The introduction of accrual accounting has implications across Malaysia’s public sector, not least in accounting for property, plant and equipment, explains Ramesh Ruben Louis
This article was first published in the September 2015 Malaysia edition of Accounting and Business magazine.
Studying this technical article and answering the related questions can count towards your verifiable CPD if you are following the unit route to CPD and the content is relevant to your learning and development needs. One hour of learning equates to one unit of CPD. We'd suggest that you use this as a guide when allocating yourself CPD units.
The Malaysian public sector will see a new dawn in its financial reporting as it embraces accrual accounting in the current fiscal year, starting with the federal government. An initiative for better fiscal discipline management (see opposite) sees all federal ministries, departments and responsibility centres adopting accrual-based Malaysia Public Sector Accounting Standards (MPSAS). These are drawn primarily from International Public Sector Accounting Standards (IPSAS), with some minor changes. The state governments will follow suit in 2016 but since local authorities and statutory bodies are already on either modified accrual or accrual basis of accounting, they are excluded.
One of the main areas of concern is the accounting for assets, especially property, plant and equipment (PPE). Here, we will look at the key accounting treatment and specific requirements when it comes to accounting for these assets under MPSAS. We will also look at some practical implementation and transitional issues relating to accrual accounting for assets.
Distinct measurement and recognition policies
The accounting standard for PPE in accrual accounting is MPSAS 17. Generally, most of the accounting policies relating to recognition and measurement for PPE are relatively similar to those in International Financial Reporting Standards (IFRS) based accounting standards – IAS 16 (or MFRS 116 in Malaysia). However, there are some distinct differences relating to the unique circumstances of public sector operations/administration that have been proposed by the Accountant General’s Department (AGD).
Firstly, it is important to note that the concept of service potential is central to the recognition principles across the MPSAS, not only for assets but also for liabilities, income and expenses. Service potential in the context of public sector accounting refers to the ability or purpose to generate other than a commercial return, such as social economic flows that benefit the community. An item is therefore recognised as an asset even though it might not be expected to generate future cashflows for the entity, as IPSAS (MPSAS, in the case of Malaysia) based accrual accounting recognises that the primary intention of the public sector is not to earn income but to provide public service. In some instances, the government needs to continue with the provision of public service even though it may not be profitable.
The AGD has proposed that the capitalisation threshold for property, plant and equipment is set at RM2,000 per item, subject to a periodic review. Assets below RM2,000 (known as low-value assets) are to be expensed off but their details will still be recorded in the assets register for control purposes.
The government may also use life assets in carrying out their operations. For life assets where future benefits or service potential are obtained, such as dogs belonging to the narcotic division of the police force, these are accounted for as PPE.
It is also common in the public sector that an item of PPE may be acquired through a non-exchange transaction. For example, land may be contributed to a local government by a developer at no or nominal consideration, to enable the local government to develop parks, roads and paths in the development. An asset may also be acquired through a non-exchange transaction by the exercise of powers of sequestration. When an asset is acquired this way, its cost shall be measured at its fair value as at the date of acquisition.
Some assets are classified as heritage assets because of their cultural, environmental or historical significance. Examples include historical buildings and monuments, archaeological sites, conservation areas and nature reserves, and works of art. Certain characteristics, including the following, are often displayed by heritage assets:
a) Their value in cultural, environmental, educational and historical terms is unlikely to be fully reflected in a financial value based purely on a market price.
b) Legal and/or statutory obligations may impose prohibitions or severe restrictions on disposal by sale.
c) They are often irreplaceable and their value may increase over time, even if their physical condition deteriorates.
d) It may be difficult to estimate their useful lives, which in some cases could be several hundred years.
Public sector entities may have large holdings of heritage assets that have been acquired over many years and by various means, including purchase, donation, bequest and sequestration. These assets are rarely held for their ability to generate cash inflows, and there may be legal or social obstacles to using them for such purposes. Generally, MPSAS 17 does not require an entity to recognise heritage assets that would otherwise meet the definition of, and recognition criteria for, property, plant and equipment. However, the AGD has set out that heritage assets shall be recorded if it is gazetted under the National Heritage Act 2005. If the cost is available, it shall be measured at cost. If it is impractical to determine the cost, it shall be measured at a nominal cost of RM1.
Some of these heritage assets have future economic benefits or service potential other than their heritage value – for example, an historic building being used for office accommodation. In these cases, they may be recognised and measured on the same basis as other items of property, plant and equipment. For other heritage assets, their future economic benefit or service potential is limited to their heritage characteristics – for example, monuments and ruins. The existence of both future economic benefits and service potential can affect the choice of measurement base.
In accordance with Section 5 of National Land Code 1965, any structure sitting on a piece of land belongs to the land owner. As a result, government buildings sitting on third-party land shall not be accounted for as PPE as the government is not the land owner. However, government buildings sitting on state/third-party land can be accounted for as property, plant and equipment if ownership or control can be demonstrated under the following circumstances:
a) There is a formal agreement/lease arrangement with the land owner that gives the government the right to control/use the building for a specific period of time.
b) Control given by a legal statute (ie Water and Services Industry Act) gives the government the right to control/use the building.
Some assets are commonly described as infrastructure assets. These usually display some or all of the following characteristics:
- They are part of a system or network.
- They are specialised in nature and do not have alternative uses.
- They are immovable.
- They may be subject to constraints on disposal.
Significant infrastructure assets are frequently found in the public sector. Examples of infrastructure assets include road networks, sewer systems, water and power supply systems, and communication networks. Infrastructure assets usually meet the definition of PPE and should be accounted for in accordance with MPSAS 17.
Generally, assets and liabilities recognised on first adoption of MPSAS should be adjusted against accumulated surplus or deficit on the date of adoption. However, the AGD has prescribed some exemption to ease the transition to accrual accounting, which also encompasses PPE. In terms of measurement and recognition, these assets can be recognised for reporting periods within three years following the date of adoption. For measurement of PPE including those assets acquired through a non-exchange transaction, fair value as deemed cost can be applied at the date of adoption where historical cost is not available.
One of the major implementation hurdles is obtaining opening balances for the PPE as this information could be missing or never made available. As such, the following may need to be done:
- A detailed survey of existing items of PPE will need to be conducted. For most organisations, existing data in current asset registers is not complete, since it likely excludes the following types of assets: shared assets, assets controlled but not owned (such as finance leases and right to use buildings), and ‘self-constructed’ assets including buildings and infrastructures, such as roads.
- In cases of ‘complex assets’ such as buildings, major components will have to be identified and assigned useful lives.
- Once a detailed survey of PPE items has been performed, the items will have to be valued. This might involve the recording of pending impairments and requesting the service of professional appraisers.
- Some organisations might be able to obtain data from their current asset register. In this case they will first have to determine whether the existing data in the current systems is ‘reliable’ (complete and accurate).
Ramesh Ruben Louis is a professional trainer and consultant in accounting