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International Convergence of Accounting Standards: A Case Study of Malaysia 23 May 2006

International Convergence of Accounting Standards: A Case Study of Malaysia 23 May 2006. How A Developing Economy Embraces IFRS: Malaysia . How Malaysia Embraces IFRS. Embrace: “Integral part of …” IFRS an integral part of the capital market & corporate governance structure

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International Convergence of Accounting Standards: A Case Study of Malaysia 23 May 2006

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  1. International Convergence of Accounting Standards: A Case Study of Malaysia 23 May 2006

  2. How A Developing Economy Embraces IFRS: Malaysia

  3. How Malaysia Embraces IFRS • Embrace: “Integral part of …” • IFRS an integral part of the capital market & corporate governance structure • Malaysia’s experience vs Asia’s experience • Historical, structural, political (will) • Looking back 1972 - 2001 • Strategy & Challenges • Looking forward 2006 - beyond • Strategy & Challenges

  4. Integral part of the capital market & corporate governance structure Degree of integration Adoption 1978 1997 2000 2001 2006 1972 Profession Legal Governance Capital MasterPlans 7 & 8 Malaysia Plan (1996-2005) 9 Malaysia Plan

  5. 1972 Presentation of Accounts 1973 IASC Formed 1978 – 1997 Adoption of IAS • Malaysia has a history of a formal integration of accounting standards into the professional fabric since 1972

  6. 1978 - 1997 Profession • 1978 Adoption of first 4 IAS by MACPA • 1986 Next 13 IAS adopted • 1992 All IAS adopted by MACPA and MIA • 1997 Accounting standards setting function taken over by Malaysian Accounting Standards Board under Act of Parliament

  7. Integral part of the capital market & corporate governance structure Degree of integration Fin Rpt Act Adoption 1978 1997 2000 2001 2006 1972 Profession Legal Governance Capital MasterPlans 7 & 8 Malaysia Plan (1996-2005) 9 Malaysia Plan

  8. Financial Reporting Act 1997 Legal • Financial Reporting Act passed by Parliament in March 1997 (prior to Asian financial crisis) • Formation of Financial Reporting Foundation and Malaysian Accounting Standards Board • New to Malaysia and the region • Dedicated independent body • First time accounting standards has the force of law • Non-compliance means breach of law • Stringent enforcement infrastructure by Securities Commission, Central Bank and Registrar of Companies

  9. Compliance is Mandatory Compliance with FRS Mandatory for: Publicly Listed Companies under Exchange–1,000 Companies registered with the Registrar –701,000 !! Financial Institutions under Central Bank –23 Dedicated Enforcement Infrastructure: Publicly Listed Companies – Securities Commission Registered companies – Companies Commission Financial Institutions – Central Bank MASB does not have enforcement power

  10. Malaysian Accounting Standards Board • Mandate: • Develop financial reporting standards • Develop Islamic accounting standards • Extensive consultative process • Funded by: • Securities Commission (1/3) • Stock Exchange (1/3) • Ministry of Finance (1/3) • Public, accounting firms, NGOs (Nil) Independence

  11. Consultative Process & Autonomy IAS IFRS Discussion Paper prepared Finalise DP into ED Public Exposure Review of DP Review of DP 1 2 3 4 5 Working Group Public MASB MASB FRF MASB 6 Final review Review of comments FRS issued Approval 10 9 8 7 9-15 months MASB * Working Group Public FRF MASB * No need for Parliamentary approval

  12. 1997 – 2001: Harmonization • MASB Standards vs International Accounting Standards • MASB Standards are IAS Plus • Similar to IAS, plus • Guidance added, plus • Other requirements added Harmonization

  13. Integral part of the capital market & corporate governance structure Capital Financial Corp Gov Code Degree of integration Fin Rpt Act Adoption 1978 1997 2000 2001 2006 1972 Profession Legal Governance Capital MasterPlans 7 & 8 Malaysia Plan (1996-2005) 9 Malaysia Plan

  14. Integration with Master Plans Governance & Capital • Malaysia’s 5-year Master Plans • Code of Corporate Governance issued in 2000 • Capital Market Masterplan • Financial Sector Masterplan • “Recommendations for achieving highest standard for financial reporting for corporate governance among capital and financial market players in Malaysia” issued in 2001

  15. 2005: Convergence Harmonization Convergence

  16. Malaysia Support convergence. IFRS Convergence not an issue. Question of managing implementation Sufficient buy-in Discretion to determine implementation date Participate early in standards setting development Alliance with recognized bodies, lead if necessary Asia Developing economies seem to have no choice but to converge participate in free trade/globalization funding for industrialization No choice but to participate regionally, greater representation No choice but to have regular discourse to identify commonalities, or diversities Strategy

  17. Malaysia Managing change Mindset – old habits die hard, price for having long history Interpretations Cost of complex standards vs benefits to owner manager companies Region Lack of regional participation Lack of voice, representation Where problems are common, countries must be forthcoming Where problems are not common, endeavour to find a consensus IASB Developed economies focus Board representation Changing goalpost Challenges

  18. Addressing Challenges – Changing mindset • Convergence impact: • Tough for many countries • Suddenly have to migrate to new environment • Accounting standards are now law of these countries • Europe (2005), Philippines (2004) • Language matters • Malaysia – not as bad …relatively • Have been on IAS all along • Standards are law in 1997 • Standards in English, no need for translation

  19. Addressing Challenges - Interpretations Discourse with Affected Parties Degree of Buy-in

  20. Addressing Challenges – Sharing with others • Australia - intangibles • China/HK - state controlled entities, leases • N. Zealand - agriculture, leases • Singapore - leases • Malaysia - related party, agriculture

  21. Addressing Challenges – Costs vs Benefits • In Malaysia, 95% of 701,000 companies are SMEs. Initial intent to cover ALL companies was noble. • But as Standards become more complex… • Burden of compliance by SMEs becomes main issue • MASB announced 2 – tier reporting standard 1.1.2006 • IFRS (international GAAP) for PLCs, subsidiaries, assoc., JV • Choice of IFRS or MASB Standards (which are IAS compliant) for private entities • Currently working on private entity reporting standards (PERS)

  22. Moving Forward • Convergence is the way forward • Understanding the needs of developing economies important for significant buy-ins in the region • Challenges: Regional diversity remains a challenge • Help is needed: • IFRS likely to remain complex • Goalposts keeps changing • Implementation remains an issue • Malaysia stands ready to offer: • MASB has significant learning curve • MASB is active in Islamic accounting standards • MASB has a good understanding about SMEs in the region • MASB has models to follow

  23. Conclusion • Success of convergence contingent upon how developing economies “embrace” IFRS • Malaysia fortunate to have: • a history • infrastructure • political will • … to drive international convergence • Others may not be as fortunate, but • Asia can learn from each other • Asian diversity is a beauty • Malaysia stands ready to offer assistance

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