FAR660 – ADVANCED FINANCIAL ACCOUNTING AND REPORTING 2

CHAPTER 1 – HISTORY AND DEVELOPMENT OF ACCOUNTNG AND ACCOUNTING

THEORY

TUTORIAL SOLUTION

SOLUTION 1 (May 2016)

a) Due to the increase in number of shareholders and the dominant economic role played by
industrial corporations after 1900, the reporting practices in the USA saw the influence of
management in the formulation of accounting principles. The separation of ownership gave
the management complete control over the format and content of accounting disclosures.
The dependence on management over financial reporting practices led to the following
consequences:

a. Pragmatic solutions to accounting problems which lacked theoretical support.

b. Focusing on taxable income and minimization of taxes
c. Income smoothing was prevalent
d. Expedient solution to accounting problems and complex problems being avoided
e. Different firms solving the same problems differently.

The situations above generated dissatisfaction in the 1920s and called for the protection of
investors. In the early 1930s, USA went into Great Depression which saw companies
liquidating and the economy downturned. However, the period between 1900-1933 saw few
important events of the era. There was a growing effect of accounting theory of taxation on
business income and it set the stage for the beginning of a harmonisation between tax
accounting and financial accounting. Also, the New York Stock Exchange required all
corporations applying for listing to agree to publish annual financial statements.
(7 marks)

b) In my opinion, the Great Depression in the early 1930s had impacted very heavily on the
government to see the need to protect investors who fell victims to biased financial reports
prepared under the widespread influence of the management. The Institution contribution
phase saw the emergence of institutions established to protect the capital market especially
evidenced by the establishment of the Securities and Exchange Commission by the
Congress in 1934 to administer various federal investment laws including the Securities Act
1933 and Securities Act 1934. The era set the stage for the role of the SEC as a creative
irritant in the development of accounting principle in the USA.

(3 marks)
(Total: 10 marks)

QUESTION 2 (May 2016)

i. Accounting Professions
 MACPA (now known as MICPA) and MIA play active role in the development of
financial reporting in Malaysia.
 MACPA issued specimen company accounts.

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  MACPA was admitted as a member to IASC in 1978 and immediately adopted 4
IASs.
 MIA was established in 1967 under the Accountants Act 1967.
 Both MIA and MACPA developed accounting standards: CWTC and AASC

ii. Securities Commission

 established under the Securities Commission Act 1993.
 issue sets of guidelines for companies to follow: Corporate Disclosure Policy, Post-
Listing Obligations and Accounting Standards and Valuation.
 has the power to ensure companies comply with AAS.

iii. Companies Commission of Malaysia


CCM is formed in 2002 under the Companies Commission of Malaysia Act 2001,
assuming the functions of the Registrar of Companies and Registry of Business.

regulates all types of companies.

ensures companies to lodge the annual returns of financial statements and hold
AGM every year.

has the power to enforce companies to comply with AAS

iv. Bank Negara Malaysia

BNM relies on the guidelines to ensure they provide useful information to users
particularly in the financial reporting area. Guidelines on financial reporting practices for
banking and financial institutions (FSA 1993), including:
a. Guidelines on the suspension of interest on NPL (BNM/GP3) e.g. the classification of
interest accrued on NPL as credit to interest-in-suspense account.
b. Guidelines on the specimen financial statements for the banking industry (BNM/GP8)

v. Bursa Malaysia
 Bursa Malaysia (BM) is a body incorporated to regulate companies listed on its
exchange.
 It has the power to delist, suspend or publicly reprimand companies which did not
adhere to its regulations.
 Companies listed on BM must comply with the KLSE Listing Requirements.
 Provisions relating to financial accounting and reporting on:
o Submission of Reports
o Interim Reporting Requirements

vi. Malaysian Accounting Standard Board - Similar to above

vii. Audit Oversight Board

 implement policies and programmes in ensuring an effective audit oversight system
in Malaysia;
 register or recognise auditors of public interest entities (“PIEs”);
 direct the Malaysian Institute of Accountants (“MIA”) to establish or adopt, or by way
of both, the auditing and ethical standards to be applied by registered auditors;
 conduct inspections and monitor programmes on registered auditors to assess the
degree of compliance of auditing and ethical standards;
 conduct inquiries and impose appropriate sanctions against registered auditors who
fail to comply with auditing and ethical standards;

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  cooperate with relevant authorities in formulating and implementing strategies for
enhancing standards of financial disclosures of PIEs;
 liaise and cooperate with oversight bodies outside Malaysia to enhance the standing
of the auditing profession in Malaysia and internationally; and
 perform such other duties or functions as the Audit Oversight Board determines
necessary or appropriate to promote high professional standards of auditors and to
improve the quality of audit services provided by auditors.

If the breach has been established or proven, the AOB is empowered to take actions
against the person in breach. The sanctions are:
 Directing the person in breach to comply with the provisions the SCA or any
condition, written notice or guidelines;
 Reprimand;
 Requiring professional education to be undertaken;
 Assigning a reviewer to oversee an audit that is undertaken by the auditor
concerned;
 Financial penalty of not exceeding RM500,000;
 Prohibiting the person concerned from auditing financial statements of a public
interest entity for a period of not exceeding 12 months or permanently; and
 Prohibiting the person concerned from accepting any public interest entity as its
client for a period not exceeding 12 months.
(Any 5 x 2 = 10 marks)

Solution 3 (Apr 2017)

(a) Belkaoui (2000) described accounting history as a study of the heritage of accounting.
Explain briefly the contribution of accounting history from the perspective of pedagogy,
policy and practice.
(5 marks)
Contribution of accounting history:
 Pedagogy - accounting history can be very helpful to a better understanding and
appreciation of the field of accounting and its evolution as a social science. It is
meant to educate the members to appreciate their intellectual heritage. The
import of advances in thought may be lost unless they are documented by
scholars who have the historical skills. Without access to analyses and
interpretations of historical developments, empiricists today risk basing their
investigations upon incomplete or unjustified claims about the past.
(3 marks)

 Policy - accounting history is instrumental for a better understanding of the

accounting problems and their institutional contexts as well as the formulation of
public policy.
(1 mark)

 Practice- accounting history could provide a better assessment of the existing

practices by a comparison with the methods used in the past.
(1 mark)

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(b) One of the phases in the development of accounting principles in the US was the
Institution contribution phase. The phase was marked by the creation and the increasing
role of the institutions in the development of accounting principles. Explain the major
events that occurred during this phase.
(10 marks)

During this phase there were 3 major events that occurred:

1. The creation of the SEC

Congress created the SEC in 1934 to administer various federal investment laws
including the Securities Act 1933 and 1934. Section 13 (b) of the Securities Act 1934
played a role in the development of accounting principles by prescribing the form of
the accounting report and the details of information to be shown in the financial
statements. In April 1938 the SEC sent a definitive message that unless the
profession established a standard-setting body, the SEC would use its mandate and
develop accounting principles. It set the stage for the role of the SEC as a creative
irritant in the development of accounting principles.
(3 marks)

2. The approval of broad principles

During this phase the AICPA begin a cooperative effort with the NYSE to establish
standards. However, the AICPA ‘s Special Committee and the NYSE Committee
decided to allow corporation to choose its own accounting methods with very broad
limits but require disclosure of the methods employed and consistency in their
application from year to year. The Committee proposed the first formal attempt to
develop generally accepted accounting techniques known as May’s broad principles.
(3 marks)

3. The new role of the Committee of Accounting Procedures (CAP)

The CAP was given the power to issue pronouncements. CAP issued Accounting
Research Bulletins (ARBs) with a strategy of eliminating questionable and suspect
accounting practices and focusing on particular reporting problems. However,
despite these efforts CAP was criticized for various reasons including failure to give
adequate hearings to financial executives and accounting practitioners; failure to
work on unpopular issues; failure to develop a comprehensive statement of basic
accounting principles and crossing swords with SEC for CAPs preference for the
‘current-operating performance’ and by its failure to limit alternatives available to
management.
(4 marks)

(c) Explain the differences in the roles played by the Financial Reporting Foundation (FRF)
and the Malaysian Accounting Standard Board (MASB) in the new framework for
financial reporting in Malaysia.
(5 marks)

The MASB, together with the Financial Reporting Foundation (FRF), make up the new
framework for financial reporting in Malaysia. The FRF and the MASB was set up with
the passing of the Financial Reporting Act (1997).

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 The FRF act as a trustee body that oversees MASB’s performance, financial and funding
arrangements, and act as an initial source of views for the MASB on proposed standards
and pronouncements. It has no direct responsibility with regard to standard setting.
(2.5 marks)

The MASB on the other hand, was established with the objective of improving the quality
of external financial reporting in Malaysia. It acts as an independent body to develop and
issue accounting and financial reporting standards in Malaysia. It comprises of an
independent standard-setting structure with representation from all relevant parties in the
standard-setting process, including preparers, users, regulators and the accountancy
profession.
(2.5 marks)

Solution 4 (Apr 2018)

a. During the age of stagnation, there were few improvements in accounting techniques
and in most societies single entry still dominated record keeping; amounting to no more
than simple lists on inventories and a receipts and payments account probably due to
due to the small size of businesses and the relatively few transactions involved. During
this period, the main function of the profit and loss account was to provide a mechanism
for closing books of account and much less for the calculation of profit. Books were
closed to the profit and loss on three occasions: the death of a merchant, the dissolution
of a partnership, or when the ledgers were full and new books were required to be
opened. The need for a statement of annual income was not as pressing as it is today.
The average business was small with little distinction between ownership and
management. Most merchants were owner managers and familiar with every aspect of
their trade. There was no public or outside interest in an enterprise reported operations
and merchants considered their businesses to be their own private affairs.
(5 marks)

b. Institution Contribution Phase

Signified by the creation and the increasing role of institutions in the development of
accounting principles. These include the establishment of SEC to administer federal
investment laws including the SC Act that regulates trading securities. The SEC sent a
definitive message that unless the profession established a standard-setting body, the
Sec would use its mandate and develop accounting principles. This has set the role of
the SEC as a creative irritant in the development of accounting principles in the USA.
The Committee on the Accounting Procedure (CAP) was also established to issue
Accounting Research Bulletin or pronouncement with a strategy of eliminating
questionable and suspect accounting practices and focusing on particular reporting
problems. In spite of its efforts, CAP was criticized for its failure, among others to provide
adequate hearings to financial executives and accounting practitioners, failure to work
on unpopular issues and failure to limit the alternatives available to management.

(5 marks)

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Professional Contribution Phase

Signified by the interventions of professional associations and agencies in the

formulation of an accounting theory was spurred on by efforts to eliminate undesirable
techniques and to standardized acceptable techniques. These include the dissolution of
CAP and the setting up a Special Committee of Research Program. In 1959, APB
(Accounting Principle Board) and ARD (Accounting Research Division) is established
with the mission to advance the written expression of what constitutes GAAPs
(Generally Accepted Accounting Principles). However, APB was criticized for providing
limited controversial or random opinions and failing to solve problems of accounting for
business combinations and goodwill.
(5 marks)

c. The MASB was established with the objective of improving the quality of external
financial reporting in Malaysia. It acts as an independent body to develop and issue
accounting and financial reporting standards in Malaysia. It comprises of an independent
standard-setting structure with representation from all relevant parties in the standard-
setting process, including preparers, users, regulators and the accountancy profession.
The MASB, together with the Financial Reporting Foundation (FRF), make up the new
framework for financial reporting in Malaysia. The FRF and the MASB was set up with
the passing of the Financial Reporting Act (1997)
(5 marks)

Solution 5 (Oct 2018)

a) Contribution by Luca Pacioli

 He is generally associated with the introduction of double-entry bookkeeping.
and he published a book (Summa de Arithmetica Geometrica, Proportioni et
Proportionalita), which include two chapters describing double-entry bookkeeping.

Cushing outlines a series of developments of the double-entry model. They include the
following:
 Around the sixteenth century a few changes were made in the bookkeeping
techniques, noticeably, the introduction of specific journals for the recording of
different types of transactions.
 The 16th and 17th centuries saw the evolution of the practice of periodic financial
statement.
 The application of the double-entry system was extended to other types of
organization.
 The 17th century saw the use of separate inventory accounts for different types of
goods.
 Beginning with the East India Company in the 17th century, and continuing with the
growth of corporation following the industrial revolution, accounting acquires a better
status, characterized by the need to inform absentee investors, the need for
auditing, the need for cost accounting, and a reliance on concepts of continuity,
periodicity and accrual.
(5 marks)

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b) Management Contribution phase
 Management had complete control over the selection of financial information
disclosed in annual reports
 Characterised by ad hoc solutions to urgent problems and controversies
 Lack of theoretical support
 Focus on minimisation of income taxes
 Smoothing of earnings
 Complex problems avoided in favour of expedient solutions
 Significant influences of the period
o Interest as a cost controversy:
 The need to invest large amounts of capital for long periods
o Increased overhead
 The inclusion of overhead in product cost became an issue
o Growing effect of taxation of business income
 Arguments for improvement in standards of financial reporting
o From 1900, New York Stock Exchange required corporations to publish
annual financial statements
o Calls for protection of investors
o Board of Examiners established in 1917 to create a uniform certified
practising accountant (CPA) examination
(5 marks)

Institution Contribution phase

 Marked the creation and the increasing role of institutions on the development of
accounting principles.
 Increasing role of institutions on development of accounting principles:
o Creation of the Securities and Exchange Commission to administer
federal investment laws
o Emergence of accounting principles
o Companies were permitted to choose their accounting methods but had
to disclose them
 Committee on Accounting Procedure (CAP) began issuing accounting research
bulletins (ARBs) in 1938
(5 marks)

c) Important development of the Malaysian Companies Act.

 Companies Ordinances were established before Companies Act 1965
 Malaysian Companies Act was established in 1965 that repealed the Ordinances
which formally established the requirements for reporting; and rules and regulations
on accounting.
 It also contained the Ninth Schedule that specified the disclosure requirements in the
financial statements of Malaysian companies.
 The Act was used as the absolute disclosure requirements rather than as minimum
requirement because an accepted accounting framework for financial reporting did
not yet exist in Malaysia.
 This changed when Malaysian approved accounting standards were amended to
converge with IFRS issued by IASB. The focus now is on providing information that
is useful to users in making economic decisions.

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  Companies Act 1965 was replaced by the new Companies Act 2016 in its entirety. √
 Key feature of the new Act is the requirement for reporting companies to comply with
the approved accounting standards issued by MASB. Thus, removing conflicts in
some areas that existed before.
 Further, the Ninth Schedule is removed which means Companies Act does not
prescribe accounting treatments and disclosure requirements for financial reporting.
(5 marks)

Solution 6 (Apr 2019)

a. Briefly explain the importance of accounting history in the development of accounting

practices.
Accounting history could provide a better assessment of the existing practices by a
comparison with the methods used in the past. A tool for a historiography of accounting
to provide knowledge that contributes to a better conduct of accounting research,
practice and enquiry.

Accounting history allows us to better understand our present and to forecast or control
our future. It also increases our ability to make judgments on a broader, more informed
basis. Practitioners can gain insights into accounting methods and practices employed in
the pass as a basis for assessing the procedure’s success or lack of it.

Or any acceptable answers

(5 marks)

b. i. Management Contribution Phase

o Signified by a complete control over the selection of financial information and

disclosure requirements in the annual reports by corporate player; a growing
effect on accounting theory of taxation on business income. √√
o Consequences of the dependence on management initiative include solutions
adopted were pragmatic resulting in the use of accounting techniques which
lacked theoretical support motivated by the desire to smoothen earnings; firm
adopting different techniques for similar issues; focus was on determination of
taxable income and the minimization of income taxes.
(5 marks)

ii. Institution Contribution Phase

o The SEC established to administer federal investment laws including the

Securities Commission Act that regulates trading securities. The SEC sent a
definitive message that unless the profession established a standard-setting
body, the SEC would use its mandate and develop accounting principles. This
has set the role of the SEC as a creative irritant in the development of
accounting principles in the USA.

o Committee on the Accounting Procedure (CAP) to issue Accounting Research

Bulletin or pronouncement with a strategy of eliminating questionable and
suspect accounting practices and focusing on particular reporting problems. In
spite of its efforts, CAP was criticized for its failure, among others to provide

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 adequate hearings to financial executives and accounting practitioners, failure
to work on unpopular issues and failure to limit the alternatives available to
management.
(5 marks)

c. Bursa Malaysia

The Bursa Malaysia is an exchange holding company (a private sector body)

incorporated under s15 of the Capital Markets and Services Act 2007 (CMSA) to
regulate companies listed on its exchange. Unlike the Companies Commission, the
Securities Commission or Bank Negara Malaysia, the Bursa Malaysia does not have the
legal power to enforce compliance. Bursa Malaysia can, however, rely on the power it
has to delist, suspend or publicly reprimand errant listed companies for any non-
compliance with its regulations. The Bursa Malaysia Listing Requirements contain some
provisions relating to financial accounting and reporting which are submission of annual
reports and interim reporting requirements.

(2.5 marks)
Securities Commission

The SC is a public sector statutory body established under the Securities Commission
Act 1993 with investigative and enforcement powers. Their main functions are the
encouragement and promotion of the development of the capital market in Malaysia
through the regulation and enforcement of all matters relating to the securities industry.
The SC places great importance on due diligence and professional responsibilities of
corporate advisers, directors and management of public companies and the
maintenance of high standards of disclosure and accounting standards. It has statutory
power to enforce compliance with its regulations, including compliance with approved
accounting standards.
(2.5 marks)

Solution 7A (Dec 2019)

A. The Great Depression in the early 1930s had impacted very heavily on the government to
see the need to protect investors who were victims to biased financial reports prepared
under the widespread influence of the management.

The Institution contribution phase saw the emergence of institutions established to protect
the capital market especially evidenced by the establishment of the Securities and
Exchange Commission by the Congress in 1934 to administer various federal investment
laws including the Securities Act 1933 and Securities Act 1934. The era set the stage for the
role of the SEC as a creative irritant in the development of accounting principle in the USA.

(5 marks)

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b. Professional Contribution Phase (1959-1973)

 The intervention of professional associations and agencies in the formulation of

accounting theory was spurred on by the efforts to eliminate undesirable techniques
 The professionals (AICPA) take lead role in GAAP formulation through collaborative
efforts between the Accounting Research Division and the Accounting Principles Board
(APB).
 AICPA lead the team to formulate the GAAP, however faced with obstacles such as - no
established theoretical framework, no authority on statement issued and the flexibility of
alternative accounting treatments.

(5 marks)
The Politicization Phase

 The Financial Accounting Standard Board (FASB) was established in which deductive
and quasi political approach to the formulation of accounting standard appears.
 As accounting affects economic behavior of users, standard setting process becomes
political
 Standard setting process is a social decision. Since standards restrict behavior, affected
parties must accept the standards. Acceptance can be gained voluntarily, forced or
mixture of both
(5 marks)

Solution 7 (B) (Dec 2019)

Securities Commission

The SC is a public sector statutory body established under the Securities Commission Act 1993
with investigative and enforcement powers. Their main functions are the encouragement and
promotion of the development of the capital market in Malaysia through the regulation and
enforcement of all matters relating to the securities industry.
The SC places great importance on due diligence and professional responsibilities of corporate
advisers, directors and management of public companies and the maintenance of high
standards of disclosure and accounting standards. It has statutory power to enforce compliance
with its regulations, including compliance with approved accounting standards.
(2.5 marks)
Bursa Malaysia

The Bursa Malaysia is an exchange holding company (a private sector body) incorporated
under s15of the CMSA 2007 to regulate companies listed on its Exchange. Unlike the
Companies Commission, the Securities Commission or Bank Negara Malaysia, the Bursa
Malaysia does not have the legal power to enforce compliance. It can however, rely on the
power it has to delist, suspend or public reprimand errant listed companies for any non-
compliance with its regulations.
The Bursa Malaysia Listing Requirement contains some provisions relating to financial
accounting and reporting. They are provisions on the submission of the annual report and the
submission of the quarterly report to Bursa Malaysia.

(2.5 marks)

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