Under the Securities Industry (Compliance with Approved Accounting Standards) Regulation 1999, every listed company, its directors and chief executive shall prepare and present the company's financial statements in accordance with approved accounting standards for financial periods ending on or after 30 June 1999.

This reminder is given following the SC's review of financial statements of 100 companies for the financial years ended 1998 and 1999 on compliance with the International Accounting Standards - IAS 7 (Cash Flow Statement). In the review, the SC focused on compliance with IAS 7 on the basis that the cash flow statement is an important tool for evaluating the financial viability of a business enterprise. Cash flow is an important element of a business as it determines the liquidity and long-term survival of the business.

Through the review, the SC intends to create awareness among public-listed companies (PLCs) on the need to comply with approved accounting standards. With that awareness it is hoped that PLCs will address deficiencies in their subsequent financial statements in accordance with the requirements of approved accounting standards.

The findings of the review of IAS 7 revealed several common reporting deficiencies relating to, among others, the following areas:

adjustment of non-cash transactions

In applying the indirect method, paragraph 18(b) of IAS 7 requires the adjustment of non-cash transactions to the net profit or loss in the cash flow statement. Non-cash items that were not adjusted included the provision for doubtful debts, provision for slow-moving stocks and various provisions that were charged or credited to the profit and loss account.

From the review, 6% of the companies reviewed should be commended for their presentation of the cash flows from operating activities using the direct method, which is encouraged under Paragraph 19 of IAS 7, and in doing so, these companies are not required to identify and adjust non-cash items.

disclosure of accounting policy used for determining cash and cash equivalent components

Companies also typically did not disclose or inadequately disclosed the accounting policy used for determining cash and cash equivalent components, contrary to paragraph 46 of IAS 7.

The SC also found that some companies included borrowings such as revolving credit, short-term borrowings and term loans as a component of cash and cash equivalents, which are generally considered as financing activities, in accordance with the standard.

presentation of interest paid and received

Interest paid and received was not presented separately and consistently in the cash flow statement as either operating, investing and financing activities, as required by the standard. Several companies that had capitalised their interest also failed to disclose this item as interest paid in the cash flow statement.

classification of cash flow transactions

The SC found that companies often made errors in the way they classified cash flow items. Several companies did not classify their cash flow transactions in accordance with their nature of trade and non-trade, which should then be classified according to their purpose i.e. for operating, investing or financing activities, as prescribed by the standard.

identification of assets and liabilities of subsidiaries acquired or disposed

Companies also had a tendency of not identifying or inadequately disclosing the assets and liabilities of subsidiaries disposed/purchased.

presentation of foreign exchange differences arising from translation of foreign subsidiaries

Most companies with foreign subsidiaries did not present the exchange differences arising from translation of foreign subsidiaries separately from operating, investing and financing activities, as provided in the standard.

presentation of investing and financing activities

Another area of non-compliance is the presentation of investing and financing activities as net instead of gross amount, contrary to the requirements of the standard.

In addition, resulting from the diversity of reporting practices, the SC found that certain areas of the standard gave rise to differing interpretations. These interpretations aggravated the non-compliance issues and should be addressed in order to have a consistent and uniform application and presentation of the cash flow statement, for ease of comparability.

The SC has and will communicate its findings to the respective companies with major deficiencies. The affected companies have acknowledged the need for their cash flow statements to be refined and would be taking concerted efforts towards ensuring that all aspects of approved accounting standards are rigorously applied in the presentation of their future financial statements.

The SC on its part will be monitoring these companies and if the corrective actions are not forthcoming, the SC will initiate additional regulatory steps, including enforcement actions where appropriate.

It is important that preparers of financial statements exercise diligence and take an active role in making themselves integral constituents within a disclosure-based regulatory (DBR) regime, where enhanced transparency, accountability and comparability of financial statement will be paramount. In this respect, the SC would like to see improvement in the quality of disclosure in financial statements by PLCs.

In addressing the above, the SC will also be working with the industry such as the Federation of Public-listed Companies (FPLC), the Malaysian Institute of Accountants (MIA) and the Malaysian Accounting Standards Board (MASB) to facilitate greater compliance and understanding of the Malaysian accounting standards.

As a point of clarification, financial statements for the period ended 30 June 2000 must comply with the Malaysian Accounting Standards Board standards including MASB 5, which has replaced IAS 7 and is consistent in all material respect with IAS 7. The SC is currently conducting a review of the extent of compliance with MASB 1 - Presentation of Financial Statements and MASB 5 - Cash Flow Statements.