LEMBAGA PIAWAIAN PERAKAUNAN MALAYSIA
MALAYSIAN ACCOUNTING STANDARDS BOARD
MASB TECHNICAL RELEASE 2
Year 2000 Issue: Accounting and Disclosures
(Issued 31 July 1998)
The accounting treatments, which have been set in the bold italic type, should be read in the context of the Foreword to Financial Reporting Standards and Other Technical Pronouncements. Financial Reporting Standards and Other Technical Pronouncements are not intended to apply to immaterial items
The Malaysian Accounting Standards Board (herein called the Board) has approved the issuance of this Technical Release for immediate application by reporting enterprises. The Release addresses accounting for costs of modifying computer hardware and software to achieve Year 2000 compliance, revenue and loss recognition principles, possible impairment issue, and the disclosure of the Year 2000 compliance. It also requires disclosure of certain significant risks and uncertainties associated with the Year 2000 issue.
This Technical Release presents the Board's view on the appropriate accounting treatments for the Year 2000 issue within the framework of the law and the principles established in accounting standards and other pronouncements issued or adopted by the MASB. It also has due regard to international developments. Accordingly, the Board expects reporting enterprises to comply with the requirements of this Technical Release.
Small reporting enterprises as defined in the proposed MASB's Conceptual Framework are exempted from the requirements of this Technical Release. However, such enterprises are strongly encouraged to consider the potential impact and extent of the Year 2000 issue on their businesses and other operations as discussed in this Release and to give appropriate disclosures.
The Year 2000 Issue
It has now been well recognised that as the Year 2000 approaches, many existing computer systems of enterprises, which are based on the two-digit years, are not programmed to consider the start of the new millennium, unless they have been recently modified. Such computer systems that will process Year 2000 transactions with the digit of "00" may encounter significant processing inaccuracies and may even experience system failures or incompatibility that renders systems inoperative. Indeed, it has been noted that some computer systems may encounter difficulties even earlier than the Year 2000 when dealing with dates in 1999 or when processing "forward-dated" transactions in 1998 or 1999. The potential impact may be pervasive throughout the enterprise, extending beyond the computer hardware or software to many other aspects, such as chips embedded in operating fixed assets, loss of operating income and possible mitigating costs necessary to address or fix the Year 2000 problems. The advent of information technology, the dependence of enterprises on sophisticated computer systems and the interdependence of such systems among businesses, their suppliers and their customers, are such that even seemingly minor failures in addressing the Year 2000 issue may result in significant consequences to any particular enterprise's ability to run its business.
Many enterprises will thus incur significant costs deemed necessary to mitigate the risks and uncertainties of the Year 2000 issue. Such costs may include external and internal costs of making hardware and software changes, upgrading of existing hardware and software, development of software and replacement of embedded computer-chips in hardware. Other costs that may arise include losses and other contingencies associated with actual failures of an enterprise's computer system in the Year 2000 and the consequential effects of failures of computer systems to other assets, such as decrease in net realisable values of products embedded with computer-chips and impairment of or decrease in useful lives of operating fixed assets. Loss contingencies could also arise from sales of products which are not Year 2000 compliant, such as product-warranty, product-defect liabilities and product-returns, and from lawsuits and other litigation risks.
Whilst some published literature have estimated that the costs of fixing the Year 2000 problems will be very significant, it is generally not possible to estimate reliably the extent of costs each enterprise will have to bear in order to fix the Year 2000 problems. Also, some enterprises may not have addressed the issue but some may well be in the advanced stage of planning or implementing remedies to fix the Year 2000 problems. Given the significant nature of the Year 2000 issue, users of financial statements are increasingly expecting enterprises to provide some assurance that potential Year 2000 problems are being identified and addressed. Accordingly, a reporting enterprise should disclose the risks and uncertainties associated with the Year 2000 problems for its business and operations and its plans to address the issue. Although the Year 2000 problems are not the only risk faced by an enterprise, disclosures are justified by the pervasiveness and complexity of the issue and the possible significant effects. This Release requires disclosures to be in the form that explains the enterprise's efforts to mitigate the risks and uncertainties, rather than an assurance of those efforts. Accordingly, the term "Year 2000 compliance" used in this Release has the same meaning as risk mitigation efforts. This Release envisages that the disclosures should normally appear in the chairman's statement or any operating and financial review statement published by the enterprise in its annual report that also contains the financial statements.