The recent amendments to the Malaysian Private Entity Reporting Standards could have big implications, says Ramesh Ruben Louis
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This article was first published in the February 2016 international edition of Accounting and Business magazine.
Even before private entities could grasp the Malaysian Private Entity Reporting Standards (MPERS), effective for periods beginning on or after 1 January 2016 and hereafter referred to as MPERS 2014, the Malaysian Accounting Standards Board (MASB) issued modifications. In October 2015, the MASB published 2015 Amendments to the MPERS, which is equivalent to the International Accounting Standards Board’s 2015 Amendments to the IFRS for SMEs.
The amendments are the result of the first comprehensive review of the IFRS for SMEs, which was originally issued in 2009. They affect 21 of the 35 sections of the standard (not counting consequential amendments) and the glossary.
The 2015 Amendments to the MPERS are effective for annual periods beginning on or after 1 January 2017, with early application permitted.
Undue cost and effort
There are various requirements in the MPERS 2014 that provide an undue cost and effort exemption. For example, paragraph 34.3 prescribes that an entity shall recognise a biological asset or agricultural produce when, and only when, the fair value or cost of the asset can be measured reliably without undue cost or effort. In the MPERS 2014, undue cost and effort was not explicitly defined and explained. Under the amendments, undue cost depends on the entity’s specific circumstances and on management’s judgement of the costs and benefits from applying a particular requirement of MPERS 2014.
Applying a requirement would involve undue cost or effort if the incremental cost (eg surveyor’ fees) or additional effort (eg work that has to be undertaken by employees) substantially exceeds the benefits that those that are expected to use the private entity’s financial statements would receive from having the information. Where the undue cost or effort exemption is used by an entity, the entity shall disclose that fact and the reasons why applying the requirement would involve undue cost or effort (except for exemption in paragraph 19.15).
Revaluation of property, plant and equipment and investment property at cost
The amendments now permit an entity to measure an item of property, plant and equipment whose fair value can be measured reliably at a revalued amount, which is its fair value at the date of the revaluation. Where an asset’s carrying amount is increased as a result of the revaluation, the increase is recognised in other comprehensive income and accumulated in equity as revaluation surplus.
Under MPERS 2014, if a reliable measure of fair value for investment properties is no longer available (ie it was available before and was measured previously using fair value) without undue cost or effort for an item of investment property measured using the fair value model, the entity will thereafter account for that item as property, plant and equipment in accordance with section 17 until a reliable measure of fair value becomes available. The carrying amount of the investment property on that date becomes its cost under section 17. However, the amendments now allow for such investment properties to be classified as investment property carried at cost less accumulated depreciation and impairment. As such, in these circumstances, there would be another classification of investment property – at cost.
Statement of comprehensive income
As a result of property, plant and equipment now being permitted to be measured using the revaluation model, this gives rise to a fourth item of other comprehensive income (previously only three items under MPERS 2014): ‘changes in the revaluation surplus for property, plant and equipment measured in accordance with the revaluation model’.
Another significant addition to the statement of comprehensive income is the requirement to further classify the other comprehensive income items into two categories as follows:
i) those that will not be reclassified subsequently to profit or loss and
ii) those that will be reclassified subsequently to profit or loss when specific conditions are met.
The ‘other comprehensive income’ section of the statement of comprehensive income will therefore be presented as shown above.
Consolidation of ‘short-term’ subsidiaries
A subsidiary is not consolidated if it is acquired and is held with the intention of selling or disposing of it within one year of its acquisition date.
Such a subsidiary is accounted for as a basic financial instrument, which is an investment in non-puttable ordinary shares. It is measured at fair value with changes in fair value recognised in profit or loss (if the shares are publicly traded or their fair value can otherwise be measured reliably) or at cost if otherwise.
If a subsidiary previously excluded from consolidation is not disposed of within one year of its acquisition date, the parent shall consolidate the subsidiary from the acquisition date. Consequently, if the acquisition date was in a prior period, the relevant prior periods shall be restated. However, if the delay is caused by events or circumstances that are beyond the parent’s control and there is sufficient evidence at the reporting date that the parent remains committed to its plan to sell or dispose of the subsidiary, the parent shall continue not to consolidate the subsidiary and account for it as a financial instrument.
When a parent has no subsidiaries other than subsidiaries that are not required to be consolidated as discussed above, it is not required to present consolidated financial statements. However, the parent is required to disclose the relevant disclosures in section 11 and the carrying amount of investments in subsidiaries that are not consolidated at the reporting date, in total, either in the statement of financial position or in the notes.
Useful life of intangible assets and goodwill
Where the useful life of an intangible asset cannot be established reliably, the life shall be determined based on management’s best estimate but shall not exceed 10 years. The same applies for goodwill as well. Previously under MPERS 2014, the useful life for intangible assets and goodwill is presumed to be 10 years if an entity is unable to make a reliable estimate of the useful life.
The 2015 amendments to MPERS puts forth some key changes to the MPERS 2014, which may have significant impact or differences to how some private entities will be affected by adopting MPERS on 1 January 2016. Where the amendments result in significant changes to these entities, it’s probably worthwhile to consider early adoption (instead of waiting until 1 January 2017) so that the transition from PERS to MPERS will be smoother and alleviate the challenges of having to go through multiple cycles of making changes.
Private entities may want to make some impact assessment and comparisons by transiting to MPERS 2014 only, MPERS 2014 (with early adoption of the 2015 amendments) or perhaps to MFRS instead, in order to ascertain which is the best option in terms of cost-benefit in both the short and long term.
Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory