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This article was first published in the February 2017 Malaysia edition of Accounting and Business magazine.

In the second of a four-part series on the Malaysian Private Entities Reporting Standard (MPERS), which is effective for private entities in Malaysia from 1 January 2016, we take a closer look at how it impacts group accounting and accounting for associates and joint ventures as well as some key changes from the previous PERS framework.


Section 9 of MPERS requires a parent entity to present consolidated financial statements in which it consolidates its investments in subsidiaries. However, a parent need not present consolidated financial statements if the parent itself is a subsidiary, and its ultimate parent (or any intermediate parent) produces consolidated general purpose financial statements that comply with Malaysian Financial Reporting Standards or MPERS. A parent is also exempted if it has no subsidiaries other than those acquired with the intention of selling or disposing of it within one year. Nevertheless, an ultimate Malaysian parent shall present consolidated financial statements that consolidate its investments in subsidiaries in accordance with MPERS when either the parent or the group is a reporting entity or both the parent and the group are reporting entities. Under the PERS framework, a parent is exempted from consolidating its subsidiary if it operates under severe long-term restrictions; however, such an exemption is not available under MPERS. 

Section 9 also requires consolidation of special-purpose entities (SPE), which a reporting entity controls. An entity may be created to accomplish a narrow objective – for example, to effect a lease, undertake research and development activities or securitise financial assets. Such an SPE may take the form of a corporation, trust, partnership or unincorporated entity. Under the PERS framework (MASB 11), there was no explicit mention on consolidating SPEs. 

In terms of consolidation procedures, section 9’s requirements remain largely similar to that under the PERS framework which encompasses elimination of investment in subsidiaries, full elimination of intragroup balances and transactions and any resulting unrealised profits, use of uniform accounting policies and use of financial statements drawn from the same reporting date. However, when it comes to the measurement of non-controlling interests (minority interests under the PERS framework), there is a significant difference. Under the PERS framework (MASB 11.35), losses applicable to the minority in a consolidated subsidiary that exceeds the minority interest in the equity of the subsidiary (and any further losses) are charged against the majority interest (ie the parent). If the subsidiary subsequently makes profits, the majority interest (ie the parent) is allocated all such profits until the minority’s share of losses previously absorbed by the majority has been recovered. Under section 9 of MPERS, profit or loss and each component of other comprehensive income shall be attributed to the owners of the parent and to the non-controlling interest. Total comprehensive income shall be attributed to the owners of the parent and to the non-controlling interest even if this results in the non-controlling interest having a deficit balance. 

Investment in associates

Under section 14 of MPERS, an entity is given an accounting policy choice to account for its associates using either a cost model, fair value model or equity method. The PERS framework generally required all investments in associates to be accounted for under the equity method in the consolidated financial statements of the investor. However, if the investor did not present any consolidated financial statements, the investment is accounted for under the cost method or at revalued amount in its financial statements. The effect of equity accounting was only disclosed in the notes to the financial statements. 

Under the cost model in MPERS, an investor shall measure its investments in associates, other than those for which there is a published price quotation, at cost less any accumulated impairment losses. It is imperative to note that investments in associates for which there is a published price quotation must be accounted for using the fair value model. Under the equity method of accounting, an equity investment is initially recognised at the transaction price (including transaction costs) and is subsequently adjusted to reflect the investor’s share of the profit or loss and other comprehensive income of the associate. Under MPERS, there is no prohibition on the equity method if there are no consolidated financial statements presented. For the fair value model, an investment in an associate is recognised initially at the transaction price, excluding transaction costs. At each reporting date, an investor shall measure its investments in associates at fair value, with changes recognised in profit or loss, using the fair valuation guidance in section 11 of MPERS. An investor using the fair value model shall use the cost model for any investment in an associate for which it is impracticable to measure fair value reliably without undue cost or effort.

Just like PERS, MPERS also does not require disclosure of summarised financial information about associates. For investment in associates measured using fair value, the entity shall disclose the basis for determining fair value, eg quoted market price in an active market or a valuation technique. When a valuation technique is used, the entity shall disclose the assumptions applied in determining fair value. If a reliable measure of fair value is no longer available, the entity shall disclose that fact.

Joint ventures

A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control – the cornerstone in accounting for joint ventures. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic, financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). Joint ventures can take the form of jointly controlled operations, jointly controlled assets or jointly controlled entities: 

Jointly controlled operations (JCO) This arrangement involves the use of the assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer uses its own property, plant and equipment and carries its own inventories. It also incurs its own expenses and liabilities and raises its own finance, which represent its own obligations. 

A venturer shall recognise in its own financial statements:

i. the assets that it controls and the liabilities that it incurs, and

ii. the expenses that it incurs and its share of the income that it earns from the sale of goods or services by the joint venture.

Jointly controlled assets (JCA) These involve the joint control and often the joint ownership, by the venturers of one or more assets contributed to, or acquired for the purpose of, the joint venture and dedicated to the purposes of the joint venture. 

A venturer shall recognise in its own financial statements:

a) its share of the jointly controlled assets, classified according to the nature of the assets

b) any liabilities that it has incurred

c) its share of any liabilities incurred jointly with the other venturers in relation to the joint venture

d) any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture, and

e) any expenses that it has incurred in respect of its interest in the joint venture.

The treatment for JCOs and JCAs under PERS and MPERS is rather similar. However, the difference arises when it comes to investments in jointly controlled entities (JCE). 

Investment in jointly controlled entities (JCE)The accounting treatment for investment in JCE under the MPERS framework is similar to investment in associates, as discussed earlier, whereby a venturer has a policy choice in using either cost model, equity method or fair value model. But just like associates, a venturer shall measure its investments in jointly controlled entities for which there is a published price quotation using the fair value model. Proportionate consolidation is prohibited under MPERS and PERS (which was allowed under the previous IAS 31, Interests in Joint Ventures, superseded in 2013 by IFRS 11, Joint Arrangements).

Under PERS, a venturer of JCE uses the equity method in its consolidated financial statements and applies the cost method or revalued amount in its separate financial statements. If a venturer does not prepare consolidated financial statements, it uses the cost method or revalued amount to measure its interest in JCE in its financial statements, with the effects of equity accounting shown in the notes. 

When a venturer in a joint venture does not have joint control, it shall account for that investment in accordance with section 11 (ie as a financial instrument) or, if it has significant influence in the joint venture, in accordance with section 14 Investments in Associates.

Ramesh Ruben Louis FCCA is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory