Financial Reporting

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TP021713

Financial Reporting

Mohammad Talha Awan

Table of content: 1) Introduction of Financial Reporting ………………………………………………… Objective of MASB 2

2) Qualitative characteristics of financial statement …………………………………… 3-5 Understandability Relevance Reliability Comparability Recognition Measurement

3) Introduction to Malaysian Airlines ………………………………………………….

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4) Conceptual Framework of Malaysian Airlines …………………………………….. 6-10 FRS 139 FRS 101 Critical judgements made in applying accounting policies Key sources of estimation Revenue Recognition Consolidation Basis

5) Corporate Governance in MAS ……………………………………………………. 10-13 Roles and Responsibilities of the board The audit Committee

6) Conclusion ………………………………………………………………………….

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7) Appendix …………………………………………………………………………... 14-15 8) References …………………………………………………………………………. 16

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TP021713

Financial Reporting

Mohammad Talha Awan

Introduction: As the users of accounting information are entitled to reliable, relevant information and unbiased financial statements, the International Accounting Standards Board (IASB) has developed or prepared a Conceptual framework that includes a set of principles, rules and accounting standards to ensure that the accounting process remains consistent and error free. The Malaysian Accounting Standard Board that was established under the 1997 Financial Reporting Act as an independent body develops and issues financial and accounting reporting standards in Malaysia. The Malaysian accounting standards have adopted many (IFRS) but with additional guidelines that reflect the local circumstances not covered or stated in the International Standards. The functions and objectives of MASB are stated below: To issue new accounting standards and review, modify or revise existing standards as approved ones. Conduct consultations from public and determine the scope of accounting standards. To develop a conceptual framework where proposed accounting standards can be measured and evaluated To develop and implement such accounting standards that can provide clear, biased and accurate information to accounting users. To make both international and national accounting standards comparable and compatible with each other. (http://www.masb.org.my/index.php?option=com_content&view=article&id=3&Itemid=7) The framework also outlines the users of accounting information and why they are interested: Investors: these are people who are willing to invest money into the business and provide capital, in return which dividends are paid to them. Financial statements help them determine whether to invest or sell of their existing shares depending on the financial position of the business. As they are willing to take the risk, they are entitled to fair and bias information.

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TP021713

Financial Reporting

Mohammad Talha Awan

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Employees: these are the people that work for the betterment of the company. They are interested about the profitability and stability of the company so that it can assure them job security and they can look for better job opportunities based on the financial statements.

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Lenders are interested in accounting information just to make sure that they will be able to receive their loan and interest on the due dates.

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Government agencies are interested in corporate information for monitoring business activities and also to determine the tax policies.

Qualitative characteristics of Financial Statement: These are concepts that are applied while producing financial statements and make them useful for accounting users. There are 4 qualitative characteristics: 1) Understandability: An important characteristic that the financial statement should include is that it should be presented in such a way that it is understandable by the users of accounting. While preparation of the financial statement it is assumed that the users have a basic knowledge about business, accounting activities and their importance so that they can study the information given. However it does not mean that complex accounting information should be excluded just because it might be difficult for the users to understand and therefore such information should be stated as it is relevant to economic decision making needs of users.

2) Relevance: This concept states that accounting information generated should be able to make an impression or influence the decision making of the users by helping them compare past, present and future information so that evaluations can be made.
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The relevance of an information can be easily determined its nature or materiality. Information is only considered material if its omission from the financial statement can influence or change the economic decisions of the accounting users. It helps the business determine which information is useful depending on the size of the item, or misjudgment made due to its omission.

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TP021713

Financial Reporting

Mohammad Talha Awan

3) Reliability: For information to be useful, it is necessary that it’s also reliable meaning that it’s free of errors and the financial statements represent a fair and bias value. For example the balance containing assets should only record transactions that are termed and recognized as assets rather than recording expenditures under it. There are usually risks involved in representing faithful or fair value as some items or transactions are very difficult to classify or measure, this can involve the treatment of goodwill. Some of the firms might not recognize such information in financial statements but it is considered relevant to record such items and disclose that there might be a possible risk involved in measuring or recognizing the particular item

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Substance over firm: this is an accounting principal that ensures the financial statements give accurate and relevant information. Entities the practice using this concept, records items according to their economic reality rather than its legal form. Example: a firm using an item on lease states that they don’t actually own he machine but it will still be recorded as asset if they intend to make most use of its useful period or if the lease value is almost equal to its actual market value.(http://www.ventureline.com/accountingglossary/S/substance-over-form-definition/)

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Prudence: in order for financial statements to be relevant it is necessary to record transactions on time. Prudence is a concept that makes sure assets are not overstated and expenses and liabilities understated as it takes into account consideration of bad debts and depreciation of assets. You tend to delay recording of revenue unless and until you certain about it, whereas expenses and liabilities are recorded at once. This concept ensures that all assets and liabilities represent a fair realistic value and thus reliability is maintained.

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Completeness: for financial statements to be reliable it is necessary for the all information to be recorded completely, as omission of an item or transaction can cause the data to be misleading therefore affecting the judgment and decision making of accounting users.

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TP021713

Financial Reporting

Mohammad Talha Awan

4) Comparability: Users should be able to compare financial statements with that of previous years so that they can evaluate the financial position and performance of the business. It is important that consistency is maintained while applying accounting policies and standards, any changes in policies should be informed to the users. This is why International accounting standards helps to achieve and maintain comparability.

Recognition is the process of deciding whether to include an item that is defined as an element and meets the recognition criteria in the Comprehensive Income Statement or the Statement of financial position. For example revaluation of assets and liabilities leads to increase or decrease in equity which can be defined as income or expenses, but they are actually included under equity as revaluation reserve.

Measurement is another process which determines the monetary value of the items or elements that are to be recorded in the Financial Statements. There are various basis of measuring the monetary value depending on the type of transaction or element. Historical cost: assets are to be recorded at the purchase price of the item or fair value of the consideration given, whereas liabilities are to be recorded at the expected amount to be paid to satisfy the liability. Realizable value: assets are recorded at the amount that could currently be obtained by disposing or selling it off. Present value: assets are to be recorded at the presented value of their future cash flows that they are expected to generate whereas the liabilities are discounted to present value of future payments that are required to make in order to settle the loan payments. Most the enterprises use historical cost while preparing financial statements, but usually stocks are recorded at lower of cost or net realizable value.

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TP021713

Financial Reporting

Mohammad Talha Awan

Introduction to Malaysian Airlines: To clearly understand how a conceptual Framework is followed while preparing financial statements let us have a look at the Annual report of Malaysian Airlines. The Malaysian airline is a government owned air freight Company and mainly operates its flights from Kuala Lumpur. The airline has diversified itself vastly into related industry which includes catering service, tourism packages, air freights and also leasing aircraft. The Airline business consists of more than 20 subsidiaries and that are fully owned by Malaysian airlines that means it had more than half shares in that company or voting power to influence the decision making and operating activities in the subsidiary companies. Conceptual Framework applied in Malaysian Airlines: The Malaysian Airlines is a public limited company that is listed on the stock exchange market, which means that they have to follow the accounting framework and ensure that the Malaysian Accounting Standards are applied while preparing Financial Statements. Under the Directors report and financial statement the accounting policies or qualitative characteristics applied are clearly stated as notes, so that the users are aware of any changes in policies that are applied while preparing financial statements. Significant accounting policies followed by Malaysian Airlines are stated below: The financial statements of both group and the company as whole were prepared on the basis of historical cost concept, where most of the assets or transactions were valued at the actual purchase price. (http://www.swck.edu.my/Courses%20Available/downloads/FRS%20139%20Flyer.pdf) The implementation of FRS 139 was supposed to be after January 2010, but MAS has decided to adapt to it at the starting of January 2009 itself. FRS 139 main characteristic is the measurement and recognition concept, which requires all past and future transaction or derivatives to be recorded in the financial statements on their contracted dates. The standard also requires great use of fair value, while allowing some of the assets and liabilities to be measured according to the amortized cost model.

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TP021713

Financial Reporting

Mohammad Talha Awan

1) Under FRS 139 assets are classified into 4 categories:

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Loans and trade receivable until year end 2008 were recorded at gross receivables less provision for doubtful debt, now after the implementation of FRS 139 all loans and receivables are recorded at the fair value which later on is amortized using the effective interest rate method (this rate actually discounts future cash payments through useful life of the financial asset).

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Held to maturity- for debt investments such as bonds and notes that the company holds onto until maturity, they should be amortized and recorded in the Balance Sheet, where as any gain or loss on amortization is recorded in the comprehensive income statement.

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Assets available for investment- financial assets that are available for sale and are not for trading purposes are recorded at Fair or market value in Balance Sheet whereas if any impairment loss is incurred it will be recognized in the Income Statement.

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Any financial assets or derivatives that are held for trading purpose are recognized as fair value in the Balance Sheet.

Treatment of tax after implementation of FRS 139: Any sort of interest income derived from a Malaysian source is subject to tax. Realized foreign exchange gains and losses that are generated from revenue transactions are taxable in that particular year of assessment, whereas unrealized gains or losses are not subject to tax Foreign exchange gains or loss whether realized or unrealized are not chargeable to tax if they arise from capital transactions.

2) FRS 101: Presentation of Financial Statement: This revised FRS requires the owner and non-owner’s equity to be presented separately; it introduces the Statement of Comprehensive Income where all income and expenses that are recognized in profit or loss and equity are shown together, which is being followed at Malaysian Airlines also.

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TP021713

Financial Reporting

Mohammad Talha Awan

3) Critical judgements made in applying accounting policies: Contingent liabilities: it is discussed in the financial statement notes that the company has several due litigations with various parties; these are just legal proceedings in courts to determine legal rights. The board of directors after consulting with lawyers assessed the merits of each case and made provision for liabilities in the financial statements. Lease commitments: the group as whole is involved in lease arrangements of air crafts and freights with its holding company and other third party. They have determined that since they do not retain the ownership and rewards of these leased assets, the aircrafts and freighters won’t form part of any property, equipment or classified as assets of the Group.

4) Key sources of estimation uncertainty: Impairment of Intangible assets: the group decides about the landing slots which have an endless useful life which are tested for impairment usually on an annual base or on frequent intervals. Estimation is usually made for the value of cash generating units to which the landing slots actually belong; this is done by making an estimation of the future cash flows that will be generated by this unit and then discounting it to present cash value. Provision for direct operating costs relating to aircraft: operating an airlines business involves creating provisions for many direct operating costs such as fuel, landing and parking charges; meals and technology upgrade related expenses. An estimate is made for provision based on historical experience or other factors that seems relevant under circumstances and provisions are made for carrying amounts of liabilities at the end of financial year. Depreciation of Aircraft, property and equipment: the depreciation of aircraft, spare engines, property and equipment are made on a straight line basis over the assets useful life period. Manager review the depreciation method of residual values by end of every accounting year just to ensure that consistency is maintained. Any changes occurred in the residual value or useful life of the assets may result in changes in future depreciation charges.

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TP021713

Financial Reporting

Mohammad Talha Awan

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Provision for aircraft maintenance: as part of the conditions stated in leasing aircrafts it is important to make sure heavy maintenance is carried out by the company. In order to satisfy that provisions are made for maintenance costs such as airframes, engines, landing gears, auxiliary units etc. in the financial statements based on number of flight hours and assumptions on estimated conditions of the assets. These estimates are basically made on past experience and the management regularly reviews that the estimated figures are near to actual.

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Unutilized tickets: tickets that are unutilized are eventually recorded as revenue based on the terms and conditions of the ticket and historical trends.

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Fair value of financial assets: value of assets and liabilities that cannot be derived from active markets and are recorded in the financial statements, they are valued based on valuation methods including the discounted cash flow technique.

5) Revenue Recognition: Revenue from services: all passenger tickets and cargo sales including administration fees are recognized as revenue in the Comprehensive Income Statement only when the confirmation and payment for transportation services are received. Dividend Income: this income is only recognized and recorded when the Groups rights to receive payments are organized or established. Rental Income: this is recognized on accrual basis over the time period of lease. Disposal of assets: any loss or gain that has incurred through disposal of assets is only recognized and recorded when the ownership of asset is transferred to another party, usually when the asset has been delivered to the buyer. Revenue is usually recognized when there is economic benefit is associated with the transaction and will flow to the Group.

6) Consolidation basis and subsidiaries: Subsidiaries: these are entities or companies that are completely or party owned by another company. A company can wholly control the subsidy company if it owns more than half of its stock. The group has subsidiaries and has the ability to control the

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TP021713

Financial Reporting

Mohammad Talha Awan

financial and operating activities and policies so that they can gain benefits from their activities. Any investment made in subsidiaries of the company is stated at cost value minus any impairment or non-recurring charge in the separate financial statements. Any gain or losses of disposal on such investments are shown in the Comprehensive income statement. Consolidation: the consolidated financial statement of Malaysian Airlines consists of the financial statements of both the company itself and its subsidies as at the Balance sheet date. The statements of the subsidiaries are produced or prepared at the same presentation date as the company’s. All subsidiaries are consolidated from the day of acquisition that is the date when the company actually gains control until the day that such control ceases. While preparing the consolidated financial statements the company makes sure that all intra group balances or any unrealized gains and losses are completely eliminated. It is also made sure that consistent and uniform accounting policies are applied while preparation of financial statements under similar circumstances. The financial statements of MAS include minority interest that represents the proportion of the fair value of assets and profits or losses not held by the Group.

Corporate Governance in MAS: It has become an important priority for the Board of Directors in Malaysian Airlines to maintain an optimum level of corporate governance in the company. They have been persistent in ensuring that highest level of corporate culture and standards are followed throughout the group both locally and internationally for the best interest of their shareholders. In February 2006 a Whistle blowing program was established to maintain internal and fair control in the company. Whistle blowing is a concept that involves any employee of the company to inform the shareholders about any conspiracy or mismanagement that is taking place in the company. Employees in MAS can raise any sort of concern relating to malpractice, irregularities and negligence noticed or observed in the company without any fear or threat of job security. A properly managed whistle blowing system can ensure internal control in the company

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TP021713

Financial Reporting

Mohammad Talha Awan

as effective measures and actions can be taken by shareholders to prevent any sort of fraud and preserve the integrity of the Group as whole. The “Board charter” has been adopted by the board as suggested by the Green book, to ensure that all board members fulfill their responsibilities and duties as directors and follow the legislations and regulations affecting their conduct. The following manner below states how MAS has strengthened its principals regarding fair implementation of Corporate Governance.

Roles and Responsibilities of the board: The duty of the board is to determine the Airlines long term objectives and then strategies accordingly to meet those goals. The board’s duty is to ensure that in order to fulfill the objectives optimum amount of resources as in work force is maintained, and appropriate managers are appointed to achieve given targets so that the business can operate effectively. The main objective of implementing corporate governance is to ensure that the board is mindful of monitoring the company’s performance in an ethical bias manner so that it can meet its responsibilities to the shareholders and stakeholders. Apart from the above duties the board of director’s main duty in MAS is to approve capital investments or disposal of assets, hiring and planning of experienced senior management, arranging for funding of the organization and dividends and finally approving the annual financial statements that are to be represented at the AGM. The MAS board of directors consists of 10 members: 1 non- executive Chairman 3 non-independent directors 6 independent directors

The board meets the requirement of bursa Malaysia listing on independent directors in order to maintain stability. The main purpose of implementing independent directors is to ensure that the rights of the shareholders are fulfilled as these types of directors are independent and

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TP021713

Financial Reporting

Mohammad Talha Awan

free from any restrictions. They can effectively exercise their judgment for the benefit of the company because they do not have any conflict of interests. Characteristics of an independent director are: Has not been appointed by the company for the past 5 years Is not affiliated or working under the company payroll, but is an advisor to the company Has no link with any significant customers of the company or its related parties Is not a member of relative of any employ who for the past 5 years was working for the company Is not affiliated with any organization that receives funding from the company to avoid favourism Is not a controlling person of the company

The Audit committee: The board of audit committee was appointed by MAS board of directors in accordance to Malaysian rule of Corporate Governance: It compromises of no less than 3 members Majority of the directors should be independent All members are non-executive directors One of them should be a member of the accounts association

According to the terms of office a person should be a member of BAC for three years, and then re-nominated and then appointed by the board. The performance of BAC members is monitored by the board of directors at least once every three years. The main objective of the Audit committee is to assist the board of directors in performing their duties and responsibilities properly relating to the implementation of proper accounting standards and reporting methods of the MAS Group.

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TP021713

Financial Reporting

Mohammad Talha Awan

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Duties and responsibilities of the Audit committee: All audit reports should be reviewed by the committee along with the external auditors so that they can evaluate the internal control system properly

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Analyzing the quality of external auditors and coming to a conclusion of appointing the same auditors or terminating them.

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The committee should analyze quarterly reports and all annual financial statements before submitting it to the board of directors. Any changes in accounting policies, occurrence of unusual events and to what extent the financial statements complied with the proposed standards should be reviewed by the Audit committee.

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Finally to review and resolve any sort of conflicts arising within the group including any questions raised against the duties or loyalty of management.

The MAS audit committee receives regular reports from the chief internal auditor on the results of activities conducted. It also continuously monitors the performance of both internal and external auditors throughout the period and also discusses about audit issues quarterly to ensure effective implementation of policies and Corporate Governance.

Conclusion: Malaysian Airline recognizes the importance and works hard to build an ethically responsible corporate structure and maintain transparency in business actions with all the stakeholders of the company. The company complies properly with specified financial reporting standards and has developed programs such as whistle blowing in order to maintain High level of Corporate Governance in the Company. In order to improve the corporate structure in terms of transparency and their compliance to using proper accounting standards, incentives should be offered to the management for their efficiency. Below given are the directors and independent auditors report stating that MAS have taken keen interest in the adaption of newly implemented financial reporting standards by MASB and have made sure the users of financial statements are presented with true and fair value.

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TP021713

Financial Reporting

Mohammad Talha Awan

Appendix:

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Mohammad Talha Awan

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Mohammad Talha Awan

References: MASB. 2011. MASB. [ONLINE] Available

at: http://www.masb.org.my/index.php?option=com_content&view=article&id=3&Itemid=7. [Accessed 01 December 2011].

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IAS Plus: Framework for the Preparation of Financial Statements. 2011. IAS Plus: Framework for the Preparation of Financial Statements. [ONLINE] Available at:http://www.iasplus.com/standard/framewk.htm. [Accessed 01 December 2011].

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IASB Framework - Financial Statements. 2011. IASB Framework - Financial Statements. [ONLINE] Available at:http://www.managementaccountant.in/2009/07/iasb-frameworkfinancial-statements.html. [Accessed 01 December 2011].

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Conceptual Framework (PAUSED) . 2011. Conceptual Framework (PAUSED) . [ONLINE] mework.htm. [Accessed 01 December 2011]. Available at:http://www.ifrs.org/Current+Projects/IASB+Projects/Conceptual+Framework/Conceptual+Fra

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Accrual Concept With Examples, Accrual Theory Of Accounting, Justification & Drawbacks Of Accrual Concept, Accounting Homework Assignment Help, School, College, University Accounting . 2011. Accrual Concept With Examples, Accrual Theory Of Accounting, Justification & Drawbacks Of Accrual Concept, Accounting Homework Assignment Help, School, College, University Accounting . [ONLINE] Available at: http://www.transtutors.com/accounting-homework/Concepts-and-Conventions/accrualconcept.aspx. [Accessed 01 December 2011].

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Corporate Info - Our Story | Malaysia Airlines. 2011. Corporate Info - Our Story | Malaysia Airlines. [ONLINE] Available at:http://www.malaysiaairlines.com/my/en/corporateinfo/our-story.html. [Accessed 01 December 2011].

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What is relevance in accounting? - Questions & Answers - AccountingTools. 2011. [ONLINE] Available at: http://www.accountingtools.com/questions-and-answers/what-isrelevance-in-accounting.html. [Accessed 01 December 2011].

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