Future Framework for Private Entities
By MASB Staff
Disclaimer: The views and opinions expressed in the article do not necessarily represent the official views of the MASB. Official positions of the MASB on accounting matters are determined only after extensive deliberations and due process. Thus, the article is intended to convey the general information only and they should not necessarily be taken as the official MASB view.
Neither MASB nor any member of the MASB Secretariat accepts responsibility or legal liability arising from or connected to the accuracy, completeness or reliability of the materials and information contained in the article.
Malaysia has achieved a significant milestone by converging with the International Financial Reporting Standards (IFRSs) in November 2011 when the Malaysian Financial Reporting Standards (MFRS) Framework was issued. As a result, entities in Malaysia that have since adopted MFRSs can now assert full compliance with the IFRSs and can take advantage of its benefits especially in the global marketplace.
The next major focus for the Malaysian Accounting Standards Board (the Board) is to decide on whether to improve or replace the current Private Entity Reporting Standards (PERS) Framework. This paper tries to outline the Board’s journey since 2006 on PERS and what the Board is planning to do.
The PERS was created in 2006 with the aim to reduce the financial reporting compliance burden of private entities. Private entities, which consist of mainly small and medium entities (SMEs) currently have the option to apply PERS or MFRSs but the former is the preferred option as it is perceived to be an easier set of accounting standards. The PERS was developed based on 2003 IFRSs and there have been numerous calls by stakeholders recently to update it. The urgency to make a decision on PERS is further aggravated by the World Bank’s recommendation to Malaysia that priority should be given to the development of standards for private entities.
National statistics show that SMEs represent over 97.3% of the total business establishments in Malaysia where they contribute about 32% to the nation’s GDP and represents more than half of the work force in the country. Thus, it is clear that promoting a viable SME sector is essential in the nation's focus towards broadening the sources of growth and sustaining the growth momentum. The launch of the SME Masterplan (2012-2020) in July 2012 as part of the New Economic Model is an example of a government initiative aimed to stimulate growth of SMEs to be globally competitive by 2020.
There are also other policy considerations. For example, only a minority of accountants currently need to or want to, use IFRS for their daily activities. The majority who work in government or in the Private Entities do not need to know IFRS. However, this is changing. The government sector is moving from a ‘modified cash’ to ‘accrual’ accounting framework which is based on IFRS by 2015 and our accountants are much more likely to work abroad where IFRS is the accepted standard. So, there is a need to encourage all segments of accountants to learn IFRS.
Another driver is the need for SME’s to attract funding from either investors or bankers and to grow regionally. This would suggest using a more internationally recognised accounting framework for larger or more regionally focussed SME’s.
For these reasons, the Board has been discussing alternatives to the current use of PERS.
There are a few possible options worth consideration and they are summarised below in the order in which they were discussed, over the years.
MASB Exposure Draft 52 Private Entities Reporting Standards (“simplified PERS”)
Exposure Draft (ED) 52 was issued in June 2006 and it basically proposes the use of the cost basis as the measurement principle. It also removes certain disclosure requirements which may be onerous for private entities to comply. The majority of the public comments received from the exposure of ED 2 showed a clear demand for separate reporting standards for private entities. However, they were apprehensive that locally developed standards may give an unfavourable perception that national accounting standards are less robust than that of the international standards.
In 2007, when the MASB intended to finalise ED 52, the IASB issued an exposure draft on IFRS for SMEs. In view of that development that was taking place at the IASB and in the light of the public comments, the MASB decided to defer the finalisation of ED 52 while gauging the suitability of the IASB’s IFRS for SMEs.
MASB Exposure Draft 72 Financial Reporting Standards for Small and Medium-sized Entities (FRS for SMEs)
The IASB issued the IFRS for SMEs in July 2009 which aimed to provide a common framework to facilitate financial reporting for SMEs in response to strong international demand for a rigorous and uniform set of accounting standards for SMEs. The purpose of IFRS for SMEs was to reduce the detailed requirements that exist under full IFRS. While some accounting policy choices available in IFRSs have been omitted from the IFRS for SMEs (for example, an entity does not have the option to revalue property, plant and equipment), most of the fair value requirements in IFRSs are retained (for example, investment property are measured at fair value if the fair value can be measured reliably without undue cost or effort). Despite these issues, over the past few years, 80 jurisdictions have adopted or publicly indicated or proposed a plan to adopt the standard in the future. Singapore, Hong Kong and many South American and African countries are among the many that have adopted IFRS for SMEs.
The IFRS for SMEs was issued as ED 72 in Malaysia on March 2010. Given that it was fairly significantly different when compared to the existing PERS and ED 52 (such as the prevalent use of fair value), the MASB together with the Malaysian Institute of Accountants (MIA) conducted a series of road shows to seek views from local constituents on which set of accounting frameworks for private entities would be most appropriate for application in Malaysia. The outcome indicated that ED 72 was the preferred framework while ED 52 received lesser support.
MASB Exposure Draft 74 Amendments to Financial Reporting Standards arising from Reduced Disclosure Requirements (RDR)
While deliberating the above two options, the MASB in December 2010 issued ED 74 as a response to address concerns that non-private entities which do have public accountability (e.g. subsidiaries of public listed companies) should not be subjected to the same reporting requirements as the rest of the non-private entities. ED 74 proposed to allow entities that meet the specific criteria to provide fewer disclosures based on the IFRS for SMEs, while the recognition and measurement requirements are identical to the MFRS Framework. Jurisdictions in Australia and New Zealand have adopted this approach and refer to it as a Reduced Disclosure Regime (‘RDR’) as part of their two tier accounting framework.
During the comment period, some respondents recommended that the MASB should consider prescribing ED 74 as the new framework for private entities. They noted that there may be possible cost-saving of maintaining a single set of accounting standards as its recognition and measurement criteria are identical to the MFRS Framework. In addition, the RDR may increase comparability of financial statements and better facilitate consolidation with MFRS reporting entities.
While deliberating on these three options in 2011, the Board noted that the IFRS for SMEs may be subject to review by the IASB in 2012. Given that both ED 72 and ED 74 are based on the IFRS for SMEs, the MASB reasoned that private entities may have to change its accounting policy twice within a short period of time if the IASB issues a revised IFRS for SMEs in the near future and consequently held back from making a final decision.
Upcoming revised IFRS for SMEs
In June 2012, the IASB began its initial comprehensive review of the IFRS for SMEs by issuing a Request for Information to seek public views on whether there is a need to make any amendments to the IFRS for SMEs and, if so, what amendments should be made. The tentative target effective date for the revisions is 2015. This timeline is fairly consistent with the MASB’s work plan, that is, 1 January 2016 to be the proposed effective date of the new framework for private entities.
The Way Forward
In February 2012, the MASB decided to have another attempt to arrive at a plan for Private Entities. The Board issued a Request for Views (RFV) aimed at seeking feedback from constituents on the financial reporting future of private entities. The RFV encompassed questions pertaining to all the three previous Exposure Drafts (namely ED 52, ED 72 and ED 74), the option to wait for the revised IFRS for SMEs or to improve on the existing PERS Standards. The results of this final consultation will help MASB to decide the most suitable reporting framework for private entities in Malaysia.
Based on the comments received on the RFV, most are supportive in moving to an IFRS-based framework (similar to the comments received on the previous Exposure Drafts). Nevertheless, some concerns were raised about the appropriateness of prescribing an IFRS-based framework for all classes of SMEs. There may be a need to stratify the Private Entities and have a separate framework for micro-entities (77% of SMEs). In order to assist in this decision, the MASB in collaboration with the MIA, is conducting a field test with the small medium practitioners on the implementation of ED 72 FRS for SMEs and ED 74 FRS-RDR. By field testing these proposals, the MASB hopes to be able to assess, amongst others, the burden of applying them by micro-entities and whether it is necessary to stratify private entities to micro-entities so as to prescribe a simpler set of standards for them.
The medium and larger private entities may also encounter challenges in transitioning to the new IFRS-based framework. Certain areas may be overwhelming especially the accounting concept of fair value measurement and those that requires the exercise of professional judgement which requires private entities to relook at their current capability to implement and manage the implications of the change. Failure to prepare for the change increases the risk of errors in the financial statements. Besides the private entities, other stakeholders such as auditors, the professional bodies, regulators and academia would similarly have to consider their current resources and knowledge bank so as to be prepared for the change.
The Board is now working towards issuing a blueprint for public comments on the new framework in Quarter 1 of 2013. The blueprint aims to specify the action plans and timeline for stakeholders in the financial reporting chain to ensure a smooth implementation of the new private entities framework on the proposed effective date of 1 January 2016. All stakeholders are encouraged to provide their comments to the MASB so that all aspects are considered to assist the private entities to move to a higher quality and more up to date set of accounting standards.
The change to Private Entities reporting has taken a fair bit of time. This was largely unavoidable given the changes in circumstances and the various options available. However, we are getting closer to a solution. The current view is that a change is needed given the increasing use of IFRS, the need to equip our accountants with internationally recognised qualification and the country’s aspiration to improve our SME base. As far as the solution itself is concerned, by Quarter 1, 2013 the Board will outline its proposed decision and implementation framework for comments and issue the new framework by 2014/2015.
Table 1: Comparison of the Options
Example of Trade and Other Receivables financial statements disclosures under ED 52, ED 72 and ED 74
1. Exposure Draft 52 Private Entities Standards (PERS)
2. Exposure Draft 72 Financial Reporting Standards for Small Medium-sized Entities (FRS for SMEs)
3. Exposure Draft 74 Amendments to Financial Reporting Standards arising from Reduced Disclosure Requirements (RDR)
Note: The comparisons are prepared by the MASB staff for illustration purposes only and do not purport to represent the official views of the MASB.
 A private entity is a private company which is incorporated under the Companies Act 1965 and either in itself is not required to lodge financial statements with the Securities Commission or Bank Negara Malaysia or it is not a subsidiary or associate of, or jointly controlled by, another entity which has to lodge financial statements to either of these regulatory bodies.
 Report on the Observance of Standards and Codes (ROSC) Malaysia, February 2012
 Extracted from Department of Statistics Malaysia, Census Report on SME 2011
 Extracted from SME Malaysia Newspaper, 18 June 2011 Edition
 See Table 1 at the end of the article for a comparison of the options
 IASB IFRS for SMEs Fact Sheet July 2012. http://www.ifrs.org/Alerts/SME/IFRS+SMEs+fact+sheet.htm
 Extracted from Department of Statistics Malaysia, Census Report on SME 2011