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Common Accounting Mistakes

Common Accounting Mistakes
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Common Accounting Mistakes

Introduction

Accounting is not just for tax reporting purposes, but it can help to identify areas in which costs can be cut or resources can be added to increase the profit and efficiency of the company.

Some accounting mistakes can lead to incorrect financial status presentation and hence wrong business decisions being made.

Let's find out the common mistakes in accounting.

1. Assuming Profit equals Cash Flow

This common misconception by many people will distort the company’s real financial position.

When a company buys machines to increase production, the profit of the company will not be reduced by the same amount of payment for the purchase of machines. Instead, the cost of the machines will be recorded as Property, Plant and Equipment under Balance Sheet.

2. Data Entry Error

Accounting work is all about details. While having an accounting software is essential to efficiency for complex and high transactions, nonetheless, human being can make mistakes whether we are using accounting software or manual way.

For example, wrong double entries being keyed, wrong amount being recorded or deposit paid not deducted from invoice.

It is important to have segregation of duty with other personnel to do the review work to minimize this type of errors.

3. Mix up between personal and business accounts

Many people will feel maintaining 2 bank accounts to separate personal and business accounts as very tedious work. Actually, it is not. In fact, it will smoothen the whole accounting process and increase efficiency.

It is important to have the mindset that business accounts should be strictly for business purpose. If the personal expenses are mixed up with business expenses, the accounts will be scrutinized by the auditors and tax officers even tighter.

Likewise, it is a good practice to do proper filing by separating business and personal bills.

4. Consistency in Classification between Direct and Indirect cost

Cost structure refers to different type of expenses a business incurred, which comprises of direct and indirect costs.

Direct costs are expenses that can be attributed to a specific product, while indirect costs are expenses required to maintain and run a company.

If the classification of the direct and indirect costs is not being identified properly or consistently, it will lead to unusual fluctuation in the gross profit margin. This will further affect decision making made by the company.

5. Not Reconciling Books with Bank/Loan Statements

This process, called reconciliation, helps verify that your financial records match your bank/loan statements. Failing to do this can lead to inaccuracies.

6. Not Accounting for Petty Cash

Small, petty cash transactions can add up over time and lead to noticeable discrepancies if not properly recorded.

7. Inaccurate Depreciation Calculations

Incorrect calculation of asset depreciation can lead to an overstatement or understatement of asset values.

8. Using the Cash-Based Accounting Method

Businesses usually use either cash-based or accrual accounting. Using the wrong method for your business type can lead to discrepancies.

9. Not Back-up Accounting Data

Imagine the consequence if the financial data is lost, stolen or hacked, and you don’t have any back up.

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Difference Between Tax Capital Allowance and Accounting Depreciation

Difference Between Tax Capital Allowance and Accounting Depreciation
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3 Key Difference Between Tax Capital Allowance and Accounting Depreciation


1. New Asset Yet in Use
MPERS S17: Depreciation of an asset begins when available for use. The asset must be in use.

2. Assets Acquired from Related Party
Account point of view: Cost is depreciated over the asset’s useful life. Tax point of view: Only remaining residual expenditure qualifies.

3. Company Assets Used by Related Party
According to Public Ruling No. 5/2014, assets not for business purpose is not entitled to claim capital allowance.

References
1. Public Ruling No. 5/2014
2. MPERS 17 – Property, Plant and Equipment
3. Income Tax Act 1967

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Insolvency Test for A Company

Insolvency Test for A Company
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Insolvency Test for A Company

In terms of the “solvency test”, solvency relates to the assets of the company, which are fairly valued, equal or exceed the liabilities of the company.

What does it mean to be insolvent?

It is a state of financial distress where a company is unable to pay its bills.

What are the warning signs of insolvent companies?

  • Inability to pay your debts.

  • Poor profitability.

  • No access to finance.

  • Unpaid creditors beyond normal credit terms.

  • Unable to raise further equity funding.

What is the company insolvency test?

  • Cash flow test

  • Ratio test

The purpose is to analyze:

  • Existing debt of company

  • The dates any company income will be received

  • The date each debt will be due for payment

  • The company’s present and expected cash resources

  • Whether the company’s debts are payable in the near future

Ratio Insolvency Test

Quick Ratio = Projected Cash + Account Receivable / Current Liabilities

Reveal the reliability of the company’s repayment of short-term debts with current assets and inventory.

Solvency ratio = Projected Net Profit + Depreciation / Current Liabilities

It is to measures the ability of a company to meet its short-term debts.

Current ratio = Projected Current Assets / Current Liabilities

It is commonly used as a quantification of short-term solvency and give a sense of the efficiency of a company’s operating cycle or its ability to turn its product into cash.

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What is Use of Right Assets in Accounting?

What is Use of Right Assets in Accounting?
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What is Use of Right Assets in Accounting?

Background

MFRS 117 introduces the treatment of both finance lease and operating lease, but operating lease is treated as an off-balance sheet lease.

MFRS 16 superseded MFRS 117 and introduced the “right to use” approach, which requires lessee to recognize the rights and obligations arising from the lease arrangement in the balance sheet with the effect from 01.01.2019 in order to standardize the treatment for both finance and operating lease.

Definition of Right-of-Use Asset -  MFRS 16

  • Lessee has the rights to control the use of an identified asset for a period of time. [Para 9]

  • Lessee able to obtain all of the economic benefits generated from the use of assets. [Para 9]

  • Lessee able to decide how and for what purpose the asset is used [Para 9]

  • Lessee has the obligation to make payment for the identified asset [Para 9]

  • Risk and reward of the ownership for the asset is still mainly retained with the lessor. [Para 65]

Exemption of MFRS 16 – Para B6

  • Short term lease (Less than 12 months) and contain no purchase option.

  • Lease for asset with a low value when new

Initial measurement:

(i) Cost of the right of use asset should include [Para 24]:

  • Lease liability

  • Prepayment of lease payment – lease incentives

  • Initial direct costs

  • Dismantling costs

(ii) Lease liability [Para 26]:

  • Present value of lease payments

Subsequent measurement:

(i) Right of use assets [Para 30]

  • Cost – accumulated depreciation – accumulated impairment loss

(ii) Lease liability [Para 36]

  • Recognise lease interest and payment

Tax implications:

Lessee:

  • Not entitled to claim the capital allowance on the leased assets [Public Ruling No. 5/2014 - Para 11.3]

  • Depreciation charged is non-tax deductible

  • Interest expenses is tax deductible if fulfilled the condition of Section 33 (1) of Income Tax Act 1967 

Sources:

  • MFRS 16

  • Section 33 (1) of Income Tax Act 1967

  • Public Ruling No. 5/2014

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MPERS Section 7 Statement of Cash Flows

MPERS Section 7 Statement of Cash Flows
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MPERS Section 7 Statement of Cash Flows

What is the Statement of Cash Flows?

This is the statement showing the inflows and outflows of cash for the reporting period and showing separate changes from operating activities, investing activities and financing activities.

Information to be presented in the Statement of Cash Flows

1) Operating activities

The main activities that generate revenue for the company.

Example:

o Cash receipts from sales and other revenue

o Payments to suppliers and employees

o Payments or refunds of income tax

2) Investing activities

The acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Example:

o Purchase and proceeds from the sale of Property, plant and equipment

o Purchase and proceeds from the sale of marketable securities

o Advance or repayment of advances and loans made to other parties

3) Financing activities

It results in an entity's equity and borrowings changing in size and composition.

Example:

o Proceeds from issuing shares or other equity instruments

o Proceeds from issuing short-term or long-term borrowings and repayment of debts

Method to present the cash flow statement

2 types of methods to represent:

A) Indirect method

Determined by adjusting net Profit or loss for the effects of: -

  •  Changes in inventories, receivables, and payables;

  •  Non-cash items, such as depreciation, unrealised foreign currency gains and losses and etc; and

  •  All other items that relate to investing or financing.

B) Direct method

Major classes of gross cash receipts and payments are disclosed.

Information may be obtained such as:

  •  From the accounting records; or

  •  By adjusting sales, cost of sales and other items in the income statement for:

  • Changes in inventories, receivables, and payables;

  • Other non-cash items; and

  • Other items that are investing or financing.

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Month End Closing

Month End Closing
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Month End Closing

The month-end close is the collection of financial accounting information, review, and reconciliation of records each month. This is a financial reporting requirement for some companies and helps businesses keep accurate records throughout the year.

Appended below is the checklist for month end closing :

  • Record incoming cash

  • Update account payable

  • Reconcile bank accounts

  • Review petty cash

  • Review fixed assets

  • Count stocks

  • Check revenue and expense account

  • Adjust journal entry

  • Final review

  • Plan for next month

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MPERS Section 32 - Events after the end of the reporting period

MPERS Section 32 - Events after the end of the reporting period
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MPERS Section 32 - Events after the end of the reporting period

1. What is the Event after the reporting period?

These are the events that may affect the financial statement that occurs between the end of the reporting period and the date of the financial statements.

There are two types of events which are

Adjusting events

- provide evidence of conditions that existed at the end of the reporting period

Non-adjusting events

Non-adjusting events

- indicative of conditions that arose after the end of the reporting period

2. Recognition & Measurement

a) Adjusting events after the reporting period

- Adjust the amounts recognised in its financial statements, including related disclosures

- Example of adjusting events:

o Impairment of assets with audit evidence

o contingent liabilities

o the bankruptcy of a major customer which confirms that a loss existed

o discovery of fraud or errors that show the financial statements were incorrect

b) Non-adjusting event

- No adjustment to be recognised in financial statements but including the related disclosures

- Types of non-adjusting events

o disposal of a major subsidiary

o announcement of a plan to discontinue an operation

o major purchases or disposals of assets

o destruction of a major production plant by a fire

o entering into significant commitments or contingent liabilities

3. Disclosure

a) Adjusting events after the reporting period

- Shall adjust the amounts recognised in its financial statements, including related disclosures, to reflect adjusting events after the end of the reporting period.

b) Non-adjusting events after the reporting period

- Disclosure shall include: -

 the nature of the event; and

 an estimate of its financial effect, or a statement that such an estimate cannot be made.

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Exposure Draft on Section 23 Revenue of the IFRS for SMEs

Exposure Draft on Section 23 Revenue of the IFRS for SMEs
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Exposure Draft on Section 23 Revenue of the IFRS for SMEs

Section 23 of the IFRS for SMEs Accounting Standard set out requirement for SMEs to recognise revenue. It is based on IAS11 Construction Contracts and IAS 18 Revenue.

The IASB has applied the alignment approach to IFRS 15 Revenue from Contracts with Customers and is proposing to revise Section 23 by introducing a single framework for recognising revenue for goods and services.

The IASB is proposing to

  1. introduce a framework for recognizing revenue which require revenue to be recognized when the customer obtains control of the goods/service, based on the 5 step model in IFRS 15.

  2. simplify requirements of IFRS 15 to make the five-step model easier for SME

  3. provide transition relief to allow SME to apply their current revenue recognition policy to contracts already in progress.

Framework for recognizing revenue

1. Identify the contract with a customer

2. Identify the promises in the contract

3. Determine the transaction price

4. Allocate the transaction price to the promises in the contract

5. Recognise revenue when (or as) the entity satisfy a promise

What would this proposal mean for SME?

A comprehensive framework for determining when and how much revenue to recognise for goods and services.

For many contracts, the revised Section23 is expected to have little, if any, effect on the amount and timing of revenue recognition.

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Accounting for government grants

Accounting for government grants
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MPERS vs MFRS : Government Grants

In this article, we share the main differences in the accounting requirements for associates under MFRS 120 and Section 24 of MPERS.

Government Grants

Government grants are assistance by the government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.

They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with the government which cannot be distinguished from the normal trading transactions of the entity.

Section 24 of MPERS - Government Grants

Use income approach as all government grants are income transactions.

If there is no specified future performance condition imposed, the grant is recognized upon receivable.

If there is a specified future performance condition imposed, the grant is recognized when the condition is met.

Government grants are measured at the fair value of the assets received or receivable.

MFRS 120 Government Grants

Use income approach as all government grants.

Conditions :

1. The entity will comply with the conditions imposed.

2. The grants will be received.

Recognise grants in P/L on a systematic basis over periods in which the entity recognise the related costs.

Non-monetary grants is measured by

  1. The fair value of assets received.

  2. Nominal amount paid

 

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Accounting for intangible assets

Accounting for intangible assets
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MPERS vs MFRS : Intangible Assets

In this article, we share the main differences in the accounting requirements for associates under MFRS 138 and Section 18 of MPERS.

Intangible Assets

An item meets the definition of intangible asset if it poses the three criteria:

  • Identifiability.

  • Control over resources.

  • Existence of future economic benefits (or service potential).

An intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights. Separable assets can be sold, transferred, licensed, etc.

Examples of intangible assets include computer software, licences, trademarks, patents, films, copyrights and import quotas.

Section 18 of MPERS - Intangible Assets

Research and development expenditures should be recognized as expenses.

All internally generated intellectual property should be recognized as an expense.

MFRS 138 - Intangible Assets

Development expenditure of R&D activities that meet the recognition criteria must be capitalize.

All research and other development expenditure are recognized as an expense.

Internally generated intellectual property should not be recognized as an asset.

An entity is to recognise an intangible asset only if the two criteria are met:

1. It is probable that the expected future economic benefits (or service potential) will flow to the entity; and

2. It can measure the cost or fair value of the asset reliably.

MFRS 138 allow an entity to capitalise expenditure from the development phase if it can demonstrate all of the following conditions:

  • The technical feasibility of completing the intangible asset so that it will be available for use or sale.

  • Its intention to complete the asset and use or sell it.

  • Its ability to use or sell the intangible asset.

  • How the intangible asset will generate probable future economic benefits or service potential.

  • The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.

  • Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

MFRS 138 provide an accounting policy choice to subsequently measure an intangible asset either using the cost model or the revaluation model.

MFRS 138 states that intangible assets may have a finite or indefinite useful life. This requires an entity to assess and determine useful life. An intangible asset with indefinite useful life is not amortised but must be tested for impairment annually.

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Accounting in Associates

Accounting in Associates
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MPERS vs MFRS : Associates

In this article, we share the main differences in the accounting requirements for associates under MFRS 128 and Section 14 of MPERS.

Associates

Investment in associate refers to the investment in an entity in which the investor has significant influence but does not have full control like a parent and a subsidiary relationship. Usually, the investor has a significant impact when it has 20% to 50% of shares of another entity.

Section 14 of MPERS - Associates

Measure investment in associates

  • The cost model

    Investment is measured at cost less impairment. The quoted associate must be measured at fair value.

  • The equity method

    No exception for temporary investment and for conditions of severe restriction.

  • The fair value model

    Investment is measured at fair value through profit and loss. Any investment which is impracticable to measure fair value must be measured using the cost model.

When an associate becomes a subsidiary or joint venture, a remeasurement is required with gain or loss recognized in P/L account

MFRS 128 - Associates

Measure investment in associates under the equity method in the consolidated financial statements.

No exception for temporary investment and for conditions of severe restriction.

When an associate becomes a subsidiary (not joint venture), a remeasurement is required.

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Accounting in Associates

Accounting in Associates
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MPERS vs MFRS : Associates

In this article, we share the main differences in the accounting requirements for associates under MFRS 128 and Section 14 of MPERS.

Associates

Investment in associate refers to the investment in an entity in which the investor has significant influence but does not have full control like a parent and a subsidiary relationship. Usually, the investor has a significant impact when it has 20% to 50% of shares of another entity.

Section 14 of MPERS - Associates

Measure investment in associates

  • The cost model

    Investment is measured at cost less impairment. The quoted associate must be measured at fair value.

  • The equity method

    No exception for temporary investment and for conditions of severe restriction.

  • The fair value model

    Investment is measured at fair value through profit and loss. Any investment which is impracticable to measure fair value must be measured using the cost model.

When an associate becomes a subsidiary or joint venture, a remeasurement is required with gain or loss recognized in P/L account

MFRS 128 - Associates

Measure investment in associates under the equity method in the consolidated financial statements.

No exception for temporary investment and for conditions of severe restriction.

When an associate becomes a subsidiary (not joint venture), a remeasurement is required.

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Accounting for Investment Properties in Malaysia

Accounting for Investment Properties in Malaysia
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MPERS vs MFRS : Investment Properties

In this article, we share the main differences in the accounting requirements for investment properties under MFRS 140 and Section 16 of MPERS.

Investment Properties

Investment property is property (land or a building – or part of a building – or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation, or both, rather than for:

  • Use in the production or supply of goods or services, or for administrative purposes; or

  • Sale in the ordinary course of operations.

What is the accounting treatment for investment properties?

Section 16 of MPERS - Investment Properties

If the fair value can be measured reliably without undue cost or effort on an ongoing basis, the IP must be measured at the fair value model.

All other IP must be accounted for as property, plant and equipment using the depreciated cost model in Section 17 Property, Plant and Equipment.

MFRS 140 - Investment Properties

Measured at fair value or depreciated cost model

 

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Accounting for borrowing cost Malaysia

Accounting for borrowing cost Malaysia
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MPERS vs MFRS : Borrowing Cost

In this article, we share the main differences in the accounting requirements for borrowing costs under MFRS 123 and Section 25 of MPERS.

Borrowing Cost :

Borrowing costs are interest and other expenses incurred by an entity concerning the funds borrowed. Borrowing cost includes the following type of costs:

  • Interest on bank borrowings (both short-term and long-term) as well as bank overdrafts.

  • Amortisation of discounts or premiums relating to borrowings.

  • Amortisation of ancillary costs incurred in connection with the arrangement of borrowings.

  • Finance charges in relation to finance leases and service concession arrangements.

  • Exchange differences from foreign currency borrowings, to the extent that they are regarded as an adjustment to interest costs.

  •  

What is the accounting treatment for borrowing costs?

Section 25 of MPERS - Borrowing Cost

Recognise all borrowing costs as an expense in profit or loss in the period they are incurred. The option of capitalising borrowing costs on qualifying

assets are not allowed.

MFRS 123 - Borrowing cost

Borrowing costs that are directly related to a qualifying asset shall be capitalised as part of the cost of that asset.

Borrowing costs directly attributable to the acquisition, construction or production of a 'qualifying asset' (one that necessarily takes a substantial period of time to get ready for its intended use or sale) are included in the cost of the asset.

An entity shall cease capitalising borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete

 

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MPERS vs MFRS Malaysia

MPERS vs MFRS Malaysia
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MPERS vs MFRS : An overview of Accounting Standards in Malaysia

There are 2 types of accounting standards in Malaysia

  1. MPERS : Malaysian Private Entities Reporting Standard

  2. MFRS : Malaysian Financial Reporting Standards

Private Entities

Private entities shall comply with either:

1. Malaysian Private Entities Reporting Standard (MPERS) in their entirety for financial statements. or

2. Malaysian Financial Reporting Standards (MFRS) in their entirety.

A private entity is a private company as defined in section 2 of the Companies Act 2016 that –

  1. is not itself required to prepare or lodge any financial statements under any law administered by the Securities Commission Malaysia or Bank Negara Malaysia; and

  2. is not a subsidiary or associate of, or jointly controlled by, an entity which is required to prepare or lodge any financial statements under any law administered by the Securities Commission Malaysia or Bank Negara Malaysia.

Notwithstanding the above, a private company that is itself, or is a subsidiary or associate of, or jointly controlled by, an entity that is a management company as defined in section 2 of the Interest Schemes Act 2016 is not a private entity.

MPERS vs MFRS

More to come in coming days the comparison MPERS and MFRS

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Overview of The Malaysian Financial Reporting Standards (MFRS)

Overview of The Malaysian Financial Reporting Standards (MFRS)
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The Malaysian Financial Reporting Standards (MFRS)

Accounting Standards Malaysia

There are three types of approved accounting standards here in Malaysia:

  • The Malaysian Financial Reporting Standards (MFRS) – This is the MASB approved accounting standards for entities, but this does not include private entities

  • Private Entity Reporting Standards (PERS) – This is the MASB approved accounting standards for all private entities. However, this has been withdrawn effective 1 January 2016.

  • Malaysian Private Entities Reporting Standards (MPERS) – This replaces the previous PERS and is in effect from 1 January 2016.

MFRS

Entities Other Than Private Entities shall apply the MFRS framework for annual periods beginning on or after 1 January 2012, with the exception of entities that are permitted in the alternative to apply the Financial Reporting Standards (FRS) framework.

The Malaysian Financial Reporting Standards (MFRS) framework was introduced by the Malaysian Accounting Standards Board (MASB) and came into effect on 1 January 2012.

It is fully compliant with the International Financial Reporting Standards (IFRS) framework, which enhances the credibility and transparency of financial reporting in Malaysia.

The numbering of the MFRS corresponds with the equivalent IFRS Standard issued by the IASB. MFRS prefix with “1xx” corresponds with the equivalent IAS.

 

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Accounting for lease under MPERS Section 20

Accounting for lease under MPERS Section 20
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Finance lease vs Operating lease under MPERS Section 20

What is Lease?

An agreement stated the transfer of an asset with the right of use by a lessor to a lessee.

There are two types of leases which are

- Finance lease

- Operating lease

Differences between a finance lease and an operating lease?

Classification of Finance lease:

- Ownership of the asset will be transferred to the lessee by the end of the lease term.

- Lease term is for the major part of the useful life of the asset even if the title is not transferred.

- Lessee has the option to purchase the asset at a lower price compared to the fair value.

- Present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.

- Leased assets have specialised nature that only the lessee can use without major modifications.

Classification of Operating lease:

- Lease does not transfer substantially all risks and rewards incidental to ownership.

Recognition and measurement for a lessee - Finance lease

Statement of Financial Position – Assets and Liabilities

- Recognise as assets and liabilities at amounts equal to:-

o the fair value of the assets; or

o if lower, the present value of the minimum lease payments

- Initial direct costs of the lessee are added to the amount recognised as an asset

- Using the effective interest method to reduce the outstanding liability

Statement of Comprehensive Income - Expenses

- Depreciate the asset according to lease term or useful life

- Finance charges of each period during the lease term

Operating lease

- Recognise lease payments as an expense over the lease term on a straight-line basis

Disclosure for lessee

Finance lease

- Carrying amount of the asset

- Amount of future minimum lease payment.

i) Not later than one year

ii) Later than one year and not later than five years

iii) Later than five years

Operating lease

- Amount of future minimum lease payment under non-cancellable operating leases ：

i) Not later than one year

ii) Later than one year and not later than five years

iii) Later than five years

- Lease payment is recognised as an expense.

Source:

MPERS 20 Leases

https://bit.ly/3wEJJXO

 

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How are joint ventures accounted for?

How are joint ventures accounted for?
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How are joint ventures accounted for?

i. What is an investment in a joint venture?

- A contractual agreement involved two or more parties.

- The parties involved have joint control over the business activity.

ii. Types of Joint venture

- Jointly controlled operations

- Jointly controlled assets

- Jointly controlled entities

iii. Recognition and measurement

1. Jointly controlled operations

Definition:

- Two or more venturers use their resources or expertise to produce a product.

- Each venture bears its expenses and liabilities and raises its finance.

- The revenue from the sale of the joint product and any expenses incurred in common are shared among the venturers.

Recognition in venturer's financial statements:

- Assets and liabilities incurred

- Expenses incurred and share of income

2. Jointly controlled assets

Definition:

- The joint control, and often the joint ownership, of assets dedicated to the joint venture.

Recognition in venturer's financial statements:

- share of the jointly controlled assets

- share of any liabilities incurred jointly or incurred by the venturer

- share of income

- share of expenses incurred.

3. Jointly controlled entities

Definition:

- A corporation, partnership, or other entity in which each venturer has an interest.

Recognition in venture’s financial statements:

(i) Cost model

- Cost less accumulated impairment losses

- Recognise distributions received from the investment as income

(ii) Equity model

- Recognise at the transaction price (including transactions costs)

- Subsequently adjusted to reflect the investor’s share of the profit or loss

(iii) Fair value model

- Initially, measured at transaction price (exclude transaction cost).

- Subsequently, measured at fair value, any changes recognized in profit or loss

4. What differentiates an interest in the joint venture from an investment in an associate?

Investment in associate = The investor has significant influence over the investee, by possessing the power to participate in their financial and operating decisions.

Joint venture = The parties involved have the power to joint control over the arrangement.

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Difference Between GAAP vs IFRS

Difference Between GAAP vs IFRS
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Difference Between US GAAP vs IFRS

US GAAP vs IFRS are the two most dominant systems of accounting. The International Financial Reporting Standards (IFRS) are used by international companies while companies use GAAP in the U.S.

Summarised are the key difference on these US GAAP vs IFRS

  1. International Accounting Standard Board vs Financial Accounting Standard Board

  2. USA vs The rest of world

  3. Rule based vs Principal based with flexibility

  4. General interpretation for the entity vs Specific procedure for the entity

  5. LIFO as preferred method for inventory valuation vs LIFO is not preferred for inventory valuation

  6. Cost model on PPE vs Cost & Revaluation model can be used on PPE

  7. Fair value on intangible assets vs Future economic benefits on the intangible assets

  8. R&D is expensed off vs Some development cost can be capitalized and amortised

  9. Extraordinary & unusual items are show below net profit vs Not allowed

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Investment in Associates MPERS

Investment in Associates MPERS
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Investment in Associates MPERS

Commonly asked question on investment in associates :

* How do you account for investment in associates?

* Is investment in associates a current asset?

* How do you record investment in accounting?

What is an investment in associates?

An investor has a significant influence on the investee’s decision of its

- Financial policy; and

- Operating policy

What is a significant influence?

- Power to participate in the financial and operating decisions of the investee

- Investor holds directly or indirectly ≥ 20% voting power of the investee

- For shareholdings < 20%, the significant influence must be clearly demonstrated to classify the investment as associate

What is the document showing the significant influence of an investor?

- Representation on the board of directors

- Participation in the investee’s policy-making processes, including participation in decisions about dividends or other distributions

- Material transactions between the investor and the investee

- Interchange of managerial personnel

- Provision of essential technical information

Recognition and measurement of investment of associates

(i) Cost model

- Cost less accumulated impairment losses.

- Recognise dividends and other distributions received from the investment as income.

(ii) Equity method

- Recognised at the transaction price (include transaction costs)

- Share of post-acquisition profits or losses

- Dividends received from an associate merely reduce the carrying amount of the investment.

(iii) Fair Value model

- Measured at the transaction price (exclude transaction cost)

How to Present

- classify investments in associates as non-current assets

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