MASB Confirms Malaysia to Converge with IFRS on 1 January 2012

<strong>MASB</strong> <strong>Confirms</strong> <strong>Malaysia</strong> <strong>to</strong> <strong>Converge</strong> <strong>with</strong> <strong>IFRS</strong> on 1 January 2012
Introduction
On 19 November 2011, the <strong>Malaysia</strong>n Accounting Standards Board (“<strong>MASB</strong>”) issued a new
<strong>MASB</strong> approved accounting framework, named as ‘<strong>Malaysia</strong>n Financial Reporting Standards
(MFRS Framework). This framework will bring accounting standards in <strong>Malaysia</strong> <strong>to</strong> be fully
<strong>IFRS</strong>-compliant.
MFRS Framework
The MFRS Framework comprises accounting standards as issued by the International
Accounting Standards Board (IASB) that are effective on 1 January 2012. It also comprises new
and revised accounting standards recently issued by the IASB that will be effective after 1
January 2012 such as accounting standards on financial instruments, consolidation, joint
arrangements, fair value measurement and employee benefits, among others. The adoption of
the MFRS Framework would thereafter facilitate comparability of the <strong>Malaysia</strong>n entities’ financial
statements and increase transparency.
Effective Date of Application
The MFRS Framework is <strong>to</strong> be applied by all <strong>Malaysia</strong>n entities other than private entities for
annual periods beginning on or after 1 January 2012. However, certain 'transitioning entities'
(essentially those involved in agriculture and real estate construction) will be allowed <strong>to</strong> defer
adoption of the new MFRS Framework for an additional one year, so that it will be manda<strong>to</strong>ry for
annual periods beginning on or after 1 January 2013.
Agriculture and Real Estate Industries
Agriculture and real estate industries are given one year transitional period as there are potential
significant changes in the current accounting treatments.
Real Estate Industry
Revenue recognition of property development activities may be different when the new revenue
standard is about <strong>to</strong> be finalised by 2013 which replaces IC Interpretation 15 Agreements for
Construction of Real Estate (“IC Int. 15”).
Presently, IC Int.15 appears <strong>to</strong> require revenue and therefore profit <strong>to</strong> be recognised upon the
completion of the property development. This is a <strong>to</strong>tal departure from our present practice of
recognising revenue/profit as construction progresses. The implication is that a property
developer may show no or small revenue/profit during the construction periods and a lumpy
amount of revenue and profit upon the completion of development.
However, the recent IFRIC staff paper presented at IFRIC meeting in November 2011 analysing
the application of IC Int. 15 in <strong>Malaysia</strong> and appears that, property developers in <strong>Malaysia</strong> may
recognise their revenue and profit based on the percentage of completion method instead of
completed method. This is because, based on this paper, the risks and rewards of the
ownership of properties continuously transfer <strong>to</strong> the buyers, evidenced on the following grounds:-
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Upon the execution of the sales agreement, a buyer acquires the right <strong>to</strong> borrow money
against the work-in-progress when financier’s undertaking (“FU”) is signed.
At the same time, the developer loses its right <strong>to</strong> borrow against the asset. Once the FU
is signed, any existing charges over the properties must be discharged. The developer is
prohibited thereafter from mortgaging the land and the developer’s lender must disclaim
any rights <strong>to</strong> the land or development.
Risk of non-completion by the developers is rest <strong>with</strong> the buyers as the buyers pay
continuously when the construction is in progress.
These monies are paid in<strong>to</strong> a separate bank account and are under the supervision of the
regula<strong>to</strong>r. None of these payments are refundable.
In addition <strong>to</strong> the above, the buyers receive a number of rights <strong>to</strong> protect them from the risk of
non-completion by the developers:-
(a) developers are regulated.
(b) contract terms are standardised by statute
(c) if the developer fails <strong>to</strong> fulfill their obligations <strong>to</strong> the buyer the regula<strong>to</strong>r has a wide range
of powers under the Act, including the ability <strong>to</strong> appoint another developer.
The reasons elaborated above and the protections accorded <strong>to</strong> house buyers signify that
significant risks have transferred <strong>to</strong> the house buyers. Accordingly, revenue and profit will be
recognised progressively by a property developer, which is the present practice of the industry.
However, this staff paper is still subject <strong>to</strong> the approval of the IASB Board. If such view is
acceptable by the Board, there will be no/minimal financial impacts on the adoption of the IC Int.
15 by our local real estate players.
Nevertheless, there are numerous other fac<strong>to</strong>rs that may influence the way revenue and profit of
a property development project can be recognised. Therefore careful assessment on the sale
agreements and the development arrangements should be made on each property development
project <strong>to</strong> determine if transfer of risk and rewards of ownership of the properties <strong>to</strong> the house
buyers has taken place.
Agriculture Industry
<strong>MASB</strong> <strong>to</strong>gether <strong>with</strong> several other standard setters of other jurisdictions are currently proposing
<strong>to</strong> IASB <strong>to</strong> amend IAS 41 on accounting for bearer biological assets (e.g. plantation trees) using
IAS 16 property, plant and equipment concept instead of fair value onthe bearer biological assets.
In view of the pending changes on the revised accounting standard, <strong>MASB</strong> felt that a one year
transition arrangement should be given <strong>to</strong> this industry until IASB’s direction is clearer.
However, one may view that this change in the fundamental accounting concept will not be
completed in just one year time. It may take a longer time for IASB <strong>to</strong> revisit IAS 41 as there are
further issues which may need <strong>to</strong> be addressed for e.g. how <strong>to</strong> define a biological asset which
contains both characteristic of bearer and consumable in nature (e.g. dairy cow or beef cow). In
short, more changes are <strong>to</strong> be made <strong>to</strong> the revised IAS 41 before its issuance.
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Benefits of Accounting <strong>Converge</strong>nce
Not<strong>with</strong>standing the issues that are found on the new standards such as those highlighted above
in respect of the real estate and agriculture industries, the convergence is imminent, especially
<strong>with</strong> other countries in this region which are moving ahead <strong>with</strong> the convergence. We should also
take cognisance of benefits of convergence; such as:-
Reduce reporting costs for cross-border reporting
Increased reporting consistency and provide high quality financial reporting
Increased credibility of local markets in the eyes of the foreign inves<strong>to</strong>rs
Encourage cross-border listing and development of capital markets
Increase mobility of accountants
FRS Framework
To be consistent <strong>with</strong> the issuance of MFRS Framework, several new and revised accounting
standards on FRS Framework have also been developed, namely FRS 9 Financial Instruments,
FRS 10 Consolidated Financial Statements, FRS 11 Joint Arrangements, FRS 12 Disclosure of
Interests in Other Entities, FRS 13 Fair Value Measurement, FRS 119 Employee Benefits, FRS
127 Separate Financial Statements, and FRS 128 Investments in Associates and Joint Ventures,
four limited amendments <strong>to</strong> FRSs (FRS 1, FRS 7, FRS 101 & FRS 112) and IC Int. 20
Extinguishing Financial Liabilities <strong>with</strong> Equity Instruments. Some of these pronouncements are
effective on 1 January 2012 whilst others are later.
The key differences between the FRS Framework and MFRS Framework are that in the former,
(a) FRS 2012004 Property Development Activities will continue <strong>to</strong> be the extant standard for
accounting for property development activities and not IC Int. 15, and (b) there is no equivalent
standard <strong>to</strong> IAS 41.
The <strong>MASB</strong> approved accounting standards can be downloaded at http://www.masb.org.my.
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