Company’s Financial Statement (publish account)

1. Company’s Financial Statement(publish account) FRS101- Presentation of Financial Statement

2. Annual Report • Chairman’s statement • general statements or comments about several aspects of the company • not compulsory under Co Act 1965 • Directors’ report • compulsory statements by directors stating whether the income stetament and the balance sheet give true and fair view • Auditors’ report • opinion on whether the accounts reported by the company give true and fair view of the company • opinion on whether the necessary books as required by the Act has been kept and completed

3. Annual Report • Financial statements should includes (MASB 1): • Balance sheet • Income statement • Statement showing either • all changes in equity, or • changes in equity other than those arising from capital transactions with owners and distribution to owners • Cash flow statement • Accounting policies and explanatory notes (notes to the accounts)(Reads from page 117-126) •  Format example: Page 113-116

4. Disclosure of Information in IS &BS specify by 9th Schedule (CA1965) and MASB Standards • General Information • Company name • Country of incorporation • Balance sheet date and period covered by the financial statement • Currency used (RM)

5. Cont… Accounting Policies • Measurement basis • Specific accounting policies that is necessary for proper understanding of FS • Income recognition • Consolidation principles • Depreciation and amortisation methods • Inventories • R&D • others

6. Cont… Balance Sheet(Equity Section) • Authorised capital; • Shown either on the face of BS or in the notes • Issued share capital • The movement in issued capital • Shown either on the face of BS or in the notes • Reserves; • The movement in reserves (either on the face of BS or in the notes) • Nature and purposes of each reserve (either on the face of BS or in the notes) • Reserves must be classified under separate headings • Any dividends that have been proposed, but not yet approved and not considered as liability

7. Cont… Balance SheetAssets (current and non-current) • PPE • Aggregate amount of PPE on the face of balance sheet, • details in the notes under separate heading. • Investments • Aggregate amount of Investment on the face of balance sheet, • details in the notes under separate heading • Types of investment (shares, debentures, govn. Securities, in subsidiaries) • Distinguish between quoted and unquoted investment • Its market price and cost price

8. Cont… Balance SheetAssets (current and non-current) • Intangible assets • Aggregate amount on the face of balance sheet, • details in the notes for cost less amortisation • Inventories • Receivables • Cash and cash equivalent

9. Cont… Balance SheetLiabilities (current and Long term) • Shown separately current and long term liabilities under separate heading on the face of BS. • Dividend payable on RPS • Taxation (tax payable) • Deferred taxation • details in the note showing the portion of current tax expense and portion of deferred tax for current year

10. Cont… Income Statement(on the face of IS) • Turnover or other relevant revenue • Net result of the operating profits – details in notes • Operating expenses – details in notes • Expenses can be classified according to function and nature • Finance cost • Other income • Profit and loss from ordinary activities • Income tax expense • Profit for the year

11. Classification of expenses • Operating expenses: • Administrative expenses • Ex: utilities, salaries, directors’ fees and emolument, auditors fees, depreciation • Sales and distribution expenses • Advertisement,distribution cost • Other operating expenses • Amortisation of goodwill and R&D • Finance Costs • Interest relates to all costs of using borrowed capital

12. Dividend IncomeSection 110 ITA 1967 • Section 110; tax deduction on dividends received (tax credit) • Dividends are received net of tax. • For reporting purposes, the amount of dividend income disclosed in P&L a/c is the gross dividends. • Example; • Company received net dividends of RM14,400. Then the amount of dividend income disclosed in P&L will be; RM14,400 x 100%/72% = RM20,000 • Entry; Dt Tax charge 5,600** will increase tax expense in P&L a/c Dt Cash 14,400 Cr. Dividend Income 20,000

13. Tax expense in IS • Consist of three components • Deferred tax liability – long term liability • Tax credit and • Tax charge for the current year

14. Taxation • Current rate of income tax for companies is 28% • In Malaysia, the self-assessment system is practiced; i.e companies estimate the amount of tax that they have to pay for the year. • Companies estimated their tax in advance and make adjustments in the middle of the year and at the end of the year. • If they had not paid the full amount by end of the year, there will arise a current liability, if overpaid there will be a current asset called tax recoverable.

15. Continue.. tax credit • Dividend income received net of tax-> reported gross • Tax credit on this dividend is deducted from tax payable (tax to be paid to IRB), but it increased tax expense in IS • Example: • ABX had paid tax RM67,000 to IRB through out the year 2006 • at the end of the year 2006, its tax charge (tax expense) on taxable income is RM70,000 • Balance of tax payable is RM3,000 • If ABX has a tax credit of RM2,000 from dividend income, then its tax payable will only RM1,000

16. Deferred taxation • Deferred taxation arises because the tax payable as calculated for the current year according to the tax rules is different from the tax payable calculated according to accounting rules. • For example, the company uses accrual concept on interest expense but tax authorities will allow interest on cash basis. • Another example is when tax rules disallow depreciation charge but provide capital allowances of certain percentage. These are called temporary differences.

17. Example 2 on page 132 Dear Bhd. Financial year 2000 • profit before tax RM4,500,000 • Tax paid for the year RM1,500,000 • Net dividend income RM360,000 • Tax expense for the year RM1,750,000 include transfer to deferred tax liability RM100,00 and tax credit • Tax rate 28% • What is the tax liability /tax recoverable for year 2000??

18. NOTES TO INCOME STATEMENT Profit before Tax • Charging item disclosed separately: • Finance cost • Depreciation, amortization and impairment expenses • Research and development expenses • Cost of rent for building and any other fixed assets • Auditors’ remuneration • Director remuneration • Staff remuneration • Crediting items (Other income) disclose separately: • Interest income • Rental income • Investment income

19. NOTES TO INCOME STATEMENT • Taxation • Tax charge for the year • Increase and decrease in deferred taxation • EPS • EPs should be shown in the face of Income Statement • The basis of calculation should be disclosed either in the face of IS or in the notes.

20. NOTES TO BALANCE SHEET • Authorised capital • Disclosed in the face of BS or as a note to account • Detail distinguishing between classes of share • Par value of the share • Issued share capital • The movement in the issued share capital • Distinguishing between the different classes of shares • RPS- disclosed the date of redemption and whether the redemption is obligatory or at the option of the company.

21. NOTES TO BALANCE SHEET • Reserves • Reserves must be classified under separate headings, such as: • Share premium reserve • Revaluation reserve • Capital redemption reserves • Profit and loss (retained earning) • General reserve • Other reserves

22. NOTES TO BALANCE SHEET • Property, plant and equipment • Disclosed under separate heading • Cost of the assets • Revaluation value • Depreciation charge for the year • Accumulated depreciation amount • Accumulated impairment loss • Book value of each assets

23. NOTES TO BALANCE SHEET • Investment • Distinguishing between type of investment; • Investment in debenture • Investment in shares • Investment in subsidiaries • Distinguish between investment that are quoted, listed and unquoted investment • Cost of investment and the market value for quoted investment

24. STATEMENT OF CHANGES IN EQUITY • Show the changes in the owner equity’s items. • Ordinary shares • Preference shares • Share premium • Revaluation reserves • CRR • Retained profits

25. Accounting for Dividend Is dividend an expense or an equity distribution??

26. Dividends • Distribution of profits to the shareholders • Not an expense • The only payment that the shareholders received from the company as return on their investment • Types of dividend: • Cash dividend • Bonus share • Dividend become payable only when it is declared

27. Declaring Dividends • Interim and final dividend. • Interim dividends- • Dividends declared and paid during the year for the current year • Management have the authorities to declare interim dividend. • Do not need an approval through company’s AGM. • Final dividends-Dividends declared or proposed at the end of the year or after the balance sheet date. • Must get approval by s/holder through co.’s AGM

28. Proposed Final Dividends (FRS110) p.12,13 • If dividends are declared (ie the dividends are appropriately authorised and no longer at the discretion of the entity) after the balance sheet date but before the financial statements are authorised for issue, the dividends are not recognised as a liability at the balance sheet date • This is because they do not meet the criteria of a present obligation in FRS 137. Such dividends are disclosed in the notes in accordance with FRS 101 Presentation of Financial Statements.

29. Proposed Final Dividends • If the final dividends are declared at the end of the year(i.e the dividends are appropriately authorized and no longer at the discretion of the entity) then the dividends are provided and the amount payable will be disclosed as a current liability

30. Dividends • Dividends can be expressed in percentages (12%) or in specific amount such as 15 sen per share. • In Malaysia, the dividends paid are paid net of tax. • Dividends are declared gross but paid net. • For example, if tax rate is 28%, 10% dividend is actually 10% x (100% - 28%) = 7.2%. • Section 365 Companies Act 1965; distribution can only be made out of profit

31. Example: • BEH Bhd has a paid up capital of RM1m and the directors want to declare a 10% dividend based on the paid up capital. Supposed the income tax rate for companies is 28%. Calculate the dividend that will be paid. • Answer: RM1m x 10% x 72% = RM72,000 • Journal entry: Dt P & L Appropriation a/c 72,000 Cr. Dividends payable 72,000

32. Preference Dividends and Ordinary Dividends • The total gross dividends, both the interim and final, for preference shares will be limited to the rate prescribed when the shares were issued. • For ordinary shares, the final dividend is in addition to the interim dividend.

33. Dividend Imputation • In Malaysia, the dividends paid are paid net of tax. • The company deduct the dividend from its distributable profits after tax • It is called franked dividend • Dividend are declared gross but paid net of tax i.e: the company provide and pays only 72% (assuming tax rate 28%) of the amount declared. • However, if the company declared dividend from its exempt income, the dividends are declared and paid gross. No tax are deducted at source.

34. Section108 Income Tax Act 1967 • In order to be able to frank dividend, company should have sufficient tax credit under Section 108 a of ITA 1967. • Sec. 108 Account is nominal accountof the taxes that the company has paid on its chargeable income • No tax is remitted to IRD when dividend are paid because company has already pay tax on its profit.

35. Example: • XYZ Bhd has issued ordinary shares of RM500,000. The director declared an ordinary dividend of 10%. Tax rate is 28% and company has sufficient Section 108 tax credit. • Journal entry; Dt Profit and loss a/c 36,000 Cr. Dividend payable 36,000 • If the company has no section 108 tax credit then the entry will be; Dt Profit and loss a/c 50,000 Cr. Dividend payable 36,000 Cr. Tax payable 14,000 • If the company pay dividends from its tax exempt income, the entry will be; Dt Profit and loss a/c 50,000 Cr. Dividend payable 50,000

36. Transfer to Reserves • Companies may transfer some of their profits to reserves but this profit will not be available for dividend payments. • The main reason for profits to be transferred is to restrict the amount of profits that will be available for dividends. • Balance in general reserve and sinking fund reserve (to redeem debentures/bond) can be transferred back to retained profits but not balance in capital redemption reserve.

37. Types of Reserves • Reserves are profits retained in the company. • Reserves can be classified as: • Capital reserves and • Revenue reserves (general and retained profits) • Capital reserves can be divided into: • Statutory reserves • (share premium and capital redemption)-(required by law) • Non-statutory reserves • (asset revaluation) – (required by accounting standard)