Financial Accounting and
Reporting in Malaysia
Volume 1
Fourth Edition
TAN LIONG TONG
Dip. Agriculture, B.S. Agribusiness, MBA, CA, CPA
x
TABLE OF CONTENTS
About CCH .......................................................................................................iii
Dedication ........................................................................................................ iv
About the Author .............................................................................................. v
Preface ............................................................................................................. vii
Index of Referenced Financial Reporting Standards ................................ xxvii
CHAPTER 1
An Overview of the Financial Reporting in
Malaysia .............................................................................. 1
1.1
Introduction ......................................................................................... 3
1.2
A Historical Perspective ...................................................................... 3
1.3
The Current Financial Reporting Regime . ........................................ 5
1.4
Statutory Regulations on Financial Accounting and Reporting ....... 6
1.5
1.4.1
The Financial Reporting Act 1997 ........................................ 6
1.4.2
The Companies Act 1965 . ..................................................... 8
1.4.3
The Income Tax Act 1967 .................................................... 10
1.4.4
Regulations by the Securities Commission . ...................... 12
1.4.5
The Audit Oversight Board . ............................................... 13
1.4.6
Regulations by Bursa Malaysia .......................................... 13
1.4.7
Regulations by Bank Negara Malaysia . ............................ 14
Accounting Standard Pronouncements In Malaysia ....................... 16
1.5.1
Pronouncements Before the Current Financial
Reporting Regime ................................................................ 16
1.5.2
Pronouncements under the Current Financial
Reporting Regime ................................................................ 17
1.5.3
Future Pronouncements – IFRS-compliant Financial
Reporting Standards ........................................................... 26
1.6
Summary of Reporting Requirements by Types of Entity . ............. 28
1.7
Exempt Entities ................................................................................. 30
1.8
The State-Of-The-Art Accounting and Reporting Practices ............ 33
1.9
The Directors’ Report of Companies ................................................. 35

CCH Asia Pte Limited
Table of Contents
CHAPTER 2
xi
The Conceptual Framework for Financial
Reporting and Reporting in Hyperinflationary
Economies . ...................................................................... 37
2.1
Why the Need for an Accounting Framework? ................................ 39
2.2
The MASB’s Conceptual Framework for Financial Reporting . ...... 40
2.3
2.2.1
The Objective of General Purpose Financial
Reporting ............................................................................. 41
2.2.2
Information about a Reporting Entity’s Economic
Resources, Claims, and Changes in Resources and
Claims .................................................................................. 43
2.2.3
Qualitative Characteristics of Useful Financial
Information .......................................................................... 45
2.2.4
The 2007 Framework – the Remaining Text ..................... 51
2.2.5
Concepts of Capital and Capital Maintenance .................. 58
MFRS 129, Financial Reporting in Hyperinflationary
Economies .......................................................................................... 62
2.3.1
The Restatement of Financial Statements ........................ 63
2.3.2
Historical Cost Financial Statements ................................ 63
2.3.3
Current Cost Financial Statements ................................... 66
2.3.4
Restating the Opening Statement of Financial
Position ................................................................................ 67
2.3.5
Comparative Figures . ......................................................... 69
2.3.6
Economies Ceasing to be Hyperinflationary ..................... 70
2.3.7
Disclosures ........................................................................... 70
CHAPTER 3
Presentation of Financial Statements ...................... 71
3.1
Introduction ....................................................................................... 73
3.2
Presentation of Financial Statements .............................................. 73
3.3
Components of Financial Statements . ............................................ 74
3.4
Overall Considerations . .................................................................... 75
3.4.1
Fair Presentation and Compliance with MFRSs ............... 75
3.4.2
True and Fair View Over-ride ............................................. 76
3.4.3
Going Concern Basis ........................................................... 79
Financial Accounting and Reporting in Malaysia, Volume 1
Table of Contents
xii
3.5
3.4.4
Accrual Basis of Accounting . .............................................. 80
3.4.5
Consistency of Presentation . .............................................. 81
3.4.6
Materiality and Aggregation . ............................................. 82
3.4.7
Offsetting ............................................................................. 83
3.4.8
Comparative Information ................................................... 83
Structure and Content ..................................................................... 84
3.5.1
Identification of Financial Statements . ............................ 84
3.5.2
Reporting Period . ................................................................ 85
3.5.3
Statement of Financial Position ......................................... 85
3.5.4
Statement of Comprehensive Income . ............................... 90
3.5.5
Statement of Changes in Equity ...................................... 104
3.5.6
Notes to the Financial Statements ................................... 107
3.5.7
Capital Management Disclosure ...................................... 110
3.5.8
Other Disclosures .............................................................. 112
3.6
Amendments to IAS 1 – Presentation of Items of Other
Comprehensive Income ................................................................... 112
3.7
Statement of Cash Flows ................................................................ 115
3.7.1
Rationale of the Statement of Cash Flows . ..................... 115
3.7.2
The Procedures of Preparing the Statement of
Cash Flows . ....................................................................... 115
CHAPTER 4
Accounting Policies, Estimates and Errors &
First-time Adoption of MFRSs .................................. 133
4.1
Introduction ..................................................................................... 135
4.2
Accounting Policies .......................................................................... 135

4.2.1
Selection and Application of Accounting Policies ............ 135
4.2.2
Consistency of Accounting Policies ................................... 138
4.2.3
Changes in Accounting Policies ........................................ 138
4.2.4
Methods of Effecting a Change in Accounting Policy ...... 140
4.2.5
Limitations on Retrospective Application ........................ 148
4.2.6
Day 1 Accounting . ............................................................. 149
CCH Asia Pte Limited
Table of Contents
4.3
4.4
xiii
4.2.7
Disclosure Requirements of Changes in Accounting
Policies ............................................................................... 151
4.2.8
Impending Change in Policies Due to New Standards
or Interpretations .............................................................. 152
Accounting Estimates . .................................................................... 153
4.3.1
What are Accounting Estimates? ..................................... 153
4.3.2
Changes in Accounting Estimates .................................... 153
4.3.3
Disclosure Requirements of Changes in Accounting
Estimates ........................................................................... 156
Accounting Errors . .......................................................................... 156
4.4.1
What are Accounting Errors? ........................................... 156
4.4.2
Correction of Prior Period Errors ..................................... 157
4.4.3
Disclosure Requirements of Corrections of Errors .......... 160
4.5
Impracticability Exemption ............................................................ 163
4.6
MFRS 1, First-time Adoption of Financial Reporting
Standards ......................................................................................... 164
4.6.1
Opening MFRS Statement of Financial Position . ........... 165
4.6.2
Deciding on the Accounting Policies ................................. 166
4.6.3
Incorporating the Effects of Remeasurement .................. 170
4.6.4
Exemptions and Exceptions . ............................................ 173
4.6.5
Explanation of Transition to MFRSs . .............................. 175
CHAPTER 5 Revenue . ........................................................................ 177
5.1
Introduction ..................................................................................... 179
5.2
Revenue Recognition ....................................................................... 179
5.2.1
Measurement of Revenue . ................................................ 180
5.2.2
Identification of the Transaction ...................................... 185
5.2.3
Timing of Revenue Recognition ........................................ 187
5.3
Sales of Goods .................................................................................. 188
5.4
Rendering of Services ...................................................................... 192
5.4.1
Recognition of Service Revenue ........................................ 192
Financial Accounting and Reporting in Malaysia, Volume 1
Table of Contents
xiv
5.4.2
5.5
5.6
IC Int. 131, Revenue – Barter Trade Transactions
Involving Advertising Services ......................................... 199
Interest, Royalties and Dividends .................................................. 200
5.5.1
Recognition of Interest Income ......................................... 200
5.5.2
Recognition of Royalties .................................................... 204
5.5.3
Recognition of Dividends . ................................................. 204
Other Issues and Guidance ............................................................. 205
5.6.1
Principal and Agent Relationship .................................... 205
5.6.2
IC Int. 13 Customer Loyalty Programmes ....................... 206
5.6.3
Multiple-components in an Arrangement ........................ 210
5.7
Disclosure Requirements ................................................................ 213
5.8
IASB’s ED/2010/6, Revenue from Contracts with Customers ....... 214
5.8.1
Identifying the Contract ................................................... 215
5.8.2
Identifying the Separate Performance Obligations ......... 217
5.8.3
Determining the Transaction Price .................................. 218
5.8.4
Allocating the Transaction Price to Separate
Performance Obligations . ................................................. 219
5.8.5
Recognising Revenue when a Performance
Obligation is Satisfied ....................................................... 219
5.8.6
The Improvements and How They will Affect
Practices under the Current IFRSs . ................................ 225
CHAPTER 6 Inventories, Current Assets and Current
Liabilities . ..................................................................... 227
6.1
Introduction ..................................................................................... 229
6.2
Inventories ....................................................................................... 229

6.2.1
Scope .................................................................................. 229
6.2.2
Measurement under the Cost Convention ....................... 230
6.2.3
Cost Methods/Formulas .................................................... 234
6.2.4
Basis of Inventory Valuation ............................................ 240
6.2.5
Recognition as an Expense ............................................... 244
6.2.6
Disclosure Requirements .................................................. 245
CCH Asia Pte Limited
Table of Contents
6.3
6.4
xv
Current Assets and Current Liabilities . ........................................ 246
6.3.1
Views of Current Assets and Current Liabilities ............ 246
6.3.2
Presentation of Current Assets and Current
Liabilities ........................................................................... 247
Measurement of Specific Current Asset and Current
Liability Items ................................................................................. 251
6.4.1
Trade Receivables and Allowance for Bad and
Doubtful Debts .................................................................. 252
6.4.2
Cash and Bank Balances, Deposits and Bank
Overdrafts .......................................................................... 261
6.4.3
Short-term Borrowings ..................................................... 262
6.4.4
Trade and Other Payables ................................................ 262
6.4.5
Current Tax Liabilities and Current Tax Assets ............. 263
6.4.6
Dividends Proposed and Dividends Payable .................... 266
CHAPTER 7 Construction Contracts, Property Development
Activities and Service Concession
Arrangements ............................................................... 273
7.1
Introduction ..................................................................................... 275
7.2
Accounting for Construction Contracts .......................................... 275
7.2.1
Nature and Definitions ..................................................... 275
7.2.2
Objective and Scope of MFRS 111 .................................... 276
7.2.3
Segmenting and Combining Construction Contracts . .... 276
7.2.4
The Accounting Method .................................................... 277
7.2.5
Measurement of Contract Revenue .................................. 278
7.2.6
Measurement of Contract Costs ....................................... 279
7.2.7
Recognition of Contract Revenue and Expenses ............. 280
7.2.8
Estimate of Outcome of Contract ..................................... 283
7.2.9
Recognition of Expected Losses ........................................ 285
7.2.10 Disclosure Requirements .................................................. 286
7.2.11 Cases on Construction Contracts ..................................... 288
7.3
Accounting for Property Development Activities ........................... 298
Financial Accounting and Reporting in Malaysia, Volume 1
Table of Contents
xvi
7.4
7.5
7.3.1
Nature and Definitions ..................................................... 298
7.3.2
Objective and Scope of FRS 201 ....................................... 299
7.3.3
Land Held for Property Development .............................. 299
7.3.4
Property Development Costs ............................................ 301
7.3.5
Property Development Revenue and Expenses ............... 306
7.3.6
Land Development and Allocation of Common Costs ..... 319
7.3.7
Estimates, Revocation of Sales and Incentives . .............. 323
7.3.8
Inventories – Unsold Completed Development Units ..... 325
7.3.9
Disclosure Requirements of FRS 201 ............................... 326
IC Int. 15, Agreements for the Construction of Real Estates ........ 329
7.4.1
Accounting for Revenue from Construction of
Real Estate ........................................................................ 330
7.4.2
Disclosure . ......................................................................... 334
IC Int. 12, Service Concession Arrangements ................................ 335
7.5.1
What is a Service Concession Arrangement? . ................. 335
7.5.2
Scope .................................................................................. 336
7.5.3
Issues Addressed ............................................................... 336
7.5.4
Consensus .......................................................................... 336
CHAPTER 8 8.1
Property, Plant and Equipment, Revaluation,
Depreciation and Impairment .................................. 347
Introduction ..................................................................................... 349
8.1.1
What are Property, Plant and Equipment? ...................... 349
8.1.2
What are the Main Accounting Issues? . .......................... 349
8.1.3
Scope of MFRS 116 . .......................................................... 350
8.2
Recognition of Property, Plant and Equipment . ............................ 350
8.3
Measurement at Recognition .......................................................... 352

8.3.1
Property, Plant and Equipment Purchased for Cash ...... 353
8.3.2
Self-constructed Property, Plant and Equipment ............ 354
8.3.3
Decommissioning, Dismantling and Restoration
Costs ................................................................................... 356
CCH Asia Pte Limited
Table of Contents
8.4
8.5
xvii
8.3.4
Non-monetary Consideration and Barter Trade ............. 357
8.3.5
Subsequent Costs on Property, Plant and
Equipment ......................................................................... 361
Measurement after Recognition . .................................................... 365
8.4.1
The Measurement Bases . ................................................. 365
8.4.2
Methods to Record Revaluations ...................................... 366
8.4.3
Treatments for Surpluses and Deficits ............................ 368
Depreciation Accounting ................................................................. 372
8.5.1
What is Depreciation? ....................................................... 372
8.5.2
The Depreciable Amount . ................................................. 373
8.5.3
The Estimated Useful Life ................................................ 374
8.5.4
The Allocation or Depreciation Methods .......................... 375
8.5.5
Changes in Estimates ....................................................... 379
8.5.6
The Issue of Depreciation, Residual Value and
Fair Value . ......................................................................... 381
8.5.7
Impairment Losses and Reversals ................................... 383
8.5.8
Compensation for Impairment ......................................... 386
8.6
Derecognition of Property, Plant and Equipment .......................... 388
8.7
Disclosure ......................................................................................... 391
8.8
IC Int. 18, Transfer of Assets from Customers . ............................. 395
CHAPTER 9 Investments and Investment Properties . .............. 399
9.1
Introduction ..................................................................................... 401
9.2
Investments in Equity and Debt Instruments ............................... 402
9.2.1
Recognition of Financial Instruments .............................. 402
9.2.2
Classification of Financial Assets ..................................... 404
9.2.3
Initial Measurement of Financial Assets ......................... 425
9.2.4
Subsequent Measurement of Financial Assets ................ 427
9.2.5
Gains and Losses on Remeasurement . ............................ 435
9.2.6
Derecognition of a Financial Asset ................................... 444
9.2.7
Impairment of Financial Assets ....................................... 446
Financial Accounting and Reporting in Malaysia, Volume 1
Table of Contents
xviii
9.2.8
9.3
Disclosures ......................................................................... 454
IFRS 9, Financial Instruments ....................................................... 455
9.3.1
Classification Approach . ................................................... 455
9.3.2
Embedded Derivatives ...................................................... 456
9.3.3
Impairment of Financial Assets ....................................... 458
9.3.4
Fair Value Designation Option ......................................... 458
9.3.5
Reclassification .................................................................. 459
9.3.6
Investments in Unquoted Equity Instruments ............... 463
9.3.7
Strategic Equity Investments Measured at Fair Value
through Other Comprehensive Income – the
Presentation Exception ..................................................... 464
9.3.8
The Entity’s Business Model for Managing
Financial Assets ................................................................ 465
9.3.9
Contractual Cash Flows of Payments of Principal
and Interest on Principal .................................................. 466
9.3.10 Effective Date and Transitions ......................................... 466
9.4
Accounting for Investment Property .............................................. 467
9.4.1
Classification as Investment Property ............................. 467
9.4.2
Recognition and Measurement ......................................... 471
9.4.3
Measurement after Recognition ....................................... 472
9.4.4
Transfers to or from Investment Property . ..................... 475
9.4.5
Disposal . ............................................................................ 480
9.4.6
Disclosures ......................................................................... 481
CHAPTER 10 Intangible Assets . ........................................................ 485
10.1
Introduction ..................................................................................... 487
10.1.1 What is an Intangible Asset? ............................................ 487
10.2
Issues and Controversies ................................................................ 488
10.3
Research and Development Costs . ................................................. 491
10.3.1 The Difference Between Research and Development . .... 493
10.3.2 Criteria for Capitalisation as an Asset . ........................... 493

CCH Asia Pte Limited
Table of Contents
xix
10.3.3 Cost of Development Expenditure Capitalised as
an Asset . ............................................................................ 494
10.3.4 Development Costs Initially Recognised as an
Expense .............................................................................. 496
10.3.5 Recoverability Test ............................................................ 497
10.3.6 Impairment of Capitalised Development Costs ............... 498
10.3.7 Amortisation of Capitalised Development Costs ............. 500
10.4
Goodwill Accounting ........................................................................ 502
10.4.1 Background to the Goodwill Accounting Issues in
Malaysia . ........................................................................... 502
10.4.2 Nature and Characteristics of Goodwill . ......................... 504
10.4.3 Types of Goodwill .............................................................. 506
10.4.4 Measuring Purchased Goodwill ........................................ 507
10.4.5 Accounting Treatment for Goodwill ................................. 508
10.4.6 Negative Goodwill ............................................................ 515
10.4.7 The Current Standards – MFRS 3 and MFRS 136 ......... 517
10.5
Identifiable Intangible Assets ......................................................... 523
10.5.1 Emergence of Identifiable Intangible Assets ................... 523
10.5.2 Recognition of Identifiable Intangible Assets .................. 526
10.5.3 Measurement Basis ........................................................... 528
10.5.4 Internally Generated Intangible Assets . ......................... 535
10.5.5 Subsequent Expenditure . ................................................. 536
10.5.6 Measurement After Recognition ....................................... 538
10.5.7 Retirements and Disposals ............................................... 543
10.5.8 Disclosure Requirements of MFRS 138 ........................... 543
10.6
Entity’s Own Web Site Costs – IC Int. 132 . .................................. 545
CHAPTER 11 Impairment of Assets, Non-Current Assets Held
for Sale and Discontinued Operations ................... 547
11.1
Impairment of Assets ...................................................................... 549
11.1.1 Introduction ....................................................................... 549
Financial Accounting and Reporting in Malaysia, Volume 1
xx
Table of Contents
11.1.2 The Basic Asset Measurement Model .............................. 549
11.1.3 Steps in Performing an Impairment Test ........................ 551
11.1.4 Identifying an Asset that May Be Impaired .................... 551
11.1.5 Measurement of Recoverable Amount . ............................ 553
11.1.6 Recognition and Measurement of an Impairment
Loss .................................................................................... 571
11.1.7 Cash-Generating Units ..................................................... 573
11.1.8 Allocating Goodwill to Cash-Generating Units ............... 578
11.1.9 Allocating Corporate Assets . ............................................ 583
11.1.10 Impairment Loss for a Cash-Generating Unit . ............... 586
11.1.11 Reversal of an Impairment Loss . ..................................... 590
11.1.12 Disclosure Requirements .................................................. 597
11.2
Non-Current Assets Held for Sale and Discontinued
Operations . ...................................................................................... 603
11.2.1 Introduction ....................................................................... 603
11.2.2 Scope .................................................................................. 604
11.2.3 Classification as Held for Sale .......................................... 605
11.2.4 Measurement of Non-Current Assets
(or Disposal Groups) Held for Sale ................................... 610
11.2.5 Changes to a Plan of Sale ................................................. 618
11.2.6 Presentation and Disclosure ............................................. 621
11.2.7 Additional Disclosures ...................................................... 636
CHAPTER 12 Long-Term Financial Liabilities, Leases and
Borrowing Costs .......................................................... 637
12.1
Introduction ..................................................................................... 639
12.2
Accounting for Corporate Bonds ..................................................... 640
12.2.1 Bonds Issued at Par .......................................................... 641
12.2.2 Bonds Issued at a Discount . ............................................. 642
12.2.3 Methods of Amortisation ................................................... 644
12.2.4 Bonds Issued at a Premium .............................................. 647

CCH Asia Pte Limited
Table of Contents
xxi
12.2.5 Transaction Costs of Bond Issue ...................................... 649
12.2.6 Classification and Presentation of Discount and
Premium ............................................................................ 652
12.3
Accounting for Bank Loans and Other Long-Term Debts ............. 654
12.3.1 Earlier Retirement of Debts ............................................. 655
12.3.2 Accounting for Refinancing, Troubled Debts and
Rescheduling . .................................................................... 658
12.4
Accounting for Leases . .................................................................... 660
12.4.1 Classification of Leases ..................................................... 661
12.4.2 Accounting for Finance Leases by Lessees ...................... 663
12.4.3 Accounting for Operating Leases by Lessee .................... 673
12.4.4 Disclosures in the Lessees’ Financial Statements . ......... 674
12.4.5 Accounting for Finance Leases by Lessor ........................ 675
12.4.6 Accounting for Operating Leases by Lessor . ................... 681
12.4.7 Disclosures in the Lessors’ Financial Statements ........... 683
12.4.8 Accounting for Finance Leases by Manufacturers or
Dealers ............................................................................... 684
12.4.9 Accounting for Sale and Leaseback Transactions ........... 687
12.4.10 IC Int. 127, Evaluating the Substance of Transactions
Involving the Legal Form of a Lease ................................ 693
12.4.11 IC Int. 4, Determining Whether an Arrangement
Contains a Lease ............................................................... 697
12.5
The IASB’s New Project on Leases ................................................. 700
12.5.1 Why the Need to Undertake a New Project ..................... 700
12.5.2 The Fundamental Approach to the New Lease
Accounting ......................................................................... 701
12.5.3 Accounting by Lessees . ..................................................... 701
12.5.4 Accounting by Lessors . ..................................................... 709
12.5.5 Exceptions for Short-Term Leases: Lessees and
Lessors ............................................................................... 722
12.5.6 Sales and Leaseback Transactions ................................... 723
12.5.7 Sublease Arrangements ............................................. 725
Financial Accounting and Reporting in Malaysia, Volume 1
xxii
Table of Contents
12.5.8 Contracts that Contain both Service Components
and Lease Components ..................................................... 727
12.6
MFRS 123, Borrowing Costs ........................................................... 729
12.6.1 Recognition of Borrowing Costs . ...................................... 729
12.6.2 Borrowing Costs Eligible for Capitalisation .................... 730
12.6.3 Disclosure Requirements .................................................. 735
CHAPTER 13 Deferred Taxation . ...................................................... 737
13.1
Introduction ..................................................................................... 739
13.2
A Historical Perspective to Tax Effect Accounting . ....................... 743
13.2.1 The Distribution View ....................................................... 743
13.2.2 The Expense View ............................................................. 744
13.3
Inter-Period Tax Allocation ............................................................. 745
13.3.1 Timing Differences ............................................................ 745
13.3.2 Tax Equalisation Accounting ............................................ 750
13.3.3 Permanent Differences . .................................................... 756
13.4
Methods of Computation ................................................................. 759
13.4.1 The Deferral Method ......................................................... 759
13.4.2 The Liability Method . ....................................................... 760
13.5
Bases of Provision ............................................................................ 762
13.5.1 Nil Provision Basis ............................................................ 763
13.5.2 Full Provision Basis .......................................................... 763
13.5.3 Partial Provision Basis . .................................................... 764
13.6
Comprehensive Tax Allocation . ...................................................... 768
13.7
Intra-Period Tax Allocation ............................................................. 781
13.8
Application Aspects of MFRS 112, Income Taxes .......................... 785
13.8.1 The Balance Sheet Liability Method ................................ 786
13.8.2 Taxable Temporary Differences and Deductible
Temporary Differences ...................................................... 793
13.8.3. Temporary Differences Arising on Initial Recognition .... 797
13.8.4 Basis of Provision .............................................................. 803

CCH Asia Pte Limited
Table of Contents
13.9
xxiii
Recognition of Deferred Tax Assets ................................................ 806
13.9.1 Deductible Temporary Differences and Net Deferred
Tax Asset ............................................................................ 806
13.9.2 Recognition of Tax Losses ................................................. 808
13.10 Tax Effects on Revaluation Surpluses and Fair Value Gains . ...... 812
13.10.1 Amendments (2011) to IAS 12 .......................................... 817
13.11 Fair Value Adjustments in a Business Combination ..................... 818
13.11.1 Tax Effects on Acquisition of Land-Based Companies .... 818
13.11.2 Other Fair Value Adjustments .......................................... 821
13.12 Tax Effects of Compound Financial Instruments .......................... 824
13.13 Measurement of Current and Deferred Taxes ............................... 826
13.13.1 IC Int. 125, Income Taxes – Changes in the
Tax Status of an Entity or Its Shareholders .................... 831
13.14 Other Changes or Guides ................................................................ 832
13.15 Disclosure Requirements ................................................................ 832
CHAPTER 14 Employee Benefits, Share-Based Payments
and Retirement Benefit Plans .................................. 843
14.1
Introduction ..................................................................................... 845
14.2
Accounting Principles ...................................................................... 846
14.2.1 Short-Term Employee Benefits . ....................................... 846
14.2.2 Post-Employment Benefits . .............................................. 851
14.2.3 Curtailments and Settlements ......................................... 871
14.2.4 Other Long-term Employee Benefits . ............................. 872
14.2.5 Insured Benefits ................................................................ 872
14.2.6 Termination Benefits . ....................................................... 873
14.3
Share-Based Payment ..................................................................... 875
14.3.1 Introduction ....................................................................... 875
14.3.2 Recognition Principle ........................................................ 876
14.3.3 Equity-Settled Share-based Payment Transactions . ...... 876
14.3.4 Cash-Settled Share-Based Payment Transactions .......... 895
Financial Accounting and Reporting in Malaysia, Volume 1
xxiv
Table of Contents
14.3.5 Share-Based Payment with Cash Alternatives ............... 897
14.4
Accounting and Reporting by Retirement Benefit Plans .............. 899
14.4.1 Financial Statements of Retirement Benefit Plans . ....... 900
CHAPTER 15 Commitments, Provisions, Contingencies,
Events after the Reporting Period and
Deferred Income .......................................................... 903
15.1
Introduction ..................................................................................... 905
15.2
Accounting for Commitments ......................................................... 905
15.3
Accounting for Contingencies – General Principles ...................... 907
15.4
MFRS 137, Provisions, Contingent Liabilities and Contingent
Assets .............................................................................................. 909
15.4.1 Recognition of a Provision . ............................................... 910
15.4.2 Measurement of a Provision ............................................. 914
15.4.3 Application of the Recognition and
Measurement Rules .......................................................... 921
15.4.4 Contingent Liabilities ....................................................... 924
15.4.5 Contingent Assets . ............................................................ 926
15.5
Disclosure ......................................................................................... 926
15.6
Related IC Interpretations .............................................................. 929
15.6.1 IC Int. 1, Changes in Existing Decommissioning,
Restoration and Similar Liabilities .................................. 929
15.6.2 IC Int. 5, Rights to Interests Arising from
Decommissioning, Restoration and Environmental
Rehabilitation Funds ........................................................ 932
15.6.3 IC Int. 6, Liabilities arising from Participating in a
Specific Market – Waste Electrical and Electronic
Equipment ......................................................................... 935
15.7
Current Development – IASB’s Project to Replace IAS 37 ........... 936
15.7.1 Background of the IASB’s Project . ................................... 936
15.7.2 What Are the Salient Changes? . ...................................... 937
15.7.3 Objective of the IFRS ........................................................ 937
15.7.4 Recognition of a Liability .................................................. 938

CCH Asia Pte Limited
Table of Contents
xxv
15.7.5 Measurement of a Liability . ............................................. 939
15.7.6 Subsequent Measurement ................................................ 952
15.7.7 Recognising and Measuring a Liability for Restoration
Based on Use of a Resource .............................................. 953
15.8
Events After the Reporting Period . ................................................ 955
15.8.1 Accounting for Adjusting Events ...................................... 956
15.8.2 Accounting for Non-Adjusting Events . ............................ 957
15.8.3 Identification of Adjusting and Non-Adjusting
Events ................................................................................ 958
15.9
Significant Events Which Occurred During the Reporting
Period ............................................................................................... 960
15.10 Significant Events which occurred After Issuance of the
Financial Statements ...................................................................... 961
15.11 Contingencies and Profit Guarantees in Business
Combinations ................................................................................... 962
15.11.1 Contingent Liabilities Acquired in a Business
Combination ...................................................................... 962
15.11.2 Contingent Consideration ................................................. 963
15.11.3 Acquirer’s Right in Contingent Consideration –
Refund by Former Owners of the Acquiree ...................... 971
15.12 Government Grants and Other Deferred Income .......................... 973
15.12.1 MFRS 120, Accounting for Government Grants and
Disclosure of Government Assistance .............................. 973
15.12.2 IC Int. 110, Government Assistance – No Specific
Relation to Operating Activities ....................................... 979
15.12.3 Other Deferred Income and Deferred Gains or
Losses ................................................................................. 980
CHAPTER 16 Share Capital, Reserves and Other Equity Items . 983
16.1
Introduction ..................................................................................... 985
16.2
Requirements of Statutes and Accounting Standards . ................. 986
16.2.1 The Companies Act 1965 . ................................................. 986
16.2.2 MFRS 101, Presentation of Financial Statements .......... 987
Financial Accounting and Reporting in Malaysia, Volume 1
xxvi
16.3
Table of Contents
Issuance and Repurchase of Ordinary Shares ............................... 987
16.3.1 Issuance of Equity Share Capital ..................................... 988
16.3.2 Issuance of Shares at a Discount . .................................... 994
16.3.3 Issuance of the One “Golden” or “Special” Share to
the Government ................................................................. 997
16.3.4 Share Buybacks by Public Listed Companies . ................ 997
16.3.5 Measurement of Ordinary Shares .................................. 1019
16.3.6 Shares Issued in a Business Combination ..................... 1025
16.3.7 Shares Issued in Exchange for an Asset ........................ 1027
16.3.8 Shares Issued to Settle or Extinguish Debts ................. 1028
16.3.9 Shares Issued on Capitalisation of Reserves
(Bonus Shares) . ............................................................... 1030
16.4
Issuance and Redemption of Preference Shares .......................... 1031
16.5
Distributable Versus Non-Distributable Reserves . ..................... 1036
16.6
Application of IFRS 13, Fair Value Measurement to
Equity Instruments ....................................................................... 1038
16.6.1 Reasons for Issuing IFRS 13 . ......................................... 1038
16.6.2 The Salient Features of IFRS 13 .................................... 1039
16.6.3 Application to Liabilities and Own Equity
Instruments ..................................................................... 1042
16.6.4 Valuation Techniques ...................................................... 1043
16.6.5 Measuring the Fair Values of Unquoted Equity
Instruments ..................................................................... 1046
Index ........................................................................................................... 1049

CCH Asia Pte Limited
37
CHAPTER 2
THE CONCEPTUAL
FRAMEWORK FOR
FINANCIAL REPORTING
AND REPORTING IN
HYPERINFLATIONARY
ECONOMIES
This chapter will help you to understand:
• the purpose of an accounting framework;
• the rationale of the Conceptual Framework for Financial
Reporting;
• the objective of financial reporting;
• the desirable characteristics of financial information;
• the concepts of assets, liabilities, equity, income and expenses;
• the recognition and measurement principles;
• the concepts of capital and capital maintenance; and
• to deal with reporting in hyperinflationary economies.
Financial Accounting and Reporting in Malaysia, Volume 1
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
39
2.1 Why the Need for an Accounting Framework?
Researchers in academia have long debated on what is the appropriate
approach to setting principles of accounting. One such approach is based on
the positive theory of accounting which argues that principles are developed
from observing and predicting practices. The aim of positive accounting
theory is to predict what would happen. Under this theory, it has been stated
by proponents that accounting practices adopted by firms are often explained
on the basis of showing the true image of financial performance of the firm.
However, the positive accounting theory has been subjected to much
criticism, primarily because it does not predict what should or ought to happen,
it merely explains and predicts what would happen. It is also not value-free
because it only explains and predicts what people might do, ignoring what
they should do. Opponents of the positive theory of accounting argue that
principles should be prescribed based on what should or ought to be. This
is known as the normative approach to accounting. Under this approach,
accounting principles on what should, or ought to be. are prescribed.
Although industry practices are considered, standard setters, such as the
IASB, the US FASB and the MASB, generally take the normative approach
to their development of reporting standards. In deciding on what should or
ought to be, an accounting framework needs to be developed first to provide a
starting point or as a foundation for the formulation of reporting standards.
An accounting framework can be viewed as a structured or coherent
system of inter-related objectives, fundamental characteristics and concepts
that lead to formulation of high-quality and consistent reporting standards
to prescribe the nature, function and limits of financial accounting and
reporting.
The reasons for developing an accounting framework include the following:
(a) to identify a foundation for financial reporting;
(b) to identify the objective of financial statements;
(c) to identify the desirable qualitative characteristics of financial
information;
(d) to provide a basis for setting of high-quality and consistent reporting
standards; and
(e) to serve as a reference point for resolving accounting issues and disputes.
With an accounting framework, preparers and other users will understand
better the rationale and thinking of the standard setters in their formulation
of reporting standards.
Financial Accounting and Reporting in Malaysia, Volume 1
2.1
40
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
2.2 The MASB’s Conceptual Framework for Financial
Reporting
In July 1998, the MASB issued a discussion paper MASB DP1, Framework
for the Preparation and Presentation of Financial Statements, which for
the first time in Malaysia, attempted to set a foundation for the manner in
which financial statements should be prepared and presented. After almost
a decade of deliberations, the discussion paper was finalised as the MASB’s
Framework in July 2007. In many respects, the provisions in the MASB’s
Framework (2007) were similar to the IASB’s Framework for the Preparation
and Presentation of Financial Statements.
The MASB is currently in the process of updating its conceptual
framework (with the same timeline as the IASB’s current project on updating
its conceptual framework). This conceptual framework project is conducted in
phases. The Conceptual Framework document comes in four chapters: (i) the
objective of general purpose financial reporting; (ii) the reporting entity; (iii)
qualitative characteristics of useful information; and (iv) the assumptions,
elements, recognition, measurement and concepts. As a chapter is finalised,
the relevant paragraphs of the Framework (2007) will be replaced. To date,
this version of the Framework includes the first two chapters: Chapter 1 The
objectives of general purpose financial reporting and Chapter 3 Qualitative
characteristics of useful financial information. Chapter 2 on the Reporting
Entity will be added later whilst Chapter 4 retains the remaining text of the
Framework (2007)
The Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users. The purpose of the
Framework is to:
(a) assist the MASB in the development of future MFRS and in its review of
existing MFRS;
(b) assist preparers of financial statements in applying MFRS and in
dealing with topics that have yet to form the subject of an MFRS;
(c) assist auditors in forming an opinion as to whether financial statements
comply with MFRS;
(d) assist users of financial statements in interpreting the information
contained in financial statements prepared in compliance with MFRS;
and
(e) provide those who are interested in the work of MASB with information
about its approach to the formulation of MFRS.
The Framework deals with:
(a) the objective of financial statements;
2.2
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
41
(b) the qualitative characteristics that determine the usefulness of
information in financial statements;
(c) the definition, recognition and measurement of the elements from which
financial statements are constructed; and
(d) concepts of capital and capital maintenance.
In the preparation of general purpose financial statements, the Framework
acknowledges that the many and varied external users have different
information needs. These external users include present and potential
investors, employees, lenders, suppliers and other creditors, customers,
government and their agencies and the public. While all of the information
needs of these users cannot be met by financial statements, there are needs
which are common to all users. The Framework is based on the premise that
as investors, lenders and other creditors are providers of risk capital to the
entity, the provision of financial statements that meet their needs will also
meet most of the needs of other users of financial statements.
Note that this preference for providing information that serves the needs
of investors and lenders is also evident in the Frameworks of overseas
standard setting bodies, such as the FASB of the USA, ASB of the UK and
AASB of Australia. The shift towards this preference may have been driven
by the increasing demands from investors and lenders for more relevant
value or market based information. It is thus not surprising that some
of the more recent standards issued by these bodies, such as IAS 39 on
financial instruments and IAS 40 on investment property, are on the fair
value measurement approach, which can be argued as more relevant to the
decision making needs of investors and potential investors, lenders and other
creditors.
2.2.1 The Objective of General Purpose Financial Reporting
An accounting framework needs a starting point to provide a foundation
for the characteristics, concepts and models to be developed. This requires
identifying the appropriate objective of financial reporting. In theory, the
objective may be: (i) to provide information to comply with laws and other
regulations; (ii) to provide information to all users, including meeting the
social needs of society, or (ii) to provide information to specific groups of users.
The chosen objective affects the desirable characteristics, concepts and models
of financial reporting. For example, if the objective is to provide information
to comply with laws and regulations, financial reporting will emphasise more
on stewardship reporting. The primary characteristic would be “reliability’
rather than “relevance” and the cost model of accounting is likely to be
more reliable than a fair value model. Similarly, if the objective is to meet
the social needs of society, a characteristic of “understandability” is desired
Financial Accounting and Reporting in Malaysia, Volume 1
2.2
42
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
and a performance model based on contribution rather than profit would be
emphasised. If the objective is to focus on information needs of providers
of risk capital, the primary characteristic would be “relevance” rather than
“reliability” and a fair value model of accounting is likely to be more relevant
than a cost model.
The objective chosen in the Framework is that of providing useful
information to providers of risk capital. It specifies in Chapter 1 that “the
objective of general purpose financial reporting is to provide information
about the reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about providing resources to
the entity”. Those decisions involve buying, selling or holding equity and debt
instruments, and providing or settling loans and other forms of credit”.
Decisions by investors, lenders and other creditors depend on expectations
about returns and their assessment of the amount, timing and uncertainty
(or prospects for) future net cash inflows to the entity. Consequently these
users need information to help them assess the prospects for future net cash
inflows to an entity.
To assess an entity’s prospects for future net cash inflows, existing and
potential investors, lenders and other creditors need information about the
resources of the entity, claims against the entity, and how efficiently and
effectively the entity’s management and governing board have discharged
their responsibilities to use the entity’s resources.
Many existing and potential investors, lenders and other creditors cannot
require reporting entities to provide information directly to them and must
rely on general purpose financial reports for much of the financial information
they need. Consequently, they are the primary users to whom general purpose
financial reports are directed.
General purpose financial reports do not or cannot provide all of the
information that the primary users need. Those users need to consider
pertinent information from other sources, for example, general economic
conditions and expectations, political events and political climate, and
industry and company outlooks. Also, general purpose financial reports
are not designed to show the value of a reporting entity, but they provide
information to help the primary users to estimate the value of the reporting
entity.
Individual primary users have different, and possibly conflicting
information needs and desires. The Board, in developing financial reporting
standards, will seek to provide information that will meet the needs of
the maximum number of primary users. However, focusing on common
2.2
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
43
information needs does not prevent the reporting entity from including
additional information that is useful to a particular subset of primary users.
The management of a reporting entity, other parties such as regulators and
members of the public other than the primary users, may also find general
purpose financial reports useful. However, those reports are not primarily
directed to these other user groups.
To a large extent, financial reports are based on estimates, judgements
and models rather than exact depictions. The Framework establishes
the concepts that underlie those estimates, judgements and models. The
concepts are the goal towards which the Board and preparers of financial
reports strive. The Board acknowledges that the Framework’s vision of ideal
financial reporting is unlikely to be achieved in full, at least not in the short
term, because it takes time to understand, accept and implement new ways
of analysing transactions and other events. Nevertheless, establishing a goal
towards which to strive is essential if financial reporting is to evolve so as to
improve its usefulness.
2.2.2 Information about a Reporting Entity’s Economic
Resources, Claims, and Changes in Resources and
Claims
This part of the Framework rationalises the presentation of a statement
of financial position. It explains that general purpose financial reports
provide information about the financial position of a reporting entity, which
is information about the entity’s economic resources (the assets) and the
claims (i.e. the equity and liabilities) against the reporting entity. Financial
reports also provide information about the effects of transactions and other
events (the financial performance) that change a reporting entity’s economic
resources and claims. Both types of information provide useful inputs for
decisions about providing resources to an entity.
2.2.2.1 Economic Resources and Claims
Information about the nature and amounts of a reporting entity’s economic
resources (the assets) and claims (the equity and liabilities) can help users
to identify the reporting entity’s financial strengths and weaknesses. The
information help users assess the reporting entity’s liquidity and solvency, its
needs for additional financing and how successful it is likely to be in obtaining
that financing. Information about priorities and payment requirements of
existing claims helps users to predict how future cash flows will be distributed
among those with a claim against the reporting entity.
Different types of economic resources affect a user’s assessment of the
reporting entity’s prospects for future cash flows differently. Users of financial
Financial Accounting and Reporting in Malaysia, Volume 1
2.2
44
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
reports need to know the nature and amount of the resources available for
use in a reporting entity’s operations.
2.2.2.2 Changes in Economic Resources and Claims
Changes in a reporting entity’s economic resources and claims result from
that entity’s financial performance and from other events or transactions,
such as issuing debt and equity instruments. To properly assess the prospects
for future cash flows from the reporting entity, users need to be able to
distinguish between both of these changes.
Information about a reporting entity’s financial performance helps users
to understand the return that the entity has produced on its economic
resources. It provides an indication of how well management has discharged
its responsibilities to make efficient and effective use of the reporting entity’s
resources. Information about the variability and components of that return
is also important especially in assessing the uncertainty of future cash flows.
Information about a reporting entity’s past financial performance and how its
management discharged its responsibilities is usually helpful in predicting
the entity’s future returns on its economic resources.
2.2.2.3 Financial Performance Reflected by Accrual Accounting
Unlike the original Framework (2007) where accrual concept was used
as an assumption, the revised Framework uses this concept as a basis of
accounting. Accrual accounting depicts the effects of transactions and other
events and circumstances on a reporting entity’s economic resources and
claims in the periods in which those effects occur, even if the resulting cash
receipts and payments occur in a different period. This accrual accounting is
important because it provides a better basis for assessing the entity’s past
and future performance than information solely about cash receipts and
payments during that period.
The Framework then rationalises why the accrual basis of accounting is
better for assessing past and future performance. It clarifies that changes
in a reporting entity’s economic resources and claims other than obtaining
additional resources directly from capital providers are useful in assessing
that entity’s past and future ability to generate net cash inflows. The
information indicates the extent to which the reporting entity has increased
its available economic resources, and thus its capacity for generating net cash
inflows through its operations rather than by obtaining additional resources
directly from capital providers.
Information about a reporting entity’s financial performance during a
period may also indicate the extent to which events such as changes in market
prices or interest rates have increased or decreased the entity’s economic
2.2
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
45
resources and claims, thereby affecting the entity’s ability to generate net
cash inflows.
2.2.2.4 Financial Performance Reflected by Past Cash Flows
This part of the Framework rationalises the presentation of a statement
of cash flows. Information about a reporting entity’s cash flows during the
period also helps users to assess the entity’s ability to generate future net
cash inflows. It indicates how the reporting entity obtains and spends cash,
including information about its borrowings and repayment of debt, cash
dividends or other cash distributions to investors, and other factors that
may affect the entity’s liquidity or solvency. Information about cash flows
help users understand a reporting entity’s operations, evaluate its financing
and investing activities, assess its liquidity or solvency and interpret other
information about financial performance.
2.2.2.5 C
hanges in Economic Resources and Claims not resulting
from Financial Performance.
This part of the Framework rationalises the presentation of a statement
of changes in equity. A reporting entity’s economic resources and claims
may also change for reasons other than financial performance, such as
issuing additional ownership shares. Information about this type of change
is necessary to give users a complete understanding of why the reporting
entity’s economic resources and claims changed and the implications of those
changes for its future financial performance.
2.2.3 Qualitative Characteristics of Useful Financial
Information
Chapter 3 of the Framework discusses the qualitative characteristics of
useful financial information and identifies the types of information that are
likely to be most useful to the existing and potential investors, lenders and
other creditors, for making decisions about the reporting entity on the basis
of the information in its financial reports.
Financial reports provide information about the reporting entity’s economic
resources, claims against the reporting entity and the effects of transactions
and other events and conditions that change those resources and claims
(referred to as information about the economic phenomena). Some financial
reports also include explanatory material about management’s expectations
and strategies for the reporting entity, and other types of forward-looking
information.
The four qualitative characteristics used in the original Framework
have been rearranged, with the “reliability” characteristic removed in the
Financial Accounting and Reporting in Malaysia, Volume 1
2.2
46
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
revised Framework. For information to be useful, the Framework identifies
two fundamental qualitative characteristics: i.e. (i) relevance and (ii)
faithful representation. To enhance the usefulness of financial information,
the Framework identifies four enhancing qualitative characteristics i.e. (i)
comparability, (ii) verifiability; (iii) timeliness and (iv) understandability.
2.2.3.1 Fundamental Qualitative Characteristics
(a) Relevance
Relevance has got to do with the how information affects the decisionmaking process of users. Relevant financial information is capable of making
a difference in the decisions made by users. Information is relevant when it
influences the economic decisions of users by helping them evaluate past,
present and future events or confirming, or correcting, their past evaluations.
Financial information is capable of making a difference in decisions if it has
predictive value, confirmatory value or both.
Financial information has predictive value if it can be used as an input
to processes employed by users to predict future outcome. To have predictive
value, information need not be in the form of an explicit forecast. The ability
to make predictions from financial statements is enhanced by the manner in
which information on past transactions and events is displayed. For example,
the predictive value of the income statement is enhanced if unusual, abnormal
and infrequent items of income and expense are separately disclosed.
Financial information has confirmatory value if it provides feedback
about (confirms or changes) previous evaluations. The predictive value and
confirmatory value of financial information are interrelated. Information
that has predictive value often also has confirmatory value.
Judgement is required in deciding whether an information item is relevant
to users. In some cases, an information item may be considered relevant by the
nature of the item itself. For example, information on directors’ remuneration
is usually considered relevant simply because of the fiduciary relationship
between directors and the entity. In other cases, both the nature and
materiality of the item are important considerations in deciding its relevance.
For example, the classification of fixed assets into suitable categories.
(a)(i) Materiality
Financial reports should disclose all items that are material enough to
affect evaluations or decisions (materiality consideration). Information is
considered material if omitting it or misstating it could influence decisions
that users make on the basis of financial information about a specific
reporting entity. In other words, materiality is an entity-specific aspect of
relevance based on the nature or magnitude, or both, of the items to which
2.2
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
47
the information relates in the context of an individual entity’s financial
report. In this regard, the Framework clarifies that the Board cannot specify
a uniform quantitative threshold for materiality or pre-determine what
could be material in a particular situation. Thus, applying the materiality
consideration is entity-specific and is influenced by either the size of the
item or the error, judged in the particular circumstances of its omission or
misstatement.
(b) Faithful Representation
Financial reports represent economic phenomena in words and numbers.
To be useful, financial information must not only represent relevant
phenomena, but it must also faithfully represent the phenomena that it
purports to represent. To be a perfectly faithful representation, a depiction
would have three characteristics. It would be complete, neutral and free
from error. The Framework acknowledges that perfection is seldom, if ever,
achievable. The Board’s objective is to maximise those qualities to the extent
possible.
(b)(i) Completeness
A complete depiction includes all information necessary for a user
to understand the phenomenon being depicted, including all necessary
descriptions and explanation. For example, a complete depiction of a group of
assets (such as items of property, plant and equipment) would include, at a
minimum, a description of the nature of the assets in the group, a numerical
depiction of all of the assets in the group, and a description of what the
numerical depiction represents (for example, original cost, adjusted cost or
fair value).
(b)(ii) Neutrality
A neutral depiction is without bias in the selection or presentation of
financial information. Neutrality requires that the information provided
should not be slanted, weighted, emphasised, de-emphasised or otherwise
manipulated to increase the probability that it will be received favourably or
unfavourably to achieve a pre-determined result or outcome. In other words,
information should not be bias so that users are free to use it to make their
own judgements and decisions. In this context, information provided should
be based upon facts and supportable evidences rather than personal opinions
of management. For example, information on impairment of assets shall
be based on the evidences of impairment testing rather than on opinions
of whether there has been a permanent diminution in value of the assets.
However, neutral information does not mean information with no purpose
or no influence on behaviour. On the contrary, relevant information is, by
definition, capable of making a difference in users’ decisions.
Financial Accounting and Reporting in Malaysia, Volume 1
2.2
48
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
(b)(iii) Free from Error
Faithful representation does not mean accurate in all aspects. Free
from error means there are no errors or omissions in the description of the
phenomenon, and the process used to produce the reported information has
been selected and applied with no errors in the process. In this context, free
from error does not mean perfectly accurate in all aspects.
For example, an estimate of an unobservable price or value (of say a
plantation crop) cannot be determined to be accurate or inaccurate. However,
a representation of that estimate can be faithful representation of the amount
if it is described clearly and accurately as being an estimate, the nature and
limitations of the estimating process are explained, and no errors have been
made in selecting and applying an appropriate process for developing the
estimate.
The Framework acknowledges that a faithful representation, by itself,
does not necessarily result in useful information. For example, an entity
receives an asset through a government grant at no cost. Reporting that
the entity acquired an asset at no cost would faithfully represent its costs,
but that information would probably not be very useful. Also, in estimating
impairment losses on a cash-generating unit, significant judgements and
assumptions are applied. That estimate can be a faithful representation if
the reporting entity has properly applied an appropriate process, properly
described the estimate and explained any uncertainties that significantly
affect the estimate. However, if the level of uncertainty in such an estimate
is sufficiently large, that estimate will not be particularly useful. In other
words, the relevance of the asset being faithfully represented is questionable.
If there is no alternative representation that is more useful, that estimate
may provide the best available information.
(c) Applying the Fundamental Qualitative Characteristics
The Framework clarifies that the most efficient and effective process for
applying the fundamental qualitative characteristics would usually be in the
following steps:
(a) identify an economic phenomenon that has the potential to be useful to
users of the reporting entity’s financial information;
(b) identify the type of information about that phenomenon that would be
most relevant if it is available and can be faithfully represented;
(c) determine whether that information is available and can be faithfully
represented.
(d) If so, the process of satisfying the fundamental qualitative characteristics
ends at that point. If not, the process is repeated with the next most
relevant type of information.
2.2
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
49
2.2.3.2 Enhancing Qualitative Characteristics
Comparability, verifiability, timeliness and understandability are
qualitative characteristics that enhance the usefulness of information that
is relevant and faithfully represented. They may also help determine which
of two ways should be used to depict a phenomenon if both are considered
equally relevant and faithfully represented.
(a) Comparability
Information about a reporting entity is more useful if it can be compared
with similar information about other entities and with similar information
about the same entity for another period or another date. Comparability
should be viewed not only within an entity (for e.g. comparison of present
with past performance and financial position) but with other entities (for e.g.
industry comparison).
The characteristic of comparability can be achieved if the financial
effects of like transactions and other events are measured and displayed
in a consistent way throughout an entity, over time for that entity, and by
different entities. Consistency is a key criterion if financial reports are to be
comparable. Comparability is the goal, consistency helps to achieve that goal.
An important implication of the comparability characteristic is that users
be informed of the accounting policies used in the preparation of the financial
reports. Users need to be able to identify differences between the accounting
policies for like transactions and other events used by the same entity from
period to period, and by different entities. Compliance with MFRSs, including
the disclosure of the accounting policies used by the entity, helps to achieve
comparability.
Consistency should not be interpreted as conformity or uniformity. For
example, in assessing the useful life of a fixed asset, an entity should not
merely follow the norm set in the industry, but must assess it in the way
the asset will be used by the entity. Also, consistency does not imply that an
entity cannot change its accounting policies. Changes in accounting policies
are provided for in MFRSs and should be made if the change results in a
better presentation of the financial reports so such that the information
provided is more relevant and faithfully represented.
Because users wish to compare the financial position, performance and
changes in financial position of an entity over time, it is important that the
financial reports show corresponding amounts for the preceding periods.
(b) Verifiability
Verifiability helps assure users that information faithfully represents
the economic phenomena it purports to represent. It means that different
Financial Accounting and Reporting in Malaysia, Volume 1
2.2
50
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
knowledgeable and independent observers could reach consensus, although
not necessarily complete agreement, that a particular depiction is a faithful
representation. Quantified information need not be a single point estimate to
be verifiable. A range of possible amounts and the related probabilities can
also be verified.
Verification can be direct such as counting cash to verify the amount
depicted. It can be indirect such as checking the inputs to a valuation model
and recalculating the outputs using the same methodology.
It may not be possible to verify some explanations and forward-looking
financial information until a future period. To help users decide whether they
want to use that information, it would normally be necessary to disclose the
underlying assumptions, the methods of compiling the information and other
factors and circumstances that support the information.
(c) Timeliness
Timeliness means having information available to decision-makers in time
to be capable of influencing their decision. To be useful to users, information
must be released on a timely basis. Generally, the older the information, the
less useful it is.
(d) Understandability
Understandability has got to do with the relative ease with which financial
information can be read and understood by users. Classifying, characterising
and presenting information clearly and concisely makes it understandable.
Information provided in financial statements should be readily
understandable by users who are assumed to have a reasonable knowledge
of business and economic activities, accounting and a willingness to study
the information with reasonable diligence. Understandability does not imply
that information on complex issues should be excluded on the ground that it
may not be comprehensible by the ordinary users. It is the responsibility of
users to ensure that they have the relevant business and accounting skills to
understand the information. Thus, the financial statements are not directed
at lay users who have no knowledge of business and accounting. Information
on complex issues must also be provided, even if it can be understood only by
some specialised groups of users.
(e) Applying the enhancing qualitative characteristics
The Framework clarifies that the enhancing qualitative characteristics
should be maximised to the extent possible.
Applying the enhancing qualitative characteristics is an iterative
process that does not follow a prescribed order. Sometimes, one enhancing
2.2
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
51
characteristic may have to be diminished to maximise another qualitative
characteristic. For example, a temporary reduction in comparability as
a result of prospectively applying a new MFRS may be worthwhile to
improve relevance or faithful representation in the longer term. Appropriate
disclosures may partially compensate for non-comparability.
2.2.3.3 The Cost Constraint on Useful Financial Reporting
Balance between benefits and costs
This is a pervasive constraint rather than a qualitative characteristic.
The Framework explains that the benefits derived from information should
exceed the cost of providing it. The benefits and costs may be explicit or
implicit. For example, the benefits of providing information accrue not just to
the external users, but also to the providers of the information, who may be
able to reduce their costs of borrowings through better quality information.
The evaluation of benefits and costs is therefore substantially a judgemental
process. It is difficult to apply a cost-benefit test in any particular case.
Nevertheless, standard setters in particular, as well as preparers and users
should be aware of this constraint.
2.2.4 The 2007 Framework – the Remaining Text
2.2.4.1 Underlying Assumption
Going Concern
The Framework clarifies that financial statements are normally prepared
on the assumption that an entity is a going concern in that it will continue in
operation for the foreseeable future. Under this basis, it is assumed that the
entity has neither the intention nor the need to liquidate or curtail materially
the scale of its operations. However, if such an intention or need exists, the
financial statements may have to be prepared on a different basis and if so,
the basis used is disclosed.
As will be discussed in a later chapter, MFRS 101, Presentation of Financial
Statements, requires management to make an assessment of whether the
going concern basis can be applied. If so, the financial statements shall be
prepared on the going concern basis. Assets and liabilities recognised in the
balance sheet are therefore based on the measurement models applied to
them, such as cost, revalued amount and fair value. If management concludes
that the entity cannot continue as a going concern, this assumption shall
be rebutted and the entity prepares its financial statements on a different
basis, such as a liquidation or break-up basis, where assets and liabilities are
measured based on realisable values.
Financial Accounting and Reporting in Malaysia, Volume 1
2.2
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
52
2.2.4.2 The Elements of Financial Statements
The financial effects of transactions and other events are portrayed in the
financial statements by grouping them in broad classes according to their
economic characteristics. These broad classes are termed as the elements of
financial statements.
of:
•
The Framework explains that the elements of financial statements consist
•
Elements of financial position:
• assets;
• liabilities;
• equity;
Elements of Performance:
• income;
• expenses; and
• capital maintenance adjustments.
(a) Financial Position
The definitions of an asset and a liability identify their essential features
but do not attempt to specify the criteria that need to be met before they
are recognised in the statement of financial position. Thus, the definitions
embrace items that are not recognised as assets or liabilities in the statement
of financial position because they do not satisfy the criteria for recognition. In
particular, the expectation that future economic benefits will flow to or from
an entity must be sufficiently certain to meet the probability criterion before
an asset or liability is recognised. For example, an internally generally brand
name would probably meet the definition of an asset but not the probability
recognition criterion
In assessing whether an item meets the definition of an asset, liability or
equity, attention needs to be given to its underlying substance and economic
reality and not merely its legal form (substance over form consideration).
(a)(i) Assets
The Framework defines an asset as “a resource controlled by the entity as
a result of past events and from which future economic benefits are expected
to flow to the entity”. The key criterion to determine the existence of an asset
is the ‘control’ of a resource, which implies that an asset need not necessarily
take a particular form, like being tangible or physical. An intangible resource
may also qualify as an asset.
2.2
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
53
Control of a resource is normally associated with ownership or legal rights.
Thus, control is presumed to exist when an entity owns, or has similar legal
rights to, the resource, unless it can be demonstrated that ownership or the
existence of legal rights does not constitute control. For example, in the case
of an asset under finance lease, the lessor normally has ownership of the
asset, but it does not have control over the asset as the risks and benefits
of ownership are normally transferred to the lessee. Accordingly, the leased
asset is not recognised as an asset in the lessor’s books.
Control may also exist when the entity does not own or have legal rights
to the resource, although in such cases, control of the resource must be
accompanied by risks and benefits attached to the asset. For example, in the
case of the asset under finance lease above, the lessee controls the benefits
and risks associated with the ownership of the asset, and should accordingly
recognise it as an asset in its accounts even though it does not own the asset.
Similarly, a technical know-how or a research and development capability
may constitute an asset even though the entity does not have legal rights
(unless patented) to it but it can achieve control by keeping the knowledge a
trade secret.
The definition also requires that the asset is a result of a past transaction or
event, such as a transaction of a purchase of an asset. Events or transactions
expected to occur in the future do not constitute an asset. For example, an
intention to purchase a plant does not of itself result in the plant being
recognised as an asset. The plant has got to be purchased first before it can
be recognised as an asset.
The future economic benefit of an asset is the potential to contribute,
directly or indirectly, to the cash and cash equivalents of an entity when the
asset is used either singly, in combination with other assets to generate cash
flows, used in exchange for other assets, used to settle a liability or used to
distribute dividends to shareholders.
(a)(ii) Liabilities
A liability is a present obligation of the entity arising from past transactions
or events, the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits.
A present obligation is a duty or responsibility to perform or to act in
a specified way, such as to pay an amount owing to a trade creditor on
maturity date. Obligations may arise from contractual agreements that are
legally enforceable or from normal business practice, custom and a desire to
maintain good business relations or act in an equitable manner. An obligation
is different from a commitment in that a commitment by itself does not give
rise to a liability. For example, a decision approved by the board of directors to
Financial Accounting and Reporting in Malaysia, Volume 1
2.2
54
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
acquire some fixed assets may be a commitment but it does not, of itself, give
rise to a present obligation or liability. A liability arises only when the fixed
assets are purchased i.e. when the fixed assets are delivered.
As in the case of an asset, a liability is a result of a past transaction
or event. Transactions or events expected to occur in the future do not by
themselves give rise to a liability. For example, an intention to take a term
loan does not, of itself, meet the definition of a liability.
The settlement or extinguishment of a liability would result in an outflow
from the entity of resources embodying economic benefits. This will usually
involves the entity giving up assets in order to satisfy the obligation or claim
of the other party. Settlement may be in the form of a payment of cash or
cash equivalents, transfer of other assets, rendering of services, replacement
with another liability, or conversion of the liability into equity. Conversely, an
obligation to issue the entity’s own equity securities, such as an outstanding
equity warrant, is not a liability because the settlement of the obligation does
not result in an outflow of resources embodying economic benefits.
The amounts recognised for most liabilities can usually be determined
with a high degree of precision. This is usually the case where the liabilities
result from contractual agreements and the amounts are expressed in
monetary claims, such as an obligation to a trade creditor or a term loan. In
some other cases, the amounts recognised are based on estimations. The term
provision is sometimes used for these estimates. Examples are provision for
warranty claims, provision for income tax and deferred taxes, and provision
for retirement benefits. These provision accounts satisfy the definition of
a liability and should be treated as such. Sometimes, the term provision is
used to describe an estimated amount set aside for write-down of asset value,
such as provision for bad and doubtful debts and provision for write-down of
other assets. However, these provision accounts do not satisfy the definition
of a liability and should not be presented as such (they should be netted off
against the respective asset accounts).
(a)(iii) Equity
Equity is the residual interest in the assets of an entity after deducting
all its liabilities. It represents the interests of owners or shareholders and
the amount being determined as a residual after all liabilities have been
deducted. By virtue of the accounting equation, a balance sheet consists of
assets, liabilities and equity.
The recognition and classification of equity items (into capital, reserves,
etc.) depend on both statutory requirements and accounting standards. In
some cases, the nature of an instrument may affect the way in which an item
is classified. For example, a convertible loan stock may be classified into two
2.2
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
55
components: one as a liability and the other as equity. Similarly, in the case
of a redeemable preference share, it may satisfy the definition of a liability
although in form, it is equity.
(b) Performance
Profit is frequently used as a measure of performance or as the basis for
other measures, such as return on investment or earnings per share. The
recognition and measurement of income and expenses, and hence profit,
depends in part on the concepts of capital and capital maintenance used by
the entity in preparing its financial statements.
(b)(i) Income
The Framework defines the income element as ‘an increase in economic
benefits during the accounting period in the form of inflows or enhancements
of assets or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants’. This definition
thus encompasses both:
(i) revenues arising from the ordinary course of business, such as sales of
goods or rendering of services; and
(ii) gains, realised or unrealised, from any other activities, such as gain on
sale of fixed assets or gain on exchange differences.
In general, all items that meet the definition of income should be included
in the income statement. However, there are certain gain items that should
or may be excluded from the income statement. An example is a gain arising
from a revaluation of fixed asset, which should not be included in the income
statement but be taken directly to equity. Some unrealised gains are also
not included in income statement until some future event has occurred. For
example, an unrealised gain on a hedging instrument should be deferred
until a foreseeable loss on the hedged item is realised in the future period.
(b)(ii) Expenses
Expenses are defined in the Framework as ‘decreases in economic benefits
during the accounting period in the form of outflows or depletions of assets
or incurrence of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants’.
This definition thus encompasses both:
(i) expenses that arise in the ordinary course of business such as cost of
goods sold or services provided, salaries and depreciation; and
(ii) losses, realised or unrealised, from any other activities, such as loss on
sale of a property or a loss on exchange difference.
Financial Accounting and Reporting in Malaysia, Volume 1
2.2
56
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
In general, all items that meet the definition of an expense should be
included in the income statement. However, there are some rare circumstances
in which an unrealised loss item is not included in the income statement
but included in equity. For example, an exchange difference on a long-term
monetary item that hedges a net investment in a foreign entity should be
deferred in equity. Also, a deficit arising on a revaluation of a fixed asset may
be offset against a previously credited revaluation reserve of the same asset.
(b)(iii) Capital maintenance adjustments
The revaluation or restatement of assets and liabilities gives rise to
increases or decreases in equity. These increases or decreases meet the
definition of income and expenses. However, for some items such as property,
plant and equipment, the increases or decreases are not included in the
income statement under some concept of capital maintenance. Instead, they
are included in equity as capital maintenance adjustments or revaluation
reserves.
2.2.4.3 Recognition of the Elements of Financial Statements
Recognition is concerned with “what” an entity discloses as items in the
statement of financial position or income statement. It is the process of
incorporating in the financial statements an item that meets the definition
of an element and satisfies the recognition criteria. It thus involves the
depiction of the item in words in the statement of financial position or income
statement. Items that satisfy the recognition criteria should be recognised in
the statement of financial position or income statement.
For example, an entity leases a land from a state government for a
specified lease period. The issue here is “what” to depict for this transaction
in the statement of financial position. If this item satisfies the recognition
criteria of an asset, the depiction of the line item may be a land use right (i.e.
right-of-use asset). If it does not satisfy the recognition criteria, the lease of
land is not depicted as such. Any payment made is then depicted as a prepaid
lease payment.
A failure to recognise an element that satisfies the recognition criteria
is not rectified by disclosure of accounting policies used or by notes or
explanatory material.
Recognition Criteria
An item that meets the definition of an element should be recognised if:
(i) it is probable that any future economic benefit associated with the item
will flow to or from the entity; and
(ii) the item has a cost or value that can be measured with reliability.
2.2
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
57
Probable future economic benefit implies a degree of uncertainty
attributable to the flow of resources, but the uncertainty should be low
enough such that there is a high degree of probability that the resources
will flow. This is of course a matter of judgement although in some MFRSs,
specific guidance is provided.
Reliable measurement of cost or value, although requires estimation, will
not usually pose significant problem in practice. However, in some rare cases,
such as the valuation of internally generated intangible assets, estimation
may be very difficult, if not impossible. The use of cost or value is not a free
choice. In most cases, the element items to be recognised are based on cost.
For example, in the case a machine, cost includes cost of acquisition but may
also be fair value if it reasonably approximates cost. In some other cases,
however, a valuation may be used. For example, a property may be stated at
its market value if the amount can be reliably measured.
In accordance with the recognition criteria, an asset is recognised in the
statement of financial position when it is probable that the future economic
benefits will flow to the entity and the asset has a cost or value that can be
measured reliably.
A liability is recognised in the statement of financial position when it is
probable that an outflow of resources embodying economic benefits will result
from the settlement of a present obligation and the amount at which the
settlement will take place can be measured reliably.
Income is recognised in the income statement when an increase in
future economic benefit related to an increase in an asset or a decrease of a
liability has arisen that can be measured reliably. This means that income is
recognised when earned and not when cash is received.
Similarly, expenses are recognised in the income statement when a
decrease in future economic benefit related to a decrease in an asset or an
increase in liability has arisen that can be measured reliably. These mean
that expenses are recognised when incurred and not when they are paid.
2.2.4.4 Measurement of the Elements of Financial Statements
Measurement is concerned with “how much” an entity allocates to amounts
recognised as elements in the statement of financial position or income
statement. It is a process of determining the monetary amounts at which the
elements of the financial statements are to be recognised and carried in the
statement of financial position and income statement. For a financial position
element, measurement is required when an entity first recognises the item,
and subsequently at each reporting date. This involves the selection of the
particular basis of measurement
Financial Accounting and Reporting in Malaysia, Volume 1
2.2
58
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
The Framework acknowledges that there are a number of different
measurement bases being employed to different degrees and in varying
circumstances in financial statements. These bases include the following:
(a) Historical cost, where an asset is carried at an amount based on the cost
incurred, and a liability is carried at amount based on proceeds received
in exchangefor the obligation;
(b) Current costs, where an asset is carried at the amount of cash and cash
equivalents that would have to be paid if the same or an equivalent asset
was acquired currently, and a liability is carried at the undiscounted
amount of cash and cash equivalents that would be required to settle the
obligation currently.
(c) Realisable (settlement) value, where an asset is carried at the amount of
cash and cash equivalents that could currently be obtained by selling the
asset in an orderly disposal, whilst a liability is carried at the settlement
value i.e. the undiscounted amount of cash and cash equivalents to be
paid to satisfy the obligation in the normal course of business.
(d) Present value, where an asset is carried at the present discounted value
of the future cash inflows that the item is expected to generate in the
normal course of business. And a liability is carried at the present
discounted value of the future net outflows that are expected to be
required to settle the obligation in the normal course of business.
Other measurement bases not specifically mentioned in the Framework
includes:
(a) Cost combined with other measurement bases, such as lower of cost and
net realisable value, and lower of cost and market value;
(b) Amortised cost basis;
(c) Revaluation basis; and
(d) Market (marked to market) or fair value basis.
The measurement bases currently applied in financial statements
consist of a mixed measurement attributes of historical cost, amortised cost,
lower of cost and net realisable value, revalued amount, present value and
fair value. However, the more recent MFRSs make greater use of the fair
value measurement basis (for example, MFRS 139, Financial Instruments:
Recognition and Measurement, MFRS 140, Investment Property, and MFRS
141, Agriculture).
2.2.5 Concepts of Capital and Capital Maintenance
2.2.5.1 Concepts of Capital
The Framework identifies two concepts of capital; (i) the financial concept,
and (ii) the physical concept.
2.2
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
59
Under a financial concept of capital, such as invested money or invested
purchasing power, capital is synonymous with the net assets or equity of
the entity. Under a physical concept of capital, such as operating capability,
capital is regarded as the productive capacity of the entity based on, for
example, units of output per day.
Although the Framework does not identify a preference, the financial
concept of capital is adopted by most entities in preparing their financial
statements. However, it clarifies that the selection of the appropriate concept
of capital should be based on the needs of the users. A financial concept of
capital should be applied if users are primarily concerned with nominal
invested capital or the purchasing power of invested capital. On the hand, a
physical concept of capital should be applied if the main concern of users is
with the operating capability of the entity.
2.2.5.2 C
oncepts of Capital Maintenance and the Determination of
Profit
The concept of capital applied has a direct effect on the determination of
profit. This gives rise to the following concepts of capital maintenance and the
determination of profit:
(a) Financial capital maintenance. Under this concept a profit is earned
only if the financial (or money) amount of the net assets at the end of
the period exceeds the financial (or money) amount at the beginning
of the period, after excluding any distributions to, and contributions
from, owners during the period. Financial capital maintenance can
be measured in either nominal monetary units or units of constant
purchasing power.
(b) Physical capital maintenance. Under this concept profit is earned only
if the physical productive capacity (or operating capability) of the entity
(or the resources or funds needed to achieve that capacity) at the end of
the period exceeds the physical productive capacity at the beginning of
the period, after excluding any distributions to, and contributions from,
owners during the period.
The principle difference between the two concepts of capital maintenance
is the treatment of the effects of changes in the prices of assets and liabilities
of the entity. In general terms, an entity has maintained its capital if it has
as much capital at the end of the period as it had at the beginning of the
period. Any amount over and above that required to maintain the capital at
the beginning of the period is profit.
Financial Accounting and Reporting in Malaysia, Volume 1
2.2
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
60
Example
Assume that at the beginning of the year, Entity A has capital of RM10 m
invested in an asset purchased at cost of RM10 m. At the end of Year 1, the asset is
sold for RM11 m.
At the beginning of Year 1, the consumer price index is 100 and at the end of
Year 1, the index is 104, indicating a 4% increase in general inflation for the year.
At the end of Year 1, the current cost to replace the asset sold with a new asset that
has the same operating capability is RM10.6 million.
Required
For each of the capital maintenance concepts determine how profit is determined.
Solution
Financial Capital
Maintenance
Asset
Original capital – start of Year 1
Capital maintenance adjustment
Constant purchasing power
Current cost adjustment
Capital maintained – end of Year 1
Profit (amount in excess of capital
maintained)
Total Equity
Nominal
monetary
RM’m
11.0
Constant
purchasing
power RM’m
11.0
Physical
Capital
Maintenance
Current cost
basis
RM’m
11.0
10.0
–
10.0
10.0
0.4
10.0
10.4
0.6
10.6
1.0
11.0
0.6
11.0
0.4
11.0
The Framework does not prescribe, or identify a preference for, a
particular concept of capital maintenance. Certain MFRSs standards, such
as MFRS 116, Property, Plant and Equipment, and MFRS 138, Intangible
Assets, use the physical capital maintenance concept, which requires gains
on revaluation to be credited to a revaluation reserve (capital maintenance
adjustment). Others like, MFRS 139, Financial Instruments: Recognition
and Measurement, MFRS 140, Investment Property, and IAS 41, Agriculture,
adopt the financial capital maintenance concept, which requires changes in
fair value be recognised as gains or losses in profit or loss.
The selection of the measurement bases and concept of capital maintenance
will determine the accounting model used in the preparation of the financial
statements. Currently, it is not the MASB’s intention to prescribe a particular
accounting model, other than in exceptional circumstances, such as those
entities reporting in the currency of hyperinflationary economy (see MFRS
2.2
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
61
129). However, the period to date has seen more of the newer accounting
standards moving closer to the financial capital maintenance concept and
applying the fair value model.
The Diagram below provides a “bird’s eye view” of the Conceptual
Framework.
Objective of Financial Reporting – To provide useful information to existing and
potential investors, lenders and other creditors
The Reporting Entity – Single entity or Group of
entities
Fundamental Qualitative Characteristics
Relevance – predictive value and
confirmatory value.
Materiality consideration
Faithful Representation –
completeness, neutrality and free from
error
Enhancing Qualitative Characteristics
Comparability Consistency
Verifiability
Timeliness
Understandability
Assumption of Going Concern and Elements of Financial Statements
Financial Position
Assets
Liabilities
Financial Performance
Equity
Income
Expenses
Capital
maintenance
adjustments
Recognition of the Elements
Measurement of the Elements
Concept of Capital and Capital Maintenance
Financial Accounting and Reporting in Malaysia, Volume 1
2.2
62
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
2.3 MFRS 129, Financial Reporting in Hyperinflationary
Economies
This MFRS applies to the financial statements of any entity whose
functional currency is the currency of a hyperinflationary economy.
The MFRS takes the view that in a hyperinflationary economy, reporting
of operating results and financial position in the local currency without
restatement is not useful. This is because money loses purchasing power at
such a rate that comparison of amounts from transactions and other events
that have occurred at different times, even within the same accounting
period, is misleading.
The MFRS requires a restatement of the financial statements when
hyperinflation occurs. The Standard does not define hyperinflation or
establish a rate at which hyperinflation is deemed to arise. This is thus a
matter of judgement on when a restatement is necessary. The MFRS, however,
clarifies that hyperinflation is indicated by characteristics of the economic
environment of a country which include, but are not limited, to the following
indicators:
(a) the general population prefers to keep its wealth in non-monetary assets
or in a relatively stable foreign currency. Amounts of local currency held
are immediately invested to maintain purchasing power;
(b) the general population regards monetary amounts not in terms of the
local currency but in terms of a relatively stable foreign currency. Prices
may be quoted in that currency;
(c) sales and purchases on credit take place at prices that compensate for
the expected loss of purchasing power during the current period, even if
the period is short;
(d) interest rates, wages and prices are linked to a price index; and
(e) the cumulative inflation rate over three years is approaching, or exceeds
100%.
The Standard applies to the financial statements of any entity, from the
beginning of the reporting period in which it determines the existence of
hyperinflation in the country, in whose currency it reports. For example, if an
entity determines that there is hyperinflation in the current year ending 31
December 20x4, it applies this Standard to the financial statements beginning
of 20x4, with the opening of business on 1 January 20x4. This basically
requires a restatement of the opening statement of financial position on that
date.
2.3
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
63
2.3.1 The Restatement of Financial Statements
Prices change over time due to specific or general factors. Specific factors
may cause individual prices of goods and services to change (specific inflation),
whereas general factors relate to political, economic and social forces that
cause the changes in the general level of prices (general inflation), and
therefore in the general purchasing power of money.
Generally, financial statements prepared under the historical cost basis
of accounting do so without regard either to changes in general inflation or
to specific inflation. The exceptions are those assets or liabilities that the
entity is required or chooses to measure at fair value (for example, an item
of property, plant and equipment may be revalued to fair value or biological
assets are measured at fair value)
Some entities prepare and present financial statements that are based
on a current cost approach that reflects the effects of changes in the specific
prices of assets held, but not the general inflation.
When hyperinflation exists, the financial statements of an entity, whether
based on a historical cost approach or a current cost approach, shall be stated
in terms of the measuring unit current at the end of the reporting period. The
corresponding figures for the previous period and any information in respect
of earlier periods shall also be stated in terms of the measuring unit current
at the end of the reporting period.
The gain or loss on the net monetary position shall be included in profit or
loss and separately disclosed.
2.3.2 Historical Cost Financial Statements
2.3.2.1 Statement of Financial Position
The Standard requires that statement of financial position amounts
not already expressed in terms of the measuring unit current at the end
of the reporting period, are restated by applying a general price index. The
procedures for the restatement are as follows:
(a) Monetary items, such as cash, receivables, payables and loans (that are
not linked to price indices) are not restated as they are already expressed
in terms of the monetary units current at the end of the reporting period;
(b) Assets and liabilities linked by agreement to changes in prices, such
as index linked bonds and loans, are adjusted in accordance with the
agreement in order to ascertain the amount outstanding at the end of
the reporting period;
(c) Other assets and liabilities (non-monetary items) that are carried at
amounts current at the end of the reporting period, such as inventories
Financial Accounting and Reporting in Malaysia, Volume 1
2.3
64
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
carried at net realisable value and financial instruments measured at
fair value, are not restated.
(d) All other non-monetary assets and liabilities are restated.
In restating the non-monetary assets and liabilities, the MFRS requires
that the restated carrying amount of each item is determined by applying
to its historical cost and accumulated depreciation (if applicable) the
change in a general price index from the date of acquisition to the end
of the reporting period. For example, in restating an item of PPE carried
at the cost model, the restated amount is calculated from the date of
purchase of the item.
Some non-monetary items are carried at amounts current at dates other
than that of acquisition or that of the statement of financial position. For
example, certain items of PPE may have been revalued in some previous
periods. In these cases, the carrying amounts are restated from the date
of the revaluation.
The restated amount of a non-monetary asset is reduced when it exceeds
its recoverable amount (the normal impairment test applies).
2.3.2.2 Statement of Comprehensive Income
The MFRS requires that all items in the statement of comprehensive
income are expressed in terms of the measuring unit current at the end of the
reporting period. Therefore all amounts need to be restated by applying the
change in the general price index from the dates when the items of income
and expenses were initially recorded in the financial statements.
2.3.2.3 Gain or Loss on Net Monetary Position
In a period of inflation, an entity holding an excess of monetary assets
over monetary liabilities (net monetary asset position) loses purchasing
power whilst an entity with an excess of monetary liabilities over monetary
assets (net monetary liability position) gains purchasing power.
Intuitively, if a person has RM100 cash at the beginning of the year and he
has the same amount of cash at the end of year; in nominal value terms, there
is no change in his wealth for the year. However, if the general inflation for
the year is 20%, his real wealth at the end of the year as eroded by RM20. If
he earns RM20 for the year, and his cash at year end is RM120, that amount
is the wealth he needs to maintain his original purchasing power (financial
capital maintenance concept measured in constant purchasing power).
This gain or loss on the net monetary position may be derived as the
difference resulting from the restatement of non-monetary items, owners’
equity and items in the statement of comprehensive income. Alternatively, the
gain or loss may be estimated by applying the change in a general price index
2.3
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
65
to the weighted average for the period of the difference between monetary
assets and monetary liabilities. This gain or loss on net monetary position is
generally included in profit or loss.
Example 1
Assume that Entity A starts off its business at the beginning of Year 1 with
capital of RM100m all invested in non-monetary assets. For Year 1, it records a
profit of RM20m (income and expenses accrue evenly in the year) and the profits are
represented by RM20m monetary current assets at the end of the year.
The movements in the general price index are as follows:
At beginning of the year : 100
At middle of the year
: 120
At end of the year
: 140
Entity A assesses and concludes that the economy is hyperinflationary.
Required
Explain and show how Entity A shall apply the restatement requirements of
MFRS 129.
Solution 1
Capital
Profit
Index
Restated
Year 0 Profit or Loss Year 1 Adjustment Year 1
RM'm
RM'm
RM'm
RM'm
100
100
1.40
140
20
20
1.20
24
120
164
Loss on net monetary
assets (balancing amount)
100
Non-monetary assets
Net monetary assets
20
120
20
100
20
100
100
20
120
Proof of:
Loss on net monetary assets = 20m x (1.4 - 1.2) = RM4m
Financial Accounting and Reporting in Malaysia, Volume 1
(4)
160
1.40
140
20
160
2.3
66
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
Example 2
Suppose in Example 1 Entity A starts of its business with a capital of RM100m
and a loan of RM100m, and all are invested in non-monetary assets at the beginning
of Year 1. Assume other facts are the same as in Example 1.
Required
Explain and show how Entity A shall apply the restatement requirements of
MFRS 129.
Solution 2
Capital
Profit
Index
Restated
Year 0 Profit or Loss Year 1 Adjustment Year 1
RM'm
RM'm
RM'm
RM'm
100
100
1.40
140
20
20
1.20
24
120
164
Gain on net monetary
liability (balancing amount)
100
Non-monetary assets
Monetary current assets
Loan
20
200
20
(100)
100
Proof of net gain:
Loss on monetarry assets = 20m x (1.4 - 1.2)
Gain on loan = 100m x (1.4 - 1.0)
Gain on net monetary liability position
20
36
200
120
200
20
(100)
120
1.40
280
20
(100)
200
(4)
40
36
2.3.3 Current Cost Financial Statements
For current cost financial statements, items in the financial position stated
at current cost are not restated because they are already expressed in terms
of the measuring unit current at the end of the reporting period. All other
items in the statement of financial position are restated in the same manner
as those using the historical cost approach.
The statement of comprehensive income prepared using a current
cost approach reports costs current at the time at which the underlying
transactions or events occur. Cost of sales and depreciation are recorded
at current costs at the time of consumption, sales and other expenses are
recorded at their money amounts when they occurred. Therefore, all amounts
need to be restated into the measuring unit current at the end of the reporting
2.3
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
67
period by applying a general price index. Gain or loss on the net monetary
position is generally recognised in profit or loss
2.3.4 Restating the Opening Statement of Financial Position
For the historical cost financial statements, MFRS 129 requires that at the
beginning of the first period of application of this Standard, the components
of owners’ equity, except retained earnings and any revaluation surplus, are
restated by applying a general price index from the dates the components
were contributed or otherwise arose. Any revaluation surplus that arose in
previous periods is eliminated. Restated retained earnings are derived from
all the other amounts in the restated statement of financial position.
At the end of the first period and in subsequent periods, all components
of owners’ equity are restated by applying a general price index from the
beginning of the period or the date of contribution, if later.
Example 3
Suppose at 1 January 20x3, the opening statement of financial position of
Entity B, prepared under the cost model with modification for property, plant and
equipment, is as follows:
RM’m
Capital (share capital and share premium)
200
Revaluation surplus of PPE
Retained profits
150
Total equity
400
Property, plant and equipment at revalued amount
200
Intangible assets – cost model
100
Net monetary current assets
150
Loans
(50)
Total net assets
400
50
The relevant consumer price indices are as follows:
When capital was contributed
80
When the PPE were revalued
100
When the intangible assets were acquired
110
At 31 December 20x2 (end of prior year)
130
Financial Accounting and Reporting in Malaysia, Volume 1
2.3
68
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
Suppose the year ended 31 December 20x3 is the first period that Entity B
applies MFRS 129, the restatement of the opening statement of financial position
would be as follows
Capital
Revaluation surplus
Retained profits
PPE - revaluation model
Intangible assets - cost model
Net monetary current assets
Loans
Opening
1 Jan 20x3
RM'm
200.00
50.00
150.00
400.00
Adjustment
200.00
100.00
150.00
(50.00)
400.00
1.625
1.300
1.182
Restated
1 Jan 20x3
RM'm
325.00
–
153.18
478.18
260.00
118.18
150.00
(50.00)
478.18
Adjustment:
Adjustment factor for capital = 130/80 = 1.625
Adjustment factor for PPE = 130/100 = 1.300
Adjustment factor for intangible = 130/110 = 1.182
Suppose during the year ended 31 December 20x3, Entity B records revenue and
expenses in its accounts based on the general inflation rates current at the dates
of the respective transactions and this produces a profit of RM50m, all reinvested
in monetary current assets. The average general inflation index at the respective
recognition of revenue and expenses is 150. At 31 December 20x3, the index increases
to 169. Ignore depreciation and amortisation of non-monetary assets.
The summarised statement of financial position at 31 December 20x3 before
restatement is as follows:
Capital
Revaluation surplus
Retained profits
PPE - revaluation model
Intangible assets - cost model
Net monetary current assets
Loans
2.3
Restated Profit or Loss
At
1 Jan 20x3
31 Dec. 20x3
RM'm
RM'm
RM'm
325.00
325.00
–
–
153.18
153.18
50.00
50.00
478.18
50.00
528.18
260.00
118.18
150.00
(50.00)
478.18
50.00
50.00
260.00
118.18
200.00
(50.00)
528.18
CCH Asia Pte Limited
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
69
The restatement of the statement of financial position at the end of 20x3 would
be as follows:
Capital
Revaluation surplus
Retained profits - opening
Profit before loss adjustment
Loss in profit or loss
Retained profits - closing
At
Adjustment
Restated
31 Dec. 20x3
31 Dec. 20x3
RM'm
RM'm
RM'm
325.00
1.300
422.50
–
–
153.18
1.300
199.14
50.00
1.127
56.33
(36.33)
219.14
528.18
PPE - revaluation model
Intangible assets - cost model
Net monetary current assets
Loans
260.00
118.18
200.00
(50.00)
528.18
641.64
1.300
1.300
338.00
153.64
200.00
(50.00)
641.64
Adjustment factor:
Capital, opening retained profits, PPE and intangible = 169/130 =1.300
Profit = 169/150 = 1.127
Proof of loss on monetary items
RM'm
%
Opening monetary items
100.00
(169-130)/130
30.0%
Increase in current year
50.00
(169-150)/150
12.7%
RM'm
30.00
6.33
36.33
2.3.5 Comparative Figures
The Standard requires that corresponding figures for the previous
reporting period, whether prepared under a historical cost approach or a
current cost approach, be restated by applying a general price index so that
the comparative financial statements are presented in terms of the measuring
unit current at the end of the reporting period. Information that is disclosed
in respect of earlier periods is also expressed in terms of the measuring unit
current at the end of the reporting period.
In the Example 3 above, a restatement of the statement of financial
position at 31 Dec. 20x2 of Entity B for the purpose of presentation in the
financial statements of the year 20x3 would be as follows:
Financial Accounting and Reporting in Malaysia, Volume 1
2.3
70
Chapter 2: The Conceptual Framework for Financial Reporting and
Reporting in Hyperinflationary Economies
Capital
Revaluation surplus
Retained profits
PPE - revaluation model
Intangible assets - cost model
Net monetary current assets
Loans
Opening
Adjustment
Restated
31 Dec 20x2
31 Dec 20x2
RM'm
RM'm
200.00
2.113
422.50
50.00
–
150.00
169.14
400.00
591.64
200.00
100.00
150.00
(50.00)
400.00
1.690
1.536
338.00
153.64
150.00
(50.00)
591.64
Adjustment:
Adjustment factor for capital = 169/80 = 2.113
Adjustment factor for PPE = 169/100 = 1.690
Adjustment factor for intangible = 169/110 = 1.536
2.3.6 Economies Ceasing to be Hyperinflationary
When an economy ceases to be hyperinflationary and an entity discontinues
the preparation and presentation of financial statements prepared in
accordance with this Standard, it shall treat the amounts expressed in the
measuring unit current at the end of the previous reporting period as the
basis for the carrying amounts in its subsequent financial statements
2.3.7 Disclosures
The following disclosures are required:
(a) the fact that the financial statements and the corresponding figures
for previous periods have been restated for the changes in the general
purchasing power of the functional currency and, as a result, are stated
in terms of the measuring unit current at the end of the reporting period;
(b) whether the financial statements are based on a historical cost approach
or a current cost approach; and
(c) the identity and level of the price index at the end of the reporting period,
and the movement in the index during the current and the previous
reporting period.
2.3
CCH Asia Pte Limited