the development of new practice and procedures.

50. Continued….. • The different theories that have been advanced regarding the appropriate perspective to be adopting in accounting. • In order accounting to be used to its best advantage, it is important to develop theories that enable us to understand the roles of accounting. • There are different theories to describe, explain or predict how accounting is used in different context, and how it should be used.