Accounting Theory And Policy - (final Paper) - International Islamic University Malaysia

Set 1

END-OF-SEMESTER EXAMINATION SEMESTER I, 2007/2008 SESSION KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES Programme

:

BACC

Level of study

:

3&4

Time Duration

: :

9am – 12noon 3 hours

Date

:

29/10/2007

Course Code

:

ACC 4001

Section(s)

:

1-3

Course Title

:

Accounting Theory & Policy

(This Question Paper Consists of 6 Printed Pages with 2 Sections)

DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO INSTRUCTION(S) TO CANDIDATES 1. Section A: Compulsory question 2. Section B: Answer TWO questions only ANY FORM OF CHEATING OR ATTEMPT TO CHEAT IS A SERIOUS OFFENCE WHICH MAY LEAD TO DISMISSAL APPROVED BY:

PART A: Compulsory question Question 1 a. Among the recent concerns on the failure of corporate governance is the collapse of big business corporations such as Enron, Polly Peck and Baring. Various reasons such as lack of monitoring by the relevant parties including board of directors and external auditors have been attributed to such a failure. Provide, and briefly discuss, three governance mechanisms which could be instituted to enhance the monitoring system in a business organization. (9 marks) b. Apart from the collapse of big business corporations, briefly discuss two other recent concerns on the failure of corporate governance (You could refer to Whittington (1993) for the recent concerns on the failure of corporate governance). (6 marks) c. The issue of transparency of information has been viewed as one of the important aspect of corporate governance. Discuss the link between financial reporting function and corporate governance (6 marks). Based on Whittington (1993), discuss in detail, the following two issues related to the systemic problems of corporate governance, with regard to financial reporting: a. Demand of information (5 marks), and b. Monitoring costs (5 marks). (16 marks) d. In the year 2000, Malaysia introduced its own Malaysian Code of Corporate Governance (MCCG) in an attempt to improve the level of corporate governance to be at par with the international standards. Later in the year 2001, these recommendations in the MCCG became mandatory requirements for all public listed companies by Bursa Malaysia. Do you think such institution of corporate governance requirements as mandatory compliance will help improve the level of corporate governance in Malaysia? Briefly justify your answer. (3 marks) (Total: 34 marks)

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PART B: Answer two questions only. Question 1 a. The main underlying factor contributing to a company’s exposure of foreign currency risk is the changes of the exchange rates. For example, during the Asian financial crisis in 1997, many countries such as Indonesia, Thailand and even Malaysia, recorded huge losses due to the adverse effects of volatility of exchange rates. Discuss, the measure which has been taken by Malaysia to limit such foreign currency exposure (2 marks), and its implication to accounting records (2 marks). Is there any solution which Islam could offer to the above problem (3 marks)? (7 marks) b. One of the main requirements in FRS 121 is the determination of functional currency. Why is the determination of the functional currency very important for treating foreign currency transactions and translations (6 marks)? Provide four factors in determining the functional currency of foreign operations (8 marks). (14 marks) c. A related party relationship could have an effect on the financial and operating results of an enterprise in several situations. Provide and explain two examples of such situations. (6 marks) d. In considering any possible related party relationship, FRS 124 stipulates that we need to apply the concept of substance over form in identifying such possible relationship. Provide three situations which might not necessarily lead to related party relationship. (6 marks) (Total: 33 marks)

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Question 2 a. You have just graduated from the International Islamic University Malaysia (IIUM) and you were glad to get a job as the Assistant Accountant of a major land developer in Malaysia. However, within the first month at your new job, you suspected that about 20% of the property held was overvalued. These properties were buildings which were over 20 years old and many of them were not in use anymore. Therefore, the market value of these properties as well as the value in use are likely to be lower than their net book value. When you approached the accountant (your immediate boss) regarding this matter, she informed you, “This is the normal practice of the company. Moreover, the auditors have checked the accounts every year, and each year the auditors report that everything is ok.” You, as the new employee of the company, do not want to cause any problems. However, you know that the company’s practice on accounting for these properties seem to be different from what you learnt in IIUM, particularly under FRS 136 (Impairment of assets). Related to the matter above, provide three steps (with elaboration) to determine whether there is an impairment to those buildings. (6 marks) Provide one plausible reason that could justify the company keeping the buildings at historical costs less depreciation, which the auditors accept. (2 marks) What are the accounting and ethical implications of keeping it at historical costs if the buildings’ values are impaired? Your arguments could include references to accounting concepts and Islamic perspectives. (5 marks) (13 marks) b. EZ Bhd. bought 5 specialised machines on 1 January 2003. Each machine costs RM 100,000. The machines’ useful life is 10 years with no residual value. EZ Bhd uses the straight line method of depreciation. Since these machines are specialised, they do not have a market value. On 31 December 2005, it was found that the demand for the products manufactured by the machines had declined, thus the machines’ value in use was only RM 320,000. On 31 December 2006 the demand for the products picked up and the value in use of the machines was RM 290,000. Show the extract of the Balance sheet as at 31 December 2005 and the extract of the Balance Sheet as at 31 December 2006. (TIP: Show ALL workings and round up your answers to the nearest RM). (10 marks) c. In your own words, what is a hyperinflationary economy? (1 mark) Explain, in your opinion, why it is important that a company in a hyperinflationary economy cannot prepare a regular financial statement, but has to comply with FRS 129? (3 marks) (4 marks) d. You are an auditor of Globewide Bhd. Globewide Bhd. has recently set up a subsidiary in Ruritania, a country which is undergoing hyperinflation. As the auditor, provide three important requirements (with elaboration), as per FRS 129, on how the financial statements of the Ruritania subsidiary and / or consolidated financial statements should be prepared. (6 marks) (Total: 33 marks) 4

Question 3 a. What is the meaning of compound financial instruments? (2 marks) Provide one example of compound financial instruments (1 mark). What are the underlying principles in the treatment of compound financial instruments as suggested by FRS 132 (3 marks)? (6 marks) b. Derivative financial instruments such as futures, forward contracts and swaps have always been used as hedging tools. Define, in your own words, the meaning of derivative financial instruments (3 marks). What do you understand by the term “hedge” (2 marks), and how are derivative financial instruments used as hedging tools (illustrate with one specific example) (4 marks). Is the use of derivative financial instrument contradictory to the Syariah principle? Briefly explain (3 marks). (12 marks) c. Due to the era of globalization and high competition in the business environment, companies have been diversifying their operations either through products’ diversification or operating in various geographical locations to tap various incentives offered, in minimizing their risks’ exposures and maximizing their returns. In conjunction with the above phenomena, FRS 114 outlines recommendations in presenting segment information. How would a business enterprise identify reportable segments in accordance with FRS 114? (7 marks) Is there a possibility of differences arising due to the application of the rules in identifying reportable segments? Explain briefly (3 marks). (10 marks) d. FRS 114 also requires identification of primary and secondary segments for the purpose of reporting format. How would a business entity decide which segment (either business or geographical) is a primary and secondary segment? (3 marks) In addition, the disclosure requirements for the primary segments are much more extensive compared to the requirements for the secondary segments. Apart from segment revenue, results, assets and liabilities, provide four other disclosure requirements for the primary segments (2 marks). (5 marks) (Total: 33 marks)

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Question 4 a.

Explain two main differences between the defined contribution plan and defined benefit plan (4 marks) and provide one example of each (2 marks). Provide two possible reasons, related to accounting, why many employers now prefer to provide defined contribution plan instead of a defined benefit plan to its employees. (4 marks) (10 marks)

b.

IIUM employed a Professor on the 1st of January 2007 on a contract basis for 3 years. At the end of the 3 years of service (31st December 2009), in addition to his normal salary, the Professor has been promised a bonus. The bonus is 20% of his final annual salary. The Professor’s annual salary for 2007 is RM 96,000. On the 1st of January every year he is entitled to a salary increment of 5%. The salary increment rate reflects the interest rate. Required: i. Calculate the bonus the Professor will receive at the end of the 3 years in service at IIUM. ii. If IIUM deposits an equal amount of money as savings every year, and they make the first savings on 31st December 2007, how much will have to be saved in the bank each year by IIUM in order to pay the Professor’s bonus on 31st December 2009? (TIP: Show ALL workings and round up your answers to the nearest RM.) (9 marks)

c.

List three employee benefits other than post-employment benefits (3 marks). Briefly explain how to do the accounting for each. (6 marks) (9 marks)

d.

Briefly explain two main differences between FRS 119 and FRS 126 (2 marks). List three main disclosure requirements of FRS 126 (Accounting and Reporting by Retirement Benefit Plans). (3 marks) (5 marks) (Total: 33 marks)

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