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August 28, 2008

Malaysia charts its convergence course

The announcement of full adoption of IFRS in Malaysia caught no one within the nation’s accounting industry by surprise. However, the actual date of the deadline was news to most. Carolyn Canham speaks to several of the profession’s leaders about the opportunities and challenges IFRS presents.


Malaysian accounting standards have been based on international standards since 1978, and since 2006 the move to make them identical to their international counterparts has picked up pace. Therefore, when the Malaysian Accounting Standards Board (MASB) said local standards would fully converge with IFRS by 2012, few stakeholders were caught by surprise. Most will be prepared for the changes the move will bring, however, some industry figures speaking with The Accountant warned smaller companies and firms might struggle with aspects of convergence.

The existing Malaysian standards are already word-for-word identical with IFRS. The difference lies in standards Malaysia has not adopted. The two major ones are IAS 39 – Financial Instruments: Recognition and Measurement, which will be effective from 1 January 2010, and IAS 41 – Agriculture, which is currently being reviewed for adoption.

BDO Binder audit partner Tang Seng Choon was involved in a number of MASB working groups so the announcement came as no surprise to him. However, he said compliance with IAS 39 by 2010 would come as a shock to some stakeholders, including both companies and professional services firms, and many might not be prepared.

Seng Choon is not concerned about BDO’s capacity to deal with the changes – he sits on the BDO International IFRS working committee and is up-to-date on the standards. He does, however, concede the firm will need to “look inwards”. “We need to see whether our firm has the expertise to tackle those things… I need to retrain my seniors and the managers in charge of engagement teams to be more focussed on IAS 39 – that standard comes in hundreds of pages,” he says.

BDO Binder’s clients are less prepared. Seng Choon says: “The major companies in Malaysia are talking about readiness and early adoption, but a lot of other companies in Malaysia, although listed, are really smaller, mid-sized companies and they may have some problems.”

The BDO partner’s sentiments are echoed at PricewaterhouseCoopers Malaysia (PwC). Ng Mi Li is a senior executive director and technical partner at the Big Four firm and a council member of the Malaysian Institute of Certified Public Accountants (MICPA). Mi Li says PwC is prepared for convergence with IFRS and has for some time assisted clients with subsidiaries that prepare IFRS financial statements. Local tertiary institutions are also aware of the need to incorporate IFRS into their curricula in order to equip future graduates with IFRS knowledge, she adds.

However, Mi Li’s colleague, Loh Lay Choon, a board member of the Financial Reporting Foundation in Malaysia, says the preparers of financial statements are at various degrees of readiness. “Those corporations with overseas subsidiaries are obviously better prepared than those without significant foreign subsidiaries in IFRS jurisdictions,” she says.

Stephen Oong, an audit partner in the technical department of Ernst & Young Malaysia (E&Y), is less concerned about the implementation of IAS 39. He explains the long lead-up to the implementation of the standard means many stakeholders will already be prepared. Oong points out that the MASB originally planned for IAS 39 to be effective from 1 October 2006. “At that point in time the accounting firms got themselves ready. We also gave a lot of training and seminars to all our clients to get them geared up. So I think in that sense, people who were ready at that point in time are ready,” he says.

Oong says there has also been a test exercise to examine how ready Malaysian companies are for IAS 39. “That was done about two years ago and more than 20 listed companies participated in a trial run of adoption and application of IAS 39,” he says. “When that exercise was completed, the conclusion was Malaysian companies were actually ready.”

MASB executive director Nordin Zain is also positive the accounting profession and listed companies are prepared for the final steps to conversion.

“We worked together with market players to carry out field tests on agriculture, impact study on IAS 39 and field studies on IFRS for Private Entities. Participation from stakeholders was forthcoming and that has helped us identify problem spots and hence issues of implementation to address,” Zain says. “The market was unaware about 2012 before the announcement. I would have thought they were expecting it to be earlier than 2012, so it is a good break for them.”

Zain says that although some smaller listed companies may not be as prepared as the larger ones, they must accept the responsibilities that come with being public interest entities. “The fact that they are listed… means they are publicly accountable companies. It is a conscious decision they have made and therefore they have to play by international rules,” he says.

The MASB executive director is also optimistic about the preparation of the accounting profession.

“The education and training programme has been very active in this part of the world,” Zain says. “I am glad to see a healthy growth of reputable outfits offering training to the accounting profession and I am glad too for the amount of energy and effort put up by the Big Four accounting firms in Malaysia in getting their clients ready for the standards.”

While preparation for IAS 39 is a concern to some, the agriculture standard is also a topic of discussion. According to Zain, the nation is the largest palm oil producer in the world and the third-largest rubber producer, therefore the agriculture standard has the potential to affect a lot of people.

Determining the fair value of biological assets is one major concern within the scope of IAS 41. Oong explains most plantation companies are concerned whether there are sufficient resources in terms of people who have the capability to determine the fair value of biological assets. However, he adds that when the MASB engaged the valuers and plantation stakeholders in public forums, the valuers said they do have the capability to do the valuation.

Gary Yong, a member of the public practice committee of the MICPA and a partner at Nexia International member firm SSY Partners, is concerned fair value causes problems in general.

“I don’t know about the Western world, but in the Asian context it is rather difficult,” he says, adding that in the case of a barter trade, for example, “how does one place a fair market value? Very honestly, it is open to abuse.”

All the firms expect revenue opportunities to arise from the adoption of the new standards – particularly IAS 39. However, Seng Choon warns that although he expects increased fee income, there will also be increased time costs that may not be translated into fees. “The local going wages underestimate the full compliance of these standards and a lot of time spent by the auditors may not be translated into fees,” he explains.

Despite any reservations, most partners are pleased convergence dates have been settled. Seng Choon explains: “I am quite happy that the road map has been clearly spelled out so that we can actually have a full convergence by 2012. Otherwise, when I do an international engagement, I have to think about what is in IFRS, what is in Malaysian GAAP and it is very difficult sometimes.”

Yong is an exception – saying he has some reservations about IFRS: “I have been in practice since 1975, and it has come to the point where form has become more important than substance. That is my concern.”

He is also concerned about the setting of standards being handled mainly by academics, adding: “The practitioners, fortunately or unfortunately, do not play a major role.

“I confess myself that when we have an exposure draft, one doesn’t find time to take a look at it and then before you know, it is implemented and then when we start to really look at it and try and apply it, we say ‘whoops, it does cause a problem’. All these suppositions or what may happen hypothetically academically doesn’t in real life, so it is difficult.”

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