Sample Disclosure – Principal Activities [continuing and discontinued operations] (27 January 2011)

Principal Activities

The principal activity of the Company is investment holding and its subsidiaries are primarily engaged in the manufacture and sale of chilli sauce, bottles and containers manufacturing and packaging and the provision of management services.

There have been no significant changes in the nature of these activities during the financial year except as disclosed in Note 5 to the financial statements.

Please click this for all the relevant disclosure in one place: Sample Disclosure Of Continuing And Discontinued Operations In One Place (27 January 2011)

Sample Disclosure – Accounting Policy Of Warrants Reserve (24 January 2011)

Warrants reserve

Proceeds from the issuance of warrants, net of issue costs, are credited to warrants reserve. Warrants reserve is non-distributable and will be transferred to share premium account upon the exercise of warrants. Balance of warrants reserve in relation to the unexercised warrants at the expiry of the warrants period will be transferred to accumulated profits.

Article On Income Tax Treatment Of Non-Executive Directors (19 January 2011)

A good article I have read today on income tax treatment of non-executive directors of companies on The Star newspaper

The Star, starbiz, Wednesday January 19, 2011

Did you know non-executive directors are a special group of taxpayers?

Tax Insights – By Kang Beng Hoe kbh@taxand.com.my

COMPANY non-executive directors are a special breed of taxpayers under our tax laws.

They are treated differently from their position recognised in contract law. Directors are not employees; they do not have a master-servant relationship with the company of which they are directors. They have what is commonly known as a contract “for” service with the company. This is distinct from an employee’s contract, a master-servant relationship evidenced by a contract “of” service.

If this sounds confusing, it is. An eminent judge in Britain drew the difference between a ship’s master, a chauffeur and a reporter on the staff of a newspaper all being employed under a contract of service whereas a ship’s pilot, a taximan and a newspaper contributor are employed under a contract for services.

Directors are holders of “office” for a term, which is not defined in the tax legislation and is said to be of “indefinite context”. However, under most tax laws, including ours, directors are included in the definition of “employees” and the term “employment” includes the holding of an “office”.

What is the significance of this rather convoluted tax treatment? Well, the reason is not difficult to guess: to garner more taxes for our tax collectors.

Without this extended definition, directors pay tax on their fees and other cash benefits such as attendance allowances and nothing else.

Their treatment as employees means that they are taxed on “perquisites” and “benefits-in-kind”, which they receive as directors of the company that pays them.

The home utilities costs incurred by a director, if paid for by the company, would be a “perquisite”. The value of accommodation provided to a director would be a “benefit-in-kind”.

The law on the taxability of “benefits-in-kind” derives from the English common law, i.e. the judicial pronouncement of courts in England.

In a landmark case, the House of Lords took the view that a benefit which is not convertible into money would not constitute income and should not be taxable on the employee receiving it. The case involved a bank manager who was allowed to occupy the upper floor of the said bank premises. The tax authorities sought to regard the value of the living accommodation as income to the employee. The court took the view that since the manager could not convert the benefit into money by say, assigning his occupying right to another person for cash, the benefit was not income to him. This decision became a general principle, that a benefit would only be taxable if it is capable of being converted into money or money’s worth.

Our tax laws, in light of this principle, contain a specific provision to tax a housing benefit provided to an employee, thus effectively nullifying the general rule.

No similar specific provision has been enacted to tax benefits such as the use of a car. Thus, a director who has been provided the use of a car might argue that this benefit is not convertible into money and he should pay no tax on it.

He would find his claim thwarted by the fact that specific words have been added to the taxing provision to tax a benefit (not being a benefit convertible into money).

These words are clearly designed to put our present day non-executive director (and all employees as well) receiving non-monetary benefits on quite a distinct fiscal path from that of our legendary bank manager.

So non-executive directors should be in no doubt that the tax man would seek to tax many, if not all the benefits which they receive as directors. The benefits are becoming more varied, with levels of remuneration packages increasing.

This is in part due to the recognition by companies, particularly public companies, that directors’ responsibilities and the risks associated with them have increased substantially in recent years.

A recent study of directors’ remuneration of financial institutions made a strong case that fees and other payments should be trending upwards if talented and experienced individuals are to fill a depleting pool of qualified directors.

Public companies generally make payments to their non-executive directors in some of the following forms:

  • Director fees. These are generally fixed to motivate responsibility.
  • Meeting fees are paid to encourage participation.

Both fees are taxable in full. A recent change in the law allows the fees to be taxed in the year they are received rather than in the year for which they are paid.

Fees received from a foreign tax resident company are not taxable on the basis of it being foreign income. Exceptionally a Malaysian incorporated company can be tax resident outside Malaysia if it is managed and controlled from outside the country.

Ex-post and ex-gratia payments are made to recognise long service and substantial contributions.

These are taxable in full unless they meet the criteria of “retirement gratuities”.

Stock awards paid to cultivate a longer-term perspective and sense of belonging are taxable on the market value of the stocks.

In certain instances, the use of a personal service company of the director to receive the fees could be used to benefit from the lower 20% rate.

However care should be taken in structuring this to avoid challenge as a tax avoidance arrangement.

The question often arises as to whether the expenses of travelling to attend board meetings could be deductible against the fees received where such costs have to be borne by the director.

The general principle is that travelling from home to office is not deductible and the tax authority will apply this rule to disallow such a claim.

  • Kang Beng Hoe is an executive director of Taxand Malaysia Sdn Bhd, a member firm of the Taxand global organisation of independent tax firms. The views expressed do not necessarily represent those of the firm. Readers should seek specific professional advice before acting on the views.

Sample Disclosure – Accounting Policy Of Investment Properties (19 January 2011)

Investment Properties

Investment properties are held for long term rental yields or for capital appreciation or both, and are not occupied by companies within the Group.

Investment properties are measured initially at cost. After initial recognition, investment properties are measured and carried at fair value.

Fair value is based on valuation performed by appointed independent registered valuer(s) taking into account factors such as the property growth and market in the surrounding area. The fair value of the investment properties reflects the market conditions at the balance sheet date. Changes in fair values are recorded in the income statement as investment properties fair value adjustment.

On disposal of an investment property, or when it is permanently withdrawn from use and future economic benefits no longer are expected from the property concerned, it shall be derecognised. The difference between the net disposal proceeds and the carrying value is recognised in the income statement in the period of the retirement or disposal.

Transfer to or from investment property will be made when there is a change in use of the property. The commencement of owner-occupation for the property would result in a transfer of the investment property to self-occupied property, included in category of asset named “Property, Plant and Equipment”. On the other hand, the end of owner-occupation of a property would result in  a transfer from the self-occupied property which is included in Property, Plant and Equipment to the category of asset known as “Investment Properties”.

If a self-occupied property became an investment property that will be carried at fair value, the revaluation surplus of the self-occupied property, included in Asset Revaluation Reserve account would be transferred to accumulated profits.

For a transfer from investment property which is carried at fair value to self-occupied property, the fair value of the property at the date of change in use would be treated as deemed cost of the property for subsequent accounting purposes.

For the transfer of investment property to prepaid lease payments, the Group have adopted the transitional provision stated in Para 67A of FRS 117 which allows the Group to retain the unamortised revalued amount of the property as the surrogate carrying amount of prepaid lease payments.

Sample Disclosure – Exemption From The Requirement Of The Financial Year End Of New Subsidiaries To Coincide With That Of The Holding Company In Directors’ Report (12 January 2011)

Exemption from the requirement of the financial year end of new subsidiaries to coincide with that of the holding company

Pursuant to Section 168 of the Companies Act, 1965, the financial year end of the Company’s two newly acquired foreign subsidiaries, ABC Pte Ltd and DEF Pte Ltd, are required to coincide with the financial year end of the Company within two years from date of acquisition.

However, upon the approval obtained from Companies Commission of Malaysia (“CCM”) on XX, the financial year end of these two foreign subsidiaries need not be coterminous with that of the financial year end of the Company.

For the purpose of the preparation of the consolidated financial statements of the Group for the current financial year ended 31 December 2010, the financial statements of these two foreign subsidiaries drawn up for the same period were audited. Such practice of having the financial statements of the two subsidiaries for the same period with that of the Company audited for the purpose of preparing consolidated financial statements of the Group has been adopted and would be applied for future years.

Sample Disclosure – Accounting Policy Of Financial Guarantees Issued (7 January 2011)

Financial guarantees issued

Financial guarantees issued by the Company and those companies within the consolidated entity (“Group”) are recognised as financial liabilities at the date the guarantee is issued. Liabilities arising from financial guarantee contracts, including Company guarantees of subsidiaries through deeds of cross guarantee, are initially recognised at fair value and subsequently at the higher of the amount determined in accordance with the Group’s provisions accounting policy (please refer to Note XX) and the amount initially recognised less cumulative amortisation.

The fair value of the financial guarantee is determined by way of calculating the present value of the difference in net cash flows between the contractual payments under the debt instrument and the payments that would be required without the guarantee, or the estimated amount that would be payable to a third party for assuming the obligation.

Where guarantees in relation to loans or other payables of subsidiaries or associates are provided for no compensation, the fair values are accounted for as contributions and recognised as part of the cost of the investment in the financial statements of the Company.