Business

Saturday February 7, 2009

Slow response to new accounting standards

By ERROL OH


Local firms need to act fast as Malaysia aims for full convergence by 2012.

Corporate Malaysia has not adapted fast enough to the evolution in financial reporting in recent years. This may be a big problem three years from now, when local companies will have less time to prepare for the impact of new accounting standards.

Dr Nordin Mohd Zain, an 11-year veteran of the Malaysian accounting standards scene, says our listed companies ought to do better in responding to the changes in the international standards for financial reporting, which are increasingly demanding.

“They (the companies) need a lot more convincing, a lot more buying in. The general perception worldwide is that today’s accounting standards require a lot more investments and resources,” he adds.

»The moment the standards are issued, they will be effective sooner rather than later« DR NORDIN MOHD ZAIN

The mindset shift has to happen soon because the Financial Reporting Foundation (FRF) and Malaysian Accounting Standards Board (MASB) plan to bring Malaysia to full convergence with International Financial Reporting Standards (IFRS) by the end of 2011.

Currently, MASB incorporates the provisions of the international standards, issued by the International Accounting Standards Board (IASB), into the local accounting standards.

As such, account preparers and users in Malaysia have substantial time to digest the effect of new standards because there is effectively two periods of draft review during the development of a standard – one before IASB issues the standard and the second before MASB adopts the new international standard.

However, once Malaysia is in full convergence, the second stage will be dropped, thus narrowing the window for our business community and accounting fraternity to have a say in the formulation of the standards. “We only have three to four months to give our feedback,” Nordin explains.

“Come 2012, IFRS will become the national standards. The implication is that the moment IASB issues a standard and it is made effective worldwide, our companies that are bound to follow the IFRS under the Financial Reporting Act, will have to comply.”

In the past, he adds, MASB has struggled to get the relevant people together to churn out ideas on how best to formulate standards. The key, he says, is to increase the engagement with the relevant parties through efforts such as public hearings.

The aim is to get auditors, regulators and companies to come forward to express their views on how the proposed standards will affect them and how Malaysia can contribute towards improving the global standards via comments and arguments.

Nordin points out that people have to understand that the consultation process for the drafts of the standards is an important exercise. Also, it is critical for the companies to be involved because the standards affect them. In addition, the relevant parties should realise that IASB is open to input as long as it is argued well.

“This is an opportunity not to be missed. The moment the documents are out, look at them quickly and get together. The MASB will provide a platform for people to come together,” he says.

“The companies have to be on their toes all the time. The moment the standards are issued, they will be effective sooner rather than later. Once convergence comes, the difference is that they don’t have the second due process window for them to think about what to do.”

In an exit interview, he tells StarBizWeek that between now and 2012, MASB will roll out plans to inform the players about what to expect when full convergence kicks in. MASB will also encourage people to look at their systems, to determine what needs to be changed and the investments required in order to be ready.

The board will also seek the support of the Malaysian Institute of Accountants and the Big Four accounting firms to talk to their clients about the significance of convergence and what they should do.

Nordin had been MASB’s executive director until end-January, when he resigned to become an executive director at Deloitte Malaysia. He joined MASB as a founding board member in July 1997, representing academia. When the then MASB CEO had left, Nordin took the helm in May 2000.

The need to be serious about the review of proposed financial reporting standards is underlined by cases of IFRS that may work against Malaysian companies.

The IFRS for agriculture, for example, appears to work against growers of perennial crops such as oil palm and rubber. Nordin says the standard is inconsistent with other standards in the treatment of changes in the fair value of agricultural assets.

He explains: “Other standards allow assets to be valued at fair value or cost. With agriculture, the companies must opt for fair value first. You have to test (for impairment) until such time when you really cannot establish a fair value. Then only you can go to cost.

“This is onerous, when other standards allow you to have a choice between fair value or cost. The changes in the fair value of agricultural assets go to the P&L (profit and loss account). In other industries, the changes can go to P&L or equity.”

There has also been a stir recently when an interpretation committee of the IASB ruled that real estate sales have to meet certain criteria, failing which the sales will only be recognised when a project is completed. This will be a blow to local property developers, who currently recognise sales from progressive payments.

Although this does not affect their cash flow, the developers’ bottomline will fluctuate wildly.

Nordin concedes that sometimes the IFRS can be Western-centric because they tend to reflect the business practices of the developed countries.

“It’s just that we need to express ourselves as one regional voice to get the IASB’s attention. To be fair, it does recognise such input if backed by good justification and arguments. We are working with the big players in the region, such as China, to form a voice,” he says.

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