There are increasing MASB accounting standards which require the application of fair value accounting and measurement in the financial statements, notable accounting standards include fair value model under FRS 140 Investment Properties and recognition and measurement of financial instruments at fair values under FRS 139.
In order to enhance the existing disclosure by all the listed companies on Bursa Malaysia, Bursa Malaysia has, in March 2010 issued directives to all listed companies to disclose the breakdown of unappropriated profits or accumulated losses into realised and unrealised on group and company basis in the Quarterly Reports and Annual Reports for the period/years ended 30 Sept 2010.
However, the meaning of “realised” and “unrealised” profits or losses are not defined in the MASB approved accounting standards nor in the Companies Act, 1965.
In this respect, Bursa Malaysia requested the assistance of Malaysia Institute of Accountants (MIA) to develop a guide on the determination of realised and unrealised profits and losses to assist the listed companies in analysing and distinguishing between realised and unrealised profits or losses at individual legal entity level.
On 15 Oct 2010, MIA has released for comments Draft Guidance on Determination of Realised and Unrealised Profits or Losses in the context of disclosure requirements of Bursa Malaysia. The Draft Guidance is available at MIA website. Click here to download.
Principle of realisation
The general principles in the said Draft Guidance suggests that any charge or credit to the profit or loss of a legal entity is deemed as realised when it is resulted from the consumption of resource which result in the outflow (eg. expenses incurred) or depletion of assets (eg. write down/impairment of assets), and that a resource may be consumed through sale or use. Where the consumption of resource could not be demonstrated, such charge or credit should be regarded as unrealised until such consumption could be demonstrated or the associated asset or liability is derecognised.
Some examples of expenses incurred in respect of consumption of resources given in the Draft Guidance include:
- cost of goods sold and related write down of inventories to NRV
- wages and salaries (including share-based payment expenses)
- contract cost and expected foreseeable loss
- depreciation and impairment of PPE and IP
- amortisation of impairment of intangible assets
- borrowing/finance cost incurred
- lease expense
How about dues and taxes payable to government? Say, provision for current income tax or RPGT? The Draft Guidance said when a legal entity consumes public goods provided by the government in exchange for payment of dues and taxes in the current year of assessment should be regarded as realised. However, deferred tax income/expense is regarded as unrealised as it is related to the future consumption of public goods.
Some examples of realised income provided in the Draft Guidance:
- revenue from sale of goods and rendering of services
- contract revenue
- lease/rental income
- interest/finance income
- dividend income
- royalty income
Unrealised profit or loss
Common examples of unrealised profit or loss include:
- deferred tax income/expense
- cumulative net gains (but not net losses) from the remeasurement of assets or liabilities at fair value through profit or loss;
- provision of liabilities in respect of present obligations where resources are only consumed upon settlement of the obligations (eg. provision for warranty)
- translation gains or losses of monetary items denominated in a currency other than the functional currency.
Breakdown of realised and unrealised profits or losses
How the presentation of the breakdown may look like?
Realised profits, net xx
Unrealised profits, net xx
Total unappropriated profits xxx
or by way of disclosure in the notes – “unappropriated profts as at 30 Sept 2010 comprise realised profits of RMxxx and net unrealised profits are RMxxx”
One may refer to quarterly report (QR) or annual reports (AR) of Malaysian Real Estate Investment Trust (REIT) for sample disclosure format (see picture above), where REIT companies are required to disclose and distinguish realised and unrealised profits or losses in their QR and AR. Example of REIT’s disclosure above is more details as it also presents components of realised and unrealised profit or loss for the period/year and the movements of realised and unrealised profit or loss in the statement of changes in net asset value (equivalent to statement of changes in equity).
However, it may be complicated to breakdown the realised and unrealised profit or loss on a group basis (i.e. consolidated profits or losses at group accounts) if there are a number of consolidation adjustments, inter-group transactions, share of unrealised profits by minority shareholders, etc.
Distributable profits versus realised/unrealised profits
Despite the Bursa Malaysia’s Directives above to distinguish and disclose realised and unrealised profits or losses for disclosure purposes, it does not have legal constraints in prohibiting the companies from distributing dividends out of unrealised profits.
Section 365(1) of the Companies Act states that no cash dividends shall be payable to the shareholders except out of profits. But no further definition of profits is given. This dividend rule was not even mentioned in the Final Report – Review of Companies Act 1965 issued by the Corporate Law Reform Committee (CLRC).
The Malaysian company law which is enacted long time ago may not on the pace with the changes of international accounting standards, and it may need a serious review and revamp in the on-going Corporate Law Reform Program commissioned by the Suruhanjaya Syarikat Malaysia (SSM).
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