Ramesh Ruben Louis explains the changes in accounting for revenue, borrowing costs and related party disclosures under MPERS compared with the PERS framework
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This article was first published in the September 2017 Malaysia edition of Accounting and Business magazine.
In this third 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 MPERS affects accounting for revenue, treatment of borrowing costs and related party disclosures as well as some of the key changes to the previous PERS framework.
Accounting for revenue
Section 23 of MPERS prescribes the treatment for revenue. The requirements are very similar to the treatment of revenue under the PERS framework, and with MFRS as well. The accounting for sales of goods, rendering of services, and interest, royalties and dividend will remain largely unchanged from previous practices under PERS. Accounting for construction contracts has been included in this section of MPERS, and is also similar to that in PERS. Nevertheless, there are some key areas in section 23 of MPERS that preparers of financial statements need to pay particular attention to.
The first key area is deferred payment arrangements with customers. When the inflow of cash or cash equivalents is deferred, and the arrangement is in effect a financing deal, the fair value of the consideration is the present value of all future receipts determined using an imputed rate of interest. A financing deal arises when, for example, an entity provides interest-free credit to the buyer or accepts a note receivable bearing a below-market interest rate from the buyer as consideration for the sale of goods. The imputed rate of interest is the more clearly determinable of either:
- the prevailing rate for a similar instrument from an issuer with a similar credit rating
- a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services.
An entity will recognise the difference between the present value of all future receipts and the nominal amount of the consideration as interest revenue (commonly known as finance income).
Deferred payment example
On 1 January 2016, ABC Sdn Bhd sold goods for RM2,000,000 on two years’ interest-free credit at a time when the current cash sales price of the goods was RM1,652,893.
Since there is a RM347,107 difference between the cash price of RM1,652,893 and the amount due under the two years’ interest-free credit arrangement, the arrangement is in effect a financing transaction as well as the sale of goods. Assuming that the implicit discount rate is reasonable (considering, for example, the time value of money and the credit standing of the customer), ABC must accordingly recognise revenue from the sale of goods on 1 January 2016 of RM1,652,893.
In addition, ABC must recognise finance income of RM165,289 for the 2016 financial year and RM181,818 in the following year, calculated using the effective interest. This can be derived using a spreadsheet or a financial calculator, with an imputed rate of interest of 10% per year (ie the rate that discounts the nominal amount of RM2,000,000 payable in two years’ time to the current RM1,652,893 cash sales price of the goods).
The revenue arising from the sale of goods is the current cash selling price of RM1,652,893 (ie the present value of the future payment).
Finance income for the 2016 financial year is RM165,289 – ie RM1,652,893 × 10%. Finance income for the 2017 financial year is RM181,818 – ie (RM1,652,893 + RM165,289) × 10%.
Customer loyalty awards
Another area in revenue to pay attention to is customer loyalty awards. In some cases, as part of a sales transaction, an entity grants the customer a loyalty award or points that may be redeemed in the future for free or discounted goods or services. In this case, the entity will account for the award credits as a separately identifiable component of the initial sales transaction.
The entity will allocate the fair value of the consideration received or receivable for the initial sale between the award credits and the other components of the sale. The consideration allocated to the award credits will be measured by reference to their fair value – ie the amount for which the award credits could be sold separately.
Customer loyalty example
MyHypermart is a hypermarket chain that operates a customer loyalty programme. It grants programme members loyalty points when they spend a specified amount on goods. Programme members can redeem the points for further purchases, and the points have no expiry date. By supplying award credits to its customers in this way, the hypermarket enters into multiple element sales.
MyHypermart must account for award credits as a separately identifiable component of the sales transaction for which they are granted (the ‘initial sale’). The fair value of the consideration received or receivable for the initial sale must be allocated between the award credits and the goods supplied to the customer in the initial sale. The consideration allocated to the award credits must be measured by reference to their fair value (ie the amount for which they could be sold separately).
MyHypermart must recognise the consideration allocated to award credits as revenue when award credits are redeemed and it fulfils its obligations to supply awards. The amount of revenue recognised will be based on the number of award credits that have been redeemed in exchange for awards, relative to the total number expected to be redeemed.
Section 25 of MPERS covers the treatment of borrowing costs, all of which will be recognised as an expense in profit or loss in the period they are incurred. There is no option whatsoever for capitalisation. This is a distinct difference compared to the treatment under the PERS framework. Previously under PERS (MASB 27), while the benchmark treatment was to recognise all borrowing costs as an expense when incurred, there was an allowed alternative treatment. The alternative treatment permitted the capitalisation of borrowing costs that were directly attributable to the acquisition, construction or production of a qualifying asset (for example, a building under construction).
Likewise, under PERS, borrowing costs incurred while land was under development were capitalised during the period in which activities related to the development were being undertaken. With MPERS, property developers and entities that have capitalised borrowing costs for their constructed (and other) assets will be affected.
Related party disclosures
The previous framework did not prescribe any standard on related party disclosures. As such, related party disclosures in the financial statements were previously based on the requirements of the Companies Act 1965. Section 33 of MPERS sets out explicit requirements on the scope of related parties and the required disclosures.
A related party to the reporting entity is:
- a person or a close member of that person’s family if that person is a key member of management of the reporting entity or of the parent; or has control or joint control or significant influence over the reporting entity;
- an entity, if any of the following conditions apply:
- the entity and reporting entity are members of the same group (parent, subsidiary and fellow subsidiary);
- one entity is an associate or joint venture of the other entity
- both entities are joint ventures of the same third entity
- one entity is a joint venture of a third entity, and the other is an associate of the third entity
- the entity is a post-employment benefit plan for employees of either the reporting entity or an entity related to it
- the entity is controlled or jointly controlled by a person identified in (a).
- the entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.
In terms of disclosures required, entities must disclose parent-subsidiary relationships irrespective of whether there have been related party transactions. An entity also has to disclose the name of its parent and, if different, the ultimate controlling party. In addition, total compensation for key management personnel must be disclosed.
If an entity has related party transactions, it must disclose, as a minimum, the following:
- the amount of the transactions
- the amount of outstanding balances, including:
- i. terms and conditions, including whether they are secured and the nature of the consideration to be provided in settlement
- ii. details of any guarantees given or received
- the provisions for uncollectable receivables related to the amount of outstanding balances
- the expense recognised during the period for bad or doubtful debts due from related parties.
Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory
CPD technical article
"Under MPERS, total compensation for key management personnel has to be disclosed"