1. What is the Double Entry
System Accounting?
FROM ACCOUNTING EQUATION
TO COMPANY ACCOUNTS
Prof. Dr. Syed Noh Syed Ahmad
Handout 2 Fakulti Perakaunan
Universiti Teknologi MARA
Forensic Accounting Module – Certified Financial Investigator Program – 1
Bank Negara Malaysia
2. Topics in Handout 2
• Review of process of preparing financial
statements.
– Double entry system
– Income Statement and Balance Sheet
– Links between the two statements
• Accounting concepts and principles
• Management decisions affecting the bottom line.
• Accounts of companies
• Common terms in the accounts of companies
Forensic Accounting Module – Certified Financial Investigator Program – 2
Bank Negara Malaysia
3. What is the Double Entry System
Accounting?
ASSETS = LIABILITIES + EQUITY
Forensic Accounting Module – Certified Financial Investigator Program – 3
Bank Negara Malaysia
4. ACCOUNTING (BALANCE
SHEET) EQUATION
ASSETS: Things owned by the business; these
represents the resources of the business
LIABILITIES: Amounts owed by the business
OWNER‟S EQUITY: In accounting terms, after all
liabilities are paid, ownership equity is the
remaining interest in assets representing the
amounts invested by the owner in the business.
Depending on the type of business, owners‟ equity
can be in the form of Owner‟s or Partnership
Capital, or for companies Share Capital
Forensic Accounting Module – Certified Financial Investigator Program – 4
Bank Negara Malaysia
5. Accounting Equation
Assets(RM) Liabilities(RM) Owner‟s
Equity(RM)
100,000 60,000 40,000
80,000 50,000 ?
300,000 ? 200,000
400,000 ? 2
Forensic Accounting Module – Certified Financial Investigator Program – 5
Bank Negara Malaysia
6. Extended Accounting Equation
• This extended version is to take into
account the classification of Assets into
Fixed and Current Assets; and Liabilities
into Current and Long Term Liabilities.
FA + CA = CL + LTL + OE
The mathematical operations remain the
same
Forensic Accounting Module – Certified Financial Investigator Program – 6
Bank Negara Malaysia
8. Extended Accounting Terms
Explained
Forensic Accounting Module – Certified Financial Investigator Program – 8
Bank Negara Malaysia
9. EXTENDED ACCOUNTING
EQUATION
ACCOUNTING
EQUATION
A=L+E
ASSETS
= LIABILITIES
+ EQUITY
CURRENT
CURRENT NON-CURRENT
FIXED ASSETS LIABILITIES
ASSETS LIABILITIES
Forensic Accounting Module – Certified Financial Investigator Program – 9
Bank Negara Malaysia
10. Classification of Assets
ASSETS
FIXED CURRENT
INTANGIBLE TANGIBLE INVENTORY
ACCOUNTS
GOODWILL PLANT
RECEIVABLE
PATENTS PROPERTY CASH
TRADEMARKS EQUIPMENT BANK
FRANCHISE LAND PREPAID EXPENSES
LICENCES MACHINERY ETC
ETC FURNITURE
ETC
Forensic Accounting Module – Certified Financial Investigator Program – 10
Bank Negara Malaysia
11. Classification of Liabilities
LIABILITIES
NON-CURRENT CURRENT
ACCOUNTS
BANK LOANS PAYABLE
MORTGAGES BANK OVERDRAFT
LOAN FROM FUNDING AGENCIES SHORT TERM LOANS
CURRENT PORTION
OTHER LONG TERM LOANS
OF LONG TERM DEBTS
ACCRUED EXPENSES
ETC
Forensic Accounting Module – Certified Financial Investigator Program – 11
Bank Negara Malaysia
12. Fixed Assets and Current Assets
• Fixed Assets: Those assets of a permanent nature required for the normal
conduct of a business, and which will not normally be converted into cash
during the ensuring fiscal period. For example, furniture, fixtures, land, and
buildings are all fixed assets. In published financial statements these are
classified as Non-Current Assets.
– Tangible Assets: Physical and material assets that have shape and form, and
can be touched. Examples are the current assets (explained below), land,
buildings, plant, equipment.
– Intangible Assets: These assets that do not have a physical, tangible existence.
Assets that cannot be physically touched . Examples of intangible assets could
include goodwill, brand value, patents, franchises, trademarks, patents,
copyrights, Intellectual Property (Patents, Copyright, Trade Marks), licenses
• A current asset is an asset on the balance sheet which is expected to be
sold - turned into cash - or otherwise used up in the operations of the
company within one year usually Generally includes cash, accounts
receivable, inventory and prepaid expenses.
Forensic Accounting Module – Certified Financial Investigator Program – 12
Bank Negara Malaysia
13. Non-Current Liabilities and Current
Liabilities
• Non-Current Liabilities or Long term
Liabilities are debts that are due to be paid or
settled after more than one year such as bank
loans, mortgages, loans from MARA, etc.
• Current Liabilities are considered liabilities of
the business that are to be settled in cash within
the financial year. Briefly, these are debts a
business expects to pay within one year. These
include accounts payable (creditors), short-term
debts such as bank overdraft, interest on long-
term debt or current portion of long term debt.
Forensic Accounting Module – Certified Financial Investigator Program – 13
Bank Negara Malaysia
14. What is Revenue
• Basically an inflow of assets as a result of
sales of goods or providing of services to
customers; (also called income; which is
not really accurate)
• E.g of revenues are : sales, commissions
received (or earned), rent income, interest
income, dividends received from
investment, etc
Forensic Accounting Module – Certified Financial Investigator Program – 14
Bank Negara Malaysia
15. REVENUE
COMMISSIONS INTEREST RENT
SALES RECEIVED INCOME OTHERS
INCOME
Forensic Accounting Module – Certified Financial Investigator Program – 15
Bank Negara Malaysia
16. What is an Expense
• As opposed to revenue, an expense
represents an outflow of assets (usually
cash) in order to generate (or earn)
revenue. Or put simply, a revenue
represents expenditure made to earn the
revenue.
• Examples of expenses: salaries,
advertising, rent expense, utilities, etc.
Forensic Accounting Module – Certified Financial Investigator Program – 16
Bank Negara Malaysia
17. EXPENSES
Advertising Rent Expenses Salaries Depreciation Utilities Others
Forensic Accounting Module – Certified Financial Investigator Program – 17
Bank Negara Malaysia
18. An important point to understand
concerning expenses!
• In accounting Expenditure can be classified in two types,
which will have important consequences to the financial
statement:
– Revenue expenditure: Expenses incurred as a result of day-to-
day operations.
These are also called operating expenditure (OPEX). Example:
all selling and general & administrative expenses, depreciation,
interest expense (interest is also classified as a financial
expense). These are used as deductions from revenue to obtain
the profit.
– Capital expenditures (CAPEX) are expenditures creating future
benefits, that is ,capital expenditure is incurred when a business
spends money either to buy fixed assets: land building, plant
equipment, vehicles, furniture and fittings, etc or to add to the
value of an existing fixed asset with a useful life that extends
beyond a financial year. These capital expenditure are
recorded in the financial statement.
Forensic Accounting Module – Certified Financial Investigator Program – 18
Bank Negara Malaysia
19. TYPES OF EXPENDITURE
EXPENSES
REVENUE OR OPERATING CAPITAL EXPENDITURE
EXPENSES [OPEX] [CAPEX]
INCOME BALANCE
STATEMENT SHEET
Forensic Accounting Module – Certified Financial Investigator Program – 19
Bank Negara Malaysia
20. What is Profit/(Loss)
• In Accounting, profit is defined as the difference
between Revenue and Expenses, the amount
left over when expenses are subtracted
revenues (if expenses is more then revenue, this
will result in a Loss!)
Revenue – Expenses = Profit/Loss
R>E = Profit
R<E = Loss
Forensic Accounting Module – Certified Financial Investigator Program – 20
Bank Negara Malaysia
21. Calculation of Profit
• The profit (or loss) of a business is
calculated in a statement called
(imaginatively!), the Profit and Loss
Account or Income Statement.
Forensic Accounting Module – Certified Financial Investigator Program – 21
Bank Negara Malaysia
22. CALCULATION OF PROFIT
Total Revenue Total Expenses Profit/ (Loss)
83,000 47,000 ?
128,000 198,000 ?
? 46,000 32,000
86,000 ? 36,400
68,000 ? (32,000)
? 32,000 (12,000)
Forensic Accounting Module – Certified Financial Investigator Program – 22
Bank Negara Malaysia
23. Balancing of Accounts and the
Trial Balance
• At the end of a period (usually a month) the
accounts are balanced; that is the debit and
credit entries are totaled and the difference is
then entered as the balancing figure or simply
called (imaginatively of course, the “balance”)
• The balance of all the accounts are listed in a
statement called the Trial Balance; which lists
the accounts according to the “balance”, in other
words, the deit balance is listed on the debit side
and the credit balance is listed on the credit side
Forensic Accounting Module – Certified Financial Investigator Program – 23
Bank Negara Malaysia
24. • The Trial Balance is an important
document in that it checks the accuracy
of the entries in the recording process;
although this list does not detect all the
inaccuracies, and errors – thus a prefect
opportunity for fraud
• The Trial Balance then serves as a
basis of preparing the:
Forensic Accounting Module – Certified Financial Investigator Program – 24
Bank Negara Malaysia
25. Income Statement
• The Income Statement of a Merchandising
(Retailing) business consists of two
components:
– The Trading Account (for calculating the gross
profit); and
– Expenses and Other Income
Forensic Accounting Module – Certified Financial Investigator Program – 25
Bank Negara Malaysia
26. A Basic Income Statement
• Sales RMxxxxx
• Less Cost of Goods Sold (xxxx)
• Gross Profit xxxx
• Less Expenses xxxx
• Operating Income xxxx
• Add other income xxxx
• Net profit (income) xxxx
Forensic Accounting Module – Certified Financial Investigator Program – 26
Bank Negara Malaysia
27. A Basic Balance Sheet
Balance Sheet
Assets RMxxx Capital RMxxxx
Net Profit for the year xxxx
xxxx
Liabilities xxx
XXX XXX
Forensic Accounting Module – Certified Financial Investigator Program – 27
Bank Negara Malaysia
28. Link between P & L A/c and
Balance Sheet
• An important point to note is that the link of
the Profit and Loss account and the
Balance Sheet is that the Net Profit
increases the capital of the business and
therefore the amount from the Profit and
Loss account is added to the capital of the
business if not the Balance Sheet will not
balance!!
Forensic Accounting Module – Certified Financial Investigator Program – 28
Bank Negara Malaysia
29. The Link Between the Income Statement and Balance Sheet
Profit and Loss Statement
Sales RM xxxx
Cost of Goods Sold (x)
Gross Profit xxx
Expenses (x)
Operating income xxx
Other income x
Net Profit xx
Balance Sheet
Assets RMxxx Capital RMxxxx
Net Profit for the year xxxx
xxxx
Liabilities xxx
XXX XXX
Forensic Accounting Module – Certified Financial Investigator Program – 29
Bank Negara Malaysia
30. ACCOUNTING CONCEPTS
AND CONVENTIONS
The accounting concepts and conventions
represent the basis of how the financial
statements are prepared. An
understanding of these concepts and
conventions is essential to the
understanding of the financial statements.
These concepts are also sometimes
known as Generally Accepted Accounting
Standards (GAAP).
Forensic Accounting Module – Certified Financial Investigator Program – 30
Bank Negara Malaysia
31. • Basic underlying accounting principles:
– These basic principles of accounting evolved
over time and is the direct result of practices
by the accounting profession and statutory
requirements, such as those issued under the
Companies Act, Securities Commission, Bank
Negara and institutional requirements such as
the BursaMalaysia.
Forensic Accounting Module – Certified Financial Investigator Program – 31
Bank Negara Malaysia
32. • However, these accounting principles
are currently being issued by the
Malaysian Accounting Standards Board
(MASB).
• The standards issued by MASB (known
as FRS – Financial Reporting
Standards) have the authority of law as
prescribed by the Financial Reporting
Act, 1997.
Forensic Accounting Module – Certified Financial Investigator Program – 32
Bank Negara Malaysia
33. • Historical Cost Concept
– Under this concept, the amount shown in
the financial statements (for example
assets, expenses, liabilities) represents the
historical costs of the items; i.e. what the
organisation actually pays for these items.
It does not reflect other values. If other
values are used, for example revalued
amounts, then this fact must be disclosed
in the financial statements.
Forensic Accounting Module – Certified Financial Investigator Program – 33
Bank Negara Malaysia
34. • Revenue Recognition:
– In general, revenue is recognised or
recorded when it becomes
realised, measurable and reasonably
colletable. It is important to note that
revenue recognition policies depends on
the industry the business is in.
Examination of this policy is an important
aspects of forensic accounting; there are
many cases of fraud by just changing the
revenue policies. In the financial
statements, this policy is given under notes
to the accounts.
Forensic Accounting Module – Certified Financial Investigator Program – 34
Bank Negara Malaysia
35. • Matching
– The matching concept requires that
revenue and expenses related to
generating the corresponding revenue be
recorded in the same accounting period.
As a result, it is necessary to have
estimates, accruals and allocations in the
preparation of the financial statements
when this concept is used. Industry
practices should be used in judging the
appropriateness of matching revenues and
expenses.
Forensic Accounting Module – Certified Financial Investigator Program – 35
Bank Negara Malaysia
36. • Consistency
– This concept states that the methods used
in the financial statements (such as
depreciation and inventory valuation
methods) must be applied consistently
from year to year. Organisations are not
supposed to change methods according to
their whims and fancy. Any changes must
be for a good reason and the effects of the
change must be stated in the financial
statements
Forensic Accounting Module – Certified Financial Investigator Program – 36
Bank Negara Malaysia
37. • Full disclosure
– In preparing and presenting the financial
statements, the organisation must take into
account the interest of the readers of the financial
statements (the “stakeholders”) and therefore the
financial statement must be comprehensive. The
organisation must include enough information so
that the user can make an informed judgement
based on the information disclosed and the
information so disclosed must not mislead the
user. In meeting this principle, it is sometimes
important for these reporting entities to go beyond
double entry and thus additional information in the
form of notes to the accounts must be included.
Forensic Accounting Module – Certified Financial Investigator Program – 37
Bank Negara Malaysia
38. • Entity concept (separate entity assumption)
– In accounting, there is a separation between the
owner of the business and the business itself.
Accounts are kept from the point of view of the
business and not that of the owner of the
business. Therefore, it limits the transactions to be
recorded in the accounts to those that are directly
related to the activities of the business.
Remember that in some form of business
organisations such as sole trader and
partnership, this separation does not exist in law.
However, for companies, this view is consistent
with that of the law; that is the owner of the
business is separate from that of the business
itself.
Forensic Accounting Module – Certified Financial Investigator Program – 38
Bank Negara Malaysia
39. • Stable currency/monetary /unit of measure
assumption
– All financial reports are based on the monetary unit (Ringgit
in Malaysia) and generally does not take into account the
changing value of money (e.g. caused by inflation). An
asset purchased in 1990 for RM10,000 and a similar asset
purchased in 2002 for RM20,000, will simply be added
together even though the purchasing power of RM1 in 1990
is more than the purchasing power of RM1 in 2002. This
“additivity” principle will result in the two assets being added
together to obtain a total of RM30,000 in the financial
statement. There are exceptions in applying this principle
such as in the case of revaluation of certain assets, for
example land and buildings and now the use of fair value
(impairment) of assets.
Forensic Accounting Module – Certified Financial Investigator Program – 39
Bank Negara Malaysia
40. • Going Concern Concept
– This concept assumes that the life of the
business entity will go on indefinitely, that
is long enough for the entity to fulfill its
financial, business and legal obligations
This principle is especially important in the
valuation of the assets of the business. If
this principle is absent, then the value of
the assets will be stated for example, at
market value or current value. If there is
evidence that the business is not a “going
concern”, then this fact must be disclosed
in the financial statements.
Forensic Accounting Module – Certified Financial Investigator Program – 40
Bank Negara Malaysia
41. • Objectivity concept:
– This concept requires that the accounting
records and reports be based upon
objective evidence. In transactions
between a buyer and seller, both try to get
the best price. Only the final agreed upon
amount is objective enough for accounting
purposes; and for this evidence such as
receipts and invoices will be used.
Forensic Accounting Module – Certified Financial Investigator Program – 41
Bank Negara Malaysia
42. • Periodicity or time period assumption
– This assumption is as a result of the going concern concept
– since it is assumed that the entity will carry on its activity
indefinitely, it is not practical for the reporting to be carried
out until the end of the entity‟s “life” to account for its
activities. Thus the life of the entity is divided into artificial
time period for it to account for its activities, so that the
interested parties may then be able to evaluate its
performance. This time period is known as the financial
period – if it is one year, then it is called the “financial year”.
I have not yet come across an organisation in which the
financial period is either less or more than one year!!!
{Unless it is a fixed period partnership or joint ventures.)
Forensic Accounting Module – Certified Financial Investigator Program – 42
Bank Negara Malaysia
43. Modifying Conventions
• Modifying conventions are used when
variations or departures from GAAP are
necessary.
• These conventions give guidance and
should be taken into account when
departing from what is generally
acceptable
Forensic Accounting Module – Certified Financial Investigator Program – 43
Bank Negara Malaysia
44. • Conservatism or Prudence Concept:
– Generally, this concept states that, in the financial statement,
given two values, the lower amount will be shown. E.g.; if
the company were to purchase shares as investments, and
the cost amounted to RM15,000 and at the financial
statement date, the market value was RM12,000, the
amount to be stated in the financial statement will be
RM12,000 (the lower value). In this case the company will
have to recognise the loss of RM3,000. On the other hand if
the market value of these shares increased to RM20,000,
the original cost of the asset will be recorded in the financial
statement. That is the amount to be recorded in the Balance
Sheet will be RM15,000 and the “unrealised profit” of
RM5,000 will not be recorded in the accounts. This concept
also means that the anticipate profits (unrealised profit) will
not be recorded but losses will be recognised as soon as
they become apparent.
Forensic Accounting Module – Certified Financial Investigator Program – 44
Bank Negara Malaysia
45. • Industry practices and
characteristics
– Different industries are characterised by
different reporting needs, for example
banking, investments, financing and
Islamic financial institutions. Thus there
may be situations in which there are
exceptions to GAAP. In addition, many
specialised industries have to meet
statutorily mandated requirements which
may go against the GAAP.
Forensic Accounting Module – Certified Financial Investigator Program – 45
Bank Negara Malaysia
46. • Substance over form:
– The economic substance of a
transaction determines the
accounting treatment even when the
legal aspects of the transaction
indicate otherwise. For example, a
leased assets, amy not transfer
property rights, if the transactions is
more of a purchase, then it should be
considered as a sale. Similarly for
accounting practices (as in the Enron
case!!). Module – Certified Financial Investigator Program –
Forensic Accounting 46
Bank Negara Malaysia
47. • Materiality concept
– Accounting focuses on events that are
material or important. For example, it is
not necessary to account an item such as
a calculator as a fixed assets even though
the item could be used for a number of
years. It will be expensed directly, as the
omission of this item will not affect the
financial statements material. An item or
event is considered material if its omission
would affect the judgement of a person
who is relying on the financial statement.
Forensic Accounting Module – Certified Financial Investigator Program – 47
Bank Negara Malaysia
48. • Professional Judgement
– An accountant may depart from GAAP if
the results of departure appear reasonable
under the circumstances, expecially when
the strict application of GAAP will produce
unreasonable or misleading results. The
judgement maybe called into question and
the accountant must be able to explain and
defent the grounds for the departure from
GAAP.
Forensic Accounting Module – Certified Financial Investigator Program – 48
Bank Negara Malaysia
49. OTHER ACCOUNTING
CONCEPTS AND PRINCIPLES
• The other accounting concepts and principles
are those contained in the Accounting Standards
as given out by the Malaysian Accounting
Standards Board. The pronouncements of the
MASB has the effect of law and all companies
must comply with these standards.
• The accounting practices of the companies are
normally given in the Notes to the Accounts
section of the Annual report under “Significant
Accounting Policies”.
Forensic Accounting Module – Certified Financial Investigator Program – 49
Bank Negara Malaysia
51. Types of companies
• Private limited companies (Sdn Bhd)
• Public limited Companies (Bhd)
• Public Listed Companies (Public
Companies listed on the Kuala Lumpur
Stock Exchange)
Forensic Accounting Module – Certified Financial Investigator Program – 51
Bank Negara Malaysia
52. Formation of Companies
• All companies are formed under the regulations
as per the Companies Act, 1965
• Among the important documents to be filed with
the commissioner of companies are:
– The Memorandum of Association
– The Articles of Association
– The list of directors of the companies
– A statement of the nominal capital of the companies
Forensic Accounting Module – Certified Financial Investigator Program – 52
Bank Negara Malaysia
53. • Memorandum of association:
– Name and domicile of company
– Objects of the company: the types of
activities and business that the company
is engaged in
– Statement that the liability of members
is limited
Forensic Accounting Module – Certified Financial Investigator Program – 53
Bank Negara Malaysia
54. • The amount and types of share
capital, divided into shares of a fixed
amount (the authorised capital. The
authorised capital represents the
maximum amount of shares that can be
issued by the company.
Forensic Accounting Module – Certified Financial Investigator Program – 54
Bank Negara Malaysia
55. • Articles of association:
–The rules and regulations which
govern the internal relationships
of the company:
• Voting rights of shareholders,
• Duties and powers of directors
Forensic Accounting Module – Certified Financial Investigator Program – 55
Bank Negara Malaysia
56. OWNER‟S EQUITY AND
SHAREHOLDERS FUND
• Unlike the sole trader, the capital section
of the Balance Sheet contains detailed
information about the various types of
items forming owner‟s equity.
Forensic Accounting Module – Certified Financial Investigator Program – 56
Bank Negara Malaysia
57. • An important concept in the case of a
company is the concept of limited liability.
Briefly, this concept means that the liability of
the shareholders is limited to the amount of
shares that he subscribes to. If a shareholder
pays RM10,000 for the shares, his liability is
limited to the RM10,000. In other words, the
maximum loss is RM10,000. The creditors
could not ask the shareholders for his
personal assets to settle the loans of the
company.
Forensic Accounting Module – Certified Financial Investigator Program – 57
Bank Negara Malaysia
58. SHARE CAPITAL
The Share Capital section of a company
consists of:
• Authorised capital: the amount and
types of shares that is allowed by the
Registrar of Companies to be issued by
the company.
Forensic Accounting Module – Certified Financial Investigator Program – 58
Bank Negara Malaysia
59. • Issued and paid up capital: This
represent the actual amount of capital
that is issued by the company. The
amount and type is determined by the
Authorised Capital. For listed
companies, the amount of capital issued
is almost always equal to the paid up
capital because it is the practice of
companies to demand payment even
before the shares are issue to the
shareholders.
Forensic Accounting Module – Certified Financial Investigator Program – 59
Bank Negara Malaysia
60. Types of Shares
• Ordinary (or Common) Shares: An important
characteristic of this type of share is that the
shareholders have voting rights; that is the
right to vote the members of the Board of
Directors. The shareholders do not have a
fixed rate of dividends and only have residual
rights; that is if the company were to be
wound up, they will have the right to the
assets of the company after all the creditors
and other financiers have been paid.
Forensic Accounting Module – Certified Financial Investigator Program – 60
Bank Negara Malaysia
61. • Preference Shares: A major characteristic of
this type of share is that the shares do not
carry voting rights, but the shareholders have
a fixed rate of dividends. In addition, they
have preference to the dividends; that is the
dividends for the preference shares must be
paid first before the dividends of the ordinary
shareholders. There are of course many
types of preference shares and the types
depend on the company issuing these types
of shares; e.g., redeemable, cumulative,
participative etc.
Forensic Accounting Module – Certified Financial Investigator Program – 61
Bank Negara Malaysia
62. “Golden Shares”
• These are shares which are issued by former
government companies, for example, Tenaga
Nasional, MAS, Talikom Malaysia, etc.
• These are shares (cases I have seen are
Redeemable Preference Shares) with special
rights, and the purpose of these shares is that
the government has the final say in certain very
limited, strategic situations such as the taking
over of these companies, financial structuring,
etc.
Forensic Accounting Module – Certified Financial Investigator Program – 62
Bank Negara Malaysia
63. Example 1: Tenaga Nasional‟s
“Golden Shares”
• Special Rights Redeemable Preference Share („Special
Share‟)
• (a) The Special Share would enable the Government of
Malaysia through the Minister of Finance Incorporated to
ensure that certain major decisions affecting the operations of
the Company are consistent with the Government‟s policies.
The Special Shareholder, which may only be the Government
or any representative or person acting on its behalf, is entitled
to receive notices of meetings but not to vote at such
meetings of the Company. However, the Special Shareholder
is entitled to attend and speak at such meetings. The Special
Shareholder has the right to appoint any person, but not more
than six at any time, to be the Board of Directors of the
Company. Accounting Module – Certified Financial Investigator Program –
Forensic 63
Bank Negara Malaysia
64. • (b) Certain matters, in particular the alteration of the
Articles of Association of the Company relating to the
rights of the Special Shareholder, creation and issue of
additional shares which carry different voting rights, the
dissolution of the Company, substantial disposal of
assets, amalgamations, merger and takeover,
require the prior consent of the Special Shareholder.
• (c) The Special Shareholder does not have any right to
participate in the capital or profits of the Company.
• (d) The Special Shareholder has the right to require the
Company to redeem the Special Share, at par, at any
time
Forensic Accounting Module – Certified Financial Investigator Program – 64
Bank Negara Malaysia
65. Example : TM‟s “Golden
Shares”
• Special Rights Redeemable Preference Share (Special Share)
• The Special Share of RM1.00 would enable the Government
through the Minister of Finance to ensure that certain major
decisions affecting the operations of the Company are consistent
with the Government‟s policy. The Special Shareholder, which may
only be the Government or any representative or person acting on
its behalf, is entitled to receive notices of meetings but does not
carry any right to vote at such meetings of the Company. However,
the Special Shareholder is entitled to attend and speak at such
meetings.
• Certain matters, in particular, the alteration of the Articles of
Association of the Company relating to the rights of the Special
Shareholder, the dissolution of the Company, any substantial
acquisitions and disposal of assets, amalgamation, merger and
takeover, require the prior consent of the Special Shareholder.
Forensic Accounting Module – Certified Financial Investigator Program – 65
Bank Negara Malaysia
66. • The Special Shareholder has the right to require the
Company to redeem the Special Share at par at any
time. In a distribution of capital in a winding up of the
Company, the Special Shareholder is entitled to the
repayment of the capital paid-up on the Special Share in
priority to any repayment of capital to any other member.
The Special Share does not confer any right to
participate in the capital or profits of the Company.
Forensic Accounting Module – Certified Financial Investigator Program – 66
Bank Negara Malaysia
67. RESERVES
• The reserves of a company are divided
into two types:
– Capital (or non-distributable) reserves
– Revenue (or distributable) reserves.
Forensic Accounting Module – Certified Financial Investigator Program – 67
Bank Negara Malaysia
68. Capital Reserves
• This non-distributable reserves (meaning that
the reserves could not be used as cash
dividends to the shareholders) arise from the
non-trading gains or income of the company;
e.g.
– Share premium: the excess of the issued price
over the par value of the shares;
– Revaluation reserves: reserves which arise from
the revaluation of the assets of the company; for
example the revaluation of the land and buildings.
• Although the capital reserves could be used
for cash dividends, it could be utilised for the
purposes of declaring bonus shares.
Forensic Accounting Module – Certified Financial Investigator Program –
68
Bank Negara Malaysia
69. Revenue Reserves
• This distributable reserves represent amounts
set aside from the normal trading profits of
the business for specific or non-specific
purposes; e.g.
– Unappropriated profits (or retained profits)
– General reserves (amount set aside from the
profits for no specific purposes)
– Fixed assets replacement reserves; amount set
aside to be used in the replacement of certain
fixed assets.
Forensic Accounting Module – Certified Financial Investigator Program – 69
Bank Negara Malaysia
70. • Other than the retained profits,the reserves set
aside indicate that this amount is not available
for distribution of profits in the current
year, although the amounts can be written back
to the income statement in case the current
profits is not enough to pay the current
dividends. But basically, revenue reserves can
be used to pay dividends
Forensic Accounting Module – Certified Financial Investigator Program – 70
Bank Negara Malaysia
71. Issue of Shares
• New issue: issue of shares by a new
company; also called IPOs (initial public
offering)
• Public issue: subsequent issue of shares
to the general public to raise funds for the
company
• Bonus issue: issue of “free” shares to the
shareholders of a company.
Forensic Accounting Module – Certified Financial Investigator Program – 71
Bank Negara Malaysia
72. • Rights issue: the issue of shares to the
existing shareholders of a company; as
the name suggest, this is a special right
to the shareholders. The price of the
rights issue at which the shares are
issued are generally lower than the
prevailing market price. If a shareholder
does not exercise the “right”, he could
sell the “rights” in the open market.
Forensic Accounting Module – Certified Financial Investigator Program – 72
Bank Negara Malaysia
73. Par Value
• The par value of a share is the nominal value
stated in the share certificate; or when the
shares are issued. It is also called the
nominal value. For most of the companies
listed on the KLSE, the par value is RM1.00
per share. A major use of the share value is
the dividend rate announcement. For
example a 20% rate of dividend for RM1.00
par value share is 20 sens. [The irrelevance
of par value to most investors can be judged
by the fact that in the U.S. many companies
issue no par value shares.]
Forensic Accounting Module – Certified Financial Investigator Program – 73
Bank Negara Malaysia
74. Share Premium
• The share premium is the difference between the
issued price and the par value of the shares. For
example, if a company were to issue shares at
RM2.70, and the par value of a share is RM1.00, the
share premium is RM1.70. Do not be confused with
the everyday term of share premium; for example
when a newspaper reports that the opening price of
the shares is at a premium of RM2.00, this means
that the market price of the shares is RM4.70, that is
the difference between the issued price and the
market price on the first day of trading of the shares!!
The share premium account is a capital reserve and
therefore is not available for dividends.
Forensic Accounting Module – Certified Financial Investigator Program – 74
Bank Negara Malaysia
75. INTRODUCTION TO
ANNUAL REPORT
COMPONENTS OF LISTED
COMPANIES
Forensic Accounting Module – Certified Financial Investigator Program – 75
Bank Negara Malaysia
76. INTRODUCTION TO ANNUAL
REPORTS
• All organizations must or should prepare
annual reports on the activities during the
past year. Annual reports represent the
achievement (or otherwise ) of the
organizations.
• In the case of organizations such as
companies, the preparation of annual
reports is a statutory requirement.
Forensic Accounting Module – Certified Financial Investigator Program – 76
Bank Negara Malaysia
77. • This is also true for other organizations
such as government departments or
statutory bodies, where it is required
under Acts of Parliament or state laws.
• Similarly for cooperatives, where the
Board of Directors of cooperatives are
required to present to the members the
annual reports.
Forensic Accounting Module – Certified Financial Investigator Program – 77
Bank Negara Malaysia
78. • For other organizations such as sole
traders or small businessmen, annual
reports, specifically the final
accounts, are important as a method of
assessing the performance of the
business. Also, these annual reports
are important for income tax
purposes, and maybe a requirement
imposed by providers of finance such as
banks, government lending
agencies, etc.
Forensic Accounting Module – Certified Financial Investigator Program – 78
Bank Negara Malaysia
79. Annual Report Components
• The Annual Reports of Companies
represent the most important means of
communication to the shareholders and
other interested parties concerning the
events affecting the company over the
immediate year. The reports
summarises the company‟s operating
activities for the past year and plans for
the coming years.
Forensic Accounting Module – Certified Financial Investigator Program – 79
Bank Negara Malaysia
80. • The contents of the Annual Reports of
listed companies are determined by the
various legal and statutory
requirements.
• The formats also vary from company to
company. There are companies who
issue very impressive annual reports
with high quality printing and numerous
photographs of personalities, products,
etc.; and there are also companies
which issue annual reports only with the
“bare essentials‟.
Forensic Accounting Module – Certified Financial Investigator Program – 80
Bank Negara Malaysia
81. • As a minimum, the annual reports must
comply with the requirements, laws and
regulations of the Companies‟ Act and
regulations set by bodies such as the
Securities Commission and Bursa
Malaysia.
• After meeting the above requirements,
the companies are “free” to determine
the contents and format of the annual
reports
Forensic Accounting Module – Certified Financial Investigator Program – 81
Bank Negara Malaysia
82. Contents of the Annual Reports
of a Typical Listed Company
• Corporate Information
– Members of the Board of Directors
– Board committees
• Audit Committee
• Remuneration Committee
• Nominaton Committee
– Company secretaries
– Address of the registered office
– External Auditors
– Solicitors
– Principal Bankers
Forensic Accounting Module – Certified Financial Investigator Program – 82
Bank Negara Malaysia
83. • Profile of Directors
– Brief description of the personal profile of
the BOD
• Chairman‟s Statement
– Overview of the operations of the business
– Accomplishments of the company during
the financial year
– Challenges of the company and plans for
the coming years
– Thanking specific groups: BOD,
management and employees, suppliers,
creditors, etc
Forensic Accounting Module – Certified Financial Investigator Program – 83
Bank Negara Malaysia
84. • Corporate Governance Statement
– Composition of the BOD
– Attendance at meetings of board members
– Reports of the various Board committees:
• Audit
• Remuneration
• Nomination
• Other committees
– Details of the remuneration of the Directors
– Relations with the shareholders
Forensic Accounting Module – Certified Financial Investigator Program – 84
Bank Negara Malaysia
85. • Statement of Internal Control
– Provides an overview of the state of
internal controls within the company,
primary purpose of which is to safeguard
and protect shareholders‟ interest and the
interest of the company
– Description of the monitoring and
controlling of the assets of the company
– Risk management policies and procedures
– Internal and external audit functions
Forensic Accounting Module – Certified Financial Investigator Program – 85
Bank Negara Malaysia
86. • Financial Summary and Highlights for the
past years (typically three or five
preceding years.
• Financial Statements:
– Directors report
– Balance Sheet
– Income Statement
– Statement of Changes in Equity
– Cash Flow Statement
Forensic Accounting Module – Certified Financial Investigator Program – 86
Bank Negara Malaysia
87. • Notes to the Accounts (Financial
Statements): These notes are
considered as part of the financial
statements and should be read in
conjunction with the Balance Sheet,
Income Statements, Cash Flow
Statements and Statement of Changes
in the Equity.
– General information about the company:
such as the business the company is
involved in, a brief history etc.
– Basis of preparation of the financial
statementsModule – Negara Malaysia Investigator Program –
Forensic Accounting
Bank
Certified Financial 87
88. – Summary of the significant
accounting policies
• Basis of consolidation
• Methods of valuation for stcoks,
investments
• Depreciation methods and rates
• Revenue recognition
• Foreign currency transaction
• Leasing policies
• Dividends, impairment of assets
• Other accounting policies.
Forensic Accounting Module – Certified Financial Investigator Program – 88
Bank Negara Malaysia
89. • Auditors Report:
– Opinion of the auditors of the true and fair view of
the financial statements
• Statutory Declarations: Board of Directors
and Financial Officers
• Analysis of shareholdings /warrantholdings
• List of properties
• Material related parties transactions
• Notice of the annual general meetings
– Agenda at the general meeting
– Statement accompanying the general meetings
– Proxy forms
Forensic Accounting Module – Certified Financial Investigator Program – 89
Bank Negara Malaysia
90. IMPORTANT CONTENTS OF THE
ANNUAL REPORTS
My personal order of preference
• AUDITORS REPORTS
• FINANCIAL STATEMENTS
• NOTES TO THE ACCOUNTS
• DIRECTORS REPORT
• PROFILE OF THE DIRECTORS
• TWENTY OF THE LARGEST AND
SUBSTANTIAL SHAREHOLDERS AND
SHAREHOLDINGS
• FINANCIAL HIGHLIGHTS
Forensic Accounting Module – Certified Financial Investigator Program – 90
Bank Negara Malaysia
91. • Please do the “Exploring the Annual
Reports” exercise.
Forensic Accounting Module – Certified Financial Investigator Program – 91
Bank Negara Malaysia