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Frequently Asked Questions on Malaysia's Convergence with IFRS in 2012

Disclaimer

The MASB's primary role is to develop accounting and financial reporting standards. It is the MASB's operating procedure that generally precludes the MASB or its staff from giving advice to any individuals or corporations or individual cases nor to act as an arbitrator regarding any issue. Resolution of matters concerning the application of the accounting standards should be addressed and discussed with the respective independent accountants, or auditors.

Likewise the MASB's resources do not allow for it to respond to students' individual requests for help in completing their assignments.

Below are some of the questions that the staff frequently receives from preparers, auditors and users with regard to the Malaysia's convergence with IFRS in 2012.The answers to the following questions have been prepared by the MASB staff and are not the Board’s views.

Frequently Asked Questions on Malaysia’s Convergence with IFRS in 2012 (7 December 2011)

1.  What is IFRS?

International Financial Reporting Standards (IFRS) is a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of general purpose financial statements, being financial statements that are intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs.

2.  Who is IASB?

The IASB is an independent accounting standard-setting body of the IFRS Foundation. The principal objectives of the IFRS Foundation are:

  • to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB;
  • to promote the use and rigorous application of those standards;
  • to take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and
  • to bring about convergence of national accounting standards and IFRSs to high quality solutions.

The IASB, based in London, consists of 15 members. It began operations in 2001 when it succeeded the International Accounting Standards Committee.

In fulfilling its standard-setting duties the IASB follows a thorough, open and transparent due process of which the publication of consultative documents, such as discussion papers and exposure drafts, for public comment is an important component. The IASB engages closely with stakeholders around the world, including investors, analysts, regulators, business leaders, accounting standard-setters and the accountancy profession.

The governance and oversight of the activities undertaken by the IFRS Foundation and its standard-setting body rests with its Trustees, who are also responsible for safeguarding the independence of the IASB and ensuring the financing of the organisation. The Trustees are publicly accountable to a Monitoring Board of public authorities. For more information about the IASB and IFRS Foundation, please visit www.ifrs.org.

3.  How did MASB get to where we are today?

From 1978 to 1996, accounting standards in Malaysia were issued by the professional accounting bodies, the Malaysian Institute of Accountants and The Malaysian Institute of Certified Public Accountants, and were enforceable under their codes of ethics.

In 1997, the MASB was established under the Financial Reporting Act as the independent authority to develop and issue accounting and financial reporting standards in Malaysia, giving them the force of law. The principles of the standards developed by the MASB were based on IASB Standards with additional guidance tailored to deal with (i) specific issues that are not dealt with in IASs; (ii) illustrations or additional clarification for better understanding of the context of the standards; or (iii) compliance with local laws and regulations.

In 2004, the MASB initiated a broad strategic direction to align its accounting standards to those issued by the IASB to keep up with developments worldwide. As a first step, the standards were renamed as FRSs (Financial Reporting Standards) and renumbered to be in line with standards issued by IASB to make it easier for investors, preparers and auditors to see the relationship between the two. In 2005 and 2007, the standards were revised to be virtually identical with IASB standards save for the effective dates and some transitional provisions.

In 2008, MASB issued a statement about their plans to bring Malaysia to full convergence with IFRS by 1 January 2012. As part of the convergence, a new IFRS-compliant framework (herein after referred to as the “MFRS Framework”) will be introduced effective 1 January 2012.

4.  What does convergence with IFRS mean?

Convergence with IFRS means full compliance with IFRS as a basis for the financial reporting system in Malaysia. We use the word “convergence” rather than “adopt” as we will still be following a Malaysian due process and will also need to comply with local legislation on financial reporting. So, a dual framework is still envisaged and the intention is to fully converge or align the two frameworks as at 1 January 2012.

As a consequence of the IFRS convergence plan, the Board has adopted a new due process for approving and adopting new or amended standards for application in Malaysia. For more information about the Board’s new due process, please visit www.masb.org.my.

5.  What are the advantages of convergence?

Investors would have better understanding of financial statements prepared by companies in Malaysia and in making comparisons between companies worldwide as investors are increasingly making decisions in a global context. Therefore it is important the Malaysian capital market uses internationally recognised standards for financial reporting purposes.

Convergence will enhance national reputation of Malaysia as being in compliance with international accounting standards. The need to establish this profile is imperative to ensure Malaysia is not left out from the globalisation wave, especially since more than 100 countries are converging or have converged with IFRS, including Australia, Brazil, Canada, Korea, South Africa, the United Kingdom and other European countries. China, India, Japan, Singapore and Indonesia are also in the process of converging with or adopting IFRS whilst the United States, which has published proposals for conversion to IFRS, permits foreign issuers to file IFRS financial statements. This is because IFRS has been established to be the preferred international accounting language compared to any other generally accepted accounting practices. Therefore information provided under the IFRS converged framework will be comparable with IFRS jurisdiction’s companies thus giving Malaysia’s companies and our capital market the recognition that they deserve.

In addition, convergence with IFRS will provide greater credibility and transparency to financial reporting in Malaysia making it easier for global investors to understand and rely on the financial report of Malaysian companies. Another benefit is that it will help incorporate better practices within corporate Malaysia by adopting international standards.

With convergence, Malaysian multinational companies are expected to benefit from reduced compliance costs and reduced translation risks when consolidating multiple international subsidiaries into a single set of consolidated financial statements. Companies—large and small—are able to attract capital from a larger pool of investors, driving down the cost of capital and facilitating cross-border mergers and acquisitions activity and strategic investments.

Recent developments

At the seventh edition of Invest Malaysia 2011 held in March, the Securities Commission said it will focus on internationalising the capital market in response to the Capital Market Masterplan Two (CMP2), of which internationalisation is one of the key priorities. Market experts have noted that consolidation of global markets will be a growing trend, and given the developments taking place, a single-country based capital market may stand to be marginalised.

Therefore full convergence with IFRS is now even more important for Malaysia as it serves to complement the CMP2 strategies, whose theme is Growth with Governance, which aims to further unlock the potential value of the capital market over the next 10 years.

Convergence Task Force

6.  What is role of the Convergence Task Force (CTF)?

The CTF, comprises generally the regulators and associations, was formed to monitor the convergence plan so as to meet the time line set. The CTF is supported by a sub-technical committee on technical matters relating to adoption of the IFRS converged framework. The CTF has been running since 2009.

Where are we today in Convergence

7.  What is the difference between MASB standards and IFRSs and how different are they (as at 18 November 2011)?

Back in 2008 when the convergence plan was announced, the Board unveiled a roadmap to facilitate a phased changeover to IFRS. The roadmap charted out a series of broad steps to ensure that Malaysia's financial reporting standards will be in line with IFRS, both in content and timing of implementation. At that time there were altogether 22 IASB technical pronouncements that were not adopted yet under the Financial Reporting Standards (FRS) Framework.

With the issuance of the Malaysian Financial Reporting Standards (MFRS) Framework in November 2011 for adoption on 1 January 2012, MASB standards applicable to Entities other than Private Entities  are identical to IFRSs in all respects other than the nomenclature.

8.  What happens to the local technical pronouncements, namely FRS 2012004 Property Development Activities, FRS 2042004 Accounting for Aquaculture, Statement of Principles (SOP) and technical releases at the changeover date to IFRS?

Under the MFRS Framework, matters addressed under FRS 201 and FRS 204 are dealt with by IC Interpretation 15 Agreements for the Construction of Real Estate (IC 15) and MFRS 141 Agriculture (MFRS 141) respectively. Nonetheless, FRS 201 and FRS 204 will continue to be applicable for the FRS Framework (see Question # 13).

Unlike MFRSs, the SOP and technical releases are not mandatory and are developed to provide guidance on matters not dealt with by an approved accounting standard such as, amongst others, disclosures on share buybacks within local law, financial reporting issues related to zakat on business or transactions and events based on Ijarah. Nothing in these pronouncements are construed to amend or override the MFRS Framework as they only serve as a persuasive source of reference for identification of principles to resolve the issues at hand.

The effect of Convergence

9.  How will IFRS convergence affect us?

The most significant milestone that the Board believes the country should achieve out of convergence is the ability to assert compliance with IFRS. In this regard all entities are required to apply MFRS 1 First-time Adoption of Malaysian Financial Reporting Standards, equivalent to IFRS 1, to enable entities to assert that their financial statements are in full compliance with IFRSs.

The general principle underlying MFRS 1 is that standards effective at the date of an entity’s first financial statements that is fully converged with MFRS should be applied retrospectively. Effectively, this general principle will result in full retrospective application as if MFRSs had been used for an entity’s accounting since its inception. However, MFRS 1 adapts this general principle of retrospective application by providing entities with a number of exceptions and exemptions from the requirements of other standards. Therefore, careful analysis is required to fully understand the nature and impact of both the exceptions and the exemptions when applying MFRS 1. This involves consideration not only of the conversion process itself, but of issues relating to risks, stakeholder relations, financial reporting, and internal controls which will be triggered by the transition.

10.  Who will be affected by IFRS convergence?

All entities that are required to comply with approved accounting standards under the Financial Reporting Act 1997 will be affected except for Private Entities.

11.  What standards do private entities apply?

Private entities that apply PERS will continue to do so until such time the Board decides otherwise.

The Board in February 2012 issued the Request for Views: Private Entities, the Way Forward document for public comment which expired in June 2012 and is currently deliberating the comments received. The Board plans to unveil by the Q4 of 2012 or Q1 of 2013 on its plan for private entities.

The agriculture and real estate industries

12. What are the issues facing the agriculture and real estate industries?

The agriculture industry

Under the existing framework, the Board has not yet adopted IAS 41 Agriculture which requires an entity to use a fair value approach in measuring all types of biological assets. The Board believes the requirements in IAS 41 can be further improved and enhanced for bearer biological assets (BBA). Since 2008 the Board has been in discussion with the IASB about amending the requirements for BBA. In 2010 and 2011, the Board submitted Issues Papers outlining its proposals for BBA for IASB’s consideration and requested IASB to add the proposed limited amendment to IAS 41 in its post 2011 project agenda.

IASB recently launched a public consultation to seek broad public input on the future strategic direction and overall balance of its future work program. IAS 41 is among the topics in the Agenda Consultation 2011. Affected parties are encouraged to respond to IASB’s Agenda Consultation 2011 as it would lend support to the Board’s limited amendment proposal as a basis for amending IAS 41. For more details about IASB’s Agenda Consultation 2011 and the Issues Paper proposal, please visit www.ifrs.org and www.masb.org.my respectively. However, the Board notes that even if the proposal to amend IAS 41 is added to the IASB’s agenda, it is still uncertain whether all the proposals in the Issues Paper will be accepted by the IASB.

The real estate industry

The industry is concerned whether the requirements of IC 15 will result in a change to existing accounting policy under FRS 201 as the resulting accounting treatment may not reflect the economics of the ‘sell and build’ business model.

The Board deferred the effective date of IC 15 to 1 January 2012 in view of the issuance of the IASB’s exposure draft on Revenue from Contracts with Customers in mid of 2010. The new revenue standard is anticipated to subsume the requirements of IC 15 upon issuance. The IASB recently issued a revised exposure draft and deliberations are ongoing whether the real estate industry concerns will be addressed and whether the changes will be the preferred approach of the industry. On the basis of IASB’s current timetable for the project, a final revenue standard would be issued in second half of 2012.

13. How does the Board address the issues facing the agriculture and real estate industries?

As an interim step pending the outcome of IASB’s Agenda Consultation 2011 and the issuance of the new IFRS on Revenue, entities within the scope of MFRS 141 and/or IC 15 will be permitted to continue with the existing FRS Framework for one year. In other words, adoption of the MFRS Framework by these entities will be mandatory for annual periods beginning on or after January 1, 2013.

Similarly, private entities that are applying the FRS Framework (instead of the PERS Framework) and are within the scope of MFRS 141 and/or IC 15 may also avail to this option, i.e. continue applying the existing FRS Framework for one year and apply either the MFRS Framework or the PERS Framework for annual periods beginning on or after 1 January, 2013.

In line with the Board’s phased approach adopted in 2008 to prepare entities in converging with IFRS, the existing FRS Framework has also adopted the following new/revised IASB pronouncements which will be effective on or after 1 January 2012:

Document title

1

IFRS 9 Financial Instruments (issued by IASB in November 2009)

2

IFRS 9 Financial Instruments (issued by IASB in October 2010)

3

Disclosures–Transfers of Financial Assets (Amendments to IFRS 7)

4

Deferred Tax: Recovery of Underlying Assets (Amendments to IAS 12)

5

Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (Amendments to IFRS 1)

6

IFRS 10 Consolidated Financial Statements

7

IFRS 11 Joint Arrangements

8

IFRS 12 Disclosure of Interests in Other Entities

9

IFRS 13 Fair Value Measurement

10

IAS 19 Employee Benefits (amended in 2011)

11

IAS 27 Separate Financial Statements (amended in 2011)

12

IAS 28 Investments in Associates and Joint Ventures (amended in 2011)

13

Presentation of Items of Other Comprehensive Income (Amendments to IAS 1)

14

IFRIC Interpretation 20 Stripping Costs in the Production Phase of a Surface Mine

With the adoption of the above pronouncements, the key differences between the FRS and MFRS Framework (or the IFRS Framework) are:

(a) in the FRS Framework, IC 15 will be withdrawn and FRS 201 will continue to be the extant standard for accounting for property development activities;

(b) in the FRS Framework, there is no equivalent standard to IAS 41; and

(c) in the FRS Framework, there are two other local standards, i.e. FRS 2042004 Accounting for Aquaculture and IC Interpretation 201 Preliminary and Pre-operating Expenditure, in addition to FRS 201.

The option will enable any entity that is within the scope of MFRS 141 and/or IC 15 to apply the existing FRS Framework although our concerns raised to the IASB were limited to certain types of bearer biological assets, e.g. oil palm trees and property development activities governed by the Housing Development (Control and Licensing) Act 1966. The Board considered whether the option should be restricted to entities involved in the management of such biological assets and property development activities but in view of the uncertainty at this stage whether the IASB agrees with the Issues Paper proposals or will make further amendments to IAS 41 and the new revenue standard, the Board decided the option should be extended to all entities affected by MFRS 141 and IC 15, such as entities involved in livestock farming or the construction of real estate.

14. What is the appropriate framework for a consolidated group of companies?

An entity that consolidates or equity accounts or proportionately consolidates another entity that has applied FRSs as its financial reporting framework may itself apply FRSs as its financial reporting framework.

The Board intends the exemption is to assist a particular type of industry. Therefore, the Board decided the option to apply the FRS Framework does not extend to subsidiaries, associates and jointly controlled entities that are not themselves subject to the application of MFRS 141 and/or IC 15.

An entity shall consider the relief given in paragraphs D16 and D17 of MFRS 1 when an entity becomes a first-time adopter earlier than its subsidiary (or associate or joint venture) or vice versa.

15. Does the Board intend to give exemptions to other standards?

The rationale to provide the transitional period for both the agriculture and real estate industries is because of the imminent accounting standard changes on the horizon that may change current accounting treatments. The Board is not aware of any other potential changes to other standards by the IASB in the near future that would necessitate similar treatment for other industries.

16. How does a preparer take advantage of this option and what do they need to do?

An entity that avails to the option should take the opportunity to educate its investors and stakeholders of the possible outcome if MFRS 141 is amended and of the requirements of the new revenue standard.

However the entity must take cognisant that its financial statements will not be able to assert compliance with IFRS. Therefore management and Board of Directors need to consider the implications arising from its decision e.g. benefits forgone and reputational risks.

In addition, entities that elect to use the option will have to disclose in their financial statements the reasons for not adopting the MFRS framework and to disclose the fact that its financial statements are prepared in accordance with the existing FRS Framework and not the MFRS framework.

17.   What is the auditors’ responsibility for a client electing to apply the option?

The auditors shall conduct the audit in accordance with approved standards on auditing in Malaysia. In particular, in forming an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework, auditors shall evaluate whether the financial statements of the entity electing the option are prepared, in all material respects, in accordance with the requirements of the existing FRS Framework. Financial statements prepared under the FRS Framework shall not assert compliance with IFRS.

18. Will the option affect Malaysia’s convergence with IFRS in 2012?

No. The Board intends the option to assist a particular type of entity in view of the timing of the related IASB projects and believes that the number of entities that will elect the option will not represent a significant portion of the total market capitalisation. In any case, that exemption is a transitional measure as we hope the issues will be resolved by end of 2012.

Preparation required

19. As a preparer, what do I need to do?

Among others, entities will need to:

(a) learn about IFRS and assess how these accounting standards will affect them. Such knowledge will help entities facilitate the need for appropriate internal reporting, information systems and training to accommodate their particular circumstances.

(b) perform a gap analysis to identify what system, processes or people changes are needed.

(c) invest in their human resources and systems infrastructure.

In addition, entities should establish the appropriate implementation plans and assess the potential impact of changes in current FRS and IFRS during the transition period.

20. As an auditor or an academician, what do I need to do?

Among others, auditors should take advantage of platforms provided to share their knowledge and also participate in the due process of adopting new standards. They should also be consistently keeping up to date with technical developments.

Auditors also need to be equipped with a deep understanding of the requirements of standards effective on 1 January 2012, particular the new ones in order to be able to assist the industry in implementation aspects.

Academia, though not directly involved in the implementation process, have a significant role to play in the education of IFRS so that graduates will be equipped with IFRS knowledge when they join the capital market.

21.  What if an entity is not ready to converge by 2012?

Entities have been given more than 3 years of advanced notice on the convergence plan and hence, should have ample time to put in place the necessary resources to ensure they are ready for the changeover in 2012.

MASB’s future role

22.  What is MASB’s future role after convergence with IFRS?

Whilst the main focus of the MASB’s strategy moving forward is for convergence with IFRS, it should be borne in mind that MASB’s future role will not be confined to simply reproducing IFRS.

It is ever more important that Malaysia’s voice is heard at the IASB and in other international fora where future accounting standards, which Malaysian companies will be required to comply, are discussed. MASB will continue to devote significant resources to working with, and contributing positively to the work of, the IASB and the IFRS Interpretations Committee (IFRIC) as well as regional bodies.

Since 2009, in response to the global financial crisis, the IASB has been requested to review its standards on financial instruments, consolidation, fair value measurement and leasing in a much more fundamental way than previously. As a consequence, the IASB is reaching out extensively to many parties especially the domestic standard setters as there is a real need for informed comments to reduce the risk of overlooking any issue when developing or amending the standards. This has put more pressure on the Board to obtain input from constituents, provide constructive comments continuously and participate in the IASB due process. It also shows that domestic standard setters are essential to the IASB’s due process.

The importance of national standard setting bodies is again emphasised in the recent IFRS Foundation publication where the trustees had sought public comment of their strategy review for the next decade. It is stated in that consultative document that the IFRS Foundation and IASB should encourage the maintenance of a network of national and other accounting standard-setting bodies as an integral part of the global standard-setting process. National and other accounting standard-setting bodies should continue to undertake research, provide guidance on the IASB’s priorities, encourage stakeholder input from their own jurisdiction into the IASB’s due process and identify emerging issues.

Regional collaboration

The MASB will continue to actively participate in the activities of the Asian-Oceanian Standard-Setters Group (AOSSG), where Malaysia is one of the founding members. The composition of members of the AOSSG with countries such as Australia, China, Japan, Korea and India, to name a few, will endow with it a stronger voice to convey concerns and important feedback on issues from the Asian-Oceanian region to the IASB to improve future IFRS towards development of a single set of high quality international accounting standards.

The AOSSG currently has 25 member standard setters from the Asian Oceanian region: Australia, Brunei, Cambodia, China, Dubai, Hong Kong, India, Indonesia, Iraq, Japan, Kazakhstan, Korea, Macao, Malaysia, Mongolia, Nepal, New Zealand, Pakistan, Philippines, Saudi Arabia, Singapore, Sri Lanka, Thailand, Uzbekistan and Vietnam. For more details about AOSSG, please visit www.aossg.org.

Consultation with stakeholders

More importantly the Board will continue and increase its outreach programmes to exchange views with its constituents and stakeholders’ engagements. This will ensure that constituents interested in financial reporting are aware of IASB proposals for future accounting standards. It will also ensure that the Board is aware of the views of its constituents and thus is enabled to feed them into international discussions.

Currently we meet regularly with the Financial Institutions, Agriculturalists and Real Estate associations as well as the Regulators.

Financial reporting by private entities

Whilst there is an expectation that financial reporting standards for the capital market must be of high quality given its accountability to the public, the MASB recognises that due emphasis should also be given to the financial reporting framework for private entities, comprising of small-medium sized entities (SMEs).

SMEs account for large business establishments in Malaysia and have the potential to contribute significantly to the nation’s economic growth and provide for the country’s future development, either locally or internationally. According to the Strategies under the Third Industrial Master Plan (2006-2015), the government aims to develop SMEs with competitive edge through integration and rationalisation; and also SMEs which are armed and prepared in a global arena. In order to achieve this, it is important that a group of diverse and competitive SMEs are developed.

In this regard, for SMEs to be at the same level playing field internationally one of the criteria is having a set of globally accepted financial reporting systems and statements; this would enhance, amongst other things, financing access to the global market. Hence, it is important that the Board continues to play an active role in developing a set of accounting standards which is suitable for the SMEs, i.e. less burdensome than the IFRS but at the same time of global standing. The Board is currently evaluating the existing Private Entities Reporting Framework, IFRS for SMEs and Reduced Disclosure Requirements (RDR) and will make an announcement on its conclusion in due course.

Education

While it is not within the MASB mandate to provide education on IFRS, we are well placed to help provide assistance to the industry and academia on the basis, rationale and interpretation of the IFRS. We intend to expand our assistance in this area in 2011-2012 to assist preparer and academia.

23.  Why does MASB need to be more active internationally?

The world has changed to be more global and competitive resulting in the need for Malaysia to adopt international standards such as IFRS.

One of the burdens of convergence is that the timing and pace is determined internationally. Consequently, MASB needs to be more involved in the standard setting process, and be in an earlier position to challenge or put forth our views as to the applicability of changes to Malaysia and Asia in general.