Unformatted text preview: Accrual Accoun*ng and Financial Repor*ng in Hong Kong 1 1. Accoun*ng Principles and Concepts 2 Concepts and Principles The En*ty Concept The business en*ty is separate from its owners The Reliability Principle Accoun*ng records are based on the most objec*ve evidence available The Cost Principle Assets and services are recorded at actual (historical) cost The Going Concern Concept The assump*on that the en*ty will remain in opera*on long enough to use exis*ng assets for their intended purpose The Stable-Monetary-Unit Concept The assump*on that the monetary unit's purchasing power is stable (ignores infla*on) 3 2. Accrual accoun*ng and cash flows 4 Accrual vs Cash Accoun*ng Accrual Accoun*ng Impact of business transac*ons are recorded when the transac*on occurs Revenues are recognized when earned. Expenses are recognized when incurred. Cash Accoun*ng Transac*ons are recorded when cash is received or paid. Revenues are recorded when cash is received. Expenses are recorded when cash is paid. 5 Income Measurement Business Deals Business Deals Beginning of Year End of Year Accrual vs Cash Accoun*ng Under accrual accoun*ng, cash transac*ons are recorded as well as noncash transac*ons such as: Purchases of inventory on account Sales on account Deprecia*on expense Accrual of expenses incurred but not yet paid Usage of prepaid rent, insurance, and supplies 7 Accrual vs Cash Accoun*ng Generally accepted accoun*ng principles (GAAP) require that business use accrual accoun*ng. 8 Ethical Issues in Accrual Accoun*ng Accruals require the use of judgment to determine which period should reflect revenues earned. Managers should not use accruals to "smooth" income by delaying or accelera*ng recogni*on of either revenues or expenses. 9 What has this company done? Sales of PT900 in first quarter of 2003: --- 6000 pieces (Total produc*vity in 2003: 112) Sales of diamond in first quarter: ---2302.45 carat / (Total produc*vity in the year: 926.3) Sales of Golden Kalium in 3rd quarter--- 60133.09 g /(Total produc*vity: 0) 3. Adjus*ng the accounts 11 The Adjus*ng Process Prepare a trial balance. Review trial balance and other records for adjus*ng entries - basic categories of adjus*ng entries: Accruals Deferrals Deprecia*on Prepare and post adjus*ng entries. Prepare an adjusted trial balance to ensure accuracy of debits and credits aber pos*ng. Prepare financial statements. 12 A Case Study 13 Modern Beauty Salon Background Founded in 1991 by Ms. Tsang. Expanded during 1991-2006 with regards to services and branches By 2005: Staff--831 Branches--13 Week 4 14 Background--Loca*on Week 4 15 Background--Services and products 16 Incen*ve The IPO process induce the large shareholder--Ms. Tsang--to manipulate up earnings Offering price is determined by performance of company Constraint--Lis*ng regula*on, GAAP, Auditor and Market 17 Behavior--How the company is making money? 18 Behavior--Revenue recognized from expired package (revenue was overstated) Week 4 19 Behavior--hiding the lodge raised to HKCC against company (Hiding cost) 20 Consequence: First day stock price First day stock price: Opened with 0.79 (decrease with 21% from offering price) Closed at 0.91 (decrease with 9%) Second day Week 4 21 Is Modern Beauty a single case? 22 4. Financial repor*ng in Hong Kong 4.1 Complete Set of Corporate Annual Reports Rules governing the lis*ng of securi*es on the SEHK Corporate Governance Profiles of directors and senior management Companies Ordinance Report of the Directors Report of the Auditor HKAS 1 Income statement (profit and loss accounts); Balance sheet; Statement of changes in equity; Cash flow statement; Accoun*ng policies and explanatory notes; 24 4.2 Corporate Governance Minimum Disclosure for companies listed on main board and growth enterprises market (GEM) corporate governance prac*ces; directors' securi*es transac*ons; the board of directors; chairman and chief execu*ve officer; non-execu*ve directors; remunera*on of directors; nomina*on of directors; auditors' remunera*on; and audit commimee. 25 4.2 Corporate Governance Disclosure encouraged share interests of senior management; shareholders' rights; investor rela*ons; internal controls; and management func*ons. 26 4.2 Profile of directors and senior management Execu*ve directors Non-execu*ve directors Management Informa*on Age Educa*on Qualifica*on Experience ... 27 Li Ka-shing 77 GBM, KBE, JP, was sent to hospital on Sep. 6th , 2005. Cumulated Daily Stock Return 28 Monthly cumula*ve abnormal stock return (CAR) around succession Succession and firm value Fan, Jian and Yeh (2008) 29 If the CEO used to be a poli*cian... 30 4.3 Directors' report Corporate Ordinance Main board lis*ng rules Informa*on included (for example): Principal ac*vi*es of the company and its subsidiaries & any significant changes; Results and Dividend recommended; Charitable and other dona*ons (>$1,000) Movements in reserves, fixed assets, debentures and share capital; Directors' interest in shares, share op*ons and contracts; Names of the directors during the financial year Connected transac*on Major suppliers and customers 31 Wuliangye ( Wang Guochun, now the chairman of parent company, used to be the chairman of parent and listed company. Investment in trading shares with Chendu Yizhi ends with a loss of RMB80 M Wang Guoxue, his brother, runs a company opera*ng with the distribu*on of wine. Wang Ge, his son, is in charge of New York branch, the real proper*es of which values US$20M is missed from acct book Wang Guohui, his brother,... Mr. Wang, he nephew... Baiqiang, husband of his private doctor, .... Li Xiaobo, brother of his private doctor,.... 32 4.3 Directors' report Informa*on included (for example): Substan*al shareholder Remunera*on policy Interest in compe*tor Post balance sheet event Auditor and remunera*on to auditor (the above is not exhaus*ve) 33 4.4 Independent auditor's report Para.1 -Introduc*on and scope Para. 2-Director's responsibility Para. 3-Auditor's responsibility Para. 4-Opinion Unqualified Opinion report Qualified Opinion report Adverse Opinion report Disclaimer of Opinion report Reference @ Wikipedia 34 4.4 Income Statement Disclosure requirements: Show a true and fair view of the profits HKAS 1 states the minimum disclosure requirements for material items on the face of the income statement 35 Informa*on to be presented on the face of the income statement Revenue Other income is income derived from ordinary course of business that is not included in revenue such as royal*es, commissions and interests. Finance cost; Share of profits and losses of associates and joint ventures accounted for using the equity method; Pre-tax gain or loss recognized on the disposal of assets or semlement of liabili*es amributable to discon*nuing opera*ons; Tax expenses; and Profit or loss Profit or amributable to minority interests & to equity holders of the parent when items of income and expenses are material, addi*onal line items, headings and subtotal should be presented 36 4.5 Income statement Informa*on to be presented on the face of the statement of comprehensive income The components of other comprehensive income include: changes in revalua*on surplus (see HKAS 16 Property, Plant and Equipment and HKAS 38 Intangible Assets); actuarial gains and losses on defined benefit plans recognized in accordance with paragraph 93A of HKAS 19 Employee Benefits; gains and losses arising from transla*ng the financial statements of a foreign opera*on (see HKAS 21 The Effects of Changes in Foreign Exchange Rates); gains and losses on remeasuring available-for-sale financial assets (see HKAS 39 Financial Instruments: RecogniHon and Measurement); the effec*ve por*on of gains and losses on hedging instruments in a cash flow hedge (see HKAS 39). 4.5 Comprehensive income 37 4.6 Balance Sheet Disclosure requirements: Give a true and fair view of the state of affairs of the company at the end of its financial year. Comply the CO. HKAS 1 states the minimum disclosure requirements for material items on the face of the Balance Sheet 38 4.6 Balance Sheet Informa*on to be presented on the face of the BS HKAS 1 Property, plant and equipment; investment property intangible assets financial assets investments accounted for using the equity method; biological assets; inventories; trade and other receivables; cash and cash equivalents; trade and other payables; 39 4.6 Balance Sheet provisions; financial liabili*es liabili*es and assets for current tax deferred tax liabili*es and deferred tax assets minority interest, presented within equity; and issued capital and reserves amributable to equity holders of the parent. addi*onal line items, headings and subtotals shall be presented on the face of the balance sheet when such presenta*on is relevant to an understanding of the en*ty's financial posi*on. 40 4.8 Notes to the Financial Statements statement of compliance with HKFRSs; summary of significant accoun*ng policies applied; suppor*ng informa*on for items presented in the statements of financial posi*on and of comprehensive income, in the separate income statement (if presented), and in the statements of changes in equity and of cash flows, in the order in which each statement and each line item is presented; and other disclosures, including: con*ngent liabili*es (see HKAS 37) and unrecognized contractual commitments, and (ii) non-financial disclosures, eg the en*ty's financial risk management objec*ves and policies 41 4.7 Statement of Change in equity total comprehensive income for the period, showing separately the total amounts amributable to owners of the parent and to minority interest; for each component of equity, the effects of retrospec*ve applica*on or retrospec*ve restatement recognised in accordance with HKAS 8; the amounts of transac*ons with owners in their capacity as owners, showing separately contribu*ons by and distribu*ons to owners; and for each component of equity, a reconcilia*on between the carrying amount at the beginning and the end of the period, separately disclosing each change. 42 AMR case Please refer to word file. 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- Spring '11
- Generally Accepted Accounting Principles, accrual vs, HKAS, accoun*ng