The Malaysian Conceptual Framework: Conventional Accounting

1. The Malaysian Conceptual Framework: Conventional Accounting

2. Learning outcomes • Understand the need for a conceptual framework (CF) of accounting • Explain the influences that impacted the development of CF • Understand the issues faced by the MASB in adopting an international accounting framework • Understand the components of CF • Explain the advantages of CF • Implication of IFRS convergence

3. Introduction • Users of financial statements need relevant and reliable information • To provide such information, the profession has developed a set of principles and guidelines called Conceptual Framework • The framework is to be the foundation for building a set of coherent accounting standards and rules • Also to be a reference of basic accounting theory for solving emerging practical problems of reporting

4. Evolution of the CF • Need for theory as the objective of accounting expanded (history to present) • To communicate information • Diverse audience – who? • Selection & measurement of information • ‘why we do the way we do it?’ • ‘why it is accounted’ • To keep record • Concentrate on ‘how to do it’

5. Evolution of the CF • Government / government agencies urge the professional accountants to codify the regular/normal modes of FR GAAP emerged • To remove inconsistencies & conflicts • To encourage improvement in FR

6. Evolution of the CF • Std setting bodies: • Independent • Widely representative • authority Standards of FR recommendations

7. Conceptual Framework A devise to provide the accounting fraternity boundaries within which accountants can operate. A structured theory of accounting to provide guidance to form a set of general rules that could improve standard setting and therefore improve financial reporting (FR).

8. CONCEPTUAL FRAMEWORK • Definition of conceptual framework: “a constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribe the nature, function, and limits of financial accounting and reporting” • Objectives means identify goals and purposes of accounting • Fundamentals mean the underlying concepts of accounting, concepts that guide the selection of events to be accounted for, the measurement of those events, and the means of summarizing and communicating them to interested parties.

9. Influences on the CF • US’s FASB concepts statements • Model of CF • Six Statements of FA issued from 1978 to 1985 • Objective for decision usefulness and importance of investors interests • Shift from revenue-expense view to asset-liability view.

10. Influences on the CF • Capital market • To make a framework accepted at least for a significant period of time – conventional boundaries are needed concerning users, their utilities, decision functions and actions. • Decision needs of capital market participants • FR are intended to be useful • CF focus on the use of business financial reports for investment & credit decisions

11. Influences on the CF • Efficient market literature • EMH – accounting information & share price relationship • Concerned with the role of FR to facilitate investor decision-making • Agency Theorists & Positive Acctg Theorists • AT- demand for actg info – the principal can’t observe directly the activities of the agent • Agent is provided with incentive to manage the firms in the best interest of principal • PAT explains management behaviour in their attempts to present FS in the best way of stewardship concept.

12. IASB CF • Obj - To harmonize the actg principle use by organisations for FR • July 1989- issue the Framework for the Preparation & Presentation of Financial Statements (PPFS) • IASB CF Sets out the concepts to aid PPFS for external users • Among its projects - Explores the definitions of the elements in the FS: A, L, Eq, Rev, exp, Gains & losses

13. Historical Development of Conceptual Framework in Malaysia • Requirements of “true and fair view” under the Companies Act 1965 • In July 1998, the MASB issued a discussion paper MASB DP1, Framework for the Preparation and Presentation of Financial Statements • This represents a first attempt by Malaysia to set a foundation for the manner in which financial statements should be prepared and presented • It contains guidance that may influence the direction of financial reporting practices in Malaysia

14. The Malaysian CF • Proposed by MASB • The main issues confronted by MASB • Selection of preferred accounting treatments • Different in environment – developed vs developing countries • Openness of the economy • Level of development of capital market • Objective of FR • National development in tandem with international development • Any deviation fr internationally accepted practice can only be allowed if the exception can be justified. • Exemption fr complying with specific actg std • Exempt enterprises • differential reporting • Acknowledge the applications of concepts & ideologies congruent with the Islamic perspectives

15. CF at a glance • CF begins by exploring objectives of FS • Assessment of management stewardship • Narrow stewardship responsibility to accountability concepts • Based on AT & PAT • Decision usefulness • Who are the users? • What financial information is relevant to their decision? • MASB CF = IASB CF – concentrates on the use of financial reports for investment & credit decisions • Primacy to the decision needs of capital market participants • Promotion of social welfare • How feasible? - Difficult to measure cost & benefits • If social welfare consideration are effective guidance in legislative and government actions – this is a signal to guide accounting stds • FS be fairly presented – implies that social welfare is served by unbiased financial disclosure

16. Users & their information needs • Information to help making decision- buy, hold / sell • Assess the firm’s ability to pay dividends Investor • Firm’s stability & profitability • Firm’s ability to provide remuneration, retirement benefits & employment opportunities Employees Lenders • Firm’s ability to pay loan

17. Users & their information needs Suppliers & other Trade creditors Firm’s ability to pay amounts owing when due Customers • Continuation of the firm • Allocation of resources • Information to regulate the activities of the firms • Determine taxation policies • Basis for national income & similar statistics Government & its agencies

18. Users & their information needs • Contribution to local economy: • Employment • Patronage of local suppliers • Range of activities • Trend & recent developments Public

19. Responsibility of the reporting firm Biosphere/nature General society Affected society Customers Creditors / debtors Employees Shareholders

20. Responsibility of the reporting firm • Dilemma: • The narrower the basic premises & objectives, the tighter & more reliable that model will be • But then it suffers from narrowness in applicability • When one broadens the premises & objectives, then there is a loss in general applicability • The model become less useful in individual decision making

21. Responsibility of the reporting firm • No information model can ever be developed that would totally responsive • Necessary to have random agreements about: • users, • their utilities, decision functions & actions they need to make • What are the users want? Quality (relevance, reliable, understandable & comparable)

22. Components of Conceptual Framework • A statement of objectives of financial reporting • A specification of qualities of financial information to be disclosed in the financial statements • A set of definitions of the elements of financial statements • A specification of the criteria for deciding when to recognize the various elements of financial statements • A set of measurements rules • A set of guidelines for presentations and disclosure of information that is useful in fulfilling objectives of financial reporting • Elements of financial statements

23. Qualitative Characteristics Representational faithfulness

24. Underlying assumptions & influences

25. Elements of FS Primary purpose of profit-oriented entity-create wealth Wealth in what form? Cash equivalent – focus of accounting recognition, measurement & disclosure

26. Advantages of Conceptual Framework • Guide the FASB in establishing accounting standards • Act as guidance to the standard setting body to be in better position in choosing the alternatives methods available • Provide a frame of reference for resolving accounting questions in the absence of specific promulgated standards • Improve communication among accountants and standard setting bodies and its constituents • Determine the bounds of judgement in preparing financial statements by prescribing the nature, functions and limits of financial accounting and reporting

27. Advantages of Conceptual Framework • Enhance comparability of financial statements by decreasing the number of alternative accounting methods • If standards were derived from a coherent and plausible body of concepts, this will reduce the accountant’s vulnerability to political pressures • Reporting requirement will be more consistent and logical because they will stem from an orderly set of concepts • The need for specific accounting standards will be reduced • The setting requirements will be more economical because issues should not be re-debated from different viewpoints

28. Advantages of Conceptual Framework • Enhance the credibility of financial reporting and in turn help to reduce accounting’s vulnerability to political pressure • Increase users confident and understanding of financial reporting • Provide a measure or bench-mark against which general and specific accounting can be tested in an objective sense • Provide a basis of reason, direction and a basis of appeal in the resolution of disputes • Provide a consistence approach in the making of decisions concerning the choice of accounting practices, methods and in assisting the setting of accounting standards

29. LATEST DEVELOPMENT OF IFRS • Financial Reporting Foundation (FRF) and the MASB have announced and expect full convergence with the IFRSs of the International Accounting Standards Board (IASB) by 1 January 2012 • By 1 January 2012, there will be 63 IFRS-complaint Financial Reporting Standards (37 MFRSs and 26 IC Interpretations).

30. In May 2011, the IASB simultaneously issued six IFRSs, five of which relate to consolidation and one on fair value measurement. These are: 1. IFRS 10, Consolidated Financial Statements; 2. IFRS 11, Joint Arrangements; 3. IFRS 12, Disclosures of Interests in Other Entities; 4. IFRS 13, Fair Value Measurement; 5. IAS 27(r), Separate Financial Statements; 6. IAS 28(r), Investments in Associates and Joint Ventures.

31. Implication of IFRS Convergence on Malaysia ?