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HIGHLIGHTS OF RECENT FINANCIAL REPORTING STANDARDS AND THEIR IMPLICATIONS ON
FUTURE BREED OF ACCOUNTANTS
UNIVERSITY MALAYSIA SABAH – MAREF SEMINAR
23 June 2010
DR NORDIN MOHD ZAIN
Executive Director
Deloitte Malaysia
Change: Global trends on Financial Reporting Adoption
Europe
2005
Australia
2005
Canada
2009/2011
South Africa
2005
United States
(2014)
Current or committed to using IFRS
Brazil
2010
China
2007
India
2011
Chile
2009
Japan(2010/2015?)
Malaysia, Spore,
Indonesia(2012)
Malaysia’s position
• Pursuant to August 2008 announcement that:
• 1 January 2010 – FRS 139 effective date• Co-terminuous with Basel 2 implementation
• 1 January 2012 – Full blown IFRS in Malaysia• Global trends
4Deloitte @ 2009
MASB IASB
6 8 IFRS 1 2 3 4 5 6 7 8
27 29 IAS 1 2 7 8 10 11 12 16 17 18 19 20 21 23 24
33 (4) 37 26 27 28 29 31 32 33 34 36 37 38 39 40 41
6 (11) 17 IFRIC 1 2 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
6Deloitte @ 2009
GAAP gap POSITION @ 31 December 2009
GAAP gap POSITION @ 1 January 2010 - narrowing
MASB IASB
8 9 IFRS 1 2 3 4 5 6 7 8 9
28 29 IAS 1 2 7 8 10 11 12 16 17 18 19 20 21 23 24
36 (2) 38 26 27 28 29 31 32 33 34 36 37 38 39 40 41
16 (1) 17 IFRIC 1 2 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
7Deloitte @ 2009
I F R S
37 Years and Forging Ahead
• 1973 - International Accounting Standards Committee (Committee)
• Historical cost regime
• Accounting regime
• 2001 - International Accounting Standards Board (Board)
• Fair value regime
• Financial reporting regime
I A S
Notable Changes
• Accounting standards have become a law of the country– FRS
– PERS
• Mandatory for companies to comply with accounting standards issued by MASB
• Applies to:– Public Listed Companies
– Financial Institutions under Bank Negara Malaysia
– Companies registered with Companies Commission of Malaysia (Sdn Bhdand Berhad)
• Not required but encouraged use by:– Government agencies
– Cooperatives
• Emergence of a family of standards on Fair Value –IAS 39 Financial Instruments Standards
• Change from Historical Cost to Fair Value
• Disclosure of market value in the notes to financial statements
• And many more
Notable Changes
FRS 139 - a Standard never so popular
• Complex
• Changing
• If you have read it and understood . . .
• FRS 139 (IAS 39) IFRS 9
14
What’s in store for 2012
FRS 3
Business
combination
FRS 141
Agriculture
IFRIC 4
Leases
Income
taxes
FRS 7 Fin.
instrument
disclosure
FRS 139
financial
instruments
Financial
statement
presentation
(Phase 1)
FRS 4
Insurance
(Phase 2)
Deadlines
-6 -5 -4 -3 -2 -10
1 2 3 4 5 67
8 9 10 1112
13 14 15 n n24
17
2011Half 2
FRS 3IFRIC 15
2010
FRS 139FRS 7FRS 4Interpretations
Qtr 1
First Qtrresult onFRS 139compliant
Opening IFRScompliant Balance Sheet
2012
Full suite IFRSFull suite IASAmendments
Deloitte @ 2009
Learning points
• Many more new things to come; exciting
• Train to be comfortable with pro-forma financial statements• speak to CFOs to understand areas of compliance & potential risk areas of
non-compliance
• simulate impact – understand areas with most impact
• stress test results – organizational impact & investors reactions
• Ensure accuracy of FRS 139 financial statements• Verification necessary before result is released to the regulators, public
• Balance Sheet remediation may be useful
• Lesson: Engage with professionals, practitioners
Communicate with them early
18
Pressure Points And Beyond
-6 -5 -4 -3 -2 -124
1 23
4 5 6 7 8 9 10 11 12 13 14 15 n n 24
19
2012 2013 2014
Full suite IFRSFull suite IASAmendments
•Exp Draft
IASB
•Standard
IASB•Simultaneous
•adoption
MASB
CAPACITY BUILDING – UNIV PLAYS A BIG ROLE
First QTRresult on Full suite ofIFRS + comparative
2011
Learning point
• Change is rapid; may be too rapid for some
• Skills building• Nothing beats this
20
Recent changes
• 1 July 2010 - Presentation of financial statements– (see article)
• 1 July 2010 - IFRIC 15– (see annexure)
• Agriculture– (see article)
• IFRS 9– (see annexure)
• Insurance Phase 2
Features of new breed of accountants
• New things to learn
• Technically sound
• Quick
• Judgemental
• Soft touch
• Communication
Implications on academics
• Keeping up with changes
• Research areas are abound
• Literature can be a challenge
• Quantum leap forward through frequent engagements with practice
Conclusion
• Change necessitate changes to the professionals in the accounting profession
• Inevitable change but opportunities are abound
• Track these changes to be ahead
• Success for those who differentiates
• Skill building is a must
• Accountants are the new breed of financial reporters of tomorrow
Industry So Unique ….
• Sell OFF-plan
• Then construct
• Meanwhile, purchasers imagine
• Happy if completed…. or …. Sad & angry if not
vs
• Register interest, 10% down
• Wait for construction to complete
• Or, purchase completed house
• Happy
So Unique …. with so many rules
• LAWS OF MALAYSIA FOR HOUSING DEVELOPMENT
• Principle Act 663 Building and Common Property (Maintenance and Management) Act 2007 12/04/2007 Principle Act 118 Housing
Development (Control and Licensing) Act 1966 29/08/1969 Amendment Act A402 Housing Developers (Control and Licensing) (Amendment) Act 1977 10/06/1977 Amendment ActA 703 Housing Developers (Control and Licensing) (Amendment) Act 1988 01/12/1988 Amendment Act A1142 Housing Developers (Control and Licensing) (Amendment) Act 2002 01/12/2002 Amendment Act A1289 Housing Developers (Control and Licensing) (Amendment) Act 2007 12/04/2007 Subsidiary PU (A) 58/1989 Housing Development (Control and Licensing) Regulations 198901/04/1989 Amendment PU(A) 446/1998 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT) REGULATIONS 1998 04/12/1998 Amendment PU(A) 473/2002 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT) REGULATIONS 2002 01/12/2002 Amendment PU(A) 42/2003 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT) REGULATIONS 2002-CORRIGENDUM 07/02/2003 Amendment PU(A) 226/2003 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT) REGULATIONS 2003 01/12/2002 Amendment PU(A) 395/2007 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT) REGULATIONS 2007 01/12/2007 Amendment PU(A) 190/2008 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT) REGULATIONS 2008 09/06/2008 Amendment PU(A) 200/2008 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT) REGULATIONS 2008 17/06/2008 Subsidiary PU (A) 231/1991 Housing Developers (Housing Development Account) Regulations 199126/08/1991 Amendment PU(A) 474/2002 HOUSING DEVELOPERS (HOUSING DEVELOPMENT ACCOUNT) (AMENDMENT) REGULATIONS 2002 01/12/2002 Order PU(A) 293/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) ORDER 2007 06/09/2007 Order PU(A) 294/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 2) ORDER 2007 06/09/2007 Order PU(A) 295/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 3) ORDER 2007 06/09/2007 Order PU(A) 296/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 4) ORDER 2007 06/09/2007 Order PU(A) 297/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 5) ORDER 2007 06/09/2007 Order PU(A) 298/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 6) ORDER 2007 06/09/2007 Order PU(A) 299/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 7) ORDER 2007 06/09/2007 Order PU(A) 017/2008 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) ORDER 2008 21/01/2008 Order PU(A) 109/2008 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 2) ORDER 2008 10/04/2008 Order PU(A) 111/2008 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 3) ORDER 2008 14/04/2008 Order PU(A) 120/2008 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 4) ORDER 2008 24/04/2008 Order PU(A) 111/2008 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 3) ORDER 2008 14/04/2008 Order PU(A) 063/2009 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) ORDER 2009 16/02/2009 Subsidiary PU (A) 476/2002 Housing Development (Tribunal for Homebuyer Claims) Regulations 2002 01/12/2002 Subsidiary PU (A) 475/2002 Housing Development (Compounding of Offences) Regulations 2002 01/12/2002 Supplement PU (B) 307/2004 DELEGATION OF POWERS UNDER SUBSECTION 9(1) OF THE HOUSING DEVELOPMENT (CONTROL AND LICENSING) ACT 1966 05/08/2004 Principle Act 318 Strata Titles Act 1985 01/06/1985 Amendment Act A573 STRATA TITLES (AMENDMENT) ACT 1990 23/02/1990 Amendment Act A951 STRATA TITLES (AMENDMENT) ACT 1996 02/08/1196 Amendment Act A1290 STRATA TITLES (AMENDMENT) ACT 2007 12/04/2007 Subsidiary PU (A) 164/1988 Strata Titles (Federal Territory of Kuala Lumpur) Rules 1988 23/04/1988 Subsidiary PU (A) 5/2003 Strata Titles (Federal Territory of Putrajaya) Rules 2003 09/01/2003 Subsidiary PU (A) 503/2002 FEDERAL TERRITORY OF PUTRAJAYA (MODIFICATION OF STRATA TITLES ACT 1985) ORDER 2002 27/12/2002 Principle Act 133 Street, Drainage and Building Act 1974
Supported by unique accounting standards
• MAS 7 issued by MICPA/MIA
• MASB adopted MAS 7 in 1998
• Revised in 2004 as FRS 201
– Percentage of completion
– Completed method allowed alternative
– Matching
– Lots of guidance
Uniqueness given way to convergence
• IASB issued draft IFRIC 15 in March 2007
• Deliberation
• IASB issued IFRIC 15 in July 2008
• Deliberation
MASB issued IFRIC 15 on 1 Jan 2010, effective 1 July 2010Supersedes FRS 2012004
IFRIC 15 in essence
• IAS 18 (Revenue) and IAS 11 (Construction Contract) as bases
• Is it a sale or an obligation to construct?
• Rights and obligations
• Compels players to take a look at the agreement
• New concept called ‘continuous transfer’
IFRIC 15 in simple terms
IAS 18 revenue
risk & reward
rights & obligation
IAS 11 construction
IFRIC 15 Agreement
NO
NO
IFRIC 15―Quick reminder
NO
Revenue when criteria met
Agreement for construction of real estate
YESIFRIC 15 construction contract?
Agreement is a construction contract –
IAS 11% completion
YESAgreement only for
services?% completion
Agreement is for services – IAS 18
YESAgreement is for sale of goods – IAS 18
Criteria for goods met on continuous basis?
% completion
YES
YES
YES
Disclosure requirements
IAS 11 IAS 18 IFRIC 15
(a) How entity determines which agreements meet all the criteria in IAS 18.14 continuously as construction progresses.
(b) The amount of revenue arising from such agreements in the period.
(c) The methods used to determine the stage of completion of agreements in progress.
For agreements in progress:
(a) The aggregate amount of costs incurred and recognized profits (less recognized losses) to date; and
(b) The amount of advances received.
IFRIC 15 – ‘continuous transfer’
Implications
Quarterly submission
State of readiness
Readiness to change
Must change
Must bear with the change
Summary
• IFRIC 15 driven by convergence decision
• Has impact on industry so unique to Malaysia and to some others
• Since accounting is law in Malaysia, decision to adopt makes IFRIC 15 mandatory for companies sooner rather than later
• Implications can be significant on industry, income taxes, systems and bottom line
The Beginning of The End for IAS 39
• IFRS 9 Financial Instruments is the first phase of a complete rewrite of IAS 39
• Second phase covering amortised cost and impairment
• Third phase, hedge accounting
38
39
• Debt instruments meeting both a “business model” test and a “cash flow
characteristics” test are measured at amortised cost
• Investments in equity instruments can be designated as “fair value through
other comprehensive income” with only dividends being recognised in profit
or loss
• All other instruments (including all derivatives) are measured at fair value
with changes recognised in the profit or loss
• The concept of “embedded derivatives” does not apply to financial assets
within the scope of the standard and the entire instruments must be
classified and measured in accordance with the above guidelines
• Unquoted equity instruments can no longer be measured at cost less
impairment (must be at fair value).
IFRS 9 Changes
40
• In determinining amortised cost or fair value, an entity must use
two criteria:-
• a business model test
• a cash flow characteristics test
• If the financial asset satisfies the two criteria:-
• the financial asset must be measured at amortised cost
41
• Business Model Test
• to assess whether its business objective is to collect the
contractual cash flows of the assets
• rather than realise their fair value change from sale
• this determination is made at business unit level not an
individual financial instrument level
• therefore is not based on management’s intent for individual
instruments
Key changes under IFRS 9
Investments in equityinstruments
Often classified as ‘available for sale’ with gains and some losses deferred in other comprehensive income. Impairment losses recognised in profit or loss.
Measured at fair value with gains/losses recognised in profit or loss, unless designated at fair value through other comprehensive income in which case only dividends recognised in profit or loss
Available for sale debtinstruments
Recognised at fair value with gains/ losses deferred in other comprehensive income. Impairment losses and reversalsrecognised in profit and loss
May be measured on amortised cost basis if the ‘business model’and ‘cash flow characteristics’ tests are met, otherwise measured atfair value through profit or loss
Convertibleinstruments
Embedded conversion option bifurcated and separately recognised at fair value, underlying debt instrument may bemeasured at amortised cost
Entire instrument must be classified and measured. Results inmeasurement at fair value with gains/losses in the profit or loss
Other financial hosts with embedded derivatives
Bifurcation from underlying instrument in many cases, separately accounted for atfair value with gains/losses in profit or loss
No bifurcation, entire instrument classified and measured. Will often result in entire instrument being measured at fair value through profit or loss
Listed debt securities Measured at fair value (unless included in the held-to-maturity category)
Measured at amortised cost if ‘business model’ and ‘cash flowcharacteristics’ tests are satisfied otherwise measured at fair valuethrough profit or loss
Held-to-maturity investments Measured at amortised cost with a ‘tainting’ test
Must meet ‘business model’ and ‘cash flow characteristics’ teststo be measured at amortised cost, otherwise generally fair valuethrough profit or loss
Key changes under IFRS 9
Summary
• Attempts to make IAS 39 simpler
• Phase 1 looks friendly
• Subsequent phases undergoing debate
• More to come
Further technical resources
• Deloitte International Accounting Manual
• Deloitte IFRS model financial statements
• Deloitte IFRS Compliance Checklists
• IAS Plus website (www.iasplus.com)
• IFRS Knowledge Resource Centre
• Global Technical Library (techlibrary.deloitteaudit.com)
• iGAAP 2009
• IFRS Specialists
• IFRIC 15 – Agreements for the construction of real estate
• iGAAP 2009 – chapter 23 Revenue
Deloitte @ 2009 46© 2010 Deloitte Touche Tohmatsu
Contact
Dr. Nordin Zain
Executive Director / Client
Service Leader
Tel: +603 7723 6556
nordinzain@deloitte.com
Dr Nordin was formerly the Executive Director with the Malaysian
Accounting Standards Board for 9 years where he was responsible
for developing conventional and Islamic accounting standards for
Malaysia. He joined Deloitte in February 2009 and is responsible
for IFRS implementation and Islamic finance. He is a member of
the Malaysian Institute of Accountants, a Board member of AAOIFI
and sits on the Asia Pacific Financial Reporting Advisory Group in
Melbourne. He was formerly a corporate banker, an internal
auditor, a lecturer and a consultant to the United Nations.
Please request for permission from the author if you wish to
reproduce the materials herein.
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