19 November 2011 – The Malaysian Accounting Standards Board  (MASB) today issued a new MASB approved accounting framework, named as “Malaysian Financial Reporting Standards (MFRS Framework)”, which are word-by-word equivalent to IFRS standards issued by IASB including effective dates.

The MFRS Framework is to be applied by all Entities Other Than Private Entities for annual periods beginning on or after 1 January 2012, with the exception of entities that are within the scope of MFRS 141 Agriculture (MFRS 141) and IC Interpretation 15 Agreements for Construction of Real Estate (IC 15), including its parent, significant investor and venturer
(‘Transitioning Entities’).

Transitioning Entities will be allowed to defer adoption of the new MFRS Framework for an additional one year. Consequently, adoption of the MFRS Framework by Transitioning Entities will be mandatory for annual periods beginning on or after 1 January 2013. Transitioning Entities continues to apply existing FRS framework 2013.

Both the agriculture and real estate industries are given one year transitional period as there are potential changes in the current accounting treatments. Revenue recognition of property developer may be different when the new revenue standard is about to be finalized by 2013 which subsume IC 15. However, the recent IFRIC staff paper presented at IFRIC meeting in November 2011 analyzing the application of IC 15 in Malaysia and appears that, Malaysian property developers could recognize property development revenue and profit based on percentage of completion method (POC method) instead of completed method.

Another industry is the agriculture sectors, MASB together with several other standard setters of other jurisdictions are proposing to IASB to amend IAS 41 on accounting for bearer biological assets (e.g. plantation trees) using IAS 16 fixed asset concept instead of fair value the bearer biological assets. However, one may also view that one year transitional exemption is given to agriculture companies so that they have more time to fair value their agriculture (e.g oil palm trees) and its produce (e.g. FFB). Changing the fundamental concept of fair value the agriculture (e.g. trees) will not take place in just one year time, it will take longer time to propose amending IAS 41 standard, it could be few more years as post-omplemetation review of IAS 41 has yet been a top agenda of IASB currently.

One may expect some difficulties on the scoping of entity during the transitional period. Say, Company A adopted MFRS framework by 1 January 2012, however in November 2012 Company A ventures or acquires another Company B involved in property development or plantation, can Company A unwinds and uses back FRS instead of MFRS?

Another issue is, Subsidiary S involved in property development, thus both Subsidiary S and its Holding Company P are exempted from applying MFRS in 2012 but continue to use FRS, but other subsidiaries of Holding Company P are required to apply MFRS. It creates some difficulties when preparing the consolidation of P, P will need to re-align and restate the results of other subsidiaries as if they never applied MFRS (but use FRS) to align with Holding Company P’s FRS policies (instead of MFRS policies).

One more thing, how do you think MASB has carried out its role in creating public awareness and when they are only issuing the final IFRS convergence decision one month before the effective date?

Any other problems or issues you may foresee? Let’s comment.

To view MASB announcement and notice of issue.

To view all new Malaysian Financial Reporting Standards (MFRS).

Based on the strict reading of the definition of Transitioning Entities under the notice of issuance (being the official notice with legal binding effect), these Transitioning Entities are those entities that would have been subject to the application of MFRS 141 and IC 15. Say for example, a property developer with just holds a land held for development (undeveloped yet) or is about to develop a piece of land, but have not entered into any sale agreements yet, thus not subject to IC 15 – Agreements for Construction of Real Estate. In this case, would this property developer a Transitioning Entity that can be exempted from applying MFRS in 2012?