International Convergence of
Accounting Standards:
A Case Study of Malaysia
23 May 2006
1
How A Developing Economy
Embraces IFRS: Malaysia
2
How Malaysia Embraces IFRS

Embrace: “Integral part of …”


Malaysia’s experience vs Asia’s experience


Historical, structural, political (will)
Looking back 1972 - 2001


IFRS an integral part of the capital market & corporate
governance structure
Strategy & Challenges
Looking forward 2006 - beyond

Strategy & Challenges
3
Degree of integration
Integral part of the capital market & corporate
governance structure
Adoption 1978
1972
Profession
1997
2000
2001
Legal
Governance
Capital
7 & 8 Malaysia Plan (1996-2005)
2006
MasterPlans
9 Malaysia Plan
4
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
5
1978 - 1997

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
6
Degree of integration
Integral part of the capital market & corporate
governance structure
Fin Rpt Act
Adoption 1978
1972
Profession
1997
2000
2001
Legal
Governance
Capital
7 & 8 Malaysia Plan (1996-2005)
2006
MasterPlans
9 Malaysia Plan
7
Financial Reporting Act 1997

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
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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
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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)
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Consultative Process & Autonomy
IAS
Discussion
Paper
prepared
IFRS
1
MASB
Review
of DP
2
3
Working
Group
Finalise
DP into ED
Review
of DP
4
MASB
Public
Exposure
5
FRF
Public
MASB
6
FRS
issued
Final
review
Approval
10
9
Review of
comments
8
7
9-15 months
Public
FRF
MASB
MASB
Working
Group
*
* No need for Parliamentary
approval
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1997 – 2001: Harmonization
• MASB Standards vs International Accounting
Standards
Harmonization
• MASB Standards are IAS Plus
• Similar to IAS, plus
• Guidance added, plus
• Other requirements added
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Integral part of the capital market & corporate
governance structure
Degree of integration
Capital
Financial
Corp Gov Code
Fin Rpt Act
Adoption 1978
1972
Profession
1997
2000
2001
Legal
Governance
Capital
7 & 8 Malaysia Plan (1996-2005)
2006
MasterPlans
9 Malaysia Plan
13
Integration with Master Plans

Malaysia’s 5-year Master Plans

Code of Corporate Governance issued in 2000

Capital Market Masterplan
issued in 2001

Financial Sector Masterplan

“Recommendations for achieving highest standard
for financial reporting for corporate governance
among capital and financial market players in
Malaysia”
14
2005: Convergence
Harmonization
Convergence
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Strategy

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
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Challenges

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
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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
18
Addressing Challenges - Interpretations
Degree of Buy-in
Discourse with Affected Parties
19
Addressing Challenges – Sharing with
others





Australia China/HK N. Zealand Singapore Malaysia -
intangibles
state controlled entities, leases
agriculture, leases
leases
related party, agriculture
20
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)
21
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
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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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