Malaysia's convergence with IFRS

This article was first published in the May 2012 Malaysia edition of Accounting and Business magazine

On 19 November 2011, the Malaysian Accounting Standards Board (MASB) issued a new accounting framework, the Malaysian Financial Reporting Standards (MFRS).

The issue of MFRS brings together the exposure drafts of 75 IFRS-compliant Financial Reporting Standards (FRS) exposed in Malaysia in June 2011, and the MASB’s plan to converge with International Financial Reporting Standards (IFRS) in 2012 – a plan which has been made known to the Malaysian business community and accounting fraternity since 2008.

However, when the MASB announced the ‘birth’ of MFRS, many accountants and finance professionals wondered how MFRS was going to fit into the Malaysian financial reporting framework, already occupied by FRS and Private Entity Reporting Standards (PERS). Would MFRS replace FRS? Or would it be in addition to FRS, therefore creating a trio of MFRS, FRS and PERS in the Malaysian framework?

MFRS and where it stands

In essence, corporate Malaysia (except private entities) moves to MFRS this year. MFRS comprises standards issued by the International Accounting Standards Board (IASB) that are effective for annual periods beginning on or after 1 January 2012. It also comprises new and revised standards that will be effective for periods after 1 January 2012, such as those on financial instruments, consolidation, joint arrangements, fair value measurement and employee benefits. The adoption of MFRS is seen as a significant milestone for the Malaysian capital market as corporations will be able to affirm that their financial statements fully comply with IFRS.

While MFRS is applicable to all entities other than private entities for annual periods beginning on or after 1 January 2012, the exception is entities that are within the scope of MFRS 141, Agriculture and IC Interpretation 15, Agreements for Construction of Real Estate, including their parent, significant investor and venturer (known as transitioning entities). Transitioning entities are allowed to defer adoption of MFRS to annual periods beginning on or after 1 January 2013.

According to the MASB, the rationale to provide the transitional period for both the agriculture and real estate industries is in view of potential changes that may change current accounting treatments. The IASB is planning to issue a new standard on revenue recognition next year that will subsume IC 15 and is likely to amend IAS 41 (the equivalent of MFRS 141) requirements for bearer biological assets. Given this uncertainty, the MASB will allow the status quo until the IASB direction is clearer. On balance, the MASB believes that this arrangement will not affect its convergence objective as MFRS is fully IFRS-compliant and the transitional period is limited and based on the IASB’s own programme of standard changes.

The FRS framework

For FRS (which is likely to be adopted by the transitioning entities in 2012), the MASB has issued the following new or revised standards, which are effective on 1 January 2012 or later:

• FRS 9, Financial Instruments.
• FRS 10, Consolidated Financial Statements.
• FRS 11, Joint Arrangements.
• FRS 12, Disclosure of Interests in Other Entities.
• FRS 13, Fair Value Measurement.
• FRS 119, Employee Benefits.
• FRS 127, Separate Financial Statements. 
• FRS 128, Investments in Associates and Joint Ventures.
• Four limited amendments.
• A new Interpretation.

The key differences between FRS and MFRS are:

A In FRS, IC 15 will be withdrawn in line with the decision concerning transitioning entities and FRS 201 will continue to be the extant standard for accounting for property development activities.

B In FRS, there is no equivalent standard to IAS 41.

C In FRS, there are two other local standards, FRS 204 2004, Accounting for Aquaculture, and IC Interpretation 201, Preliminary and Pre-operating Expenditure, in addition to FRS 201.

Private entities

There will basically be no change for private entities as PERS perseveres into 2012. Private entities shall comply with either PERS in its entirety or MFRS in its entirety for annual periods beginning on or after 1 January 2012, except for those entities under the scope of MFRS 141 and/or IC 15, which may alternatively apply FRS for annual periods beginning before 1 January 2013.

To date, there has been no explicit decision nor notification made on the much-anticipated FRS for SMEs (MASB ED 72).

Consolidating consolidations

In May 2011, the IASB simultaneously published a new suite of five accounting standards that will affect and could significantly change the consolidation evaluation and joint venture accounting for many companies, as follows:

• IFRS 10, Consolidated Financial Statements.
• IFRS 11, Joint Arrangements.
• IFRS 12, Disclosures of Interests in Other Entities.
• IAS 27(Revised), Separate Financial Statements.
• IAS 28(Revised), Investments in Associates and Joint Ventures.

In Malaysia, these standards will be effective for annual periods beginning 1 January 2013, and will carry the abbreviation MFRS instead of IFRS/IAS.

IFRS/MFRS 10 replaces the consolidation part of the former IAS 27/FRS 127. IAS 27/MFRS 127(Revised) therefore deals only with accounting for investments in subsidiaries, joint ventures and associates in the separate financial statements of an investor (ie retaining the part on separate financial statements in the former IAS 27/FRS 127). IFRS/MFRS 11 supersedes the former IAS 31/FRS 131 on accounting for joint arrangements. Disclosure requirements on subsidiaries, joint arrangements, associates and involvement in unconsolidated structured entities are now prescribed in IFRS/MFRS 12.

The key attributes of these new/revised standards are summarised in the table on the left.

Fair value measurements

The IASB’s project on fair value measurement can be traced back to September 2005. A discussion paper on fair value measurement was subsequently issued in November 2006, followed by the issue of an exposure draft in May 2009. It was re-exposed in June 2010, before being established as a fully fledged standard – IFRS 13, Fair Value Measurement – in May 2011. In Malaysia, this IFRS (MFRS 13) will be effective for annual periods beginning 1 January 2012.

The IASB’s objectives in publishing this standard on fair value measurement are to:

I Define fair value.
II Set out in a single IFRS a framework for measuring fair value.
III Require disclosures about fair value measurement.

IFRS/MFRS 13 seeks to increase consistency and comparability in fair value measurements and related disclosures through a ‘fair value hierarchy’ (see diagram below ). The hierarchy categorises the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Conclusion

It is apparent that 2012 and 2013 are set to be exciting and challenging years for accountants in Malaysia, with a new framework in place, a new comprehensive model for consolidation and the realisation of the much-awaited fair value pronouncement beckoning at their doors.

Standards and key attributes

IFRS/MFRS 10

An investor consolidates another entity when it has defacto (effective) control over it, even if it does not control a majority of the shares.

The nature of involvement need not necessarily require an investment in the investee. An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

Potential voting interests such as options and conversion features will be considered and, coupled with other interests, could result in consolidation of an investee even before those rights are exercisable.

Guidance on consolidation for companies using special purpose entities, such as financial institutions and other entities dealing with securitisation structures.

IFRS/MFRS 11

A company no longer has a free choice between a single-line depicting their net share of a joint venture entity (equity accounting) or inclusion of its share of each asset, liability, revenue and expense individually
proportionate consolidation).

If the arrangement is a joint operation, a joint operator accounts for the assets, liabilities, revenues and expenses related to its interest in the joint operation in accordance with the IFRSs/MFRSs applicable to the particular assets, liabilities, revenues and expenses.

If the arrangement is a joint venture, a joint venturer recognises its interest in the joint venture as an investment and accounts for that investment using the equity method. The proportionate consolidation is disallowed in such a joint arrangement.

IFRS/MFRS 12

Most of the disclosure requirements on subsidiaries, joint ventures and associates in the former IASs/FRSs are retained in IFRS/MFRS 12.

The additional disclosures are judgments and assumptions applied to determine the relationships and the risks of involvement, including risks of involvement in consolidated structured entities.

New disclosure requirements for reporting entities with involvement in unconsolidated structured entities.

IAS 27/MFRS 127 (Revised)

Requires that when an entity prepares separate financial statements, investments in subsidiaries, associates, and jointly controlled entities are accounted for either at cost, or in accordance with IFRS/MFRS 9, Financial Instruments (now IAS 39/MFRS 139).

Also deals with the recognition of dividends, certain group reorganisations and includes a number of disclosure requirements.

IAS 28/MFRS 128 (Revised)

Prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.

Defines ‘significant influence’ and provides guidance on how the equity method of accounting is to be applied (including exemptions from applying the equity method in some cases). It also prescribes how investments in associates and joint ventures should be tested for impairment.

Level 1

Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.

A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available, with limited exceptions.

Level 2

Inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3

Unobservable inputs.

An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity’s own data, taking into account all information about market participation assumptions that is reasonably available.

Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate advisory