standard setting in malaysia

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Roshayani Arshad/Accounting Theory Page 1

Standard Setting In Malaysia

Learning Objectives

i. Understand the development of accounting standards in Malaysia.ii. Describe the structure and objectives of Malaysian Accounting Standards Board.iii.Describe the structure and objectives of the International Accounting Standards

Board.

iv.Explain the issues related to convergence of accounting standards.v. Explain the relationship between Malaysian Accounting Standards Board to

International Accounting Standards Board in relation to convergence of accounting

standards.

1.0 Introduction

Accounting standards refer to a set of standards stating how particular types of transactionsand other events should be reflected in financial statements. These standards are issued by

accounting standard setters. The application of accounting standards in the preparation and

presentation of financial statements is generally govern by regulatory bodies and/or

professional accounting bodies in a particular country.

The emergence and development of multinational concerns and the growth of international

financial markets, among other factors, are influencing the preparation of financial statements

beyond national borders. Many countries around the world that are using their national

Generally Accepted Accounting Principles (GAAP) are adopting the International Financial

Reporting Standards (IFRS) in the preparation and presentation of their financial statements.

The IFRSs are issued by International Accounting Standards Board (IASB) and the adoptionof IFRSs is having a growing influence on national accounting requirements and practices.

This chapter discusses the adoption of IFRSs and other aspects of standard setting

environment in Malaysia.

2.0 Development of Financial Reporting in Malaysia

The demand for corporate information by capital providers and other stakeholders, such as

employees, lenders, suppliers, customers and other agents has shaped the financial reporting

environment in Malaysia. These parties require corporate information in making their

economic decisions. The provision of corporate information to these users has been initiatedby the Ninth Schedule of the Companies Act 1965 requiring companies to disclose minimum

information. Financial reporting environment has evolved since then and currently companies

are disclosing more comprehensive information as a result of considerable efforts by various

bodies. Figure 1 depicts the timing of significant events relative to the development of

financial reporting in Malaysia.

Figure 1: Timeframe Depicting Significant Events Relative To The Development Of

Financial Reporting In Malaysia.

Period Financial Reporting Development1965 Ninth Schedule of the Companies Act 1965


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- Minimum disclosure of specific information

1979 Representation on the International Accounting Standards Committee (IASC)

- Adoption of International Accounting Standards (IAS)

- Issue of Malaysian Accounting Standards (MAS)

1997 Financial Reporting Act 1997 established Financial Reporting Foundation (FRF)and Malaysian Accounting Standards Board (MASB)

- FRF, a trustee body responsible for the oversight of MASBs operations

- MASB is responsible for standard setting in Malaysia

- MASB issue standards called MASB, e.g. MASB 2Inventories

2005 MASB standards renamed as FRS, e.g. FRS 102Inventories

2012 Full convergence of FRSs with IFRSs

The provision of corporate information in Malaysia was first mandated by the Companies Act

1965 requirements. Schedule 9 of the Companies Act 1965 requires all registered companiesin Malaysia to disclose specific information in their financial statements. The format and

content of financial statements are not prescribed by Schedule 9 of the Companies Act 1965.

As such, only minimum disclosure requirements are prescribed by the legislation.

The disclosure of corporate information beyond the minimum statutory disclosure

requirements in Malaysia began in 1979 when Malaysia was represented on the International

Accounting Standards Committee (IASC). The IASC was set up in 1973 and was responsible

for the setting of International Accounting Standards (IAS). The guidelines issued by the

IASC were called SIC. Soon after its representation on the IASC, Malaysia began adopting

the IASs. While the adoption of IASs lead to more comprehensive disclosure of corporate

information, it was not able to meet some local reporting requirements. Accounting andreporting requirements for transactions and events in relation to specific industries such as

aquaculture and insurance were not addressed by the IASs. In meeting the local reporting

requirements, accounting standards known as Malaysian Accounting Standards (MASs) were

issued jointly by two professional accounting bodies in the 1980s. These bodies were

represented by Malaysian Institute of Accountants (MIA), Malaysian Association of Certified

Public Accountants (MACPA), now known as Malaysian Institute of Certified Public

Accountants (MICPA). Examples of these standards are MAS 1 Earnings Per Share, MAS 6

Accounting for Goodwilland MAS 8Accounting for Pre-Cropping Costs.

2.1 Malaysian Accounting Standards Board (MASB)

The standard setting role by MIA and MACPA was superseded by Malaysian Accounting

Standards Board (MASB) in 1997. MASB is established under the Financial Reporting Act

1997 (the Act). The Act was gazetted on 6 March 1997. In addition to MASB, the Act also

created Financial Reporting Foundation (FRF). The overall responsibility of the FRF is to

oversee the operating activities of the MASB.

The FRF comprises of nineteen (19) members who are appointed by the Minister of Finance.

- seven members are ex-officio representing the Minister of Finance, the Central Bank,

the Securities Commission, the Companies Commission of Malaysia, the BursaMalaysia Berhad, the MIA and the MASB.


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- twelve members representing a broad spectrum of interest groups - principal officers

of public listed companies, senior partners of public accounting firms and persons with

other relevant experience and background.

The responsibilities of the FRF as provided under the Financial Reporting Act 1997 are as

follows:

i. To provide views to the MASB on matters which the MASB seeks to undertake or

implement with respect to the development and issue of accounting standards and

conceptual framework;

ii. To review the performance of MASB;

iii.To be responsible for the financing arrangements and operations of the MASB;

iv. To approve the MASB budget;

v. To engage or to employ persons and determine the conditions of such appointments as

are necessary to assist the FRF and MASB perform their functions under the Act;

vi. To administer the fund established to finance the ongoing operations of FRF and

MASB including management of funds not expanded on operations during any period;vii.To maintain proper accounts and prepare an annual statement of accounts of the FRF;

viii.To forward annual statement of accounts and audit report to the Minister of Finance,

and report on the activities of the FRF and MASB at the end of each financial year,

and

ix. To perform such other functions as the Minister of Finance prescribe.

The functions and powers of the MASB as provided under the Act are to:

issue new accounting standards as approved accounting standards and to review,

revise or adopt existing accounting standards as approved accounting standards;

issue statements of principles for financial reporting;

sponsor or undertake development of possible accounting standards;

conduct public consultation as necessary;

develop a conceptual framework for the purpose of evaluating proposed accounting

standards;

make such changes to proposed accounting standards as considered necessary;

seek the view of the FRF in relation to new and existing standards, statement of

principles, and changes to proposed standards;

determine scope and application of accounting standards; and

to perform such other function as the Minister of Finance may prescribe.

The functions of the MASB as formulated in its mission statement are as follows:

i. to develop and promote high quality accounting and reporting standards that are

consistent with international best practices for the benefit of users, preparers, auditors

and the public in Malaysia.

ii. to contribute directly to the international development of financial reporting for the

benefit of users, preparers and auditors of financial reports.

In fulfilling the above functions, MASB sets out the following objectives:

to develop high quality, clear and enforceable national accounting standards forfinancial reporting that benefit users;


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to bring about harmonisation of national accounting standards with international

accounting standards;

to promote the use and application of those standards by way of communication with

and education of users, preparers, auditors and the public;

to actively contribute to the development of accounting standards internationally,

including, Islamic-based accounting standards; and to promote and support research in the area of financial reporting, in particular, for

emerging markets and Islamic markets.

The members of MASB are appointed by the Minister of Finance and comprises of the

following members:

- a chairman,

- the Accountant General,

- advisors representing the Securities Commission, Companies Commission of Malaysia

and MIA, and

-

six other members with expertise in accountancy, law, business and finance. It shouldbe noted that the FRA 1997 specifies that at least five of these members are members

of MIA.

Section 27 of the Act requires all companies incorporated under the Companies Act to comply

with accounting standards issued and adopted by the MASB. Accounting standards are

defined by FRF as statements of standard accounting practices used for the preparation of

financial statements. The MASB established a committee called Issues Committee and

Working Groups in dealing with standard setting related matters.

2.1.1 Issues Committee

Issues Committee was established in May 2002, replacing its predecessor, the Interpretation

Committee. The change of name reflects the expanded scope of the committee which goes

beyond interpretations of approved accounting standards. In addition to reviewing accounting

issues that have received or are likely to receive divergent views in interpretation, Issues

Committee also deals with other accounting related issues where there is no existing

accounting standard.

The committee comprises representatives from the accounting profession, commerce, the

academia as well as an analyst and a solicitor. Observer representatives from MIA, Securities

Commission, Bank Negara Malaysia and Companies Commission of Malaysia also form partof the committee.

2.1.2 Working Group

The MASB has established numerous Working Groups which are assigned with different

projects. Each working group is responsible for reviewing and undertaking detailed studies of

the assigned project, taking into accounts any statutory and regulatory reporting requirements

as well as its practical implications. A Working Group must be chaired by a member of the

MASB. Other group members include a project manager and representatives from the

accounting profession, commerce, academia as well as regulatory authorities.


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The work undertaken by Working Group plays an important role in the development of the

MASB standards. The MASBs due process for developing a standard is summarized in

Figure 2.

Figure 2: MASB Due Process

1. MASB Identifies IAS for review.

2. Working Group Prepares Discussion Paper (DP).

3. MASB Review DP.

4. FRF Review DP.

5. MASB Finalises DP into Exposure Draft (ED).

6. Public Public exposure of ED.

7. Working Group Prepare report on feedback received on ED.8. MASB Review feedback on ED.

9. FRF Final review of feedback on ED.

10. MASBApproval of MASB standard. Subsequent issue of MASB

standard.

Prior to the creation of MASB, Malaysia has already adopted the IASs issued by the IASC

and MASs issued by the Council of MIA and MICPA. Upon its creation, MASB adopted

most of these standards which gave these standards the status of approved accounting

standards. These standards were referred to as MASB standards. With the exception of theadopted MASs, the MASB standards were in substance similar to the IASs.

In April 2001, the international standard setting role of IASC was superseded by the IASB

and subsequently the IASB began issuing IFRS. At this point in time, all IASs issued by the

IASC remained in force until amended or withdrawn by the new IFRS issued by IASB. In line

with this development, MASB standards have been renamed to Financial Reporting Standards

(FRS) in 2005. The numbering of the FRSs corresponds to the IFRSs issued by the IASB. For

example, FRS 1 in Malaysia is equivalent to IFRS 1. FRS with a 100 prefix corresponds to its

equivalent IASs. Thus FRS 101 is equivalent to IAS 1. FRS with a 200 prefix represents

locally developed Standard with no equivalent International Standard. The list of standards

issued and adopted by MASB, the corresponding IFRS and MASB standards prior toconvergence efforts are shown in Figure 3 below.

Figure 3: List of IASB Standards and MASB Standards

Standard International Financial Reporting

Standards as at 1 April 2010 - Title

MASB Standards For Entities

Other than Private Entities

Framework for the Preparation and

Presentation of Financial Statements

Framework for the Preparation and

Presentation of Financial

Statements


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International Financial Reporting

Standards (IFRSs):

IFRS 1 First-time Adoption of International

Financial Reporting Standards

FRS 1

IFRS 2 Share-based Payment FRS 2

IFRS 3 Business Combinations FRS 3

IFRS 4 Insurance Contracts FRS4

IFRS 5 Non-current Assets Held for Sale and

Discontinued Operations

FRS 5

IFRS 6 Exploration for and Evaluation of Mineral

Resources

FRS 6

IFRS 7 Financial Instruments: Disclosures FRS 7

IFRS 8 Operating Segments FRS 8

IFRS9 Financial Instruments

International Accounting Standards

(IASs):

IAS 1 Presentation of Financial Statements FRS 101

IAS 2 Inventories FRS 102

IAS 7 Statement of Cash Flows FRS 107

IAS 8 Accounting Policies, Changes in

Accounting Estimates and Errors

FRS 108

IAS 10 Events After the Reporting Period FRS 110

IAS 11 Construction Contracts FRS 111

IAS 12 Income Taxes FRS 112

IAS 16 Property, Plant and Equipment FRS 116IAS 17 Leases FRS 117

IAS 18 Revenue FRS 118

IAS 19 Employee Benefits FRS 119

IAS 20 Accounting for Government Grants and

Disclosure of Government Assistance

FRS 120

IAS 21 The Effects of Changes in Foreign

Exchange Rates

FRS 121

IAS 23 Borrowing Costs FRS 123


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IAS 24 Related Party Disclosures FRS 124

IAS 26 Accounting and Reporting by Retirement

Benefit Plans

FRS 126

IAS 27 Consolidated and Separate Financial

Statements

FRS 127

IAS 28 Investments in Associates FRS 128

IAS 29 Financial Reporting in Hyperinflationary

Economies

FRS 129

IAS 31 Interests in Joint Ventures FRS 131

IAS 32 Financial Instruments: Presentation FRS 132

IAS 33 Earnings per Share FRS 133

IAS 34 Interim Financial Reporting FRS 134IAS 36 Impairment of Assets FRS 136

IAS 37 Provisions, Contingent Liabilities and

Contingent Assets

FRS 137

IAS 38 Intangible Assets FRS 138

IAS 39 Financial Instruments: Recognition and

Measurement

FRS 139

IAS 40 Investment Property FRS 140

IAS 41 Agriculture FRS 141*

i-1 Presentation of Financial

Statements of Islamic Financial

Institutions **

FRS 201

Property Development Activities**

FRS 202 General Insurance

Business**

FRS 203 Life InsuranceBusiness**

FRS 204 Accounting for

Aquaculture**

*IAS 41/FRS 141 is not adopted in Malaysia but an exposure draft has been issued by MASB.

** These standards were issued by MASB in order to meet local reporting requirements and

they do not have the corresponding IFRSs issued by IASB.

Note:

- FRS 202 is not equivalent to IFRS 4 Insurance Contract as this standard applies to

insurance contract as defined in IFRS 4. FRS 202 is applicable to entities conductinggeneral insurance business in Malaysia.


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- FRS 203 is not equivalent to IFRS 4 Insurance Contract as this standard applies to

insurance contract as defined in IFRS 4. FRS 203 is applicable to entities conducting

life insurance business in Malaysia.

- FRS 204 prescribes the accounting method for aquaculture operations where the

products from such operations are used mainly for food consumption. Under IFRS,

IAS 41 applies but to the wider definition of agriculture activity.

2.1.3 Technical Pronouncements

In addition to issuing standards, the MASB may also issue technical pronouncements such as

Statement of Principles, Technical Releases and Interpretation Bulletin. The purpose of a

technical pronouncement is to provide guidance on the application of generally accepted

accounting principles. In some instances, the issue of a pronouncement represents an interim

measure prior to the issue of a particular standard. It should be noted that the technical

pronouncements do not amend or overide MASB Standards or other statements issued by the

MASB.

Examples of technical pronouncements that have been issued are as follows:

TR 1 Share Buybacks - Financial Assistance Superseded

MASB

TR 1

(revised)

Share Buybacks - Accounting and

Disclosure

1 January 1999

TR 1

(revised)

(ForFRS)

Share Buybacks - Accounting and

Disclosure

1 January 1999

TR 2 The Year 2000 Issue : Accounting and

Disclosure

31 July 1998

TR 3Guidance on Disclosures of Transition to

IFRSs31 December 2010

TR i- 1 Accounting for Zakat on Business 1 July 2006

TR i- 2 Ijarah 1 July 2006

TR i- 3 Presentation of Financial Statements ofIslamic Financial Institutions 1 Jan 2010

TR i- 4 Shariah Compliant Sale Contracts 1 Jan 2011

SOP 1

(2004)Exempt Entities

SOP 2 Interim Financial Reporting Superseded by MASB 26

SOP i-

1

Financial Reporting from an Islamic

Perspective
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Figure 4: Structure of IASB

TrusteesThe trustees are responsible for safeguarding the independence of the IASB and ensuring the

financing of the organisation. The trustees are also responsible for the appointment of the

IASB members. Members of the IASB comprise of experts with an appropriate mix of recent

practical experience of standard-setting, or of the user, accounting, academic or preparer

communities.

The IFRS Interpretations Committee

The IFRS Interpretations Committee (formerly called the IFRIC) is the interpretative body of

the IASB. The members are appointed by the Trustees and drawn from a variety of countries

and professional backgrounds. The Committee provides timely guidance on accounting issues

that have arisen within the context of current IFRSs and to provide authoritative

guidance(IFRICs) on those issues.

Standards Advisory Council

Members of the Council comprise groups and individuals with diverse geographic and

functional backgrounds. They advise the Trustees and IASB on all major projects.

IASB Due ProcessThe due process, which involves interested individuals and organisations from around the

world comprises of six stages. These stages are:

1. Setting the agenda

2. Planning the project

3. Developing and publishing the discussion paper

4. Developing and publishing the exposure draft

5. Developing and publishing the standard

6. After the standard is issued

IASC Foundation

IASB

Standard Advisory

CouncilInterpretation Committee

Working Group

Key

Appoints

Reports to

Advises
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4.0 Private Entities

Private entities in Malaysia are exempted from applying FRS in starting from the 2006. These

companies may continue to apply the MASB standards referred to as Private Entity Reporting

Standards (PERS). These standards were issued subsequent to the establishment of MASB in

1997 and they are called MASB. The list of PERS is shown in Figure 4.

Private entity is a private company incorporated under the Companies Act 1965. This

company:

is not required to prepare or lodge any financial statements under any law

administered by the Securities Commission or the Bank Negara Malaysia; and

is not a subsidiary or associate of, or jointly controlled by, an entity which is required

to prepare or lodge any financial statements under any law administered by the

Securities Commission or the Bank Negara Malaysia.

A private company is defined in Section 15(1) of Companies Act 1965 as a company having ashare capital and incorporated as a private company if its memorandum or articles:

i. restricts the right to transfer its shares;

ii. limits to not more than fifty the number of its members (counting joint holders of

shares as one person and not counting any person in the employment of the company

or of its subsidiary or any person who while previously in the employment of the

company or of its subsidiary was and thereafter has continued to be a member of the

company);

iii. prohibits any invitation to the public to subscribe for any shares in or debentures of the

company; and

iv.

prohibits any invitation to the public to deposit money with the company for fixed

periods or payable at call, whether bearing or not bearing interest.

In preparing its financial statements, an entity may only be treated as a private entity in

relation to such annual periods or annual periods through out which it is a private entity.

Private entities shall apply either PERS in their entirety or FRS in their entirety in the

preparation and presentation of their financial statements.

Figure 5: List of PERS

Standard Title Effective Date

MASB 1 Presentation of Financial Statements 1 July 1999

MASB 2 Inventories 1 July 1999

MASB 3Net Profit or Loss for the Period, Fundamental Errors and

Changes in Accounting Policies1 July 1999

MASB 4 Research and Development Costs 1 July 1999

MASB 5 Cash Flow Statements 1 July 1999

MASB 6 The Effects of Changes in Foreign Exchange Rates 1 July 1999
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MASB 7 Construction Contracts 1 July 1999

MASB 9 Revenue 1 Jan 2000

MASB 10 Leases 1 Jan 2000

MASB 11 Consolidated Financial Statements and Investments inSubsidiaries

1 Jan 2000

MASB 12 Investments in Associates 1 Jan 2000

MASB 14 Depreciation Accounting 1 July 2000

MASB 15 Property, Plant & Equipment 1 July 2000

MASB 16 Financial Reporting of Interests in Joint Venture 1 July 2000

MASB 19 Events after the Balance Sheet Date 1 July 2001

MASB 20 Provisions, Contingent Liabilities & Contingent Assets 1 July 2001

MASB 23 Impairment of Assets 1 Jan 2002

MASB 25 Income Taxes 1 July 2002

MASB 27 Borrowing Costs 1 July 2002

MASB 28 Discontinuing Operations 1 Jan 2003

MASB 29 Employee Benefits 1 Jan 2003

MASB 30 Accounting and Reporting by Retirement Benefit Plans 1 Jan 2003

MASB 31

Accounting for Government Grants and Disclosure of

Government Assistance 1 Jan 2004

MASB 32 Property Development Activities 1 Jan 2004

IAS 25 Accounting for Investments 1 Sept 1998

IAS 29 Financial Reporting in Hyperinflationary Economies 1 Jan 2003

MAS 5 Accounting for Aquaculture 1 Sept 1998

IB-1 Preliminary and Pre-operating Expenditure 1 Jan 2001

5.0 Convergence of Accounting Standards

Currently, the top global capital markets that require or permit the use of IFRS are:

(a) United Kingdom;

(b) France;

(c) Germany;

(d) Hong Kong;

(e) Spain;

(f) Switzerland;

(g) Australia.
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United States of America and Japan are considering converging with IFRS while Korea,

Canada and India have announced their plans for convergence by 2011.

In Malaysia, all entities that are required to comply with approved accounting standards under

the Financial Reporting Act 1997 will be required to prepare and present their financial

statements in accordance to the IFRSs, except for private entities. Full compliance begins onor after January 1, 2012. In relation to private entities that apply PERS, it will continue to do

so until such time as the MASB decides otherwise. In addition, local technical

pronouncements, FRS 201 to FRS 204, FRS i-1, SOP and technical releases will likely to be

reviewed by the MASB.

5.1 Benefits of Convergence

The benefits of convergence based on the benefits to various users of financial statements are

as follows:

i. Investors

- Increase comparability of financial information across borders as well as among

companies nationally in making investment decisions.

- Increase transparency.

- Greater understandabiliy.

ii. Multinational companies

- Better access to foreign capital markets.

- Increase credibility of domestic capital markets to foreign capital providers.

-

Facilitate compliance with reporting requirements of foreign stock exchanges,- Facilitate preparation and presentation of financial statements as companies are only

required to maintain one set of books prepared in compliance with IFRSs.

- Lower cost of capital to companies.

iii. Regulatory bodies

- Ease of regulation of securities market as convergence increases regulatory

acceptability of financial information provided by market participants.

- Reduced costs of national standard setters.

- Facilitate calculation of tax liability for companies receiving income from

international sources.-

Transfer of accounting staffs across borders as similar accounting practices existed

worldwide.

- Promote economic growth within region practicing common accounting practices.

5.2 Challenges of Convergence

The challenges of convergence are as follows:

- Application of similar IFRSs may not be appropriate as the purpose of financial

reporting differs across countries. For example, in countries where the legal system is

based on Roman Law, the financial statements are prepared for tax assessment whilein other countries the information is for investor decision-making.


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- Different legal system can hinder development of certain accounting practices.

- Different in culture may affect variations in objectives of accounting systems.

- Lack of professional expertise due to lack of strong accountancy bodies in certain

countries.

- Different emphasis on user groups. For instance, investors and creditors are important

in the USA, employees are important in Europe while in many East Asian countrieswhere corporate ownerships are more concentrated, there are lower investor

protection.

- Development of standards and principles in developing countries are not at par with

the developed countries. This could slower the rate of full convergence in some

countries.

- National standards in some countries are not based on a conceptual framework of

accounting while IFRSs are.

6.0 Summary

Reliable and transparent financial reporting is paramount to support the decision-making by

investors, lenders and regulatory authorities. In meeting the needs of various users, there is a

need to develop and issue accounting standards that are of high quality, transparent and

comparable in the preparation of financial statements. The current move is through the

adoption of IFRSs by countries around the world. The IASB is responsible for setting and

issuing the IFRSs. In ensuring the success of full convergence, the work of national standard

setters and the IASB should be integrated. In Malaysia, the MASB actively participates in the

IASBs due process at an early stage of standard development. The standard setting process in

Malaysia has also developed in line with the plan of full convergence by 2012.

Questions

1. Explain the development of accounting standards in Malaysia.

2. Describe the structure and objectives of Malaysian Accounting Standards Board.

3. What is the difference between International Accounting Standards and International

Financial Reporting Standards?

4.

List some of the benefits and challenges to convergence.

5. In some countries, income reported to investors differ from income prepared for tax

calculations. Discuss whether these income should be identically determined through the

application of International Financial Reporting Standards.

6. Standard setting approaches in countries may differ. Discuss how these difference affect

the acceptance of compliance with International Financial Reporting Standards.

standard setting in malaysia

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