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1.0 INTRODUCTION During 2007 global financial crisis, construction sector in Malaysia indirectly face the same problem.

According to Productivity Report 2010/2011, productivity level and growth of the construction sector between 2006 until 2010 has dropped from 7.00% in 2007 into 4.20% in 2008 and it bounce back into 5.68% in 2009. Inspite of property crisis in 2008, the nonresidential subsectors shows increment from RM8.06 billion (2007) to RM8.40 billion (2008) and RM8.89 billion (2009). It drops into RM 7.62 billion in 2010. In the residential output, it shows a little increment from RM 3.10 billion (2007) into RM 3.23 billion (2008) and RM 3.28 billion (2009). Only in 2010 it shows a major increment in output of the construction into RM 5.45 billion. Today, due to better economic climate and government initiatives, the construction sector seems to be one of the promising sectors for inside or foreign investor.

In this concept paper, our group would like to highlight an issue in financial reporting specifically in the construction sector during 2008 crisis.

Problem statement: Does Conservative Accounting in financial reporting helps firms during 2008 crisis?

2.0 DEFINITION 2.1 Definition of Conservative Accounting Conservative accounting stress on high degree of verification before making any legal claim to profit. It takes into consideration any possible losses that may discover and most of the expenditures are accrued. It also has strict revenues recognition which done later, usually after sale. Reserve and allowance are high estimates, which it may help to recover receivables in specific economic conditions. As a result, in short term period, it has lower earning.

2.2 Definition of Aggressive Accounting According to investopedia.com, aggressive accounting is defined as The practice of inappropriately misconstruing income statements for the purpose of pleasing investors and inflating stock prices. It means that the company misrepresent the financial statement by showing income as much as possible, hide any losses
within its

subsidiaries, and fail to capitalizing expenses. This is done to please shareholders. In short term, it has higher earnings.

2.3 Comparison of Policies The differences between aggressive accounting and conservative accounting are summarized below: Accounting Policy
Depreciation Method Conservative Accounting Straight Line, slower Aggressive Accounting Accelerated, faster

Contingent Liabilities

Accrue when known, consider losses now

Footnote only, postponed any bad news Capitalize, write off later

Advertising Expenditures Reserves

and

Marketing

Expense, write off now

and

Allowances

High Estimates, higher profit later LIFO

Low Estimates, higher profit now FIFO

(Warranty, Bad Debt, Returns) Cost of Goods and Inventory Valuation Method Revenue Recognition

After Sale, buyer carries all risk

At Sale, some risk remains

Next, the discussion is more focusing on conservative. Actually there are two types of conservatism: earnings conservatism and balance sheet conservatism. Conservatism can be good or bad. It can be seen as good if the firms value increases because of the strict decision by
managements regarding payments to themselves and other parties, such as shareholders (Watts, 2003a). However, it can be bad if understatement of earnings in the current period can lead to overstatement of earnings in future periods by causing an understatement of future expenses (Watts, 2003a).

3.0 PROPERTY FIRMS SELECTED To give clear picture about the matters, several properties firms in Malaysia has been choose, where PASDEC as the anchor company and other firms such as EB (Encorp Berhad), SPSB (SP Setia Berhad) and KHSB (Kumpulan Hartanah Selangor Berhad), are the industry average. Our group choose year 2007, 2008 and 2009 to show differences and its significance in the company before and after the crisis. The information and the ratio for the firms are:

3.1

Background of the company

i. PASDEC

Pasdec Holdings Berhad (PHB) was incorporated in Malaysia under the Companies Act, 1965 as a public limited company on 14 November 1995 and was listed on the Main Board of the Bursa Malaysia since 27 October 1997. PHB is a leading property developer in Pahang whereby between 50 and 60 per cent of medium-cost units, the houses to be built by PHB. To replenish its land bank, PHB also planned to acquire 300 acres of strategic lands in Kuantan, Jerantut, Rompin and Temerloh. PHB is responsible for coordinating and marketing Pahangs vast resources to create new opportunities for growth and prosperity. Its present authorised and paid up capital is RM500 million and RM205.9 million respectively. As an investment holding company, PHB's principal interests are in property development, project management, civil and building construction, manufacturing of bricks, trading of building materials and management of resort and buildings. PHBs constantly expanding investment portfolio is channelled through numerous subsidiary companies and joint ventures.

ii. Encorp Berhad (EB) EB was incorporated on 2 March 2000 (formerly known as Pioneer Design Sdn Bhd) and was listed on the Main Board of Bursa Malaysia since 11 February 2003 upon completion of the reverse take-over of Great Wall Plastics Industries Berhad ("GWPI"). A vision is aspires to be recognised as a market leader in providing quality products and services. Technology and innovation are the very spirit of EB and continue to be the driving thrust in all of its operations. Today, EB has become a Malaysian conglomerate that is building

a reputation for excellence and promoting quality of life in the areas of construction management and property development.

ii. SP Setia Berhad (SPSB) SPSB was incorporated in 1074 as a private limited company and was listed on the Main Board of Bursa Malaysia on 12 April 1993. SPSB is a Malaysia-based company engaged in real estate business and also an investment holding company. Through its subsidiaries, develops real estate properties ranging from master-planned townships to luxury residences and thriving commercial hubs. The company is also engaged in manufacturing, trading and investing. SPSB is an award-winning public listed company and a market leader in property development. The products range from landed properties to high-rise condominiums as well as commercial centres and SPSB have earned a reputation for integrity, quality and innovation.

iii. Kumpulan Hartanah Selangor Berhad (KHSB)

KHSB was established on 24 September 2001 and listed on the Bursa Malaysia since 22 July 2003. KHSB is the the property vehicle of Kumpulan Darul Ehsan Berhad (KDEB), the Selangor State Government's investment arm. KHSB has a wealth of experience in developing a wide range of fully integrated townships complete with modern infrastructure, recreational and public amenities. KHSB through its subsidiary company, Central Spectrum (M) Sdn Bhd is developing 5,324 acres of land in Pulau Indah, a part of which has been designated as the Selangor Halal Hub. Selangor Halal Hub is a one-stop facility for fast track approval and assistance from relevant bodies in obtaining the Global Halal Status.

3.2 Ratios Pasdec Holdings Berhad YEAR Current Ratio Net Working Capital Return on Assets Profit Margin % Assets Turnover Account Receivable Turnover Debt to Equity Interest Coverage Price Earnings (PE) Dividend Yield 2007 3.633 0.39 6.264 29.473 0.1 0.63 0.4 4.419 3.651 3.571 2008 3.183 0.39 0.875 4.593 0.05 0.33 0.41 0.699 11.982 7.692 2009 3.554 0.42 (0.879) (4.283) 0.04 0.23 0.43 (0.593) (17.907) 0.0

According to 2008 PASDEC Annual Report, in the section of the financial notes (page 50) it states that Construction work-in-progress is not depreciated. Depreciation of other property, plant and equipment is provided for on a straight-line basis to write off the cost of each asset to its residual value over the estimated useful life. In 2008, current ratio for PASDEC decrease from 3.633 to 3.183, and it increase back to 3.554 in 2009. This meant that by using conservative account, PASDEC is able to pay off short terms debt after the crisis in 2008. Debt to equity ratio is increasing from year 2007 until 2008 because PASDEC increase its current and non-current liabilities. Asset turnover is decrease from 0.1 in 2007 into 0.05 in 2008 and 0.04 in 2009. This is due to new management decision that some of the assets had been sold because of the crisis. One of the new PASDEC project involved in 2008 is tourismrelated development projects on 115 acres of land in Bukit Tinggi near Bentong, Pahang.

Financial ratio analysis for Industry average as following below:YEAR Current Ratio Net Working Capital Return on Assets Profit Margin % Assets Turnover Account Receivable Turnover Debt to Equity Interest Coverage Price Earnings (PE) Dividend Yield 2007 2.55 0.24 5.207 20.6 0.13 0.555 0.395 52.206 12.14 2.463 2008 2.63 0.256 1.615 (1.98) 0.085 0.415 0.3575 7.396 6.265 3.988 2009 2.41 0.318 1.387 7.928 0.0575 0.378 0.388 2.961 6.044 1.339

When referring to the 2008 annual report, other firms in this property industry, for example, ENCORP, straight-line basis is also used in depreciation for its property, plant and equipment (page 61). Overall in the industry, return on assets is decreasing from year 2007 until 2009. Profit margin also falls from 20.6 in 2007 into (1.98) in 2008. So do assets turn over, account receivable turn over, interest coverage, and also price earning. These happened due to several factors such election, changes in management and authority, and developer are not willing to develop new project. People are more focusing on saving money instead of spending it on properties. SP Setia Berhad for example, launch only one new project in 2008, involving mixed-commercial development called Setawalk in Puchong. A year after, in 2009, SP Setia Berhad aggressively involved in several new projects, including MOU and joint venture contract with its subsidiaries in China. Meanwhile, KHSB recorded net losses in 2008 and 2010. Only in 2009 it posted net profit of RM 27.11 million on a turnover of RM 125.12 million. This is due to political stability involving changes in political side in Selangor from Barisan Nasional to Pakatan Rakyat.

4.0 LITERATURE REVIEW There are many scholars who study conservative accounting and financial crisis. A study by Ross L. Watts and Luo Zuo of MIT Sloan School of Management titled Accounting Conservatism and Firm Value: Evidence from the Global Financial Crisis state that: 1. Firms with more conservative financial reporting experience less negative crisis period stock returns 2. More conservative firms issue more debt 3. Undertake more investment during the crisis period 4. Reduce managerial opportunism, thus enhance equity and firm value There are also a study done by Rahimah Mohamed Yunos, Malcolm Smith and Zubaidah Ismail regarding corporate governance titled Accounting Conservatism and Ownership Concentration: Evidence from Malaysia. They made the conclusion that 1. 2. Conservative accounting can be used as a mechanism to reduce agency conflict. Lower degrees of conservatism are being encouraged by inside and outside

shareholders 3. Conservative accounting however is not an effective governance tool if it is under the

shareholders control Next, the study by Yew Ming Chia, Irvine Lapsley and Hing-Wah Lee titled Choice of auditors and earnings management during the Asian financial crisis. It says that, 1. Asian crisis period has negative impact on companys performance. 2. Auditors play an important role to constrain the earnings management activities, and it helps the quality of reported earnings

5.0 CONCLUSION As been stated before, anchor company and also average industry having reduction figure in price earnings and dividend yield from 2007 to 2009. But both are still in the positive figure. Although there are GAAP principles, several issues are important to be think of. Managers are still can choose whether to apply aggressive or conservative policies in the firms financial reporting because both of the policies have their own advantages and disadvantages. If the manager also an owner of the company, and he expects to get higher bonus in that year, he might be more conservative. Managers who are not owners or non family company are less conservative because they do not have the feeling of afraid losing the business. This is called agency theory. As for an employee, question should be raised whether by applying conservative accounting policies, less benefits might be anticipated.

6.0 REFERENCES http://www.investopedia.com/terms/a/aggressiveaccounting.asp#ixzz1rtvk3Yev www.mpc.gov.my/mpc/.../MPC%20summary2010-11%20040511%... http://business.highbeam.com/434962/article-1P1-153638040/pasdec-developtourismrelated-project-bkt-tinggi http://www.spsetia.com.my/corporate/milestones.asp http://perangsangselangor.com/media-clippings/all-book oaithesis.eur.nl/ir/repub/asset/10394/MA021-Pothof_310798.pdf Accountating Conservatism and Ownership Concentration: Evidence From Malaysia. (Rahimah Mohamed Yunos, Malcolm Smith and Zubaidah Ismail). Journal of Business and Policy Research. Vol 5. Number 2. December 2010 Pp.1-15 accounting.eller.arizona.edu/docs/Workshop.../Ross%20Watts.pdf www.emeraldinsight.com/journals.htm?articleid=1585415

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