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Financial Accounting and Reporting in Malaysia

Volume 1Fourth Edition

TAN LIONG TONGDip. Agriculture, B.S. Agribusiness, MBA, CA, CPA

CCH Asia Pte Limited

x

TABLE OF CONTENTS

About CCH ......................................................................................................iii

Dedication ........................................................................................................ iv

About the Author ............................................................................................. v

Preface ............................................................................................................vii

Index of Referenced Financial Reporting Standards ............................... xxvii

CHAPTER 1 An Overview of the Financial Reporting in Malaysia ............................................................................. 1

1.1 Introduction ........................................................................................ 3

1.2 A Historical Perspective ..................................................................... 3

1.3 The Current Financial Reporting Regime ......................................... 5

1.4 Statutory Regulations on Financial Accounting and Reporting ...... 6

1.4.1 The Financial Reporting Act 1997 ....................................... 6

1.4.2 The Companies Act 1965 ...................................................... 8

1.4.3 The Income Tax Act 1967 ................................................... 10

1.4.4 Regulations by the Securities Commission ....................... 12

1.4.5 The Audit Oversight Board ................................................ 13

1.4.6 Regulations by Bursa Malaysia ......................................... 13

1.4.7 Regulations by Bank Negara Malaysia ............................. 14

1.5 Accounting Standard Pronouncements In Malaysia ...................... 16

1.5.1 Pronouncements Before the Current Financial Reporting Regime ............................................................... 16

1.5.2 Pronouncements under the Current Financial Reporting Regime ............................................................... 17

1.5.3 Future Pronouncements – IFRS-compliant Financial Reporting Standards .......................................................... 26

1.6 Summary of Reporting Requirements by Types of Entity .............. 28

1.7 Exempt Entities ................................................................................ 30

1.8 The State-Of-The-Art Accounting and Reporting Practices ........... 33

1.9 The Directors’ Report of Companies ................................................ 35

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Financial Accounting and Reporting in Malaysia, Volume 1

CHAPTER 2 The Conceptual Framework for Financial Reporting and Reporting in Hyperinflationary Economies ....................................................................... 37

2.1 Why the Need for an Accounting Framework? ............................... 39

2.2 The MASB’s Conceptual Framework for Financial Reporting ....... 40

2.2.1 The Objective of General Purpose Financial Reporting ............................................................................. 41

2.2.2 Information about a Reporting Entity’s Economic Resources, Claims, and Changes in Resources and Claims ................................................................................. 43

2.2.3 Qualitative Characteristics of Useful Financial Information ......................................................................... 45

2.2.4 The 2007 Framework – the Remaining Text ..................... 51

2.2.5 Concepts of Capital and Capital Maintenance ................. 58

2.3 MFRS 129, Financial Reporting in Hyperinflationary Economies .......................................................................................... 62

2.3.1 The Restatement of Financial Statements ........................ 63

2.3.2 Historical Cost Financial Statements ............................... 63

2.3.3 Current Cost Financial Statements .................................. 66

2.3.4 Restating the Opening Statement of Financial Position ................................................................................ 67

2.3.5 Comparative Figures .......................................................... 69

2.3.6 Economies Ceasing to be Hyperinflationary .................... 70

2.3.7 Disclosures .......................................................................... 70

CHAPTER 3 Presentation of Financial Statements ..................... 71

3.1 Introduction ...................................................................................... 73

3.2 Presentation of Financial Statements ............................................. 73

3.3 Components of Financial Statements ............................................. 74

3.4 Overall Considerations ..................................................................... 75

3.4.1 Fair Presentation and Compliance with MFRSs .............. 75

3.4.2 True and Fair View Over-ride ............................................ 76

3.4.3 Going Concern Basis .......................................................... 79

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3.4.4 Accrual Basis of Accounting ............................................... 80

3.4.5 Consistency of Presentation ............................................... 81

3.4.6 Materiality and Aggregation .............................................. 82

3.4.7 Offsetting ............................................................................ 83

3.4.8 Comparative Information ................................................... 83

3.5 Structure and Content ..................................................................... 84

3.5.1 Identification of Financial Statements ............................. 84

3.5.2 Reporting Period ................................................................. 85

3.5.3 Statement of Financial Position ........................................ 85

3.5.4 Statement of Comprehensive Income ................................ 90

3.5.5 Statement of Changes in Equity ...................................... 104

3.5.6 Notes to the Financial Statements .................................. 107

3.5.7 Capital Management Disclosure ..................................... 110

3.5.8 Other Disclosures ............................................................. 112

3.6 Amendments to IAS 1 – Presentation of Items of Other Comprehensive Income .................................................................. 112

3.7 Statement of Cash Flows ................................................................ 115

3.7.1 Rationale of the Statement of Cash Flows ...................... 115

3.7.2 The Procedures of Preparing the Statement of Cash Flows ........................................................................ 115

CHAPTER 4 Accounting Policies, Estimates and Errors & First-time Adoption of MFRSs ................................. 133

4.1 Introduction .................................................................................... 135

4.2 Accounting Policies ......................................................................... 135

4.2.1 Selection and Application of Accounting Policies ............ 135

4.2.2 Consistency of Accounting Policies .................................. 138

4.2.3 Changes in Accounting Policies ....................................... 138

4.2.4 Methods of Effecting a Change in Accounting Policy ..... 140

4.2.5 Limitations on Retrospective Application ....................... 148

4.2.6 Day 1 Accounting .............................................................. 149

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4.2.7 Disclosure Requirements of Changes in Accounting Policies .............................................................................. 151

4.2.8 Impending Change in Policies Due to New Standards or Interpretations ............................................................. 152

4.3 Accounting Estimates ..................................................................... 153

4.3.1 What are Accounting Estimates? ..................................... 153

4.3.2 Changes in Accounting Estimates ................................... 153

4.3.3 Disclosure Requirements of Changes in Accounting Estimates .......................................................................... 156

4.4 Accounting Errors ........................................................................... 156

4.4.1 What are Accounting Errors? ........................................... 156

4.4.2 Correction of Prior Period Errors .................................... 157

4.4.3 Disclosure Requirements of Corrections of Errors ......... 160

4.5 Impracticability Exemption ........................................................... 163

4.6 MFRS 1, First-time Adoption of Financial Reporting Standards ........................................................................................ 164

4.6.1 Opening MFRS Statement of Financial Position ............ 165

4.6.2 Deciding on the Accounting Policies ................................ 166

4.6.3 Incorporating the Effects of Remeasurement ................. 170

4.6.4 Exemptions and Exceptions ............................................. 173

4.6.5 Explanation of Transition to MFRSs ............................... 175

CHAPTER 5 Revenue ......................................................................... 177

5.1 Introduction .................................................................................... 179

5.2 Revenue Recognition ...................................................................... 179

5.2.1 Measurement of Revenue ................................................. 180

5.2.2 Identification of the Transaction ..................................... 185

5.2.3 Timing of Revenue Recognition ....................................... 187

5.3 Sales of Goods ................................................................................. 188

5.4 Rendering of Services ..................................................................... 192

5.4.1 Recognition of Service Revenue ....................................... 192

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5.4.2 IC Int. 131, Revenue – Barter Trade Transactions Involving Advertising Services ........................................ 199

5.5 Interest, Royalties and Dividends .................................................. 200

5.5.1 Recognition of Interest Income ........................................ 200

5.5.2 Recognition of Royalties ................................................... 204

5.5.3 Recognition of Dividends .................................................. 204

5.6 Other Issues and Guidance ............................................................ 205

5.6.1 Principal and Agent Relationship .................................... 205

5.6.2 IC Int. 13 Customer Loyalty Programmes ...................... 206

5.6.3 Multiple-components in an Arrangement ....................... 210

5.7 Disclosure Requirements ................................................................ 213

5.8 IASB’s ED/2010/6, Revenue from Contracts with Customers ...... 214

5.8.1 Identifying the Contract ................................................... 215

5.8.2 Identifying the Separate Performance Obligations ........ 217

5.8.3 Determining the Transaction Price ................................. 218

5.8.4 Allocating the Transaction Price to Separate Performance Obligations .................................................. 219

5.8.5 Recognising Revenue when a Performance Obligation is Satisfied ...................................................... 219

5.8.6 The Improvements and How They will Affect Practices under the Current IFRSs ................................. 225

CHAPTER 6 Inventories, Current Assets and Current Liabilities ...................................................................... 227

6.1 Introduction .................................................................................... 229

6.2 Inventories ...................................................................................... 229

6.2.1 Scope ................................................................................. 229

6.2.2 Measurement under the Cost Convention ...................... 230

6.2.3 Cost Methods/Formulas ................................................... 234

6.2.4 Basis of Inventory Valuation ............................................ 240

6.2.5 Recognition as an Expense ............................................... 244

6.2.6 Disclosure Requirements ................................................. 245

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6.3 Current Assets and Current Liabilities ......................................... 246

6.3.1 Views of Current Assets and Current Liabilities ........... 246

6.3.2 Presentation of Current Assets and Current Liabilities .......................................................................... 247

6.4 Measurement of Specific Current Asset and Current Liability Items ................................................................................. 251

6.4.1 Trade Receivables and Allowance for Bad and Doubtful Debts .................................................................. 252

6.4.2 Cash and Bank Balances, Deposits and Bank Overdrafts ......................................................................... 261

6.4.3 Short-term Borrowings .................................................... 262

6.4.4 Trade and Other Payables ............................................... 262

6.4.5 Current Tax Liabilities and Current Tax Assets ............ 263

6.4.6 Dividends Proposed and Dividends Payable ................... 266

CHAPTER 7 Construction Contracts, Property Development Activities and Service Concession Arrangements .............................................................. 273

7.1 Introduction .................................................................................... 275

7.2 Accounting for Construction Contracts ......................................... 275

7.2.1 Nature and Definitions ..................................................... 275

7.2.2 Objective and Scope of MFRS 111 ................................... 276

7.2.3 Segmenting and Combining Construction Contracts ..... 276

7.2.4 The Accounting Method ................................................... 277

7.2.5 Measurement of Contract Revenue ................................. 278

7.2.6 Measurement of Contract Costs ...................................... 279

7.2.7 Recognition of Contract Revenue and Expenses ............. 280

7.2.8 Estimate of Outcome of Contract .................................... 283

7.2.9 Recognition of Expected Losses ....................................... 285


7.2.11 Cases on Construction Contracts .................................... 288

7.3 Accounting for Property Development Activities .......................... 298

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7.3.1 Nature and Definitions ..................................................... 298

7.3.2 Objective and Scope of FRS 201 ...................................... 299

7.3.3 Land Held for Property Development ............................. 299

7.3.4 Property Development Costs ........................................... 301

7.3.5 Property Development Revenue and Expenses .............. 306

7.3.6 Land Development and Allocation of Common Costs ..... 319

7.3.7 Estimates, Revocation of Sales and Incentives ............... 323

7.3.8 Inventories – Unsold Completed Development Units .... 325

7.3.9 Disclosure Requirements of FRS 201 .............................. 326

7.4 IC Int. 15, Agreements for the Construction of Real Estates ....... 329

7.4.1 Accounting for Revenue from Construction of Real Estate ........................................................................ 330

7.4.2 Disclosure .......................................................................... 334

7.5 IC Int. 12, Service Concession Arrangements ............................... 335

7.5.1 What is a Service Concession Arrangement? .................. 335

7.5.2 Scope ................................................................................. 336

7.5.3 Issues Addressed .............................................................. 336

7.5.4 Consensus ......................................................................... 336

CHAPTER 8 Property, Plant and Equipment, Revaluation, Depreciation and Impairment ................................. 347

8.1 Introduction .................................................................................... 349

8.1.1 What are Property, Plant and Equipment? ..................... 349

8.1.2 What are the Main Accounting Issues? ........................... 349

8.1.3 Scope of MFRS 116 ........................................................... 350

8.2 Recognition of Property, Plant and Equipment ............................. 350

8.3 Measurement at Recognition ......................................................... 352

8.3.1 Property, Plant and Equipment Purchased for Cash ..... 353

8.3.2 Self-constructed Property, Plant and Equipment ........... 354

8.3.3 Decommissioning, Dismantling and Restoration Costs .................................................................................. 356

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8.3.4 Non-monetary Consideration and Barter Trade ............. 357

8.3.5 Subsequent Costs on Property, Plant and Equipment ........................................................................ 361

8.4 Measurement after Recognition ..................................................... 365

8.4.1 The Measurement Bases .................................................. 365

8.4.2 Methods to Record Revaluations ..................................... 366

8.4.3 Treatments for Surpluses and Deficits ............................ 368

8.5 Depreciation Accounting ................................................................ 372

8.5.1 What is Depreciation? ...................................................... 372

8.5.2 The Depreciable Amount .................................................. 373

8.5.3 The Estimated Useful Life ............................................... 374

8.5.4 The Allocation or Depreciation Methods ......................... 375

8.5.5 Changes in Estimates ...................................................... 379

8.5.6 The Issue of Depreciation, Residual Value and Fair Value .......................................................................... 381

8.5.7 Impairment Losses and Reversals ................................... 383

8.5.8 Compensation for Impairment ......................................... 386

8.6 Derecognition of Property, Plant and Equipment ......................... 388

8.7 Disclosure ........................................................................................ 391

8.8 IC Int. 18, Transfer of Assets from Customers .............................. 395

CHAPTER 9 Investments and Investment Properties ............... 399

9.1 Introduction .................................................................................... 401

9.2 Investments in Equity and Debt Instruments .............................. 402

9.2.1 Recognition of Financial Instruments ............................. 402

9.2.2 Classification of Financial Assets .................................... 404

9.2.3 Initial Measurement of Financial Assets ........................ 425

9.2.4 Subsequent Measurement of Financial Assets ............... 427

9.2.5 Gains and Losses on Remeasurement ............................. 435

9.2.6 Derecognition of a Financial Asset .................................. 444

9.2.7 Impairment of Financial Assets ....................................... 446

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9.2.8 Disclosures ........................................................................ 454

9.3 IFRS 9, Financial Instruments ...................................................... 455

9.3.1 Classification Approach .................................................... 455

9.3.2 Embedded Derivatives ..................................................... 456

9.3.3 Impairment of Financial Assets ....................................... 458

9.3.4 Fair Value Designation Option ........................................ 458

9.3.5 Reclassification ................................................................. 459

9.3.6 Investments in Unquoted Equity Instruments ............... 463

9.3.7 Strategic Equity Investments Measured at Fair Value through Other Comprehensive Income – the Presentation Exception .................................................... 464

9.3.8 The Entity’s Business Model for Managing Financial Assets ................................................................ 465

9.3.9 Contractual Cash Flows of Payments of Principal and Interest on Principal ................................................. 466

9.3.10 Effective Date and Transitions ........................................ 466

9.4 Accounting for Investment Property ............................................. 467

9.4.1 Classification as Investment Property ............................ 467

9.4.2 Recognition and Measurement ........................................ 471

9.4.3 Measurement after Recognition ...................................... 472

9.4.4 Transfers to or from Investment Property ...................... 475

9.4.5 Disposal ............................................................................. 480

9.4.6 Disclosures ........................................................................ 481

CHAPTER 10 Intangible Assets ......................................................... 485

10.1 Introduction .................................................................................... 487

10.1.1 What is an Intangible Asset? ........................................... 487

10.2 Issues and Controversies ................................................................ 488

10.3 Research and Development Costs .................................................. 491

10.3.1 The Difference Between Research and Development ..... 493

10.3.2 Criteria for Capitalisation as an Asset ............................ 493

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10.3.3 Cost of Development Expenditure Capitalised as an Asset ............................................................................. 494

10.3.4 Development Costs Initially Recognised as an Expense ............................................................................. 496

10.3.5 Recoverability Test ........................................................... 497

10.3.6 Impairment of Capitalised Development Costs .............. 498

10.3.7 Amortisation of Capitalised Development Costs ............ 500

10.4 Goodwill Accounting ....................................................................... 502

10.4.1 Background to the Goodwill Accounting Issues in Malaysia ............................................................................ 502

10.4.2 Nature and Characteristics of Goodwill .......................... 504

10.4.3 Types of Goodwill .............................................................. 506

10.4.4 Measuring Purchased Goodwill ....................................... 507

10.4.5 Accounting Treatment for Goodwill ................................ 508

10.4.6 Negative Goodwill ........................................................... 515

10.4.7 The Current Standards – MFRS 3 and MFRS 136 ........ 517

10.5 Identifiable Intangible Assets ........................................................ 523

10.5.1 Emergence of Identifiable Intangible Assets .................. 523

10.5.2 Recognition of Identifiable Intangible Assets ................. 526

10.5.3 Measurement Basis .......................................................... 528

10.5.4 Internally Generated Intangible Assets .......................... 535

10.5.5 Subsequent Expenditure .................................................. 536

10.5.6 Measurement After Recognition ...................................... 538

10.5.7 Retirements and Disposals .............................................. 543

10.5.8 Disclosure Requirements of MFRS 138 ........................... 543

10.6 Entity’s Own Web Site Costs – IC Int. 132 ................................... 545

CHAPTER 11 Impairment of Assets, Non-Current Assets Held for Sale and Discontinued Operations .................. 547

11.1 Impairment of Assets ...................................................................... 549

11.1.1 Introduction ...................................................................... 549

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11.1.2 The Basic Asset Measurement Model ............................. 549

11.1.3 Steps in Performing an Impairment Test ........................ 551

11.1.4 Identifying an Asset that May Be Impaired ................... 551

11.1.5 Measurement of Recoverable Amount ............................. 553

11.1.6 Recognition and Measurement of an Impairment Loss ................................................................................... 571

11.1.7 Cash-Generating Units .................................................... 573

11.1.8 Allocating Goodwill to Cash-Generating Units .............. 578

11.1.9 Allocating Corporate Assets ............................................. 583

11.1.10 Impairment Loss for a Cash-Generating Unit ................ 586

11.1.11 Reversal of an Impairment Loss ...................................... 590


11.2 Non-Current Assets Held for Sale and Discontinued Operations ....................................................................................... 603

11.2.1 Introduction ...................................................................... 603

11.2.2 Scope ................................................................................. 604

11.2.3 Classification as Held for Sale ......................................... 605

11.2.4 Measurement of Non-Current Assets (or Disposal Groups) Held for Sale .................................. 610

11.2.5 Changes to a Plan of Sale ................................................. 618

11.2.6 Presentation and Disclosure ............................................ 621

11.2.7 Additional Disclosures ..................................................... 636

CHAPTER 12 Long-Term Financial Liabilities, Leases and Borrowing Costs .......................................................... 637

12.1 Introduction .................................................................................... 639

12.2 Accounting for Corporate Bonds .................................................... 640

12.2.1 Bonds Issued at Par .......................................................... 641

12.2.2 Bonds Issued at a Discount .............................................. 642

12.2.3 Methods of Amortisation .................................................. 644

12.2.4 Bonds Issued at a Premium ............................................. 647

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12.2.5 Transaction Costs of Bond Issue ..................................... 649

12.2.6 Classification and Presentation of Discount and Premium ............................................................................ 652

12.3 Accounting for Bank Loans and Other Long-Term Debts ............ 654

12.3.1 Earlier Retirement of Debts ............................................. 655

12.3.2 Accounting for Refinancing, Troubled Debts and Rescheduling ..................................................................... 658

12.4 Accounting for Leases ..................................................................... 660

12.4.1 Classification of Leases .................................................... 661

12.4.2 Accounting for Finance Leases by Lessees ..................... 663

12.4.3 Accounting for Operating Leases by Lessee ................... 673

12.4.4 Disclosures in the Lessees’ Financial Statements .......... 674

12.4.5 Accounting for Finance Leases by Lessor ....................... 675

12.4.6 Accounting for Operating Leases by Lessor .................... 681

12.4.7 Disclosures in the Lessors’ Financial Statements .......... 683

12.4.8 Accounting for Finance Leases by Manufacturers or Dealers .............................................................................. 684

12.4.9 Accounting for Sale and Leaseback Transactions .......... 687

12.4.10 IC Int. 127, Evaluating the Substance of Transactions Involving the Legal Form of a Lease ............................... 693

12.4.11 IC Int. 4, Determining Whether an Arrangement Contains a Lease .............................................................. 697

12.5 The IASB’s New Project on Leases ................................................ 700

12.5.1 Why the Need to Undertake a New Project .................... 700

12.5.2 The Fundamental Approach to the New Lease Accounting ........................................................................ 701

12.5.3 Accounting by Lessees ...................................................... 701

12.5.4 Accounting by Lessors ...................................................... 709

12.5.5 Exceptions for Short-Term Leases: Lessees and Lessors .............................................................................. 722

12.5.6 Sales and Leaseback Transactions .................................. 723

12.5.7 Sublease Arrangements ............................................ 725

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12.5.8 Contracts that Contain both Service Components and Lease Components .................................................... 727

12.6 MFRS 123, Borrowing Costs .......................................................... 729

12.6.1 Recognition of Borrowing Costs ....................................... 729

12.6.2 Borrowing Costs Eligible for Capitalisation ................... 730


CHAPTER 13 Deferred Taxation ....................................................... 737

13.1 Introduction .................................................................................... 739

13.2 A Historical Perspective to Tax Effect Accounting ........................ 743

13.2.1 The Distribution View ...................................................... 743

13.2.2 The Expense View ............................................................ 744

13.3 Inter-Period Tax Allocation ............................................................ 745

13.3.1 Timing Differences ........................................................... 745

13.3.2 Tax Equalisation Accounting ........................................... 750

13.3.3 Permanent Differences ..................................................... 756

13.4 Methods of Computation ................................................................ 759

13.4.1 The Deferral Method ........................................................ 759

13.4.2 The Liability Method ........................................................ 760

13.5 Bases of Provision ........................................................................... 762

13.5.1 Nil Provision Basis ........................................................... 763

13.5.2 Full Provision Basis ......................................................... 763

13.5.3 Partial Provision Basis ..................................................... 764

13.6 Comprehensive Tax Allocation ....................................................... 768

13.7 Intra-Period Tax Allocation ............................................................ 781

13.8 Application Aspects of MFRS 112, Income Taxes ......................... 785

13.8.1 The Balance Sheet Liability Method ............................... 786

13.8.2 Taxable Temporary Differences and Deductible Temporary Differences ..................................................... 793

13.8.3. Temporary Differences Arising on Initial Recognition ... 797

13.8.4 Basis of Provision ............................................................. 803

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13.9 Recognition of Deferred Tax Assets ............................................... 806

13.9.1 Deductible Temporary Differences and Net Deferred Tax Asset ........................................................................... 806

13.9.2 Recognition of Tax Losses ................................................ 808

13.10 Tax Effects on Revaluation Surpluses and Fair Value Gains ....... 812

13.10.1 Amendments (2011) to IAS 12 ......................................... 817

13.11 Fair Value Adjustments in a Business Combination .................... 818

13.11.1 Tax Effects on Acquisition of Land-Based Companies ... 818

13.11.2 Other Fair Value Adjustments ......................................... 821

13.12 Tax Effects of Compound Financial Instruments ......................... 824

13.13 Measurement of Current and Deferred Taxes .............................. 826

13.13.1 IC Int. 125, Income Taxes – Changes in the Tax Status of an Entity or Its Shareholders ................... 831

13.14 Other Changes or Guides ............................................................... 832

13.15 Disclosure Requirements ................................................................ 832

CHAPTER 14 Employee Benefits, Share-Based Payments and Retirement Benefit Plans .................................. 843

14.1 Introduction .................................................................................... 845

14.2 Accounting Principles ..................................................................... 846

14.2.1 Short-Term Employee Benefits ........................................ 846

14.2.2 Post-Employment Benefits ............................................... 851

14.2.3 Curtailments and Settlements ........................................ 871

14.2.4 Other Long-term Employee Benefits .............................. 872

14.2.5 Insured Benefits ............................................................... 872

14.2.6 Termination Benefits ........................................................ 873

14.3 Share-Based Payment .................................................................... 875

14.3.1 Introduction ...................................................................... 875

14.3.2 Recognition Principle ....................................................... 876

14.3.3 Equity-Settled Share-based Payment Transactions ....... 876

14.3.4 Cash-Settled Share-Based Payment Transactions ......... 895

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14.3.5 Share-Based Payment with Cash Alternatives ............... 897

14.4 Accounting and Reporting by Retirement Benefit Plans .............. 899

14.4.1 Financial Statements of Retirement Benefit Plans ........ 900

CHAPTER 15 Commitments, Provisions, Contingencies, Events after the Reporting Period and Deferred Income ......................................................... 903

15.1 Introduction .................................................................................... 905

15.2 Accounting for Commitments ........................................................ 905

15.3 Accounting for Contingencies – General Principles ...................... 907

15.4 MFRS 137, Provisions, Contingent Liabilities and Contingent Assets .............................................................................................. 909

15.4.1 Recognition of a Provision ................................................ 910

15.4.2 Measurement of a Provision ............................................ 914

15.4.3 Application of the Recognition and Measurement Rules .......................................................... 921

15.4.4 Contingent Liabilities ...................................................... 924

15.4.5 Contingent Assets ............................................................. 926

15.5 Disclosure ........................................................................................ 926

15.6 Related IC Interpretations ............................................................. 929

15.6.1 IC Int. 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities ................................. 929

15.6.2 IC Int. 5, Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds ........................................................ 932

15.6.3 IC Int. 6, Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment ........................................................................ 935

15.7 Current Development – IASB’s Project to Replace IAS 37 ........... 936

15.7.1 Background of the IASB’s Project .................................... 936

15.7.2 What Are the Salient Changes? ....................................... 937

15.7.3 Objective of the IFRS ....................................................... 937

15.7.4 Recognition of a Liability ................................................. 938

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15.7.5 Measurement of a Liability .............................................. 939

15.7.6 Subsequent Measurement ............................................... 952

15.7.7 Recognising and Measuring a Liability for Restoration Based on Use of a Resource ............................................. 953

15.8 Events After the Reporting Period ................................................. 955

15.8.1 Accounting for Adjusting Events ..................................... 956

15.8.2 Accounting for Non-Adjusting Events ............................. 957

15.8.3 Identification of Adjusting and Non-Adjusting Events ............................................................................... 958

15.9 Significant Events Which Occurred During the Reporting Period ............................................................................................... 960

15.10 Significant Events which occurred After Issuance of the Financial Statements ..................................................................... 961

15.11 Contingencies and Profit Guarantees in Business Combinations .................................................................................. 962

15.11.1 Contingent Liabilities Acquired in a Business Combination ...................................................................... 962

15.11.2 Contingent Consideration ................................................ 963

15.11.3 Acquirer’s Right in Contingent Consideration – Refund by Former Owners of the Acquiree ..................... 971

15.12 Government Grants and Other Deferred Income ......................... 973

15.12.1 MFRS 120, Accounting for Government Grants and Disclosure of Government Assistance ............................. 973

15.12.2 IC Int. 110, Government Assistance – No Specific Relation to Operating Activities ...................................... 979

15.12.3 Other Deferred Income and Deferred Gains or Losses ................................................................................ 980

CHAPTER 16 Share Capital, Reserves and Other Equity Items 983

16.1 Introduction .................................................................................... 985

16.2 Requirements of Statutes and Accounting Standards .................. 986

16.2.1 The Companies Act 1965 .................................................. 986

16.2.2 MFRS 101, Presentation of Financial Statements ......... 987

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16.3 Issuance and Repurchase of Ordinary Shares .............................. 987

16.3.1 Issuance of Equity Share Capital .................................... 988

16.3.2 Issuance of Shares at a Discount ..................................... 994

16.3.3 Issuance of the One “Golden” or “Special” Share to the Government ................................................................ 997

16.3.4 Share Buybacks by Public Listed Companies ................. 997

16.3.5 Measurement of Ordinary Shares ................................. 1019

16.3.6 Shares Issued in a Business Combination .................... 1025

16.3.7 Shares Issued in Exchange for an Asset ....................... 1027

16.3.8 Shares Issued to Settle or Extinguish Debts ................ 1028

16.3.9 Shares Issued on Capitalisation of Reserves (Bonus Shares) ................................................................ 1030

16.4 Issuance and Redemption of Preference Shares ......................... 1031

16.5 Distributable Versus Non-Distributable Reserves ...................... 1036

16.6 Application of IFRS 13, Fair Value Measurement to Equity Instruments ...................................................................... 1038

16.6.1 Reasons for Issuing IFRS 13 .......................................... 1038

16.6.2 The Salient Features of IFRS 13 ................................... 1039

16.6.3 Application to Liabilities and Own Equity Instruments .................................................................... 1042

16.6.4 Valuation Techniques ..................................................... 1043

16.6.5 Measuring the Fair Values of Unquoted Equity Instruments .................................................................... 1046

Index .......................................................................................................... 1049


37

THE CONCEPTUAL FRAMEWORK FOR

FINANCIAL REPORTING AND REPORTING IN

HYPERINFLATIONARY ECONOMIES

CHAPTER 2

THE CONCEPTUAL FRAMEWORK FOR

FINANCIAL REPORTING AND REPORTING IN

HYPERINFLATIONARY ECONOMIES

This chapter will help you to understand:• the purpose of an accounting framework;• the rationale of the Conceptual Framework for Financial

Reporting;• the objective of financial reporting;• the desirable characteristics of financial information;• the concepts of assets, liabilities, equity, income and expenses;• the recognition and measurement principles;• the concepts of capital and capital maintenance; and• to deal with reporting in hyperinflationary economies.

Chapter 2: The Conceptual Framework for Financial Reporting and Reporting in Hyperinflationary Economies 39

Financial Accounting and Reporting in Malaysia, Volume 1 2.1

2.1 Why the Need for an Accounting Framework?

Researchers in academia have long debated on what is the appropriate approach to setting principles of accounting. One such approach is based on the positive theory of accounting which argues that principles are developed from observing and predicting practices. The aim of positive accounting theory is to predict what would happen. Under this theory, it has been stated by proponents that accounting practices adopted by firms are often explained on the basis of showing the true image of financial performance of the firm.

However, the positive accounting theory has been subjected to much criticism, primarily because it does not predict what should or ought to happen, it merely explains and predicts what would happen. It is also not value-free because it only explains and predicts what people might do, ignoring what they should do. Opponents of the positive theory of accounting argue that principles should be prescribed based on what should or ought to be. This is known as the normative approach to accounting. Under this approach, accounting principles on what should, or ought to be. are prescribed.

Although industry practices are considered, standard setters, such as the IASB, the US FASB and the MASB, generally take the normative approach to their development of reporting standards. In deciding on what should or ought to be, an accounting framework needs to be developed first to provide a starting point or as a foundation for the formulation of reporting standards.

An accounting framework can be viewed as a structured or coherent system of inter-related objectives, fundamental characteristics and concepts that lead to formulation of high-quality and consistent reporting standards to prescribe the nature, function and limits of financial accounting and reporting.

The reasons for developing an accounting framework include the following:(a) to identify a foundation for financial reporting;(b) to identify the objective of financial statements;(c) to identify the desirable qualitative characteristics of financial

information;(d) to provide a basis for setting of high-quality and consistent reporting

standards; and(e) to serve as a reference point for resolving accounting issues and disputes.

With an accounting framework, preparers and other users will understand better the rationale and thinking of the standard setters in their formulation of reporting standards.

Chapter 2: The Conceptual Framework for Financial Reporting and 40� Reporting in Hyperinflationary Economies

2.2 CCH Asia Pte Limited

2.2 The MASB’s Conceptual Framework for Financial Reporting

In July 1998, the MASB issued a discussion paper MASB DP1, Framework for the Preparation and Presentation of Financial Statements, which for the first time in Malaysia, attempted to set a foundation for the manner in which financial statements should be prepared and presented. After almost a decade of deliberations, the discussion paper was finalised as the MASB’s Framework in July 2007. In many respects, the provisions in the MASB’s Framework (2007) were similar to the IASB’s Framework for the Preparation and Presentation of Financial Statements.

The MASB is currently in the process of updating its conceptual framework (with the same timeline as the IASB’s current project on updating its conceptual framework). This conceptual framework project is conducted in phases. The Conceptual Framework document comes in four chapters: (i) the objective of general purpose financial reporting; (ii) the reporting entity; (iii) qualitative characteristics of useful information; and (iv) the assumptions, elements, recognition, measurement and concepts. As a chapter is finalised, the relevant paragraphs of the Framework (2007) will be replaced. To date, this version of the Framework includes the first two chapters: Chapter 1 The objectives of general purpose financial reporting and Chapter 3 Qualitative characteristics of useful financial information. Chapter 2 on the Reporting Entity will be added later whilst Chapter 4 retains the remaining text of the Framework (2007)

The Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. The purpose of the Framework is to:(a) assist the MASB in the development of future MFRS and in its review of

existing MFRS;(b) assist preparers of financial statements in applying MFRS and in

dealing with topics that have yet to form the subject of an MFRS;(c) assist auditors in forming an opinion as to whether financial statements

comply with MFRS;(d) assist users of financial statements in interpreting the information

contained in financial statements prepared in compliance with MFRS; and

(e) provide those who are interested in the work of MASB with information about its approach to the formulation of MFRS.

The Framework deals with:(a) the objective of financial statements;



(b) the qualitative characteristics that determine the usefulness of information in financial statements;

(c) the definition, recognition and measurement of the elements from which financial statements are constructed; and

(d) concepts of capital and capital maintenance.

In the preparation of general purpose financial statements, the Framework acknowledges that the many and varied external users have different information needs. These external users include present and potential investors, employees, lenders, suppliers and other creditors, customers, government and their agencies and the public. While all of the information needs of these users cannot be met by financial statements, there are needs which are common to all users. The Framework is based on the premise that as investors, lenders and other creditors are providers of risk capital to the entity, the provision of financial statements that meet their needs will also meet most of the needs of other users of financial statements.

Note that this preference for providing information that serves the needs of investors and lenders is also evident in the Frameworks of overseas standard setting bodies, such as the FASB of the USA, ASB of the UK and AASB of Australia. The shift towards this preference may have been driven by the increasing demands from investors and lenders for more relevant value or market based information. It is thus not surprising that some of the more recent standards issued by these bodies, such as IAS 39 on financial instruments and IAS 40 on investment property, are on the fair value measurement approach, which can be argued as more relevant to the decision making needs of investors and potential investors, lenders and other creditors.

2.2.1 The Objective of General Purpose Financial ReportingAn accounting framework needs a starting point to provide a foundation

for the characteristics, concepts and models to be developed. This requires identifying the appropriate objective of financial reporting. In theory, the objective may be: (i) to provide information to comply with laws and other regulations; (ii) to provide information to all users, including meeting the social needs of society, or (ii) to provide information to specific groups of users. The chosen objective affects the desirable characteristics, concepts and models of financial reporting. For example, if the objective is to provide information to comply with laws and regulations, financial reporting will emphasise more on stewardship reporting. The primary characteristic would be “reliability’ rather than “relevance” and the cost model of accounting is likely to be more reliable than a fair value model. Similarly, if the objective is to meet the social needs of society, a characteristic of “understandability” is desired



and a performance model based on contribution rather than profit would be emphasised. If the objective is to focus on information needs of providers of risk capital, the primary characteristic would be “relevance” rather than “reliability” and a fair value model of accounting is likely to be more relevant than a cost model.

The objective chosen in the Framework is that of providing useful information to providers of risk capital. It specifies in Chapter 1 that “the objective of general purpose financial reporting is to provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity”. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit”.

Decisions by investors, lenders and other creditors depend on expectations about returns and their assessment of the amount, timing and uncertainty (or prospects for) future net cash inflows to the entity. Consequently these users need information to help them assess the prospects for future net cash inflows to an entity.

To assess an entity’s prospects for future net cash inflows, existing and potential investors, lenders and other creditors need information about the resources of the entity, claims against the entity, and how efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s resources.

Many existing and potential investors, lenders and other creditors cannot require reporting entities to provide information directly to them and must rely on general purpose financial reports for much of the financial information they need. Consequently, they are the primary users to whom general purpose financial reports are directed.

General purpose financial reports do not or cannot provide all of the information that the primary users need. Those users need to consider pertinent information from other sources, for example, general economic conditions and expectations, political events and political climate, and industry and company outlooks. Also, general purpose financial reports are not designed to show the value of a reporting entity, but they provide information to help the primary users to estimate the value of the reporting entity.

Individual primary users have different, and possibly conflicting information needs and desires. The Board, in developing financial reporting standards, will seek to provide information that will meet the needs of the maximum number of primary users. However, focusing on common



information needs does not prevent the reporting entity from including additional information that is useful to a particular subset of primary users.

The management of a reporting entity, other parties such as regulators and members of the public other than the primary users, may also find general purpose financial reports useful. However, those reports are not primarily directed to these other user groups.

To a large extent, financial reports are based on estimates, judgements and models rather than exact depictions. The Framework establishes the concepts that underlie those estimates, judgements and models. The concepts are the goal towards which the Board and preparers of financial reports strive. The Board acknowledges that the Framework’s vision of ideal financial reporting is unlikely to be achieved in full, at least not in the short term, because it takes time to understand, accept and implement new ways of analysing transactions and other events. Nevertheless, establishing a goal towards which to strive is essential if financial reporting is to evolve so as to improve its usefulness.

2.2.2 Information about a Reporting Entity’s Economic Resources, Claims, and Changes in Resources and Claims

This part of the Framework rationalises the presentation of a statement of financial position. It explains that general purpose financial reports provide information about the financial position of a reporting entity, which is information about the entity’s economic resources (the assets) and the claims (i.e. the equity and liabilities) against the reporting entity. Financial reports also provide information about the effects of transactions and other events (the financial performance) that change a reporting entity’s economic resources and claims. Both types of information provide useful inputs for decisions about providing resources to an entity.

2.2.2.1 Economic Resources and Claims

Information about the nature and amounts of a reporting entity’s economic resources (the assets) and claims (the equity and liabilities) can help users to identify the reporting entity’s financial strengths and weaknesses. The information help users assess the reporting entity’s liquidity and solvency, its needs for additional financing and how successful it is likely to be in obtaining that financing. Information about priorities and payment requirements of existing claims helps users to predict how future cash flows will be distributed among those with a claim against the reporting entity.

Different types of economic resources affect a user’s assessment of the reporting entity’s prospects for future cash flows differently. Users of financial



reports need to know the nature and amount of the resources available for use in a reporting entity’s operations.

2.2.2.2 Changes in Economic Resources and Claims

Changes in a reporting entity’s economic resources and claims result from that entity’s financial performance and from other events or transactions, such as issuing debt and equity instruments. To properly assess the prospects for future cash flows from the reporting entity, users need to be able to distinguish between both of these changes.

Information about a reporting entity’s financial performance helps users to understand the return that the entity has produced on its economic resources. It provides an indication of how well management has discharged its responsibilities to make efficient and effective use of the reporting entity’s resources. Information about the variability and components of that return is also important especially in assessing the uncertainty of future cash flows. Information about a reporting entity’s past financial performance and how its management discharged its responsibilities is usually helpful in predicting the entity’s future returns on its economic resources.

2.2.2.3 Financial Performance Reflected by Accrual Accounting

Unlike the original Framework (2007) where accrual concept was used as an assumption, the revised Framework uses this concept as a basis of accounting. Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period. This accrual accounting is important because it provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments during that period.

The Framework then rationalises why the accrual basis of accounting is better for assessing past and future performance. It clarifies that changes in a reporting entity’s economic resources and claims other than obtaining additional resources directly from capital providers are useful in assessing that entity’s past and future ability to generate net cash inflows. The information indicates the extent to which the reporting entity has increased its available economic resources, and thus its capacity for generating net cash inflows through its operations rather than by obtaining additional resources directly from capital providers.

Information about a reporting entity’s financial performance during a period may also indicate the extent to which events such as changes in market prices or interest rates have increased or decreased the entity’s economic



resources and claims, thereby affecting the entity’s ability to generate net cash inflows.

2.2.2.4 Financial Performance Reflected by Past Cash Flows

This part of the Framework rationalises the presentation of a statement of cash flows. Information about a reporting entity’s cash flows during the period also helps users to assess the entity’s ability to generate future net cash inflows. It indicates how the reporting entity obtains and spends cash, including information about its borrowings and repayment of debt, cash dividends or other cash distributions to investors, and other factors that may affect the entity’s liquidity or solvency. Information about cash flows help users understand a reporting entity’s operations, evaluate its financing and investing activities, assess its liquidity or solvency and interpret other information about financial performance.

2.2.2.5 Changes in Economic Resources and Claims not resulting from Financial Performance.

This part of the Framework rationalises the presentation of a statement of changes in equity. A reporting entity’s economic resources and claims may also change for reasons other than financial performance, such as issuing additional ownership shares. Information about this type of change is necessary to give users a complete understanding of why the reporting entity’s economic resources and claims changed and the implications of those changes for its future financial performance.

2.2.3 Qualitative Characteristics of Useful Financial Information

Chapter 3 of the Framework discusses the qualitative characteristics of useful financial information and identifies the types of information that are likely to be most useful to the existing and potential investors, lenders and other creditors, for making decisions about the reporting entity on the basis of the information in its financial reports.

Financial reports provide information about the reporting entity’s economic resources, claims against the reporting entity and the effects of transactions and other events and conditions that change those resources and claims (referred to as information about the economic phenomena). Some financial reports also include explanatory material about management’s expectations and strategies for the reporting entity, and other types of forward-looking information.

The four qualitative characteristics used in the original Framework have been rearranged, with the “reliability” characteristic removed in the



revised Framework. For information to be useful, the Framework identifies two fundamental qualitative characteristics: i.e. (i) relevance and (ii) faithful representation. To enhance the usefulness of financial information, the Framework identifies four enhancing qualitative characteristics i.e. (i) comparability, (ii) verifiability; (iii) timeliness and (iv) understandability.

2.2.3.1 Fundamental Qualitative Characteristics

(a) Relevance

Relevance has got to do with the how information affects the decision-making process of users. Relevant financial information is capable of making a difference in the decisions made by users. Information is relevant when it influences the economic decisions of users by helping them evaluate past, present and future events or confirming, or correcting, their past evaluations. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value or both.

Financial information has predictive value if it can be used as an input to processes employed by users to predict future outcome. To have predictive value, information need not be in the form of an explicit forecast. The ability to make predictions from financial statements is enhanced by the manner in which information on past transactions and events is displayed. For example, the predictive value of the income statement is enhanced if unusual, abnormal and infrequent items of income and expense are separately disclosed.

Financial information has confirmatory value if it provides feedback about (confirms or changes) previous evaluations. The predictive value and confirmatory value of financial information are interrelated. Information that has predictive value often also has confirmatory value.

Judgement is required in deciding whether an information item is relevant to users. In some cases, an information item may be considered relevant by the nature of the item itself. For example, information on directors’ remuneration is usually considered relevant simply because of the fiduciary relationship between directors and the entity. In other cases, both the nature and materiality of the item are important considerations in deciding its relevance. For example, the classification of fixed assets into suitable categories.

(a)(i) Materiality

Financial reports should disclose all items that are material enough to affect evaluations or decisions (materiality consideration). Information is considered material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which



the information relates in the context of an individual entity’s financial report. In this regard, the Framework clarifies that the Board cannot specify a uniform quantitative threshold for materiality or pre-determine what could be material in a particular situation. Thus, applying the materiality consideration is entity-specific and is influenced by either the size of the item or the error, judged in the particular circumstances of its omission or misstatement.

(b) Faithful Representation

Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete, neutral and free from error. The Framework acknowledges that perfection is seldom, if ever, achievable. The Board’s objective is to maximise those qualities to the extent possible.

(b)(i) Completeness

A complete depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanation. For example, a complete depiction of a group of assets (such as items of property, plant and equipment) would include, at a minimum, a description of the nature of the assets in the group, a numerical depiction of all of the assets in the group, and a description of what the numerical depiction represents (for example, original cost, adjusted cost or fair value).

(b)(ii) Neutrality

A neutral depiction is without bias in the selection or presentation of financial information. Neutrality requires that the information provided should not be slanted, weighted, emphasised, de-emphasised or otherwise manipulated to increase the probability that it will be received favourably or unfavourably to achieve a pre-determined result or outcome. In other words, information should not be bias so that users are free to use it to make their own judgements and decisions. In this context, information provided should be based upon facts and supportable evidences rather than personal opinions of management. For example, information on impairment of assets shall be based on the evidences of impairment testing rather than on opinions of whether there has been a permanent diminution in value of the assets. However, neutral information does not mean information with no purpose or no influence on behaviour. On the contrary, relevant information is, by definition, capable of making a difference in users’ decisions.



(b)(iii) Free from Error

Faithful representation does not mean accurate in all aspects. Free from error means there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. In this context, free from error does not mean perfectly accurate in all aspects.

For example, an estimate of an unobservable price or value (of say a plantation crop) cannot be determined to be accurate or inaccurate. However, a representation of that estimate can be faithful representation of the amount if it is described clearly and accurately as being an estimate, the nature and limitations of the estimating process are explained, and no errors have been made in selecting and applying an appropriate process for developing the estimate.

The Framework acknowledges that a faithful representation, by itself, does not necessarily result in useful information. For example, an entity receives an asset through a government grant at no cost. Reporting that the entity acquired an asset at no cost would faithfully represent its costs, but that information would probably not be very useful. Also, in estimating impairment losses on a cash-generating unit, significant judgements and assumptions are applied. That estimate can be a faithful representation if the reporting entity has properly applied an appropriate process, properly described the estimate and explained any uncertainties that significantly affect the estimate. However, if the level of uncertainty in such an estimate is sufficiently large, that estimate will not be particularly useful. In other words, the relevance of the asset being faithfully represented is questionable. If there is no alternative representation that is more useful, that estimate may provide the best available information.

(c) Applying the Fundamental Qualitative Characteristics

The Framework clarifies that the most efficient and effective process for applying the fundamental qualitative characteristics would usually be in the following steps:(a) identify an economic phenomenon that has the potential to be useful to

users of the reporting entity’s financial information;(b) identify the type of information about that phenomenon that would be

most relevant if it is available and can be faithfully represented;(c) determine whether that information is available and can be faithfully

represented.(d) If so, the process of satisfying the fundamental qualitative characteristics

ends at that point. If not, the process is repeated with the next most relevant type of information.



2.2.3.2 Enhancing Qualitative Characteristics

Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented. They may also help determine which of two ways should be used to depict a phenomenon if both are considered equally relevant and faithfully represented.

(a) Comparability

Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. Comparability should be viewed not only within an entity (for e.g. comparison of present with past performance and financial position) but with other entities (for e.g. industry comparison).

The characteristic of comparability can be achieved if the financial effects of like transactions and other events are measured and displayed in a consistent way throughout an entity, over time for that entity, and by different entities. Consistency is a key criterion if financial reports are to be comparable. Comparability is the goal, consistency helps to achieve that goal.

An important implication of the comparability characteristic is that users be informed of the accounting policies used in the preparation of the financial reports. Users need to be able to identify differences between the accounting policies for like transactions and other events used by the same entity from period to period, and by different entities. Compliance with MFRSs, including the disclosure of the accounting policies used by the entity, helps to achieve comparability.

Consistency should not be interpreted as conformity or uniformity. For example, in assessing the useful life of a fixed asset, an entity should not merely follow the norm set in the industry, but must assess it in the way the asset will be used by the entity. Also, consistency does not imply that an entity cannot change its accounting policies. Changes in accounting policies are provided for in MFRSs and should be made if the change results in a better presentation of the financial reports so such that the information provided is more relevant and faithfully represented.

Because users wish to compare the financial position, performance and changes in financial position of an entity over time, it is important that the financial reports show corresponding amounts for the preceding periods.

(b) Verifiability

Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent. It means that different



knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. Quantified information need not be a single point estimate to be verifiable. A range of possible amounts and the related probabilities can also be verified.

Verification can be direct such as counting cash to verify the amount depicted. It can be indirect such as checking the inputs to a valuation model and recalculating the outputs using the same methodology.

It may not be possible to verify some explanations and forward-looking financial information until a future period. To help users decide whether they want to use that information, it would normally be necessary to disclose the underlying assumptions, the methods of compiling the information and other factors and circumstances that support the information.

(c) Timeliness

Timeliness means having information available to decision-makers in time to be capable of influencing their decision. To be useful to users, information must be released on a timely basis. Generally, the older the information, the less useful it is.

(d) Understandability

Understandability has got to do with the relative ease with which financial information can be read and understood by users. Classifying, characterising and presenting information clearly and concisely makes it understandable.

Information provided in financial statements should be readily understandable by users who are assumed to have a reasonable knowledge of business and economic activities, accounting and a willingness to study the information with reasonable diligence. Understandability does not imply that information on complex issues should be excluded on the ground that it may not be comprehensible by the ordinary users. It is the responsibility of users to ensure that they have the relevant business and accounting skills to understand the information. Thus, the financial statements are not directed at lay users who have no knowledge of business and accounting. Information on complex issues must also be provided, even if it can be understood only by some specialised groups of users.

(e) Applying the enhancing qualitative characteristics

The Framework clarifies that the enhancing qualitative characteristics should be maximised to the extent possible.

Applying the enhancing qualitative characteristics is an iterative process that does not follow a prescribed order. Sometimes, one enhancing



characteristic may have to be diminished to maximise another qualitative characteristic. For example, a temporary reduction in comparability as a result of prospectively applying a new MFRS may be worthwhile to improve relevance or faithful representation in the longer term. Appropriate disclosures may partially compensate for non-comparability.

2.2.3.3 The Cost Constraint on Useful Financial Reporting

Balance between benefits and costs

This is a pervasive constraint rather than a qualitative characteristic. The Framework explains that the benefits derived from information should exceed the cost of providing it. The benefits and costs may be explicit or implicit. For example, the benefits of providing information accrue not just to the external users, but also to the providers of the information, who may be able to reduce their costs of borrowings through better quality information. The evaluation of benefits and costs is therefore substantially a judgemental process. It is difficult to apply a cost-benefit test in any particular case. Nevertheless, standard setters in particular, as well as preparers and users should be aware of this constraint.

2.2.4 The 2007 Framework – the Remaining Text

2.2.4.1 Underlying Assumption

Going Concern

The Framework clarifies that financial statements are normally prepared on the assumption that an entity is a going concern in that it will continue in operation for the foreseeable future. Under this basis, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations. However, if such an intention or need exists, the financial statements may have to be prepared on a different basis and if so, the basis used is disclosed.

As will be discussed in a later chapter, MFRS 101, Presentation of Financial Statements, requires management to make an assessment of whether the going concern basis can be applied. If so, the financial statements shall be prepared on the going concern basis. Assets and liabilities recognised in the balance sheet are therefore based on the measurement models applied to them, such as cost, revalued amount and fair value. If management concludes that the entity cannot continue as a going concern, this assumption shall be rebutted and the entity prepares its financial statements on a different basis, such as a liquidation or break-up basis, where assets and liabilities are measured based on realisable values.



2.2.4.2 The Elements of Financial Statements

The financial effects of transactions and other events are portrayed in the financial statements by grouping them in broad classes according to their economic characteristics. These broad classes are termed as the elements of financial statements.

The Framework explains that the elements of financial statements consist of: • Elements of financial position:

• assets;• liabilities; • equity;

• Elements of Performance:• income; • expenses; and• capital maintenance adjustments.

(a) Financial Position

The definitions of an asset and a liability identify their essential features but do not attempt to specify the criteria that need to be met before they are recognised in the statement of financial position. Thus, the definitions embrace items that are not recognised as assets or liabilities in the statement of financial position because they do not satisfy the criteria for recognition. In particular, the expectation that future economic benefits will flow to or from an entity must be sufficiently certain to meet the probability criterion before an asset or liability is recognised. For example, an internally generally brand name would probably meet the definition of an asset but not the probability recognition criterion

In assessing whether an item meets the definition of an asset, liability or equity, attention needs to be given to its underlying substance and economic reality and not merely its legal form (substance over form consideration).

(a)(i) Assets

The Framework defines an asset as “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity”. The key criterion to determine the existence of an asset is the ‘control’ of a resource, which implies that an asset need not necessarily take a particular form, like being tangible or physical. An intangible resource may also qualify as an asset.



Control of a resource is normally associated with ownership or legal rights. Thus, control is presumed to exist when an entity owns, or has similar legal rights to, the resource, unless it can be demonstrated that ownership or the existence of legal rights does not constitute control. For example, in the case of an asset under finance lease, the lessor normally has ownership of the asset, but it does not have control over the asset as the risks and benefits of ownership are normally transferred to the lessee. Accordingly, the leased asset is not recognised as an asset in the lessor’s books.

Control may also exist when the entity does not own or have legal rights to the resource, although in such cases, control of the resource must be accompanied by risks and benefits attached to the asset. For example, in the case of the asset under finance lease above, the lessee controls the benefits and risks associated with the ownership of the asset, and should accordingly recognise it as an asset in its accounts even though it does not own the asset. Similarly, a technical know-how or a research and development capability may constitute an asset even though the entity does not have legal rights (unless patented) to it but it can achieve control by keeping the knowledge a trade secret.

The definition also requires that the asset is a result of a past transaction or event, such as a transaction of a purchase of an asset. Events or transactions expected to occur in the future do not constitute an asset. For example, an intention to purchase a plant does not of itself result in the plant being recognised as an asset. The plant has got to be purchased first before it can be recognised as an asset.

The future economic benefit of an asset is the potential to contribute, directly or indirectly, to the cash and cash equivalents of an entity when the asset is used either singly, in combination with other assets to generate cash flows, used in exchange for other assets, used to settle a liability or used to distribute dividends to shareholders.

(a)(ii) Liabilities

A liability is a present obligation of the entity arising from past transactions or events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

A present obligation is a duty or responsibility to perform or to act in a specified way, such as to pay an amount owing to a trade creditor on maturity date. Obligations may arise from contractual agreements that are legally enforceable or from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. An obligation is different from a commitment in that a commitment by itself does not give rise to a liability. For example, a decision approved by the board of directors to



acquire some fixed assets may be a commitment but it does not, of itself, give rise to a present obligation or liability. A liability arises only when the fixed assets are purchased i.e. when the fixed assets are delivered.

As in the case of an asset, a liability is a result of a past transaction or event. Transactions or events expected to occur in the future do not by themselves give rise to a liability. For example, an intention to take a term loan does not, of itself, meet the definition of a liability.

The settlement or extinguishment of a liability would result in an outflow from the entity of resources embodying economic benefits. This will usually involves the entity giving up assets in order to satisfy the obligation or claim of the other party. Settlement may be in the form of a payment of cash or cash equivalents, transfer of other assets, rendering of services, replacement with another liability, or conversion of the liability into equity. Conversely, an obligation to issue the entity’s own equity securities, such as an outstanding equity warrant, is not a liability because the settlement of the obligation does not result in an outflow of resources embodying economic benefits.

The amounts recognised for most liabilities can usually be determined with a high degree of precision. This is usually the case where the liabilities result from contractual agreements and the amounts are expressed in monetary claims, such as an obligation to a trade creditor or a term loan. In some other cases, the amounts recognised are based on estimations. The term provision is sometimes used for these estimates. Examples are provision for warranty claims, provision for income tax and deferred taxes, and provision for retirement benefits. These provision accounts satisfy the definition of a liability and should be treated as such. Sometimes, the term provision is used to describe an estimated amount set aside for write-down of asset value, such as provision for bad and doubtful debts and provision for write-down of other assets. However, these provision accounts do not satisfy the definition of a liability and should not be presented as such (they should be netted off against the respective asset accounts).

(a)(iii) Equity

Equity is the residual interest in the assets of an entity after deducting all its liabilities. It represents the interests of owners or shareholders and the amount being determined as a residual after all liabilities have been deducted. By virtue of the accounting equation, a balance sheet consists of assets, liabilities and equity.

The recognition and classification of equity items (into capital, reserves, etc.) depend on both statutory requirements and accounting standards. In some cases, the nature of an instrument may affect the way in which an item is classified. For example, a convertible loan stock may be classified into two



components: one as a liability and the other as equity. Similarly, in the case of a redeemable preference share, it may satisfy the definition of a liability although in form, it is equity.

(b) Performance

Profit is frequently used as a measure of performance or as the basis for other measures, such as return on investment or earnings per share. The recognition and measurement of income and expenses, and hence profit, depends in part on the concepts of capital and capital maintenance used by the entity in preparing its financial statements.

(b)(i) Income

The Framework defines the income element as ‘an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants’. This definition thus encompasses both:(i) revenues arising from the ordinary course of business, such as sales of

goods or rendering of services; and(ii) gains, realised or unrealised, from any other activities, such as gain on

sale of fixed assets or gain on exchange differences.

In general, all items that meet the definition of income should be included in the income statement. However, there are certain gain items that should or may be excluded from the income statement. An example is a gain arising from a revaluation of fixed asset, which should not be included in the income statement but be taken directly to equity. Some unrealised gains are also not included in income statement until some future event has occurred. For example, an unrealised gain on a hedging instrument should be deferred until a foreseeable loss on the hedged item is realised in the future period.

(b)(ii) Expenses

Expenses are defined in the Framework as ‘decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants’.

This definition thus encompasses both:(i) expenses that arise in the ordinary course of business such as cost of

goods sold or services provided, salaries and depreciation; and(ii) losses, realised or unrealised, from any other activities, such as loss on

sale of a property or a loss on exchange difference.



In general, all items that meet the definition of an expense should be included in the income statement. However, there are some rare circumstances in which an unrealised loss item is not included in the income statement but included in equity. For example, an exchange difference on a long-term monetary item that hedges a net investment in a foreign entity should be deferred in equity. Also, a deficit arising on a revaluation of a fixed asset may be offset against a previously credited revaluation reserve of the same asset.

(b)(iii) Capital maintenance adjustments

The revaluation or restatement of assets and liabilities gives rise to increases or decreases in equity. These increases or decreases meet the definition of income and expenses. However, for some items such as property, plant and equipment, the increases or decreases are not included in the income statement under some concept of capital maintenance. Instead, they are included in equity as capital maintenance adjustments or revaluation reserves.

2.2.4.3 Recognition of the Elements of Financial Statements

Recognition is concerned with “what” an entity discloses as items in the statement of financial position or income statement. It is the process of incorporating in the financial statements an item that meets the definition of an element and satisfies the recognition criteria. It thus involves the depiction of the item in words in the statement of financial position or income statement. Items that satisfy the recognition criteria should be recognised in the statement of financial position or income statement.

For example, an entity leases a land from a state government for a specified lease period. The issue here is “what” to depict for this transaction in the statement of financial position. If this item satisfies the recognition criteria of an asset, the depiction of the line item may be a land use right (i.e. right-of-use asset). If it does not satisfy the recognition criteria, the lease of land is not depicted as such. Any payment made is then depicted as a prepaid lease payment.

A failure to recognise an element that satisfies the recognition criteria is not rectified by disclosure of accounting policies used or by notes or explanatory material.

Recognition Criteria

An item that meets the definition of an element should be recognised if:(i) it is probable that any future economic benefit associated with the item

will flow to or from the entity; and(ii) the item has a cost or value that can be measured with reliability.



Probable future economic benefit implies a degree of uncertainty attributable to the flow of resources, but the uncertainty should be low enough such that there is a high degree of probability that the resources will flow. This is of course a matter of judgement although in some MFRSs, specific guidance is provided.

Reliable measurement of cost or value, although requires estimation, will not usually pose significant problem in practice. However, in some rare cases, such as the valuation of internally generated intangible assets, estimation may be very difficult, if not impossible. The use of cost or value is not a free choice. In most cases, the element items to be recognised are based on cost. For example, in the case a machine, cost includes cost of acquisition but may also be fair value if it reasonably approximates cost. In some other cases, however, a valuation may be used. For example, a property may be stated at its market value if the amount can be reliably measured.

In accordance with the recognition criteria, an asset is recognised in the statement of financial position when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.

A liability is recognised in the statement of financial position when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably.

Income is recognised in the income statement when an increase in future economic benefit related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means that income is recognised when earned and not when cash is received.

Similarly, expenses are recognised in the income statement when a decrease in future economic benefit related to a decrease in an asset or an increase in liability has arisen that can be measured reliably. These mean that expenses are recognised when incurred and not when they are paid.

2.2.4.4 Measurement of the Elements of Financial Statements

Measurement is concerned with “how much” an entity allocates to amounts recognised as elements in the statement of financial position or income statement. It is a process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the statement of financial position and income statement. For a financial position element, measurement is required when an entity first recognises the item, and subsequently at each reporting date. This involves the selection of the particular basis of measurement



The Framework acknowledges that there are a number of different measurement bases being employed to different degrees and in varying circumstances in financial statements. These bases include the following:(a) Historical cost, where an asset is carried at an amount based on the cost

incurred, and a liability is carried at amount based on proceeds received in exchangefor the obligation;

(b) Current costs, where an asset is carried at the amount of cash and cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently, and a liability is carried at the undiscounted amount of cash and cash equivalents that would be required to settle the obligation currently.

(c) Realisable (settlement) value, where an asset is carried at the amount of cash and cash equivalents that could currently be obtained by selling the asset in an orderly disposal, whilst a liability is carried at the settlement value i.e. the undiscounted amount of cash and cash equivalents to be paid to satisfy the obligation in the normal course of business.

(d) Present value, where an asset is carried at the present discounted value of the future cash inflows that the item is expected to generate in the normal course of business. And a liability is carried at the present discounted value of the future net outflows that are expected to be required to settle the obligation in the normal course of business.

Other measurement bases not specifically mentioned in the Framework includes:(a) Cost combined with other measurement bases, such as lower of cost and

net realisable value, and lower of cost and market value;(b) Amortised cost basis; (c) Revaluation basis; and(d) Market (marked to market) or fair value basis.

The measurement bases currently applied in financial statements consist of a mixed measurement attributes of historical cost, amortised cost, lower of cost and net realisable value, revalued amount, present value and fair value. However, the more recent MFRSs make greater use of the fair value measurement basis (for example, MFRS 139, Financial Instruments: Recognition and Measurement, MFRS 140, Investment Property, and MFRS 141, Agriculture).

2.2.5 Concepts of Capital and Capital Maintenance

2.2.5.1 Concepts of Capital

The Framework identifies two concepts of capital; (i) the financial concept, and (ii) the physical concept.



Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.

Although the Framework does not identify a preference, the financial concept of capital is adopted by most entities in preparing their financial statements. However, it clarifies that the selection of the appropriate concept of capital should be based on the needs of the users. A financial concept of capital should be applied if users are primarily concerned with nominal invested capital or the purchasing power of invested capital. On the hand, a physical concept of capital should be applied if the main concern of users is with the operating capability of the entity.

2.2.5.2 Concepts of Capital Maintenance and the Determination of Profit

The concept of capital applied has a direct effect on the determination of profit. This gives rise to the following concepts of capital maintenance and the determination of profit:(a) Financial capital maintenance. Under this concept a profit is earned

only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.

(b) Physical capital maintenance. Under this concept profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

The principle difference between the two concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the entity. In general terms, an entity has maintained its capital if it has as much capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit.



ExampleAssume that at the beginning of the year, Entity A has capital of RM10 m

invested in an asset purchased at cost of RM10 m. At the end of Year 1, the asset is sold for RM11 m.

At the beginning of Year 1, the consumer price index is 100 and at the end of Year 1, the index is 104, indicating a 4% increase in general inflation for the year. At the end of Year 1, the current cost to replace the asset sold with a new asset that has the same operating capability is RM10.6 million.

RequiredFor each of the capital maintenance concepts determine how profit is determined.

Solution Financial Capital

MaintenancePhysical Capital

MaintenanceNominal monetary

RM’m

Constant purchasing

power RM’m

Current cost basis RM’m

Asset 11.0 11.0 11.0

Original capital – start of Year 1 10.0 10.0 10.0Capital maintenance adjustment –Constant purchasing power 0.4Current cost adjustment 0.6Capital maintained – end of Year 1 10.0 10.4 10.6Profit (amount in excess of capital maintained) 1.0 0.6 0.4Total Equity 11.0 11.0 11.0

The Framework does not prescribe, or identify a preference for, a particular concept of capital maintenance. Certain MFRSs standards, such as MFRS 116, Property, Plant and Equipment, and MFRS 138, Intangible Assets, use the physical capital maintenance concept, which requires gains on revaluation to be credited to a revaluation reserve (capital maintenance adjustment). Others like, MFRS 139, Financial Instruments: Recognition and Measurement, MFRS 140, Investment Property, and IAS 41, Agriculture, adopt the financial capital maintenance concept, which requires changes in fair value be recognised as gains or losses in profit or loss.

The selection of the measurement bases and concept of capital maintenance will determine the accounting model used in the preparation of the financial statements. Currently, it is not the MASB’s intention to prescribe a particular accounting model, other than in exceptional circumstances, such as those entities reporting in the currency of hyperinflationary economy (see MFRS



129). However, the period to date has seen more of the newer accounting standards moving closer to the financial capital maintenance concept and applying the fair value model.

The Diagram below provides a “bird’s eye view” of the Conceptual Framework.

Objective�of�Financial�Reporting�–�To�provide�useful�information�to�existing�and�potential�investors,�lenders�and�other�creditors

The�Reporting�Entity�–�Single�entity�or�Group�of�entities

Fundamental�Qualitative�Characteristics

Relevance�–�predictive�value�and�confirmatory�value.

Materiality�consideration

Faithful�Representation�–�completeness,�neutrality�and�free�from�

error

Enhancing�Qualitative�Characteristics

Comparability�-�Consistency

Verifiability Timeliness Understandability

Assumption�of�Going�Concern�and�Elements�of�Financial�Statements

Financial�Position Financial�Performance

Assets Liabilities Equity Income Expenses Capital�maintenance�adjustments

Recognition�of�the�Elements

Measurement�of�the�Elements

Concept�of�Capital�and�Capital�Maintenance



2.3 MFRS 129, Financial Reporting in Hyperinflationary Economies

This MFRS applies to the financial statements of any entity whose functional currency is the currency of a hyperinflationary economy.

The MFRS takes the view that in a hyperinflationary economy, reporting of operating results and financial position in the local currency without restatement is not useful. This is because money loses purchasing power at such a rate that comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading.

The MFRS requires a restatement of the financial statements when hyperinflation occurs. The Standard does not define hyperinflation or establish a rate at which hyperinflation is deemed to arise. This is thus a matter of judgement on when a restatement is necessary. The MFRS, however, clarifies that hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited, to the following indicators:(a) the general population prefers to keep its wealth in non-monetary assets

or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;

(b) the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;

(c) sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the current period, even if the period is short;

(d) interest rates, wages and prices are linked to a price index; and(e) the cumulative inflation rate over three years is approaching, or exceeds

100%.

The Standard applies to the financial statements of any entity, from the beginning of the reporting period in which it determines the existence of hyperinflation in the country, in whose currency it reports. For example, if an entity determines that there is hyperinflation in the current year ending 31 December 20x4, it applies this Standard to the financial statements beginning of 20x4, with the opening of business on 1 January 20x4. This basically requires a restatement of the opening statement of financial position on that date.



2.3.1 The Restatement of Financial StatementsPrices change over time due to specific or general factors. Specific factors

may cause individual prices of goods and services to change (specific inflation), whereas general factors relate to political, economic and social forces that cause the changes in the general level of prices (general inflation), and therefore in the general purchasing power of money.

Generally, financial statements prepared under the historical cost basis of accounting do so without regard either to changes in general inflation or to specific inflation. The exceptions are those assets or liabilities that the entity is required or chooses to measure at fair value (for example, an item of property, plant and equipment may be revalued to fair value or biological assets are measured at fair value)

Some entities prepare and present financial statements that are based on a current cost approach that reflects the effects of changes in the specific prices of assets held, but not the general inflation.

When hyperinflation exists, the financial statements of an entity, whether based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end of the reporting period. The corresponding figures for the previous period and any information in respect of earlier periods shall also be stated in terms of the measuring unit current at the end of the reporting period.

The gain or loss on the net monetary position shall be included in profit or loss and separately disclosed.

2.3.2 Historical Cost Financial Statements

2.3.2.1 Statement of Financial Position

The Standard requires that statement of financial position amounts not already expressed in terms of the measuring unit current at the end of the reporting period, are restated by applying a general price index. The procedures for the restatement are as follows:(a) Monetary items, such as cash, receivables, payables and loans (that are

not linked to price indices) are not restated as they are already expressed in terms of the monetary units current at the end of the reporting period;

(b) Assets and liabilities linked by agreement to changes in prices, such as index linked bonds and loans, are adjusted in accordance with the agreement in order to ascertain the amount outstanding at the end of the reporting period;

(c) Other assets and liabilities (non-monetary items) that are carried at amounts current at the end of the reporting period, such as inventories



carried at net realisable value and financial instruments measured at fair value, are not restated.

(d) All other non-monetary assets and liabilities are restated. In restating the non-monetary assets and liabilities, the MFRS requires

that the restated carrying amount of each item is determined by applying to its historical cost and accumulated depreciation (if applicable) the change in a general price index from the date of acquisition to the end of the reporting period. For example, in restating an item of PPE carried at the cost model, the restated amount is calculated from the date of purchase of the item.

Some non-monetary items are carried at amounts current at dates other than that of acquisition or that of the statement of financial position. For example, certain items of PPE may have been revalued in some previous periods. In these cases, the carrying amounts are restated from the date of the revaluation.

The restated amount of a non-monetary asset is reduced when it exceeds its recoverable amount (the normal impairment test applies).

2.3.2.2 Statement of Comprehensive Income

The MFRS requires that all items in the statement of comprehensive income are expressed in terms of the measuring unit current at the end of the reporting period. Therefore all amounts need to be restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded in the financial statements.

2.3.2.3 Gain or Loss on Net Monetary Position

In a period of inflation, an entity holding an excess of monetary assets over monetary liabilities (net monetary asset position) loses purchasing power whilst an entity with an excess of monetary liabilities over monetary assets (net monetary liability position) gains purchasing power.

Intuitively, if a person has RM100 cash at the beginning of the year and he has the same amount of cash at the end of year; in nominal value terms, there is no change in his wealth for the year. However, if the general inflation for the year is 20%, his real wealth at the end of the year as eroded by RM20. If he earns RM20 for the year, and his cash at year end is RM120, that amount is the wealth he needs to maintain his original purchasing power (financial capital maintenance concept measured in constant purchasing power).

This gain or loss on the net monetary position may be derived as the difference resulting from the restatement of non-monetary items, owners’ equity and items in the statement of comprehensive income. Alternatively, the gain or loss may be estimated by applying the change in a general price index



to the weighted average for the period of the difference between monetary assets and monetary liabilities. This gain or loss on net monetary position is generally included in profit or loss.

Example 1Assume that Entity A starts off its business at the beginning of Year 1 with

capital of RM100m all invested in non-monetary assets. For Year 1, it records a profit of RM20m (income and expenses accrue evenly in the year) and the profits are represented by RM20m monetary current assets at the end of the year.

The movements in the general price index are as follows: At beginning of the year : 100 At middle of the year : 120 At end of the year : 140

Entity A assesses and concludes that the economy is hyperinflationary.

RequiredExplain and show how Entity A shall apply the restatement requirements of

MFRS 129.

Solution 1

Index RestatedYear 0 Profit or Loss Year 1 Adjustment Year 1RM'm RM'm RM'm RM'm

Capital 100 100 1.40 140Profit 20 20 1.20 24

120 164Loss on net monetaryassets (balancing amount) (4)

100 20 120 160

Non-monetary assets 100 100 1.40 140 Net monetary assets 20 20 20

100 20 120 160 Proof of:Loss on net monetary assets = 20m x (1.4 - 1.2) = RM4m



Example 2Suppose in Example 1 Entity A starts of its business with a capital of RM100m

and a loan of RM100m, and all are invested in non-monetary assets at the beginning of Year 1. Assume other facts are the same as in Example 1.

RequiredExplain and show how Entity A shall apply the restatement requirements of

MFRS 129.

Solution 2

Index RestatedYear 0 Profit or Loss Year 1 Adjustment Year 1RM'm RM'm RM'm RM'm

Capital 100 100 1.40 140Profit 20 20 1.20 24

120 164Gain on net monetaryliability (balancing amount) 36

100 20 120 200

Non-monetary assets 200 200 1.40 280 Monetary current assets 20 20 20 Loan (100) (100) (100)

100 20 120 200Proof of net gain:Loss on monetarry assets = 20m x (1.4 - 1.2) (4)Gain on loan = 100m x (1.4 - 1.0) 40Gain on net monetary liability position 36

2.3.3 Current Cost Financial StatementsFor current cost financial statements, items in the financial position stated

at current cost are not restated because they are already expressed in terms of the measuring unit current at the end of the reporting period. All other items in the statement of financial position are restated in the same manner as those using the historical cost approach.

The statement of comprehensive income prepared using a current cost approach reports costs current at the time at which the underlying transactions or events occur. Cost of sales and depreciation are recorded at current costs at the time of consumption, sales and other expenses are recorded at their money amounts when they occurred. Therefore, all amounts need to be restated into the measuring unit current at the end of the reporting



period by applying a general price index. Gain or loss on the net monetary position is generally recognised in profit or loss

2.3.4 Restating the Opening Statement of Financial PositionFor the historical cost financial statements, MFRS 129 requires that at the

beginning of the first period of application of this Standard, the components of owners’ equity, except retained earnings and any revaluation surplus, are restated by applying a general price index from the dates the components were contributed or otherwise arose. Any revaluation surplus that arose in previous periods is eliminated. Restated retained earnings are derived from all the other amounts in the restated statement of financial position.

At the end of the first period and in subsequent periods, all components of owners’ equity are restated by applying a general price index from the beginning of the period or the date of contribution, if later.

Example 3Suppose at 1 January 20x3, the opening statement of financial position of

Entity B, prepared under the cost model with modification for property, plant and equipment, is as follows: RM’m Capital (share capital and share premium) 200 Revaluation surplus of PPE 50 Retained profits 150

Total equity 400

Property, plant and equipment at revalued amount 200 Intangible assets – cost model 100 Net monetary current assets 150 Loans (50)

Total net assets 400

The relevant consumer price indices are as follows: When capital was contributed 80 When the PPE were revalued 100 When the intangible assets were acquired 110 At 31 December 20x2 (end of prior year) 130



Suppose the year ended 31 December 20x3 is the first period that Entity B applies MFRS 129, the restatement of the opening statement of financial position would be as follows

Opening Adjustment Restated1 Jan 20x3 1 Jan 20x3

RM'm RM'mCapital 200.00 1.625 325.00Revaluation surplus 50.00 –Retained profits 150.00 153.18

400.00 478.18

PPE - revaluation model 200.00 1.300 260.00Intangible assets - cost model 100.00 1.182 118.18Net monetary current assets 150.00 150.00Loans (50.00) (50.00)

400.00 478.18Adjustment:Adjustment factor for capital = 130/80 = 1.625Adjustment factor for PPE = 130/100 = 1.300Adjustment factor for intangible = 130/110 = 1.182

Suppose during the year ended 31 December 20x3, Entity B records revenue and expenses in its accounts based on the general inflation rates current at the dates of the respective transactions and this produces a profit of RM50m, all reinvested in monetary current assets. The average general inflation index at the respective recognition of revenue and expenses is 150. At 31 December 20x3, the index increases to 169. Ignore depreciation and amortisation of non-monetary assets.

The summarised statement of financial position at 31 December 20x3 before restatement is as follows:

Restated Profit or Loss At1 Jan 20x3 31 Dec. 20x3

RM'm RM'm RM'mCapital 325.00 325.00 Revaluation surplus – – Retained profits 153.18 153.18

50.00 50.00 478.18 50.00 528.18

PPE - revaluation model 260.00 260.00 Intangible assets - cost model 118.18 118.18 Net monetary current assets 150.00 50.00 200.00 Loans (50.00) (50.00)

478.18 50.00 528.18



The restatement of the statement of financial position at the end of 20x3 would be as follows:

At Adjustment Restated31 Dec. 20x3 31 Dec. 20x3

RM'm RM'm RM'mCapital 325.00 1.300 422.50 Revaluation surplus – –Retained profits - opening 153.18 1.300 199.14 Profit before loss adjustment 50.00 1.127 56.33 Loss in profit or loss (36.33)Retained profits - closing 219.14

528.18 641.64

PPE - revaluation model 260.00 1.300 338.00 Intangible assets - cost model 118.18 1.300 153.64 Net monetary current assets 200.00 200.00 Loans (50.00) (50.00)

528.18 641.64 Adjustment factor:Capital, opening retained profits, PPE and intangible = 169/130 =1.300Profit = 169/150 = 1.127Proof of loss on monetary items RM'm % RM'mOpening monetary items 100.00 (169-130)/130 30.0% 30.00 Increase in current year 50.00 (169-150)/150 12.7% 6.33

36.33

2.3.5 Comparative FiguresThe Standard requires that corresponding figures for the previous

reporting period, whether prepared under a historical cost approach or a current cost approach, be restated by applying a general price index so that the comparative financial statements are presented in terms of the measuring unit current at the end of the reporting period. Information that is disclosed in respect of earlier periods is also expressed in terms of the measuring unit current at the end of the reporting period.

In the Example 3 above, a restatement of the statement of financial position at 31 Dec. 20x2 of Entity B for the purpose of presentation in the financial statements of the year 20x3 would be as follows:



Opening Adjustment Restated31 Dec 20x2 31 Dec 20x2

RM'm RM'mCapital 200.00 2.113 422.50 Revaluation surplus 50.00 –Retained profits 150.00 169.14

400.00 591.64

PPE - revaluation model 200.00 1.690 338.00 Intangible assets - cost model 100.00 1.536 153.64 Net monetary current assets 150.00 150.00 Loans (50.00) (50.00)

400.00 591.64 Adjustment:Adjustment factor for capital = 169/80 = 2.113Adjustment factor for PPE = 169/100 = 1.690Adjustment factor for intangible = 169/110 = 1.536

2.3.6 Economies Ceasing to be Hyperinflationary When an economy ceases to be hyperinflationary and an entity discontinues

the preparation and presentation of financial statements prepared in accordance with this Standard, it shall treat the amounts expressed in the measuring unit current at the end of the previous reporting period as the basis for the carrying amounts in its subsequent financial statements

2.3.7 DisclosuresThe following disclosures are required:

(a) the fact that the financial statements and the corresponding figures for previous periods have been restated for the changes in the general purchasing power of the functional currency and, as a result, are stated in terms of the measuring unit current at the end of the reporting period;

(b) whether the financial statements are based on a historical cost approach or a current cost approach; and

(c) the identity and level of the price index at the end of the reporting period, and the movement in the index during the current and the previous reporting period.

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