Small and Medium Enterprises (SMEs), touted as the backbone of the Malaysian economy due to the size of their contribution, have become the focus of hope to lead Malaysia to highincome nation status by 2020.
By 2020, SMEs will be the key driver of growth, contributing 42% to the nation’s gross domestic product, employing 63% of the country’s workforce and making up 25% of Malaysian exports.
With plans ready to push SMEs to the economic forefront through the SME Masterplan 2012-2020, regulators’ eyes are on the sophistication, relevance and sufficiency of the financial reporting practices of these entities to supply the needed information. The current Private Entities Reporting Standards (PERS), based on pre-2003 International Accounting Standards (IAS) issued by the International Accounting Standards Board (IASB), have not been updated since being issued between 1999 and 2004.
In February 2014, the Malaysian Accounting Standards Board (MASB) announced that all private entities shall apply the new accounting framework, the Malaysian Private Entities Reporting Standards (MPERS), in their financial statements beginning on or after January 1, 2016. The MPERS is the word-for-word version of the IFRS for SMEs issued by the IASB with the exception of the requirements on income tax and property development activities and a few terminological changes. Alternatively, private entities may choose to apply the International Financial Reporting Standards (IFRS)-compliant Malaysian Financial Reporting Standards (MFRS). The latter requires more fair-value based reporting for assets and liabilities and robust financial statements disclosure.
Application of MPERS and MFRS is retrospective and requires early preparation so that financial information is available on the date of transition to the new framework or MFRS. The earliest date of transition is January 1, 2015.
Differences between PERS and MPERS are few. MPERS uses more cost-based models to measure assets and liabilities, and where fair value measurement is applicable it is only necessary if the fair value can be measured reliably without undue cost or effort, or it remains an option. In spite of this, preparation for transition to MPERS should begin as early as the date of transition to MPERS in several areas of accounting. This article discusses the pertinent areas.
Financial instruments
Entities on the PERS framework since inception are not exposed to the concept of financial instruments. MPERS introduces Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues (these are the specific fair value accounting standards not seen in PERS) to recognize, derecognize, measure and disclose financial assets and liabilities.
Section 11 Basic Financial Instruments:
Examples of financial instruments are cash, demand and fixed deposits, receivables, payables, investments in preference shares and ordinary shares, bonds and similar debt instruments and commitments to receive a loan.
Financial assets and liabilities are recognized initially at transaction costs, except for financing transactions, where financial instruments are measured at present value of future payments discounted at market rate of interest for a similar debt instrument. Examples of financial instruments that are financing arrangements are long-term loans made to another entity, goods or services sold to customers beyond the normal interest-free credit period and loans received from a bank.
On the date of transition and on every subsequent reporting date, financial assets are measured at cost less impairment, except that investments in shares which are publicly traded or where their fair value can be determined reliably are measured at fair value through profit or loss.
Unless an entity adopts MPERS ahead of the mandatory effective date, the above financial instruments need not be recognized or remeasured at fair value before the financial year beginning on or after January 1, 2016.
Section 12 Other Financial Instruments:
Derivative instruments (for example options, swaps, futures and forwards) are offbalance sheet items under PERS. On the date of transition, entities must obtain market prices (which may be more conveniently available on or near the date of transition) to measure the derivative contracts at fair value through profit or loss and recognize the fair value difference between contract date and date of transition in profit or loss. Subsequently derivative contracts are measured at fair value through profit or loss at each reporting date.
Inventories
MPERS has disallowed the last in, first out (LIFO) method for determining inventory costs. The standard cost method, retail price method or most recent purchase price for measuring the cost of inventories is allowed if result approximates cost.
Entities applying the LIFO cost formula must recalculate inventory costs on the date of transition based on a permissible cost formula (for example first in, first out (FIFO) or weighted average).
Doing this would go a long way to facilitate migration to a non-LIFO method of inventory costing in financial year 2016 (and eliminate substantially the pain of recalculating costs of inventory sold in the first year of adopting MPERS).
Entities must be prepared to assess potential impairment on inventory where the carrying amount is not fully recoverable at each reporting date, commencing on the date of transition.
Investment property
Under PERS, fair value changes on investment properties carried at revalued amounts are only recognized in revaluation reserve. Entities adopting MPERS can now measure investment properties at fair value through profit or loss if fair value can be determined reliably. Market value in property valuation report (at, or before date of transition) can be designated as deemed cost at the valuation date.
Biological assets and agricultural produce
On the date of transition, entities can choose to measure each class of biological assets using either the cost model or the fair value model. If the fair value model is chosen the entity shall measure the particular class of biological assets on initial recognition and at each reporting date at fair value less costs to sell with changes in fair value recognised in profit or loss.
Further, on the date of transition, agricultural produce harvested from biological assets (for example, fresh fruit bunches from oil palms and fresh milk from cows) is no longer measured at the lower of cost and net realisable value. Agricultural produce must now be measured at its fair value less costs to sell on date of transition and at each reporting date.
These changes would require management to determine the fair value of biological assets and agricultural produce less costs to be incurred up to their point of sale on the date of transition.
Share-based payments
Entities shall record the previously off-balance sheet share-based payments (in the form of shares or share options) to employees at fair value of services received on grant date or, if there are vesting conditions, during the vesting period. If fair value cannot be estimated reliably, the value of share-based payments can be measured by reference to fair value of equity instruments granted.
Exemptions are available to firsttime adopters of the MPERS from the need to apply Section 26 Share-based Payment to equity instruments that were granted before the date of transition to MPERS, or to liabilities arising from share-based payments that were settled before the date of transition.
Conclusion
The transition period from PERS to MPERS can be less arduous if accountants are well prepared with technical know-how, migration plans and staff capacity. Starting early and working steadily (at a minimum on areas mentioned in this article) is a key to successful adoption of MPERS with minimal stress, time and costs.
The more robust financial reporting with adoption of MPERS will contribute to enhancing the quality, transparency and comparability of private entities globally and improve their accessibility to finance locally and globally. With the benefit of hindsight, accountants can take advantage of opportunities to unlock value in the entity through adoption of MPERS should the entity decide to go public.
“Change to accounting framework used by SMEs in Malaysia effective financial year
2016 will require early and informed preparation.”
Eileen Lim, ECOVIS AHL, Malaysia
By 2020, SMEs will be the key driver of growth, contributing 42% to the nation’s gross domestic product, employing 63% of the country’s workforce and making up 25% of Malaysian exports.
With plans ready to push SMEs to the economic forefront through the SME Masterplan 2012-2020, regulators’ eyes are on the sophistication, relevance and sufficiency of the financial reporting practices of these entities to supply the needed information. The current Private Entities Reporting Standards (PERS), based on pre-2003 International Accounting Standards (IAS) issued by the International Accounting Standards Board (IASB), have not been updated since being issued between 1999 and 2004.
In February 2014, the Malaysian Accounting Standards Board (MASB) announced that all private entities shall apply the new accounting framework, the Malaysian Private Entities Reporting Standards (MPERS), in their financial statements beginning on or after January 1, 2016. The MPERS is the word-for-word version of the IFRS for SMEs issued by the IASB with the exception of the requirements on income tax and property development activities and a few terminological changes. Alternatively, private entities may choose to apply the International Financial Reporting Standards (IFRS)-compliant Malaysian Financial Reporting Standards (MFRS). The latter requires more fair-value based reporting for assets and liabilities and robust financial statements disclosure.
Application of MPERS and MFRS is retrospective and requires early preparation so that financial information is available on the date of transition to the new framework or MFRS. The earliest date of transition is January 1, 2015.
Differences between PERS and MPERS are few. MPERS uses more cost-based models to measure assets and liabilities, and where fair value measurement is applicable it is only necessary if the fair value can be measured reliably without undue cost or effort, or it remains an option. In spite of this, preparation for transition to MPERS should begin as early as the date of transition to MPERS in several areas of accounting. This article discusses the pertinent areas.
Financial instruments
Entities on the PERS framework since inception are not exposed to the concept of financial instruments. MPERS introduces Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues (these are the specific fair value accounting standards not seen in PERS) to recognize, derecognize, measure and disclose financial assets and liabilities.
Section 11 Basic Financial Instruments:
Examples of financial instruments are cash, demand and fixed deposits, receivables, payables, investments in preference shares and ordinary shares, bonds and similar debt instruments and commitments to receive a loan.
Financial assets and liabilities are recognized initially at transaction costs, except for financing transactions, where financial instruments are measured at present value of future payments discounted at market rate of interest for a similar debt instrument. Examples of financial instruments that are financing arrangements are long-term loans made to another entity, goods or services sold to customers beyond the normal interest-free credit period and loans received from a bank.
On the date of transition and on every subsequent reporting date, financial assets are measured at cost less impairment, except that investments in shares which are publicly traded or where their fair value can be determined reliably are measured at fair value through profit or loss.
Unless an entity adopts MPERS ahead of the mandatory effective date, the above financial instruments need not be recognized or remeasured at fair value before the financial year beginning on or after January 1, 2016.
Section 12 Other Financial Instruments:
Derivative instruments (for example options, swaps, futures and forwards) are offbalance sheet items under PERS. On the date of transition, entities must obtain market prices (which may be more conveniently available on or near the date of transition) to measure the derivative contracts at fair value through profit or loss and recognize the fair value difference between contract date and date of transition in profit or loss. Subsequently derivative contracts are measured at fair value through profit or loss at each reporting date.
Inventories
MPERS has disallowed the last in, first out (LIFO) method for determining inventory costs. The standard cost method, retail price method or most recent purchase price for measuring the cost of inventories is allowed if result approximates cost.
Entities applying the LIFO cost formula must recalculate inventory costs on the date of transition based on a permissible cost formula (for example first in, first out (FIFO) or weighted average).
Doing this would go a long way to facilitate migration to a non-LIFO method of inventory costing in financial year 2016 (and eliminate substantially the pain of recalculating costs of inventory sold in the first year of adopting MPERS).
Entities must be prepared to assess potential impairment on inventory where the carrying amount is not fully recoverable at each reporting date, commencing on the date of transition.
Investment property
Under PERS, fair value changes on investment properties carried at revalued amounts are only recognized in revaluation reserve. Entities adopting MPERS can now measure investment properties at fair value through profit or loss if fair value can be determined reliably. Market value in property valuation report (at, or before date of transition) can be designated as deemed cost at the valuation date.
Biological assets and agricultural produce
On the date of transition, entities can choose to measure each class of biological assets using either the cost model or the fair value model. If the fair value model is chosen the entity shall measure the particular class of biological assets on initial recognition and at each reporting date at fair value less costs to sell with changes in fair value recognised in profit or loss.
Further, on the date of transition, agricultural produce harvested from biological assets (for example, fresh fruit bunches from oil palms and fresh milk from cows) is no longer measured at the lower of cost and net realisable value. Agricultural produce must now be measured at its fair value less costs to sell on date of transition and at each reporting date.
These changes would require management to determine the fair value of biological assets and agricultural produce less costs to be incurred up to their point of sale on the date of transition.
Share-based payments
Entities shall record the previously off-balance sheet share-based payments (in the form of shares or share options) to employees at fair value of services received on grant date or, if there are vesting conditions, during the vesting period. If fair value cannot be estimated reliably, the value of share-based payments can be measured by reference to fair value of equity instruments granted.
Exemptions are available to firsttime adopters of the MPERS from the need to apply Section 26 Share-based Payment to equity instruments that were granted before the date of transition to MPERS, or to liabilities arising from share-based payments that were settled before the date of transition.
Conclusion
The transition period from PERS to MPERS can be less arduous if accountants are well prepared with technical know-how, migration plans and staff capacity. Starting early and working steadily (at a minimum on areas mentioned in this article) is a key to successful adoption of MPERS with minimal stress, time and costs.
The more robust financial reporting with adoption of MPERS will contribute to enhancing the quality, transparency and comparability of private entities globally and improve their accessibility to finance locally and globally. With the benefit of hindsight, accountants can take advantage of opportunities to unlock value in the entity through adoption of MPERS should the entity decide to go public.
“Change to accounting framework used by SMEs in Malaysia effective financial year
2016 will require early and informed preparation.”
Eileen Lim, ECOVIS AHL, Malaysia
