Preparing For Calamity • Helping SMPs thrive
THE MALAYSIAN INSTITUTE OF ACCOUNTANTS
May / June 2012
Vol. 25 No. 3
MFRS
MANAGEMENT
FINANCE
CORPORATE
governance
POST-CONVERGENCE,
what next?
Managing the post-convergence environment
A Bimonthly Publication of the Malaysia Institute of Accountants
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Contents
MAY / JUNE 2012
editor’s note
5
Quest for Quality
president’s message
6
Enhancing Quality
cover story
8
Post-Convergence, What Next? 1 January 2012
was the effective deadline for International Financial Reporting
Standards or IFRS convergence for Malaysia. Post-convergence,
what lies in store for corporate Malaysia?
12 MASB on Convergence Mohammad Faiz Mohammad
Azmi, Chairman of the Malaysian Accounting Standards Board
(MASB), brings us up to speed on accounting standards in
Malaysia.
accounting
14International Guidance on Auditing
Financial Instruments
18
Public Practice Concerns Public practitioners were
exposed to the latest issues at the recent inaugural MIA Public
Practitioners Seminar 2012, and invited to air their concerns at the
Members’ Engagement Forum which capped the event.
22Upholding Financial Reporting Quality
To encourage quality financial reporting, MIA’s FINANCIAL
STATEMENTS REVIEW COMMITTEE (FSRC) has released its common
findings based on reviews during the financial year July 2010 –
June 2011.
28 How to Create A Winning Annual Report
34 The Future of Corporate Governance:
From Accounting to Strategy
2
accountants today | MAY / JUNE 2012
MIA Conference 2012
38 Accountants driving innovation
governance
42 Statutory Audits for SMEs Are statutory audits on
Small and Medium Enterprises (SMEs) necessary or just a complete
waste of time?
tax
46 Tax Implications of Convergence All
accountants need to be familiar with the tax implications arising
from the implementation of converged standards. Going forward,
Malaysia urgently needs clarity on tax implications and issues
arising from convergence, which can be complex, unfamiliar
and have a far-reaching impact on financial performance and
reporting.
economy
50 PREPARING FOR CALAMITY
management+business
54
FAQs on Professional Indemnity Insurance
56
Helping SMPs thrive Giancarlo Attolini, Chair, IFAC
Small and Medium Practices (SMP) Committee talks about how to
help small and medium-sized practices (SMPs) meet the challenges
and seize the opportunities of tomorrow.
trends
60
The Future of Islamic Finance Ambiguous
shariah interpretations are bogging down the growth and
credibility of the global Islamic finance industry. How can it move
forward?
63
BOOK REVIEW
MAY / JUNE 2012 | accountants today
3
Vision and Mission
mia Council
MIA’S VISION
ACCOUNTANT GENERAL
YBhg Datuk Wan Selamah Wan Sulaiman
n To be a globally recognised and
renowned Institute of accountants
committed to nation-building.
DEPUTY ACCOUNTANT GENERAL, CORPORATE
(Nominee of the Accountant General in MIA Council)
Rosini Abdul Samad
MIA’S MISSION
PRESIDENT
Datuk Mohd Nasir Ahmad
n To develop, support and monitor quality
and expertise consistent with global best
practice in the accountancy profession
for the interest of stakeholders.
The Malaysian Institute of Accountants is a
statutory body set up under the Accountants
Act, 1967 to regulate and develop the
accountancy profession in Malaysia.
The functions of the Institute are, inter alia:
(a) To regulate the practice of the
accountancy profession in Malaysia;
(b) To promote in any manner it thinks fit, the
interests of the accountancy profession
in Malaysia;
(c) To provide for the training and education
by the Institute or any other body, of
persons practising or intending to
practise the profession;
(d) To determine the qualifications of persons
for admission as members; and
(e) To approve, regulate and supervise the
conduct of the Qualifying Examination.
Accountants Today is the official publication of the Malaysian
Institute of Accountants (MIA) and is distributed to all members
of the Institute. The views expressed in this magazine are not
necessarily those of the MIA or its Council. Contributions
including letters to the Editor and comments on articles
appearing in the magazine are welcomed and should be
sent to the Editor as addressed below. All material without
prejudice appearing in Accountants Today are copyright and
cannot be reproduced in whole or in part without written
permission from the Editor.
Editor, Accountants Today, Dewan Akauntan,
2 Jalan Tun Sambanthan 3, Brickfields,
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Tel: +603-2279 9200, Fax: +603-2274 1783
e-mail: communications@mia.org.my
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accountants today | MAY / JUNE 2012
VICE-PRESIDENT
Abdul Rahim Abdul Hamid
COUNCIL MEMBERS
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Devanesan Evanson
Francis Chan Feoi Chun
Josephine Phan Su Han
Ng Kim Tuck
Baharuddin Ahmad
Donald Joshua Jaganathan
Eugene Wong Weng Soon
Johan Idris
Mohd Noh Jidin
Mohammad Faiz Mohammad Azmi
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Dato’ Narendra Kumar Jasani
Dato’ Raymond Liew Lee Leong
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editor’s note
Quest for Quality
1
January 2012 was a milestone for
a great deal of weight and can be highly influential
convergence as Malaysia officially
in their respective sectors as advisors and decision-
enforced the Malaysian Financial
makers. To cater better to PAIBs, the Institute
Reporting Standards (MFRS).
recently organised the Accountants in Business
But the journey isn’t over. While we may have
converged, our aim is not merely to tick the convergence box. Convergence is aimed at bringing
Malaysia in line with global accounting standards,
which ultimately aim to improve the quality and
Symposium (AIBS). In this issue, we summarise
the key takeaways from the AIBS, among which
are post-convergence issues, reconciling taxation
and convergence, and disaster risk management to
ensure business continuity post-crisis.
usefulness of financial reporting. So post-con-
Do block your calendar from 27 – 28 November
vergence, professional accountants – especially
2012 for the upcoming Malaysian Institute of
those working in commerce and industry - need
Accountants International Conference 2012,
to make sure that they understand the implica-
with the theme of Innovative Society: Sustaining
tions of these standards which are being applied
Business Success. People are at the heart of
in order to produce financial statements that are
an innovation nation. Improve the quality and
true and fair. In our cover story, we look at “Post-
creativity of accounting professionals who are
Convergence, What next” and feature a Q&A with
fulcrums for business, and you strengthen inno-
Mohammad Faiz Mohammad Azmi, Chairman
vation and sustain growth.
of the Malaysian Accounting Standards Board
(MASB) to see what’s next on the agenda.
Such events tie in with MIA’s agenda to improve
quality among our members, which can spur
Being an accountant in organisations with pub-
sustainable business, and help the nation achieve
lic accountability entails preparing high-quality
high-income developed status by 2020. This is
financial statements and annual reports which
our goal and we hope that our members will work
come under intense scrutiny from regulators,
together with us to achieve this. n
stakeholders and the public. Check out the latest
findings from MIA’s Financial Statements Review
Happy reading!
Committee as well as insights from the adjudicators and previous award winners of NACRA
(National Annual Corporate Report Awards). To
EDITOR
participate in NACRA 2012, do submit your
annual reports and financial statements before
the closing date of 30 June 2012.
Lately, the Institute has also been devoting a great
deal of attention to our members who are professional accountants in business (PAIB), who comprise about 65% in commerce and industry, 7% in
the public sector and 2% in academia. PAIBs carry
letters to the editor /////
A key element in the world of publishing is what readers have to say. We want to hear from you on just about anything that
appears in each issue of Accountants Today. Why not drop us a line now? e-mail: communications@mia.org.my
MAY / JUNE 2012 | accountants today
5
president’s message
Enhancing Quality
T
I stressed that PAIBs working in the
he accounting profession today is
private sector should strive to improve
subject to intense scrutiny, and pubtheir own technical skills and knowledge
lic and stakeholder expectations of
instead of relying on auditors’ expertise.
accountants have never been higher.
Under company law, the responsibility
If we want to mitigate the pressures
for financial statements lies with company
on us, we have to improve the quality of
officers and the board. As preparers and
our performance to meet expectations.
company officers, PAIBs bear the actual
Quality can be both tangible and
responsibility for errors or false and misintangible. From the tangible perspective,
leading statements, although the finger
quality relates to productivity, which can
of blame is frequently pointed at the
be broken down into two main elements:
auditors. Since PAIBs in commerce and
efficiency and effectiveness. Efficiency
industry comprise 65% of MIA memberis about how we do our work; it is about
ship, an improvement in quality among
doing things right, being knowledgeable,
our PAIB members would definitely uplift
competent and productive.
the overall standard, stature and reputaMeanwhile, effectiveness is more
tion of the profession.
intangible. Effectiveness is about doing
Education, competence and qualthe right thing; it is about internalising
ity are tangibles that can be assessed.
the profession’s universal code of ethics
Equally important are the intanand integrity to guide our congible qualities of dedication and
duct and behaviour in accordwork ethics. I want to emphasise
ance with global standards.
If juniors are below par today, this partly reflects
that members should cultivate a
As a profession, we are
upon the training and mentorship of the senior
passion and interest in the progoverned by various sets of
members.Thus, senior members should be selfless in fession. Without passion, we will
standards. There is no runteaching the juniors in order to propagate quality in be passive and we will treat our
ning away from these standprofession as just another munards; they are part and parcel
the profession.
dane job. I would like to remind
of the profession. To uphold
members that our interest in and
quality, we must refrain from
dedication to the profession must be high
with their junior counterparts. While MIA
compromising on meeting the standards.
if we want to do our best. If we are fully
has instituted mentor-mentee relationThat is the easy way out. We must not be
invested and interested in our profession,
ships under the CARE programme, perso lenient that we sacrifice the standards
we will live up to the higher standards
haps our experienced members could
just because we cannot live up to them.
being set for us.
take it further by ensuring that those
This route leads to mediocrity. As a reguBy putting quality initiatives in place,
under their care have the opportunity
lator, MIA must enforce these standards
it is MIA’s hope that our members will
to learn from their seniors. If juniors are
to preserve and uplift the quality and thus
not only meet expectations, but anticipate
below par today, this partly reflects upon
the reputation of the profession.
and exceed them. Our stance should be
the training and mentorship of the senior
Of course, it would be unjust to
that we are here for good; our presence
members. Thus, senior members should
enforce without awareness and educaand influence should result in productive
be selfless in teaching the juniors in order
tion. Thus MIA places great emphasis
and good outcomes and comfort for our
to propagate quality in the profession.
on quality initiatives and continuing prostakeholders. Only by proactively and
All the segments of MIA’s memfessional development and education to
consistently improving our performance
bership must take equal initiative to
improve our members’ technical skills
and good behaviour can the profession in
improve quality, and not pass the buck
and knowledge of the various standards.
Malaysia reclaim the stature, reputation
to one another. Recently, at a Members’
To improve competence, I strongly
and influence that it was privileged to
Engagement Session for PAIBs
encourage senior members to generously
enjoy before. n
(Professional Accountants in Business),
disseminate and share their expertise
‘‘
6
accountants today | MAY / JUNE 2012
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cover
Post-Convergence,
what next?
1 January 2012 was the effective deadline for International Financial Reporting Standards or
IFRS convergence for Malaysia. Post-convergence, what lies in store for corporate Malaysia?
Post-convergence issues and challenges were one of the main topics of discussion at the
Institute’s recent Accountants In Business Symposium organised from 21 - 22 March
2012. The session entitled “IFRS Convergence: Converged, What’s Next?” was expressly
designed to help preparers and accountants manage in the post-convergence environment.
Majella Gomes
1
January 2012 came and went,
and everyone breathed a sigh
of relief. After much deliberation, expressions of concern,
delays and postponement,
convergence slid into place. But the dust
had hardly settled when the next question blipped on the radar: what’s next?
The road less travelled
ll “It was not easy to converge,”
remarked Mohd Raslan Abdul Rahman,
Partner of KPMG Malaysia, who chaired
the session entitled “IFRS Convergence:
Converged, What’s Next?” during the
Institute’s recent Accountants in Business
Symposium.
To understand the history of convergence, Raslan offered a quick overview
of the history of accounting standards
in Malaysia as instituted by MIA and
MICPA, starting from 1976. “In 1997,
the Financial Reporting Act was passed
by Parliament, and the power to set
accounting standards was moved to
8
accountants today | MAY / JUNE 2012
MASB,” he explained. “Then in 2006,
MASB started to align Malaysian standards to international standards. Today,
we have three accounting frameworks:
FRS, PERS (for private companies) and
Malaysian Financial Reporting Standards
(MFRS).”
Credibility on the global stage is a key
driver for convergence. Mohammad Faiz
Mohammad Azmi, Chairman of MASB
cited the example of Korea, which was
one of the first Asian countries to converge. Korean companies were experiencing rapid expansion but found they
lacked international credibility. “Other
countries didn’t trust Korean businesses,
so Korea decided to adopt international
standards,” he said. “Malaysia decided to
take the same route but we have done so
incrementally.”
But why converge in the first place?
“The minute you subscribe to a
standard, everything you do becomes
standardised,”
Mohammad
Faiz
remarked. “There are medium and long-
term benefits, especially when you are
expanding regionally. For instance, there
is no need for extra training for local
staff, if everything is already conforming
to internationally accepted standards.
Not only that, those who understand and
implement these accounting standards
almost immediately attain international
marketability, career-wise. You find
yourself suddenly in demand in countries
besides your own.”
One Size Does Not Fit All
ll It has been debated whether full
convergence should be applied equally to
different tiers of firms, e.g. should small
and medium enterprises be subjected to
full IFRS along with multinationals and
public-listed companies?
Mohammad Faiz clarified that while
MASB has no power to exempt anyone
from IFRS, the body could define the
standards for those firms which chose
to use the framework, adding that transitional situations would be considered.
Post-Convergence, What Next?
MIA Vice-President Abdul Rahim Abdul Hamid
officiating the Accountants in Business Symposium.
The IFRS Convergence Forum panellists:
(L - R) Thong Foo Vung, Mohd Raslan
Abdul Rahman, Mohammad Faiz
Mohammad Azmi and Ng Kean Kok.
MAY / JUNE 2012 | accountants today
9
Post-Convergence, What Next?
Two of the most challenging areas in
transition today concern fair value for
biological assets such as palm oil and
the recognition of profits in property
development. With reference to IFRS
13, Mohammad Faiz emphasised that
fair value was what you could get in an
orderly market for an asset, such as palm
oil or a plantation in varying stages of
growth. Fair value may also be defined as
the value derived from the best possible
use of the asset as in the case of plantation land which may be of more value if
converted to, and developed as, residential property.
Although IFRS may sound convoluted,
it is the preferred framework because it
is put together by experts on the subject.
authorities, but once you enter the race,
you have to keep up, and it is definitely
not easy! You will find the authorities
instituting new regulations all the time,
and if you don’t keep up, you will have
a problem.” He urged for a “stronger
voice at IASB,” remarking that if anyone wanted to be heard, it was best to
make a noise before a draft became a
standard. “Convergence was announced
in 2008, and ever yone just hoped that
it would be dropped – but it happened
anyway,” he reiterated. “There is a need
to keep up in the IFRS race, and take
part in the standards-setting process.
Read and pay attention to the drafts
issued by the Board, and give your feedback to MASB.”
Beyond Convergence; Move to
Integrated Reporting?
ll The profession cannot afford to ignore
the needs of end-users and stakeholders
in implementing convergence. Ng Kean
Kok, an academic currently lecturing at
Universiti Tunku Abdul Rahman, stressed
the need for financial reporting to be
more relevant to stakeholders. “Different
stakeholder perspectives must be considered,” he said. “Factors like business sustainability and environmental issues are
important to them. And as if IFRS wasn’t
enough, there is now a push for integrated reporting (IR) as well. In the UK, there
is a Non-Financial Reporting Standard.
This underscores the importance of nonfinancials in the general scheme of things.
Structural changes to reporting systems will be required. One problem identified
was that most Malaysian companies believe their auditors could take care of
their financial statements, tax computation and deferment, and everything else
to do with the financials of the firm but this is not so; the combined effort of
preparers and auditors is needed.
“There is logic to what they do,” said
Mohammad Faiz. He urged those with
objections or feedback to standards to
surface them during the exposure draft
phase. “Regular dialogue is important,
and when exposure drafts are issued, we
have to read them because this is the best
time to raise concerns. The next time
you see the document, it may well be a
regulation.”
Are We There Yet?
ll Has convergence really been fully
achieved in Malaysia? Thong Foo Vung,
Partner of KPMG Malaysia, cautioned
delegates against taking a narrow view.
“We haven’t passed the first quarter
yet,” he said. “Moving into IFRS is like
entering Formula 1 – you are ready
for the race, but there are always new
requirements. Once in a while, there is
a pit stop, where you are checked by the
10
accountants today | MAY / JUNE 2012
There was consensus that convergence
is shaping up to be a resource-intensive
matter for most companies. For instance,
companies’ reporting on tight deadlines
though doable in most cases, is but a
drain on any firm’s resources. Structural
changes to reporting systems will be
required. One problem identified was
that most Malaysian companies believe
their auditors could take care of their
financial statements, tax computation
and deferment, and everything else to
do with the financials of the firm but this
is not so; the combined effort of preparers and auditors is needed. They also
need the right resources, so the push
for structural changes in the years to
come may result in the rise of Reduced
Disclosure Reporting (RDR) frameworks
which cut down on the amount of disclosure necessary for private companies,
thereby scaling back on resources.
Auditors should explain the scope of their
audits and explain their opinions on other
matters.”
The key question for many preparers
and auditors alike is how all financial and
non-financial reports should be linked
in a way that allows for non-financial,
operational and financial information to
be reported, while simultaneously reflecting the corporation’s business strategy.
IR, done correctly, can be the solution. It
clearly delineates the different resources – financial, manufacturing, human,
intellectual, natural and social – utilised
by the firm, and the impact created by
these different elements. Through IR,
a more holistic picture of a company’s
financial and non-financial performance
becomes clear, and with this, its shortand long-term prospects for value generation, in view of existing and projected
constraints.
Post-Convergence, What Next?
Several countries have already started
incorporating IR into their reporting
frameworks; South Africa’s Integrated
Reporting Committee has gone so far as
to issue a Discussion Paper, “Framework
for Integrated Reporting and the
Integrated Report” and an IAASB proposal includes a suggestion that auditors provide separate reports on enterprise-wide risk management, business
models, internal controls, key performance indicators and corporate governance arrangements. Australia, Canada,
Nor way and Denmark have started
moving away from traditional corporate
social responsibility (CSR) reporting
towards IR. So seriously is IR being
taken, that in February 2010, the Japan
Stock Exchange made it a requirement
for all listed companies to produce an
integrated report for the financial year
beginning 1 March 2010 – or explain
why they were not doing so.
The effects are being felt locally as
well. In Malaysia, the Capital Market
Masterplan 2 (CMP2), the blueprint
for the development of the Malaysian
capital market launched in April 2011,
emphasised the importance of investor
protection and governance, both major
aims of IR. In June 2011, the Corporate
Governance Blueprint was launched,
with “Disclosure and Transparency”
as one of the main themes promoting effective disclosure of non-financial
information – yet another move in the
IR direction.
XBRL to the Rescue
ll With the increased requirements of
reporting standards comes the need for
more resource allocation, which can be
difficult for many firms. This is where
technology can play a pivotal role. “By
2013, electronic submissions using the
IFRS framework will be available,” said
Mohammad Faiz. “XBRL, a nationwide
format, will be adopted,” he explained.
“It will be used by bodies like the Central
Bank, the IRB, Securities Commission
and Bursa Malaysia. The information
lodged with SSM using the XBRL format
will be seen as accurate and correct.” The
XBRL project commenced in 2010, with
the operationalisation phase expected
to be completed in 2013. Lodgement of
financial statements in XBRL format will
be on a voluntary basis, although this is
expected to eventually become mandatory.
Remarking that standards will, in
all likelihood, continue evolving out of
necessity, he pointed out that this will also
mean that accountants will find their work
becoming more complicated. “Standards
evolve to catch the crooked, and to identify fraudulent practices,” he concluded.
“As fraud becomes more complicated, so
will the standards. But no one standard
can be depended upon to make you honest. Honesty will depend on the person
interpreting it.” n
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cover
MASB on convergence
Q
How do you rate the success
of full IFRS convergence in
Malaysia today? What are the main
challenges that are faced by users
of the financial accounting standards?
Mohammad Faiz Mohammad Azmi
I believe as with any new framework or
change for that matter, there are bound
to be some teething problems in the
initial period of implementation. Hence,
at this point in time, I would think that
it’s still too early to conclude on the success or other wise of the implementation
of the Malaysian Financial Reporting
Standards (MFRS).
However, having said that, we will
be more certain and able to gauge the
successful implementation of MFRS for
those with December financial yearends in the coming weeks as they
report their quarterly results based
on the new Framework. From the few
companies that have already reported
their quarterly results, no major issues
were noted.
One point I would like to emphasise is that compared with other jurisdictions, I believe the learning cur ve
for Malaysian accountants in adopting
the International Financial Reporting
Standards (IFRS) Framework is not that
steep. This is because our previous FRS
Framework, i.e. the Financial Reporting
Standards (FRS) was already virtually
identical to the IFRS except for a few
standards that we had yet to adopt.
Q
What are the platforms for
users of the accounting standards to convey their issues or concerns pertaining to the implementation of MFRS?
12
accountants today | MAY / JUNE 2012
Users can raise their issues or concerns relating to the MFRS Framework
through our monthly conference call
which has been run since Januar y
this year. You can check the details
of the call from our website at www.
masb.org.my. We have also set up a
Convergence Task Force (CTF) to deal
with issues relating to the implementation of this IFRS-compliant framework.
The CTF meets quarterly. Finally, we
do meet preparers by industries and
have forums with regulators and auditors on a regular basis.
Q
In view that MFRS are fully
IFRS-compliant standards for
entities other than private entities, what is the future accounting
framework for private entities?
We had in February 2012 published a
Request for Views (RFV) document to
seek views from interested parties about
the future accounting framework for private entities in moving forward. The RFV
seeks feedback as to the timeline to implement a new framework for private entities as well as the possible frameworks
for consideration, namely ED 52 PERS,
ED 72 FRSs for SME, ED 74 Reduced
Disclosure Requirements, or to consider
the upcoming revised IFRS for SMEs or
to improve on existing standards.
The Board believes that with the adoption of MFRS for public interest entities,
we now need to look at what the appropriate framework for private entities is,
bearing in mind the level of sophistication, the impact of being too divergent
with IFRS and the need to evolve local
frameworks to a certain standard. The
RFV is available on the MASB website,
MASB on Convergence
Mohammad Faiz Mohammad Azmi, Chairman of the Malaysian
Accounting Standards Board (MASB), brings us up to speed on
accounting standards in Malaysia.
www.masb.org.my and the MASB would appreciate any
comments from the public by 29 June 2012.
Q
If the issues in relation to IC Interpretation
15 and MFRS 141 could not be resolved
during the year, what would you think is the
next best solution to address these issues?
We are currently discussing this internally and we
are hopeful that a decision will be announced by 30
June 2012.
Q
Bank Negara Malaysia has always been a
strong advocator to the growth of Islamic
finance by establishing the necessary infrastructure and legal framework in creating a
conducive environment to promote Malaysia
as an Islamic finance hub. How does MASB play
a role in supporting the country’s agenda?
MASB as a statutor y body under the Ministr y
of Finance supports the nation’s agenda. For the
record, we work closely with all the regulators,
including Bank Negara.
Bank Negara and the Securities Commission have
identified Islamic finance as a sector that they want
to expand further, both by bringing in foreign direct
investment to Malaysia and by venturing forth into
untapped markets overseas. These strategies would
require a wide range of investors to have confidence
in the information we provide about our IFIs and
their product offerings.
Since a major source of this information comes
from financial reports, it is essential that IFIs prepare
their financial reports in a manner that is acceptable
to a wide investor base. This is where MASB’s role
becomes vital. By ensuring that MASB-approved
accounting standards are up to par with global standards – or, as is the case, identical with international
standards - we are doing our part to realise our countr y’s aspirations. We also see our role as advocates or
helping to clarify, changes to International Standards
that can better accommodate Islamic finance, to bodies such as the IASB. n
Q
What is MASB’s view
on the accounting
standards in relation to
Islamic finance?
MFRS apply to Islamic financial institutions (IFIs) in the same way they apply
to conventional financial institutions. In
the past, we had considered separate
Islamic standards, but we backed away
from that idea when we saw the potential for undesirable arbitrage opportunities. Moreover, after much research, we
believe that applying IFRS to Islamic
finance is possible and indeed is sought
after by the industry itself as a way of
making the industry more internationally
accepted.
This is not to say there aren’t any
problems in trying to fit Islamic finance
within an IFRS framework. Certainly, it
is common to have industry-specific
issues with IFRS; we’ve seen issues from
the extractive industry, the agricultural
industry, and Islamic finance is no exception. So, when we look at the issues with
Islamic finance from that perspective,
we realised that the issues are not insurmountable and does not need to lead to
a repudiation of IFRS principles. In fact,
many of these issues can be dealt with
satisfactorily especially with the help of
the relevant stakeholders.
MAY / JUNE 2012 | accountants today
13
accounting
MIA Professional Standards and Practices
International Guidance on
Auditing Financial Instruments
I
n December 2011, the International Auditing and Assurance
Standards Board (IAASB) issued International Auditing
Practice Note (IAPN) 1000 – Special Considerations in
Auditing Financial Instruments. Accordingly, the MIA
Council has approved this IAPN as Malaysian Approved
Auditing Practice Notes in April 2012. IAPNs are a new category
of IAASB’s publication to provide practical assistance to auditors
in their audit and they replace the International Auditing Practice
Statements (IAPSs). IAPNs are non-authoritative documents that
do not impose additional requirements on auditors beyond those
included in the International Standards on Auditing (ISAs), nor
do they change the auditor’s responsibility to comply with all
ISAs relevant to the audit. The relevant ISAs in relation to audits
of financial instruments are:
ISA 5401 on the auditor’s responsibilities relating to auditing accounting estimates, including accounting estimates
related to financial instruments measured at fair value;
ISA 3152 and ISA 3303 in identifying and assessing risks of
material misstatement and responding to those risks; and
ISA 5004 in relation to audit evidence and deals with auditor’s responsibility to design and perform audit procedures
to obtain sufficient appropriate audit evidence, and accordingly to be able to draw reasonable conclusions to form the
auditor’s opinion.
Valuation of financial instruments;
Presentation and disclosure of financial instruments; and
Other considerations including written representations and
communication with those charged with governance and
regulators.
IAPN
1000
International Auditing
Practice Note
Special Considerations in Auditing
Financial Instruments
+
IAPN 1000 provides guidance to a broad range of auditors
with different levels of familiarity with financial instruments.
Nevertheless, it will most benefit the auditors who have less
frequent contact with financial instruments in their audit.
Section I of the IAPN provides background material to help auditors understand financial instruments better. The section covers
the following:
Purpose and risks of using financial instruments;
Controls relating to financial instruments, including controls over completeness, accuracy and existence; and
Valuation of financial instruments which includes financial
reporting requirements, valuation processes and models,
the use of third-party pricing sources, and presentation and
disclosure requirements and practices.
Section II includes the following major areas:
Application of professional skepticism;
Planning considerations;
Assessing and responding to the risk of material misstatement;
14
accountants today | MAY / JUNE 2012
IAPNs are non-authoritative documents that do
not impose additional requirements on auditors
beyond those included in the International
Standards on Auditing (ISAs), nor do they
change the auditor’s responsibility to comply
with all ISAs relevant to the audit.
1.ISA 540 Auditing Accounting Estimates, Including Fair Value Accounting
Estimates, and Related Disclosures
2.ISA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment
3.ISA 330 The Auditor’s Responses to Assessed Risks
4.ISA 500 Audit Evidence
International Guidance on Auditing Financial Instruments
To further assist auditors, the Appendix to IAPN 1000 provides examples of controls that may exist in an entity that deals in a high
volume of financial instrument transactions.
Valuation of Financial Instruments
As valuation is a critical issue when auditing financial instruments, this article highlights the areas the auditor should consider when
looking at valuation as outlined by IAPN 1000. These are as follows:
AREAS TO CONSIDER
GUIDANCE TO AUDITOR UNDER IAPN 1000
Financial reporting requirements
Obtain understanding of how the financial instruments relate to fair value hierarchy. As the
level of measurement uncertainty increases, both the risk of material statements and the
level of audit procedures required increase.
Obtain understanding of how management values financial instruments. For example,
whether management has a formal valuation policy. If so, whether the valuation technique
used for a financial instrument is documented according with the policy.
Assessing the risk of material misstatement related to valuation
Evaluate the appropriateness of the valuation techniques used by the entity and whether
controls over valuation techniques are in place.
Identify significant risks relating to the valuation of financial instruments through the risk
assessment process.
For accounting estimates that give rise to significant risks, in addition to other substantive
procedures performed to meet the requirements of ISA 330, auditors are to observe the
requirements of paragraph 15 of ISA 540.
Evaluate the appropriateness of management changing the valuation technique from one
period to another.
Developing an audit approach
In testing how management values the financial instrument and in responding to the
assessed risks of material misstatements, the auditor can perform one or more of the following procedures:
Test how management made the accounting estimate and the data on which it is based.
Test the operating effectiveness of the controls over how management made the
accounting estimate, together with appropriate substantive procedures.
Develop a point estimate or a range to evaluate management’s point estimate.
Determine whether any subsequent event provides audit evidence regarding the
accounting estimate.
Audit considerations when management uses a third-party pricing source
Obtain understanding of how management uses a third-party pricing source and how the
pricing service operates in order to determine the nature and extent of audit procedures to
be performed.
MAY / JUNE 2012 | accountants today
15
International Guidance on Auditing Financial Instruments
AREAS TO CONSIDER
GUIDANCE TO AUDITOR UNDER IAPN 1000
In determining the nature, timing and extent of audit procedures on models, the auditor
Audit considerations when
management estimates fair values using may consider the methodology, assumptions and date used in the model depending on the
levels of inputs of the fair value hierarchy (i.e. levels 2 or 3).
a model
Test the model using one of the two main approaches:
Test management’s model by considering the appropriateness of the model used by management, the reasonableness of the assumptions and data used, and the mathematical
accuracy; or
Develop own estimate and then compare that with the management’s.
For unobservable inputs (i.e. level 3 inputs), auditor to consider how management supports
those inputs.
Auditor to consider his industry knowledge, knowledge of market trends, understanding of
other entities’ valuation and other relevant price indicators when testing the reasonableness
of the valuations.
From an internal control perspective, when there is a lack of observable external evidence,
it is important for management to engage those charged with governance about management’s valuation and how the evidence has been obtained to support the valuation (for
instance, via a thorough review process).
Management’s valuations may be more judgemental and as a result may be less reliable
when markets become inactive or dislocated, or inputs are unobservable. As such, auditors
may test the model by a combination of testing controls operated by the entity, evaluating
the design and operation of the model, testing the assumptions and data used in the model,
and comparing its output to a point estimate or range developed by the auditor or to other
third-party valuation techniques.
In evaluating whether the assumptions used by management are reasonable, the auditor is
to perform the following:
Testing the assumptions used by management, including inputs to the models.
Refer to paragraphs A77 to A83 of ISA 540 for further guidance in evaluating management’s assumptions.
Subsequent events review.
Where discount rate is used, auditor is to compare it to an observable trade on a similar
security or a discount rate that the auditor calculated using an independent model.
Audit considerations when a management’s expert is used by the entity
Paragraph 8 of ISA 500 contains requirements for the auditor in evaluating evidence from an
expert engaged by management.
Developing a point estimate or range
Paragraphs 106 to 135 of IAPN 1000 provide guidance to the auditor in developing a point estimate or range.
ISA 540 requires that when the auditor uses assumptions or methodologies that differ from management’s, the auditor should obtain
an understanding of management’s assumptions or methodologies and compare it against the auditor’s. The auditor may consider
using the work of an auditor’s expert to evaluate the reasonableness of management’s valuation. When an expert is used, the auditor is
to consider the requirements outlined by ISA 6205.
IAPN 1000 addresses various issues in auditing financial instruments and is useful in developing the firm’s audit procedures in auditing this
area. The full version of IAPN 1000 can be downloaded from the Institute’s website at www.mia.org.my/handbook/guide/. n
5.ISA 620 Using the Work of an Auditor’s Expert
16
accountants today | MAY / JUNE 2012
accounting
Public Practice
concerns
Public practitioners
were exposed to the
latest issues at the
recent inaugural MIA
Public Practitioners
Seminar 2012, and
invited to air their concerns at the Members’
Engagement Forum
which capped the event.
18
accountants today | MAY / JUNE 2012
T
o connect with members
and surface the latest
issues in public practice,
the Institute recently organised the inaugural Public
Practitioners Seminar 2012 – Facing
the Changing Practice Landscape.
This one-day seminar for public
practitioners is an initiative to keep
members updated with the latest technical updates and information regarding the most current developments in
the accountancy profession regionally
and globally.
The seminar focused on the current challenges faced by small and
medium practitioners in Malaysia
and other ASEAN regions, the latest
developments on tax-related issues,
company law changes and their implications, insolvency and restructuring issues affecting public practice,
issues on the relevance of the future
of audit as envisaged by the European
Commission and how it might affect
Malaysia, and new insights and
knowledge on how practitioners can
best enhance their practice management skills.
Speakers present at the event
included Alex Khaw, Partner, KPMG
Malaysia; Theresa Goh, Tax Partner,
Deloitte Kassim Chan Tax Services
Sdn Bhd.; C.K. Ooi, Senior Partner,
Public Practice Concerns
MIA President Datuk Mohd Nasir
Ahmad officiated the event.
Folks DFK & Co. and Azman, Wong,
Salleh & Co.; Chiew Chun Wee, Head
of Policy, Asia Pacific, ACCA; Heng
Chiang Pooh, Partner, Friendbond
Group of Companies; and Andrew
Heng, Executive Partner of Baker
Tilly Monteiro Heng. Below are some
highlights and takeaways from the
Public Practitioners Seminar 2012:
MFRS for SMEs
There was concern that the impending adoption of MFRS for SMEs might
impose a further reporting burden on
SMEs. In his presentation on MFRS
for SMEs, Alex Khaw, partner of
KPMG Malaysia, said that Malaysia
was among the countries planning
to require the use of IFRS for SMEs
within three years. IFRS for SMEs is
identical with MASB ED 72, Financial
Reporting Standard for Small and
Medium-sized Entities which was
issued in March 2010.
The definition of SMEs under ED72
MFRS for SMEs refers to entities that
do not have public accountability and
prepare general purpose financial statements for external users. In a nutshell,
MFRS for SMEs are a “self-contained
standard tailored for the needs and
capabilities of smaller businesses,”
noted Khaw. It has simplified some of
the principles in full MFRS for recognising and measuring assets, liabilities,
income and expenses; omitted topics
not relevant to SMEs and reduced the
number of required disclosures.
There will be key challenges in the
transition, said Khaw. These include
processes and systems changes, additional training costs incurred by preparers and auditors of financial statements, and increased complexities
compared to PERs. “Private entities
might not be keen on the transition if
they know the challenges,” said Khaw.
Are there alternative models? Khaw
cited the case of Australia, which
wants to use the full IFRS framework for all companies but will apply
the Reduced Disclosure Requirement
(RDR) to lessen the burden on its
SMEs. “Using the RDR, private entities disclose less because they don’t
have as many types of instruments as
a sophisticated entity.”
The hitch is that while ED 74
Amendments to Financial Reporting
Standards Arising From Reduce
Disclosure Requirements will allow
subsidiaries of parents with public
accountability and private entities
to use RDR, these companies must
adopt IFRS first.
Tax Challenges
Meanwhile, Theresa Goh, Executive
Director, Deloitte Malaysia, touched
on transfer pricing challenges facing
practitioners. She said that formal
transfer pricing (TP) and Advanced
Pricing Arrangement (APA) legislation effective 1 January 2009 required
contemporaneous TP documentation. Malaysia signed its first APA in
January 2011.
Tax risks are among the biggest
problems in TP. “Auditors need to
be aware of TP risks and clients need
to prepare TP documentation and
ensure arms-length pricing. It’s also
necessary to ensure that tax provisions are high enough, since TP tax
risk could be much bigger than corporate tax risk,” warned Goh. Some
of the red flags to look out for in TP
are intercompany agreements where
management fees can be one of the
biggest issues.
Goh noted that the only “answer to
solving the TP nightmare is to enter an
APA agreement with the tax authorities for future years.” The agreement
can run for a specified period, enables
you to avoid double taxation and there
is no risk and no worry about updating TP documentation.
Members’ Engagement Forum
The recent inaugural MIA Public Practitioners Seminar 2012 also featured a Members Engagement Forum (picture on page
18) for practitioners to voice out their concerns and to give their opinions relating to public practice issues. The forum
was moderated by Dato’ Narendra Kumar Jasani, Chairman, MIA Public Practice Committee (centre). Panellists included
(left - right) Subramaniam A. V. Sankar, Chairman, MIA Insolvency Practice Subcommittee; Dato’ Raymond Liew Lee Leong,
Chairman, MIA Audit Practice Subcommittee; Beh Tok Koay, Chairman, MIA Taxation Committee and Peter Lim Thiam Kee,
Chairman, MIA Taxation Practice Subcommittee.
MAY / JUNE 2012 | accountants today
19
Public Practice Concerns
Below are some of the key points
from the MEF discussion:
Audit Under Fire
Chiew Chun Wee, Head of Policy,
Asia Pacific, ACCA spoke on the EU’s
audit reform proposals to improve
audit quality and corporate governance in Audit Under Fire. Some of
the proposals include a six-year cap,
whereby auditors can’t ser ve for
more than six years and recommends
a whole firm rotation instead of merely a partner or auditor rotation. There
is a call for ‘pure audit’ firms, where
all non-audit ser vices must be car ved
out and restrictions on added ser vices. Other elements include prohibition of ‘Big-4 only’ clauses, stricter
rules on appointment and audit committee composition. Of par ticular
interest was the ‘small companies’
exemption from audits, where audits
are waived for small companies with
an annual turnover below the threshold of 10 million euros. The reforms
also call for scaled audits for SMEs
which would see the “proportionate
application of auditing standards”.
The issue here is that EU is delegating this to member states; the end
result would “perhaps be multiple
interpretations of how to do SME
audits,” said Chew.
The pros of these reforms would
include auditors being freed from man-
20
accountants today | MAY / JUNE 2012
agement pressure and a fresh look at
financial reporting. “If auditors do not
have a fixed term, they may be inclined
to be accommodating to clients and
the borders blur between management
and auditors,” said Chew.
Cons include a significant cost
increase; there is opposition from auditors as well as businesses. Plus, would
these reforms significantly improve
audit quality?
During the Q&A session, Chew
was asked regarding the impact of
small company audit abolishment in
Singapore. In his opinion, the impact
of audit exemption has been positive.
“Since SMEs don’t need audit, they get
SMPs to do their accounting, and they
don’t need to worry about regulators
coming in.”
Elsewhere, C.K. Ooi, Senior Partner,
Folks DFK & Co. and Azman, Wong,
Salleh & Co updated practitioners on
the requirements and results to date
of MIA’s Practice Review. Chartered
Secretary Heng Chiang Pooh presented a quick review on the recent
Companies (Amendment) Act 2007
and the impact on officers implicated.
Meanwhile, Andrew Heng, Executive
Partner of Baker Tilly Monteiro Heng,
spoke on insolvency and restructuring
issues affecting practitioners.
• Unlicensed Audit Services
Council members were asked about
the protocol for reporting non-licensed
firms carrying out audits. A participant
pointed out that this practice of private
limited companies or sendirian berhads
offering and conducting audits was
quite rampant.
Peter Lim noted that this was a
“very tricky situation to resolve.”
According to protocol, complainants
need to file a statutory declaration
and the complainant must be present
during the investigation and can be
held liable, “unless it can be proven
that the firm is encroaching into an
area where the license to practise is
required,” explained Dato’ Raymond
Liew. Although the Council Members
could offer no quick answer for resolution, they unanimously agreed that the
Investigation Committee is aware that
numerous secretarial firms are guilty
of offering unlicensed audit services,
and that fast appropriate action must
be taken.
• Anti-Competition
Liew noted that the implementation of
the Malaysian Competition Act 2010,
which took effect on 1 January 2012
will worsen the audit fee situation.
“MIA will be looking into the impact of
the Competition Act 2010 and will take
this up with the relevant competition
authorities,” he remarked. The suggested imposition of tariffs to prevent
undercutting and ensure feasible audit
fees might be considered price-fixing
which would go against the substance
of the Act.
Liew also noted the need to promote the value of audit instead of
merely focusing on the compliance
aspect alone. “Although compliance
and time costs have gone up, the audit
fee in Malaysia remains one of the
lowest in the region, even lower than
in the Philippines. The impression is
that audit may be a sunset industry
Public Practice Concerns
or no longer a lucrative profession.
Therefore, the authorities should not
merely emphasise the need for compliance alone but also to promote the
value of audit per se to all stakeholders. The question is: How can MIA
assist members to promote the value
of audit?”
He also reprimanded firms for being
their own worst enemy. “Member firms
shouldn’t be undercutting one another
and competing on fees. On a serious
note, we should relook at our own
practices in terms of efficiency and
cost efficacy.”
To enhance the strength and viability of smaller accounting firms, Liew
urged member firms to merge or be
globally affiliated. He mentioned that
the government has recently allocated a grant to MIA for its Merger &
Affiliation (M&A) initiatives. A series
of M&A seminars will be organised in
seven states to promote the awareness
of these M&A initiatives within the
next couple of months.
• FRS and Taxation
Will Malaysia eventually see convergence between FRS and tax statements?
J. Selvarajah, Partner with Omar Arif,
noted that there was a wide divergence between FRS and the Income
Tax Act, which results in numerous
adjustments between tax computation
and FRS accounts. He pointed out
that the New Zealand, Singapore and
Hong Kong Inland Revenue Boards
had acceded to using IFRS, while keeping capital and revenue bases intact.
Beh Tok Koay replied that a joint tax
working group was set up to consider
the matter, and had gone through more
than ten discussion papers. “There
are revenue issues related to timing.
Ultimately, change to bring about convergence is a policy decision which can
have an impact on revenue.”
• Limited Liability Partnerships (LLPs)
There is an urgent need to assess
the impact of impending LLPs on
There is a call for ‘pure audit’ firms, where all non-audit
services must be carved out and restrictions on added
services. Other elements include prohibition of ‘Big-4
only’ clauses, stricter rules on appointment and audit
committee composition. Of particular interest was the
‘small companies’ exemption from audits, where audits
are waived for small companies with an annual turnover
below the threshold of 10 million euros.
the profession and SMPs, said panellists. Peter Lim talked at length
about the impact of the LLP Act,
which was gazetted on February 2012,
although the effective date is yet to
be announced. He noted that MIA is
involved in LLP dialogues with the
government and a memorandum on
the tax treatment has been submitted to the Companies Commission
of Malaysia to be forwarded to the
Inland Revenue Board (IRB) for consideration.
“The main point to note is that LLP
is a new business vehicle, a hybrid that
is meant to protect limited liabilities.
However, there is a very onerous burden on the LLP’s compliance officers.
Although LLP accounts need not be
audited, if anything is wrong with these
accounts, the compliance officer will
be held responsible.”
Citing Singapore as an example,
Peter Lim said that the LLP format may
also be undersubscribed because the
non-requirement for statutory audits
can trigger tax audits. “Singapore introduced LLPs a couple of years ago
and companies with a paid up of less
than SGD5 million will no longer need
audits. The issue is that if LLPs need
not be audited, then the tax man will
pay a visit. As a result, the LLP is not
so popular because companies prefer
to audit themselves rather than submit
to a government audit.”
Taxation Challenges
Beh Tok Koay warned public practitioners to prepare for a more stringent
taxation environment, where heavy
penalty issues are just one example
of the fast-changing landscape they
face. “The authorities are working to
enhance tax collection and this places
stress on us of meeting high standards
of compliance.” He singled out transfer pricing as one of the key taxation
targets for tax authorities which generates a lot of tax revenue, and accountants need to be experts in this area
to serve their clients well and reduce
their tax burden from TP. Accountants
need to also prepare for new indirect
taxes like GST.
“Despite the challenging environment, there are plenty of opportunities to look at,” urged Beh. He recommended that accountants and firms
invest in specialised training in transfer
pricing, tax audits and GST. “Since this
needs a lot of investment, the pooling of
resources may be necessary,” said Beh,
which ties in with the Institute’s aim
of driving mergers and acquisitions to
strengthen public practice.
Firms will also face huge human
resource challenges in this regard.
“There will be problems retaining quality and competent staff, so firms must
ensure that their staff can visualise a
good career path within their firm to
induce them to stay on.” n
MAY / JUNE 2012 | accountants today
21
accounting
MIA Surveillance and Enforcement
Upholding Financial
Reporting Quality
To encourage quality financial reporting, MIA’s FINANCIAL STATEMENTS REVIEW
COMMITTEE (FSRC) has released its common findings based on reviews during
the financial year July 2010 – June 2011.
T
here have been many changes in financial reporting
in recent years. In line with full convergence with
IFRS in 2012, Malaysian Accounting Standards Board
(MASB) had, in November 2011, issued the Malaysian
Financial Reporting Standards (MFRS) framework
which is effective for annual periods beginning on or after 1
January 2012.
Amongst the benefits of full convergence with IFRS is improved
credibility and transparency to financial reporting, which will
help incorporate better practices within corporate Malaysia by
adopting international standards.
Despite the full convergence with IFRS, users of existing
Financial Reporting Standards (FRS) and Interpretations continue to strive in interpreting and applying these standards.
In order to ensure that the profession adopts and complies
fully with the relevant standards, the Malaysian Institute of
Accountants’ Financial Statements Review (FSR) function serves
to ensure that the quality of financial information presented within financial reporting meets the required standards. The review
of financial statements of selected listed companies is carried out
by a committee known as the FSR Committee (FSRC).
The primary objective of the FSRC is to monitor the quality of
financial statements and the auditors’ reports that are prepared
by or are the responsibility of members of MIA, for the purpose
of determining compliance with statutory and other requirements, approved accounting standards and approved auditing
standards in Malaysia.
OBSERVATIONS
For the period from July 2010 to June 2011, FSRC reviewed several financial statements of listed companies. The FSRC wishes
to share some of the common findings identified during the
review process for the period from July 2010 to June 2011, as
shown in Table A.
The FSRC draws particular attention to the following, which
continue to be the areas of deficiencies found in the financial
statements since the past reviews:
22
accountants today | MAY / JUNE 2012
1. GOING CONCERN
The going concern assumption is a fundamental principle in the
preparation of financial statements. Under the going concern
assumption, an entity is normally viewed as continuing in business for the foreseeable future with neither the intention nor the
necessity of liquidation, ceasing trading or seeking protection
from creditors pursuant to laws or regulations.
The management and directors are required to satisfy themselves that the going concern assumption used as the basis in the
preparation of the financial statements is appropriate. Under FRS
101 “Presentation of Financial Statements”, the management of
an entity is explicitly required to make an assessment of the
entity’s ability to continue as a going concern. Management’s
assessment of the entity’s ability to continue as a going concern
involves making a judgement, about inherently uncertain future
outcomes of events and conditions.
In this connection, the FSRC have raised queries to the preparers whether the required assessment has been made by management on the appropriateness of the use of the going concern
assumption in the preparation of the financial statements when
the financial statements showed signs of deteriorating financial
position.
Paragraph 25 of FRS 101 “Presentation of Financial
Statements” requires that when preparing financial statements,
management shall make an assessment of an entity’s ability
to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management
either intends to liquidate the entity or cease trading, or has no
realistic alternative but to do so. When management is aware,
in making its assessment, of material uncertainties related to
events or conditions that may cast significant doubt upon the
entity’s ability to continue as a going concern, the entity shall
disclose those uncertainties. When an entity does not prepare
financial statements on a going concern basis, it shall disclose
that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded
as going concern.
Upholding Financial Reporting Quality
In the event that the use of going concern assumption is appropriate but a material uncertainty exists, Paragraph 19 of ISA 570
states that if adequate disclosure is made in the financial statements, the auditor should express an unmodified opinion but
include an emphasis of matter paragraph in the auditor’s report
that highlights the existence of a material uncertainty relating
to the event or condition that may cast significant doubt on the
entity’s ability to continue as a going concern and draws attention to the note in the financial statements that discloses the matters. Paragraph 20 of ISA 570 states that if adequate disclosure is
not made in the financial statements, the auditor should express
a qualified or adverse opinion, as appropriate, in accordance
with ISA 705 “Modifications to the opinion in the Independent
Auditors’ Report”.
What is considered as “adequate disclosure”, to be disclosed in
the financial statements is clearly spelt out in paragraph 18 of ISA
570, where it states that financial statements should:
a) Adequately describe the principal events or conditions that
may cast significant doubt on the entity’s ability to continue
as a going concern and management’s plans to deal with
these events or conditions; and
b) Disclose clearly that there is a material uncertainty related
to events or conditions that may cast significant doubt on
the entity’s ability to continue as a going concern and,
therefore, that it may be unable to realise its assets and
discharge its liabilities in the normal course of business.
The review findings noted that some financial statements have
not adequately disclosed the material uncertainties related to
events or conditions that may cast significant doubt upon the
entity’s ability to continue as a going concern. Examples of events
and conditions that are commonly noted amongst others, are net
liability or net current liability position, substantial operating
losses, negative operating cash flows, indication of withdrawal
of financial support by lenders, e.g. breach of loan covenants,
defaulted bank loans; and adverse key financial ratios.
The auditors’ responsibility is to obtain sufficient appropriate
audit evidence about the appropriateness of the management’s
use of the going concern assumption in the preparation and
presentation of the financial statements and to conclude whether
there is a material uncertainty about the entity’s ability to continue as a going concern.
In relation to the auditors, queries were raised as to whether
the requirements of ISA 570 “Going Concern” have been complied with. ISA 570 stipulates the procedures that the auditors
will evaluate the appropriateness of the management’s use of the
going concern assumption, and to consider whether there are
material uncertainties about the entity’s ability to continue as a
going concern. ISA 570 also provides examples of indicators, i.e.
the events or conditions that may cast significant doubt upon the
entity’s ability to continue as a going concern.
The FSRC findings also include instances where auditors:
a) Expressed an unmodified opinion with an emphasis of
matter paragraphs in the auditor’s report when there were
no disclosures in the financial statements of the principal
events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern; and
b) Expressed an unmodified opinion with an emphasis of
matter paragraph in the auditor’s report when a material uncertainty exists and the financial statements did not
make any disclosure of the management’s plan to deal with
the principal events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern.
2. IMPAIRMENT OF ASSETS
The previous year has been marked by increased volatility in the
global markets. The economic slowdown in many countries may
worsen as the financial crisis continues. This widespread slowdown means that assets in many industries will generate lower
cash flows than originally expected. This inevitably increases the
probability that assets may be impaired.
As much as the industry is concerned over the likelihood of
impairment of assets, the FSRC review findings noted that there
were indications where some preparers may have chosen to
ignore the fact that carrying values of certain of their assets may
be impaired.
MAY / JUNE 2012 | accountants today
23
Upholding Financial Reporting Quality
Paragraph 9 of FRS 136 “Impairment of Assets” states that an
entity shall assess at the end of each reporting period whether
there is any indication that an asset may be impaired, such as
deteriorating financial position. If any such indication exists, the
entity shall estimate the recoverable amount of the asset.
FRS 136 also describes the indications that an entity shall
consider in the assessment of an impairment loss that may have
occurred. The FSRC review findings noted some clear indications of impairment of certain assets in financial statements
but without evidence of impairment testing being performed.
Indications of impairment noted include:
a) Negative gross profits (gross loss)
b) Significant shareholders’ deficit balance
c) Significant continuous after tax losses
d) Significant net current liabilities position
e) Default in repayment of loan obligations
f) Increase in unit sales but increase in loss incurred
g) Continuous increased in negative operating cash flow
h) Restructuring exercise undertaken on loan obligations
i) Significant delay in commencement of property development activities
j) Impairment recognised for investment in subsidiaries but
no impairment recognised on amount due from the same
subsidiaries
k) Impairment recognised by a subsidiary on the only significant asset of the subsidiary but no impairment recognised
on the parent’s cost of investment in the subsidiary
The FSRC also noted situations where material impairment
loss was recognised during the year or where there was material reversal of impairment loss recognised during the year, but
without making the necessary disclosures required by FRS 136.
Some of the disclosures required by FRS 136 include disclosure
of events leading to recognition/ reversal of impairment loss,
whether recoverable amount is fair value less cost to sell or
value in use; the basis for determining fair value less cost to sell;
and, the discount rate used in determining value in use. For a
cash-generating unit, FRS 136 requires the disclosure of the
following:
a) A description of the cash-generating unit (such as whether
it is a product line, a plant, a business operation, a geographical area, or a reportable segment as defined in FRS
8);
b) The amount of the impairment loss recognised or reversed
by class of assets and, if the entity reports segment information in accordance with FRS 8, by reportable segment;
and
c) If the aggregation of assets for identifying the cash-generating unit has changed since the previous estimate of
the cash-generating unit’s recoverable amount (if any), a
description of the current and former way of aggregating
assets and the reasons for changing the way the cashgenerating unit is identified.
24
accountants today | MAY / JUNE 2012
In light of ever-changing economic conditions,
these are definitely challenging times for those
involved in the financial reporting process.We
wish to remind that the Board of Directors owns
the responsibility in the preparation of financial
statements under the Companies Act, 1965,
whilst, the Audit Committee plays an important
role in the financial reporting process.The Audit
Committee should strive to achieve optimal
governance through monitoring the compliance
of financial reporting and other regulation.
Paragraph 130 and 131 of FRS 136 clearly states the disclosure
requirement for each material impairment loss recognised or
reversed during the period for an individual asset, including
goodwill, or a cash-generating unit.
Paragraph 134 and 135 of FRS 136 require further disclosures
on the recoverable amount for goodwill or intangible assets with
indefinitely useful lives allocated to that unit (group of units).
3. FINANCIAL STATEMENTS PRESENTATION
The objective of financial statements is to provide information in
relation to the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making
economic decisions.
As such, apart from compliance, preparers of financial statements should strive to provide relevant information to users.
FRS 101 “Presentation of Financial Statements” provides clear
guidance on this. The objective of this Standard is to prescribe
the basis for presentation of financial statements to ensure comparability both with the entity’s financial statements of previous
periods and with the financial statements of other entities.
The FSRC noted a few common review findings that relate to the
presentation of financial statements:
3.1 Nature of expenses not adequately analysed, particularly the expenses included in the cost of sales.
• Paragraph 29 of FRS 101 requires that an entity shall
present separately each material class of similar items.
An entity shall present separately items of dissimilar
nature or function unless they are immaterial.
• When items of income or expenses are material, an
entity shall disclose their nature and amount separately
as required by Paragraph 97 of FRS 101.
• An entity should present the analysis of expenses recognised in profit or loss using classification based on
either their nature or their function within the entity.
The selection of the method by “nature of expenses” or
Upholding Financial Reporting Quality
“function of expenses” is judgemental. The entity should
choose a method whichever provides information that is
reliable and more relevant according to the activities and
operations of the entity.
• Paragraph 104 of FRS 101 requires an entity to disclose
additional information on the nature of expenses if the
entity is classifying the expenses by function.
3.2 Major components included within other receivables
and other payables were not disclosed.
• Paragraph 77 of FRS 101 states that an entity shall disclose,
either in the statement of financial position or in the notes,
further sub classifications of the line items presented, classified in a manner appropriate to the entity’s operations.
For example, receivables are disaggregated into amounts
receivable from trade customers, receivables from related
parties, prepayments and other amounts.
3.3 Nature and purpose of each reser ve within equity
were not disclosed.
• Paragraph 79 of FRS 101 states that an entity shall disclose
a description of the nature and purpose of each reserve
within equity, either in the statement of financial position
or the statement of changes in equity, or in the notes.
3.4 Term loans classified as non-current when it should
be classified as current.
• The above wrong classification normally happens in
situations where a company has breached certain term
loan covenants before the reporting date, but there was
no evidence of the lender’s demand for immediate settlement of the outstanding term loan liability either before
the reporting date or after the reporting date.
• However, in accordance to FRS 101, an entity shall classify a liability as current when (amongst others), the
entity “does not have an unconditional right to defer
settlement of the liability for at least twelve months after
the reporting period.”
• In the above circumstances, because of the breach of
certain loan covenants before the reporting date, the
lender has the contractual right to demand immediate
settlement of the loan. If such is the contractual position,
it would mean the company does not have an unconditional right to defer settlement of the loan for at least
twelve months after the reporting period. Accordingly,
such loan should have been classified as current
4. STATEMENT OF CASH FLOWS
The most common review findings noted on the statement of
cash flows is the inappropriate classification of cash flow items
of operating, investing and financing activities. Classification
by activity provides information that allows users to assess the
impact of those activities on the financial position of the entity
and the amount of its cash and cash equivalents.
The FSRC noted that movement in advances to/ from subsidiaries disclosed as “operating cash flow” in the parent’s cash flow
statement instead of “investing/financing cash flow”.
The nature of the amount due from/ to subsidiaries or other
related companies should be analysed from the company’s
perspective and not how the other entity utilises the advances
given.
If the transaction is non-trade in nature, then the cash movement should be reflected as investing or financing activities
accordingly in the cash flow statements of the parent, instead of
reporting the net movement as working capital changes.
Similarly, in the respective financial statements of the subsidiaries, the advances from/ to the parent or related company should
be evaluated from the subsidiaries’ perspective in determining
the classification in the subsidiaries’ cash flow statements.
Paragraph 6 of FRS 107 “Statement of Cash Flows” defines the
activities as follows:
~
Operating activities - the principal revenue-producing activities of the entity and other activities that are not investing
or financing activities.
~
Investing activities - the acquisition and disposal of longterm assets and other investments not included in cash
equivalents.
~
Financing activities - activities that result in changes in the
size and composition of the contributed equity and borrowings of the entity.
Paragraph 14, 16 and 17 state the examples of cash flows from
operating activities, investing activities and financing activities
respectively.
The entity should evaluate the cash flows carefully and classify
to the appropriate activities in accordance with FRS 107.
CONCLUSION
In light of ever-changing economic conditions, these are definitely
challenging times for those involved in the financial reporting
process. We wish to remind that the Board of Directors owns the
responsibility in the preparation of financial statements under the
Companies Act, 1965, whilst, the Audit Committee plays an important role in the financial reporting process. The Audit Committee
should strive to achieve optimal governance through monitoring
the compliance of financial reporting and other regulation.
Meanwhile, the auditors’ role is important to enhance the
credibility of financial statements. An auditor will conduct an
audit in accordance with the approved standards on auditing and
should be able to obtain reasonable assurance that the financial
statements are free of material misstatement.
Compliance with financial reporting standards should not be
a burden to those involved in the financial reporting process.
In line with their respective responsibilities, they should work
hand in hand to improve the quality of financial reporting and to
provide the users with comprehensive and credible information
on the financials of an entity. It is important that members continuously uphold the quality of financial reporting. n
MAY / JUNE 2012 | accountants today
25
Upholding Financial Reporting Quality
Table A: Common Findings of FSRC for Review Period from July 2010 to June 2011
NO
26
AREAS FOR IMPROVEMENT
FINDINGS NOTED
1
Going Concern
• Inadequate disclosure on management’s plan in dealing with material uncertainty
on going concern. (FRS 101.23)
• Queries were raised on whether going concern assumption has been considered
by the management when the financial statements showed signs of deteriorating
financial position; and, whether the auditors have evaluated the appropriateness of the management’s use of the going concern assumption, and to consider
whether there are material uncertainties about the entity’s ability to continue as a
going concern. (FRS 101.23 and ISA 570)
2
Judgements in applying accounting • Keys sources of estimation uncertainty are not presented in a manner that helps
users of financial statements to understand the judgements management makes,
policy and key sources of estimation
e.g. sensitivity analysis not provided; the expected resolution of an uncertainty
uncertainty
and the range of reasonably possible outcomes within the next financial year in
respect of the carrying amounts of the assets and liabilities affected are not stated,
etc. (FRS 101.120)
3
Impairment of investments in subsidiary • Inadequate disclosures when there is material impairment loss recognised. E.g.
non-disclosure of whether the recoverable amount is fair value less costs to sell
company/associated company/ good(FVLCTS) or value in use (VIU), basis of determining FVLCTS, discount rate(s) used
will/intangible assets
in determining VIU. (FRS 136.130 (d) – (g))
• Cost of investment in subsidiary company or associated company was impaired,
but recoverability of amounts due from these companies not carefully evaluated.
Queries were made on whether impairment testing had been performed on property, plant and equipment and investment in subsidiaries, given deteriorating
financial position, which is one of several impairment indicatiors.
4
Deferred Taxation
• Non-disclosure of deductible temporary differences, unused tax losses and unused
tax credits of which no deferred assets are being recognised. (FRS 112.81(e))
• Non–disclosure of nature of evidence supporting recognition of deferred tax
assets. (FRS 112.82)
• Deferred tax assets is deemed probable to realise in spite of the company having
financial distress, e.g. - Net Current Liabilities position
5
Cash flow statements
• Inappropriate cash flow classifications/ movement in advances to/ from subsidiaries disclosed as “operating cash flow” in the parent’s cash flow statement, instead
of “investing/financing cash flow”. (FRS 107.6, FRS 107.16 & FRS 107.17)
• Non-disclosure of major classes of gross cash receipts and gross cash payments
separately that arose from investing and financing activities. (FRS 107.21)
6
Staff Cost
• Non-disclosure on staff cost (FRS 119.6)
7
Profit/(Loss) Before Taxation
• Inadequacy of disclosure on nature of expenses of the Group (FRS 101.93/94)
• Non-separate disclosure on the nature and amount when items of income and
expense are material. (FRS 101.86)
• Non-full elimination of unrealised profits from intercompany transactions (FRS
127.24)
8
Significant accounting policies Investment Property
• The fair value of investment property shall reflect market conditions at the end
of the reporting period. Example of error made, i.e. adopted fair value policy but
used the revaluation value in 2007 to reflect current market condition (2008) (FRS
140.38)
• Amortisation was done on straight line method, although adopted fair value
policy. (FRS 140.33)
• Non-disclosure on direct operating expenses arising from repair & maintenance of
investment property (FRS 140.75 (f )(ii)- (iii))
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accounting
NACRA 2012
How to create a winning
Annual Report
The National Annual Corporate Report Awards (NACRA) are a benchmark
for quality financial reporting. Adjudicators and a past NACRA winner
– Telekom Malaysia - tell aspirants what it takes to produce an awardwinning financial report.
Majella Gomes
E
ven seasoned shareholders
shudder at the thought of
hard-to-read annual reports,
but what exactly differentiates the merely good from
the outstanding? The experts insist that
many elements from both the standard
regulatory requirements and characteristics peculiar to the respective company
must successfully combine, before an
annual report reaches a certain level
of acceptance, and the indication that
it has indeed attained stellar levels, is
when the company becomes a recipient
of the National Annual Corporate Report
Awards (NACRA). NACRA is already
two decades old, and has become pretty
much the acknowledged benchmark for
Malaysian annual reports.
Pushing for standards
The joint organisers of NACRA 2012,
the Malaysian Institute of Accountants
(MIA), Bursa Malaysia and the
Malaysian Institute of Certified Public
Accountants (MICPA) recently launched
the event in Bursa Malaysia. Winners of
this year’s Awards will be announced
on 1 November 2012. The theme for
NACRA 2012 is “Towards Accountability
& Excellence.”
Speaking at the launch, NACRA 2012
Organising Committee Chairman Ng
28
accountants today | MAY / JUNE 2012
How to Create A Winning Annual Report
Kim Tuck said that the Awards were
being increasingly viewed as prestigious
by many corporations in Malaysia, and
competition had stiffened in recent years.
Viewing it as a positive development, he
said that it had spurred submission of
reports of better quality for adjudication.
“NACRA is aimed at promoting greater,
more effective communication of financial and other information by organisations to their stakeholders through the
publication of timely, informative, factual and reader-friendly reports,” he said.
“The Awards also aim to cultivate a spirit
of competitiveness among Malaysian
organisations in striving for excellence in
corporate reporting.”
Adding that the theme of this year’s
Awards emphasised the vital role played
by annual reports in advocating more
transparency and enhancing the integrity
of the capital market, he said that the reliability and sufficiency of information contained in corporate reports were crucial
to decision-making. “High- quality annual
reports may be equated with high-quality
management,” he said. “But there must
also be assurance as to the reliability
and sufficiency of the information presented. When adequate, accurate information is presented, market regulators
and players will acknowledge its veracity.
Ultimately, the movement in the capital
market revolves around clear, concise
information.”
“NACRA is aimed at promoting greater, more
effective communication of financial and other
information by organisations to their stakeholders
through the publication of timely, informative,
factual and reader-friendly reports.”
Ng Kim Tuck
Chairman, NACRA 2012 Organising Committee
Left to right: Ch’ng Boon Huat,Head, Corporate Surveillance & Investigation,
Regulation, Bursa Malaysia Berhad with Ng Kim Tuck and Stephen Oong
MAY / JUNE 2012 | accountants today
29
How to Create A Winning Annual Report
“Annual reports should scrutinise policies and how decisions are
made.They should state what the company stands for. For instance,
what is its policy concerning bribery and corruption? If it talks
about health and safety in the work place, quality of life or work-life
balance, what are its targets and how will these targets be met?
These should be clear.”
Ng Kean Kok
Faculty of Accountancy and Management, Universiti Tunku Abdul Rahman (UTAR)
Constantly pushing
boundaries
Pointing out that the criteria for NACRA
are reviewed and enhanced each year to
boost the quality of the reports prepared,
he confirmed that the major objective –
that of recognising and highlighting the
importance of good financial reporting
to effectively serve the capital market –
remained the same. NACRA essentially
comprises five categories of Awards: namely the Overall Excellence Awards; Industry
Excellence Awards for Listed Companies;
Presentation Awards; Corporate Social
Responsibility Awards; and a Special
Award for non-listed Organisations.
In his speech, Stephen KL Oong,
Chairman of the NACRA Adjudication
Committee said NACRA is open to all
companies incorporated or registered in
Malaysia as well as the public sector and
other organisations established in Malaysia.
The adjudication process, he said, comprised of two stages undertaken by a panel
of adjudicators from various commercial
and industrial backgrounds, public accounting, academia, advertising and public relations. “In stage one, the annual reports will
be examined and scored within industry
groups,” he continued. “The annual report
which receives the highest level of overall
excellence in the industry group will be
considered for the Industry Excellence
Award. In stage two, shortlisted reports for
the Overall Excellence and Presentation
Awards will be subjected to a second round
of adjudication.”
The official launch of NACRA by Ng,
Oong and Chief Regulatory Officer of Bursa
Malaysia Selvarany Rasiah was followed by
30
accountants today | MAY / JUNE 2012
short presentations from four speakers
who each gave insights on what constituted good annual reports, from the adjudicators’ perspectives. Audrey Chan, Audit
Partner of BDO spoke about the financial
statement component. “Good reports share
significant events during the year,” she
said. “Financial statements are a regulatory
requirement, so avoid basic errors, like figures that don’t add up and typos. Your notes
should be clear, and all policies should
be disclosed. Sometimes reports lack disclosure of accounting policy, or adopt the
wrong policy. If there are comparative notes
or changes, there should be explanations
as to why this was done. Cross-referencing
is very important. Voluntary disclosure
always adds value to the report, as do
major analysis of expenses and expanded
narrative disclosure on financial information. Companies are always encouraged to
disclose as much as possible.”
Audrey Chan, Audit Partner of BDO
Ranjit Singh, Managing Director of
Columbus Advisory
Relevant perspectives
She added, however, that presentation of
accounting information was very subjective, and adjudicators tend to fall back on
experience when it comes to this area.
“Marks are allocated but will be deducted if
standards are not met,” she concluded. “As
adjudicators, you know when you are reading a good report, and when you are not.”
Chan’s presentation was followed by
that of Ranjit Singh, Managing Director of
Columbus Advisory, which covered the key
evaluation areas of corporate information.
Agreeing with Chan that voluntary disclosure does carry a lot of weight, he pointed
out that companies would do well to provide industry analysis in their reports, so
Ng Kean Kok from the Faculty of
Accountancy and Management, Universiti
Tunku Abdul Rahman (UTAR)
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that stakeholders could obtain an improved understanding
of that particular company’s standing within its own industry. “Investors want to see what a company’s prospects are,”
he said. “They want to see its policy guidelines, and where it
stands on issues like communication and investor relations.
Good reports should have clearly delineated policies for HR,
R&D, management structure, and internal audit, among others. They should also be able to offer concise explanations of
the basis for nomination of directors, for instance, and details
of remuneration procedures.”
He urged companies to ensure consistency of information across all channels, including the information posted
on official websites, and suggested that stakeholders pay
closer attention to how companies identify and manage
risk. Speaking on the Corporate Social Responsibility
aspect of annual reports, Ng Kean Kok from the Faculty
of Accountancy and Management, Universiti Tunku Abdul
Rahman (UTAR), confirmed that the area of coverage of
CSR had expanded considerably since the philosophy of
CSR first started permeating the corporate world. Today, it
includes corporate governance, stakeholder engagement,
procurement policies and product responsibility. “Annual
reports should scrutinise policies and how decisions are
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How to Create A Winning Annual Report
made,” he said. “They should state what
the company stands for. For instance, what
is its policy concerning bribery and corruption? If it talks about health and safety
in the work place, quality of life or worklife balance, what are its targets and how
will these targets be met? These should
be clear.”
With regards to the environment within the CSR context, annual reports could
also try showcasing initiatives to monitor
greenhouse gas or carbon emissions,
energy use, waste and water management. “Reduction measurements, carbon reporting and other efforts should
show that business is being aligned to
achieving environmentally-friendly outcomes,” Ng continued. “There should
also be community investments, such as
efforts to achieve the UN’s Millennium
Development Goals, for example. Of
course, there are underlying concerns as
to the credibility of such information but
companies should consider the annual
report as their opportunity to explain in
detail what the company is doing. The five
main things to remember when putting
together an annual report are content,
communication, credibility, commitment
and comparability. You should engage
your reader; make use of multimedia –
have a good website, videos, podcasts,
slide shows, animation and any other
innovative feature that will boost interaction. Above all, present complex issues in
a simple, uncomplicated manner.”
On what constitutes good design,
Ghazali Abdullah, Chief Executive of GRA
Communications Sdn Bhd conceded that
judges look for “drop-dead presentation
that makes you feel good. Firstly, always
explain your cover design rationale, and
ensure that the cover, content, layout and
design all complement each other. All this
is taken into consideration, in adjudica-
tion,” he said. “Make it reader-friendly.
It should be uncluttered. Too much text
is overwhelming. And use good pictures.
Judges always look out for original photos,
and outstanding photography. Innovative
concepts will definitely capture their attention. They usually prefer matt art paper, not
gloss, which tends to be a bit distracting.
Use tasteful colours for graphs and charts,
and an appropriate font size – the report
should be as easy to read as a good novel!”
How Winners do it
NACRA 2011 winner Telekom Malaysia
got started on its annual report about two
months before the end of the company’s
financial year, divulged Datuk Bazlan
Osman, Group Chief Financial Officer of
Telekom Malaysia Berhad. “At that point,
we already have an idea of how we have
performed over three quarters – but the
project must be supported by senior management,” he said. Adding that there were
initiatives to improve the annual report
every year, he commented that the annual
report team innovated with box articles
that gave readers some idea of the changes and progress experienced by the company. “The annual report follows a theme
based on our business direction. There is
additional disclosure as well, much more
than was mandatory, and the pictures are
carefully chosen to dovetail with the story
line. The Board of Directors read it, and
give constructive criticism,” he said.
For annual reports, more than other
publications, the devil must surely be
in the details. Datuk Bazlan said that
Telekom’s annual report comply strictly
with all standards, place accuracy and consistency at the highest level, and ensure
financial information is correct. Spelling
and information errors are regarded seriously, and frowned upon. “Many pairs of
eyes look over the annual report before it
Ghazali Abdullah, Chief Executive of
GRA Communications Sdn Bhd
Datuk Bazlan Osman, Group Chief
Financial Officer of Telekom Malaysia
Berhad.
goes to print,” he confirmed. “There is no
repetition or duplication of information;
there are visuals of very high quality, and
every effort is made to ensure that the
publication is attractive and fresh, easy on
the eye, and reader-friendly. Proofreading
and cross-checking is robust, to put it
mildly, and we are strict about meeting
deadlines and following timelines. Above
all, it is a matter of teamwork and collaboration.” n
Public-listed companies are invited to submit their
Q
2011 annual reports to NACRA for adjudication. The deadline for submission is 30 June
2012 and entrants can find out more at www.mia.org.my or write to nacra@mia.org.my
32
accountants today | MAY / JUNE 2012
governance
The future of Corporate
Governance: from
Accounting to Strategy
Corporate social
responsibility (CSR) and
the role that corporations
play within environmental
and societal contexts is
a constantly evolving
concept, responding
to emerging pressures
of the dynamic global
business environment.
These pressures drive
change in a wide number
of interconnected
governance-related tools
that shape the conduct of
business, both domestically
and internationally. These
tools include corporate
governance frameworks,
frameworks for crossborder investment,
financial reporting
standards and nonfinancial reporting
guidelines.
34
accountants today | MAY / JUNE 2012
B
usinesses can create, preserve or erode value over
time from environmental,
human, intellectual and
social capital. It is no longer
tenable to deliver short-term immediate
gain to the detriment of societies and
natural environments. We are witnessing
demands for a radical economic, social
and business shift towards more sustainable practices. By reporting on our use
of all resources, both financial and nonfinancial, companies are enabling investors to make better decisions about longterm resource allocation. Quality, transparent external reporting is becoming even
more important as the competition for
capital increases in a global economy. And
since the global financial crisis, investors
are even more in need of wider-ranging
research to enable more confidence in
their decisions in allocating capital to sustainable investments. The investment community has become increasingly discerning and requires more than a mere set of
financial statements.
It is clear that corporations need to
advance beyond financial reporting, even
in the absence of statutory requirements.
The problem business faces is how to
navigate through the myriad of both
principle-based and technical guidance
that has emerged, while at the same
time building sound business strategy.
Accounting and financial reporting are
part of this dynamic.
Recent reports (some of which are
in response to the global financial crisis, such as the EU’s Green Paper, The
EU corporate governance framework)
highlight the need for greater scrutiny and enhancement of disclosures of
risk inherent in a corporation’s business
model, strategy and products. Corporate
governance guidance in national securities exchanges in a number of countries has also recently included remuneration practices and board independence as significant factors. In Australia,
a number of measures have been taken
to orientate executive remuneration
away from excessive risk-taking and
The Future of Corporate Governance:
From Accounting to Strategy
short-termism, while in Malaysia, the
Securities Commission had on 29 March
2012 released the Malaysian Code of
Corporate Governance which sets eight
broad principles, each outlining a series
of recommendations, including the formalisation of a board charter, capping of
the tenure of independent directors to
nine years, and separation of chairman
and CEO roles. The new Code becomes
effective 31 December 2012 and will
supersede the 2007 Code.
A further significant development
has been the quantification, and in turn
monetisation, of economic and business
externalities. The most prominent is
carbon and equivalent greenhouse gas
emission measurement under the World
Resources Institute and World Business
Council for Sustainable Development’s
GreenHouse Gas (GHC) Protocol – a
corporate accounting and reporting
standard.
Aside from attempting to deal with the
clear realisation of resource constraints,
each of the streams of development can
be seen as part of a shift in understanding
and expectations around the environmental and social impact of business, both at
an intergenerational level and in terms of
the global reach of business. The diverse,
and even disparate, range of international
initiatives, frameworks and guidelines
raises the issue of how they interrelate
and may be reconciled, acknowledging
that we are still dealing with emerging
developments. A capacity to understand
the relevance and application to particular contexts is critical to business, particularly when confronted with what appears
a confused picture of possible standards
and guidance.
One of the major drivers of responsibility-based business transformation
can be described in terms of corporate
citizenship. The UN Global Compact’s
10 Principles, which span Human Rights,
Labour Standards, Environmental and
Anti-corruption, can be regarded in this
context. Neither the UNGC nor its principles function in isolation. The UNGC is
strategically aligned with the Amsterdam-
based Global Reporting Initiative (GRI),
which is the most comprehensive and
internationally-acknowledged sustainability reporting framework.
The GRI’s guidelines are built around
a body of quantitative and qualitative
performance indicators organised in
categories of Economic, Environmental,
Labour Practices, Human Rights,
Society and Product Responsibility.
The individual indicators are in most
instances cross-referenced to external
sources which guide policy, disclosure
and measurement considerations. For
example, the Social indicator covering actions in relation to incidents of
corruption is cross-referenced to the
UN Convention. The GRI guidelines
are further complemented by Sector
Supplements which, as the title infers,
address sustainability reporting from
specific sector or industr y needs and
characteristics. The next version of
the GRI’s guidelines is expected to be
released in May 2013.
The most significant recent develop-
MAY / JUNE 2012 | accountants today
35
The Future of Corporate Governance:
From Accounting to Strategy
ment in the realm of corporate reporting
is the establishment of the International
Integrated Reporting Council (IIRC).
The IIRC is a collaborative initiative of
the GRI, the Prince of Wales’ Accounting
for Sustainability Project and the
International Federation of Accountants
(IFAC). At its August 2010 launch, the
IIRC stated that: ‘An integrated report
would present information in context
and would encourage the alignment
and linkage of financial, non-financial
and narrative information in a form
that enhances user understanding and
insights.’ The IIRC in September 2011
released a Discussion Paper as a precursor to the development in 2012/13 of
an Exposure Draft of an IR Framework.
The Discussion Paper attracted over 200
responses worldwide.
This initiative does not point directly
to a failure in our accepted modes of
corporate financial disclosure, but rather
is an acknowledgement of the need to
build capacity across the full spectrum
of reporting in the face of emerging
complexity and changing expectations.
Our current accounting standards and
securities exchange listing rules do not
adequately reflect material environmental and social factors, nor do they communicate current and future performance of an organisation in contributing
36
accountants today | MAY / JUNE 2012
Financial reporting, which is predominantly retrospective
and transaction-focused, does not capture the full
dimensions of corporate performance, risk and worth. It
conveys mainly to shareholders vital information on how
directors have discharged their duties and performed in
terms of generating wealth, and fulfils the vital function
of informing securities markets, which is vital to wider
community confidence.
to the creation of a sustainable economy.
Financial reporting, which is predominantly retrospective and transactionfocused, does not capture the full dimensions of corporate performance, risk and
worth. It conveys mainly to shareholders
vital information on how directors have
discharged their duties and performed
in terms of generating wealth, and fulfils
the vital function of informing securities
markets, which is vital to wider community confidence. Financial reporting is
conducted in a framework which tends
towards more prescriptive and mandator y-focused regulation and in many
respects serves well the objectives of
market efficiency and disclosure of the
stewardship performance of directors –
matters of vital concern to investors.
Sustainability and social issues are
reflected in financial reports to the extent
that they are, or are capable of being, monetised and reflected in financial transactions. However, the problem for investors
and wider stakeholders concerned about
environmental and social risks is that the
environmental and social attributes of
a business may not be clearly apparent
from these measures. Similarly, the time
horizons over which environmental and
social issues must be addressed are not
reflected.
The Integrated Reporting model aims
to bring reporting closer to the information used by management to run the
business on a day-to-day basis. There will
be a rebalancing of performance metrics
away from an undue reliance on shortterm financial performance. Integrated
Reporting aims to provide a framework for
The Future of Corporate Governance:
From Accounting to Strategy
the comparable reporting of all aspects of
business including environmental, social
and governance factors and will be centred around the strategic and market context within which the business is operating and how this may change over time.
It will break down what has to date been
siloed development of different streams
of corporate disclosure. Moreover, there
TNB.pdf
1
5/16/12
10:52 AM
will be transparency
around the dynamics of the business
model and the associated risks and
opportunities that
emerge, including
environmental factors, such as climate change, use
of finite resources,
biodiversity
and waste, and social factors such
as employee safety, ethics and human
rights. However, rather than increasing the reporting burden, Integrated
Reporting will rationalise and make corporate disclosure more accessible. It will
inform a business’s strategy and thus
potentially improve performance. Whilst
these intentions are clearly sound, complexity and uncertainty exist in major
areas such as intended audience, practicalities of a general framework, potential
for inadvertent disclosure of privileged
information and the measurement of
capital.
The modern corporation in its current
state is highly complex. Over many
decades it has proved to be highly
adaptive. A well-developed understanding
of how the corporation functions
internally and communicates externally
is vital to its continued transformation
towards meeting changing social and
environmental expectations, while
still serving traditional goals of wealth
generation within a robust business
strategy. n
This article was contributed by CPA
Australia. For more information on CPA
Australia, visit http://cpaaustralia.com.
au.
MIA Conference 2012
Accountants
Driving Innovation
38
accountants today | MAY / JUNE 2012
Malaysia has identified innovation as a driver in its quest
to achieve high-income developed nation status by 2020.
People are at the heart of an innovation nation. Improve the
quality and creativity of accounting professionals who are
fulcrums for business, and you strengthen innovation, which
in turn leads to sustainable business. This is what MIA aims to
achieve through its latest flagship event the Malaysian Institute
of Accountants International Accountants Conference 2012
on Innovative Society: Sustaining Business Success from
27 – 28 November 2012 at the KLCC Convention Centre.
“Innovation has nothing to do with how
many R&D dollars you have. When Apple
came up with the Mac, IBM was spending at least 100 times more on R&D. It’s
not about money. It’s about the people you
have, how you’re led, and how much you
get it.” - the late Steve Jobs
S
teve Jobs and Apple could
certainly be considered poster children for innovation.
Jobs was correct; innovation
is not confined to investing
in technology or scientific applications,
but it also involves thinking about how
to improve existing processes and generate fresh ideas that can be translated
into products and services that create
sustainable business value and financial
returns.
Jobs might be gone, but his wisdom
was spot on when he singled out people
as the success factor for innovation. At
heart, innovation is a people-oriented
process, and we need to invest in people
and make sure that leadership enables
these people to think about continuous
improvement. The most successful individuals, managers and team leaders in
the business world today are the ones
who are not only innovative in their own
work, but who encourage and assist
others to be innovative in every aspect
of their work. This innovation process
will only work if CEOs and boards are
prepared to empower their people to
experiment, test and bring forward new
products and services which don’t fit
the current business model or markets.
Apple’s iPad and iPhone are perfect
examples of calculated risks which paid
off big, and helped make Apple the
world’s most valuable company at the
time of writing. Innovation only arises
from creative and technological disruption, and leaders must be capable
risk-takers who are comfortable with
disrupting the status quo.
In this volatile world, innovation is
the only key which can provide us with
a competitive edge, whether we are
exploring changes to products, services,
processes or business models. More and
more firms realise this on a global level.
If we don’t want to be left behind, we
too need to invest in how to understand
and apply innovation in order to become
more productive and competitive.
MAY / JUNE 2012 | accountants today
39
MIA Conference 2012
“Professional accountants in business (PAIBs) today are expected
to take up a multitude of roles whether in executive or advisory
capacities. Many of them end up as CFOs and CEOs, and they
must be able to provide the best strategic and financial advice
possible, which today incorporates ideas around sustainability and
innovation.”
Datuk Mohd Nasir Ahmad, Chairman, MIA Conference 2012 Organising Committee
The link between
Sustainability and Innovation
It is particularly important to educate accountants and finance
professionals on sustainability and innovation, since they are
the key advisers and decision-makers in the corporate hierarchy. “Innovation pipelines should identify sustainability benefits alongside financial returns so that ideas that challenge
traditional revenue models are not stifled at birth,” warned Two
Tomorrows, an international corporate sustainability agency
that advises leading companies such as LG on risks and strategy. “Those evaluating and commercialising ideas need to give
weight to environmental and social impacts alongside consideration of profit potential.”
The meaningful integration of sustainability, innovation and
finance and accounting issues will be a top priority on the agenda
at the MIA Conference 2012. “Providing exposure on these
issues is part of the Institute’s commitment to continuous development for our members. Business sustainability is indelibly tied
to risk management, strategic management, financial management, and corporate planning among other functions,” said MIA
President Datuk Mohd Nasir Ahmad. “Professional accountants
in business (PAIBs) today are expected to take up a multitude of
roles whether in executive or advisory capacities. Many of them
end up as CFOs and CEOs, and they must be able to provide
the best strategic and financial advice possible, which today
incorporates ideas around sustainability and innovation,” said
Datuk Nasir who is also the MIA Conference 2012 Organising
Committee Chairman.
New Strategies, Technologies
Being Harnessed for Sustainability
Companies will need to learn to use new strategies and technologies to innovate. These include collaboration with stakeholders
Q
such as customers and business partners through activities
such as crowdsourcing, sharing of market research and even
new product development in order to understand and tap market
demands.
“Partnerships that use new technology to create mutually
beneficial market positions enable companies to share risks and
achieve scale. Whether it’s energy companies collaborating with
electronics companies, or food and beverage companies collaborating with utility companies,” said Two Tomorrows. For example, LG and GE are seeking partnerships to address environmental challenges through their Green Energy and Ecoimagination
platforms respectively. Meanwhile, global carpet and flooring
company Interface and Airbus, also Two Tomorrows clients,
use biomimicry – learning from nature in order to solve human
problems – to develop more sustainable products.
Agility, Responsiveness
are Skillsets for Innovation
Ultimately, agility, responsiveness and the ability to renew and
realign strategies to leverage new business conditions and
markets will be the core ingredients needed for innovation and
sustaining a competitive advantage. “For most individuals, firms,
and governments, simply intensifying current strategies, tactics,
and policies will not suffice,” warned Two Tomorrows. Instead,
success will demand a greater ability to quickly close the gap
between the generation of an idea and the creation of its value,
said the agency.
America’s Council on Competitiveness summed it up perfectly
when it announced: “Where once we optimised our organisations
for efficiency and quality, now we must optimise our entire society for innovation.” Do join us at the MIA Conference 2012 so
that you too can learn to become a leading member of the innovative society committed to sustainable business performance. n
For more information about the MIA Conference 2012
kindly visit www.mia.org.my | Register before 30 June 2012 and enjoy great savings!
40
accountants today | MAY / JUNE 2012
governance
MIA Professional Standards and Practices
Statutory Audits
for SMEs
Are statutory audits
on Small and Medium
Enterprises (SMEs)
necessary or just a
complete waste of
time?
Y
es, that age-old debate from way
back when continues to roil, not just
here in Malaysia, but in many parts
of the world as well! Should SMEs
be subject to statutory audits?
The arguments against them are aplenty. For
example, shareholders’ rights do need to be
protected and better transparency promoted to
all relevant stakeholders, including the existing and prospective creditors as well as financiers and not to mention to tax authorities, but
at what cost to the company? To make matters
worse, if a company’s shareholders and directors are one and the same, what really is there
to protect them in terms of their interests?
With regard to resources, by “burdening” them
with the preparation of statutory financial statements over and above the necessity to liaise
with “pesky” auditors, how in the world can
these SMEs effectively and efficiently manage
their human capital? The list of grouses goes
on for miles, but so do the facts of the case.
42
accountants today | MAY / JUNE 2012
Fact #1:
It is wrong to assume that the shareholders and
directors of companies are distinctly segregated.
Take for instance, companies owned and governed
by the same individuals and/or company. Would it
be overly far-fetched to assume that they are constantly looking out only for themselves, even at the
expense of other stakeholders? To put it simply, in
the absence of a statutory audit, how possibly could
the government ensure that it gets its fair share of
the entity’s taxable profits (if any), and what comfort level can the company’s creditors and financiers
gain in relation to the former’s financials? The statutory audit function dates back to who knows when,
and with good reason! Because of the professional
integrity imposed upon the statutory auditors by
both the Companies Act 1965 and the Institute’s ByLaws, independence on their part is a given. In short,
if the statutory auditors sign off on an unqualified
opinion on a reporting entity’s financial statements,
you can bet your bottom dollar (ringgit, I mean…)
that it holds water! And that is exactly the level of
confidence required by the shareholders and other
relevant stakeholders of a company when studying
the reported financials to serve their respective purposes.
Statutory Audits for SMEs
Fact #2:
Statutory audits guarantee that all accounting treatments and reported disclosures
are in line with relevant financial reporting standards as consistently applied by all
companies in the country; thus allowing
for meaningful analysis and benchmarking against competitors and peers alike.
The logic is simple! One should only compare apples to, well… apples! Comparing
apples to oranges only distorts the overall
picture, and more often than not leads to
poor decisions, not to mention undesired
repercussions. On top of the high level of
integrity and independence expected from
a company’s statutory auditors, yet another
of the latter’s strengths lies in their technical prowess and mastery of the relevant financial reporting standards and generally
accepted accounting practices (GAAP). Taking into account this fact, all the relevant
stakeholders can therefore rest assured that
an independent and learned party is reviewing the company’s statutory financial statements, and more importantly, in accordance
with relevant financial reporting standards
and GAAP.
Fact #3:
The million-dollar (yes, ringgit, I get it!) question in the event of fraud within a company is
who are the ultimate losers? Spot on! It is the
shareholders and other relevant stakeholders,
who are innocent at that should they be totally unaware of the harsh realities arising from
the purported underhandedness of the board
of directors and/or employees with unfortunately, nothing more than bitter selfishness on
their mind/s. It is therefore integral that shareholders, especially, be given the right to have
their company’s financial statements audited,
to at least have assurance over their figures,
i.e. investments and interests, as well as that
of other relevant stakeholders. If you think this
request sounds seemingly unreasonable and
downright absurd, perhaps you might change
your mind when I pose you this simple question: how would you be able to sleep at night,
knowing full well (well, not knowing much,
actually) that you have invested your life savings in the trust fund of a fund manager which
claims to have proven successes, but has never
had their reported financials audited before?
Frankly, I would be very much surprised if your
answer was “I sleep very well, thanks.”
MAY / JUNE 2012 | accountants today
43
Statutory Audits for SMEs
Fact #4:
Do not blind yourself to the other benefits
arising from a statutory audit! Notwithstanding the three fundamental facts highlighted
above, the shareholders of the company
would also open themselves to a host of other benefits which outweigh the costs to be
incurred and resources to be utilised, some of
which include:
• assurance on the effectiveness of the company’s internal controls and systems;
• recommendations by the statutory auditors aimed at improving process effectiveness and efficiency, based on observations
noted throughout the audit process;
• ease of negotiations when trading with
creditors and/or applying for loans and
borrowings;
• raising the opportunity for auditors to offer relevant and value-added advice and
services beyond that of traditional statutory auditing, including that of management consulting, mergers and acquisitions, corporate restructuring, valuations,
business process improvements, and the
list goes on and on; and
• the appointment of an additional watchdog which helps to protect the shareholders and other relevant stakeholders from
risks of fraud, money laundering and/or
other illegal activities.
If you think this request sounds seemingly
unreasonable and downright absurd, perhaps
you might change your mind when I pose you
this simple question: how would you be able to
sleep at night, knowing full well (well, not knowing
much, actually) that you have invested your life
savings in the trust fund of a fund manager which
claims to have proven successes, but has never
had their reported financials audited before?
Frankly, I would be very much surprised if your
answer was “I sleep very well, thanks.”
Barring the above highlighted clear-cut facts and
benefits arising from statutor y audits, many countries have, started exempting small companies within a certain threshold from the need for audit. Not
surprisingly, that fateful day when the statutor y audit requirement for certain categories of companies
in Malaysia (most likely including that of SMEs) is
removed, does not seem too faraway or implausible.
In fact, the new Companies Bill which is anticipated
to take effect in 2013 will empower the Companies
Commission of Malaysia (SSM) to exempt certain
categories of companies from the mandator y need
for statutor y audit. Specifically, in accordance with
recommendation 1.6 of the Review of the Companies
Act 1965, some exemptions from the requirement to
audit annual financial statements will be introduced
for companies based on specific criteria. SSM in its
2008 consultative document “On Creating a Conducive Legal and Regulator y Framework for Businesses” suggested using three criteria to determine
whether an entity should be considered a small entity, as summarised below:
• Total revenue of not more than RM10 million;
• Total assets of not more than RM5 million; and
• Not more than 50 employees.
Whilst that day of reckoning seems forthcoming, it
is my humble recommendation for auditors to “be prepared.”
But seriously, my dear accountants, what do you
think? Based on the multitude of benefits as shared
above, are audits on SMEs then considered very necessary or just a complete waste of time? I suspect you
already know the answer… n
44
accountants today | MAY / JUNE 2012
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tax
Tax implications of
convergence
Majella Gomes
All accountants need to be familiar with the tax implications arising from the
implementation of converged standards. Going forward, Malaysia urgently
needs clarity on tax implications and issues arising from convergence, which
can be complex, unfamiliar and have a far-reaching impact on financial
performance and reporting.
T
he implications arising from
the implementation of converged IFRS are varied and
extensive, and this includes
tax implications. Where should
accountants start in order to grasp the
impact of convergence on taxation?
Start at the beginning
“They need to understand the process of convergence,” stated Tan Khoon
Yew, BDO’s Director of Learning and
Professional Development. “In August
2008, MASB announced the intention to
converge Malaysian standards with international standards. Adoption of standards
would be gradual, moving from FRS in
2008 to IFRS by 2011, with total convergence by 1 January 2012.”
However, in November 2011, a dual
framework was announced, and full
convergence was expected only in
2013. Currently, there are three financial reporting frameworks in Malaysia:
Malaysian Financial Reporting Standards
(MFRS), Financial Reporting Standards
(FRS) and Private Entity Reporting
Standards (PERS). MFRS and FRS in
Malaysia are for public-listed entities,
while PERS, as the name suggests, covers only private entities.
All companies must generally adopt
FRS, but in 2011, MASB permitted a transitioning entity – which can include parent companies and those operating in the
plantation and property development sec46
accountants today | MAY / JUNE 2012
The panellists: Tan Chin Fook (speaking). Seated (left - right) Neoh Beng Guan,
Tan Khoon Yew, Beh Tok Koay and Lim Kah Fan.
Tax Implications of Convergence
FRS 111 covers revenue
recognised during construction and some of
the areas of contention
may stem from whether
the operator is running a
business or if it is operating and maintaining a
project; and calculation
of fair value during a
period of construction.
tors - to opt for the framework of their choice.
“Sometimes within a single group, there will
be two different reporting frameworks – FRS
and MFRS,” Tan explained. “Different companies within the same group have to keep
different sets of accounts according to different rules. Record-keeping in these instances
can be very challenging.” Property development companies, therefore, have to declare
what their intentions are with regards to the
property they own – whether it will be sold,
held or developed – when adopting MFRS.
Tax treatment will then be accorded based
on this. He added that the future challenges
in MFRS implementation will be in the areas
of revenue, leasing, insurance and financial
instruments.
Drilling down
to the nitty-gritty
Lim Kah Fan, a Partner with Ernst & Young
specialising in Business Tax Services singled
out the tax implications of FRSs 111, 121,
140, IC Interpretations 12 and 15 which are
still up in the air. “Some issues pertaining to
FRS adoption are still unresolved,” he said.
“These include estimated losses and liquidated ascertained damages, guarantee fees and
estimated margins for projects. Under FRS
121, when forex is translated to functional
currency, there is still the need to determine
which net profit before tax should be used in
the computation of tax. Also, what currency
should inventories be valued in? All this may
affect gross margins. The list of grey areas
is extensive, covering disallowable expenses,
what exchange rate to use for month-end
balances, and interest restrictions, among
others.”
Lim mentioned a possible solution adopted
in Singapore: non-Singapore currency was
acceptable, and allowed to be translated back
to Singapore currency on the date of payment,
to enable computation of tax. This was not
the case in Malaysia, where the authorities
offer neither clear-cut guidelines nor concessions, and accountants have to pick their
way through a minefield of legislation as best
they can. Where FRS 140, which pertains to
Investment Property, is concerned, he said
there were no tax implications but historical
cost records needed to be maintained for capital allowance claims. FRS 111 covers revenue
recognised during construction and some
of the areas of contention may stem from
whether the operator is running a business
or if it is operating and maintaining a project;
and calculation of fair value during a period of
construction.
“Questions should be asked, such as to whom
the assets belong, and whether they are eligible
for deductions,” Lim said. “This is particularly important for tolled roads and buildings
constructed under privatisation projects, or
Build-Lease/Maintain-Transfer arrangements.”
He also covered Service Arrangement under
IC Interpretation 12 and FRSIC Consensus 17,
which deals with the development of affordable housing. The tax implication on FRSIC
Consensus 17, however, is still being discussed
by the relevant parties.
MAY / JUNE 2012 | accountants today
47
Tax Implications of Convergence
Under FRS 139 – Recognition and
Measurement, Neoh discussed the
fair value concept, computation of
efficient interest rate, impairment
loss for Loans and Receivables
(LARs), interest-free loans, nonarm’s length loans, transaction
costs, hedging instruments, hedged
items, hedge accounting, derivatives, transitional rules and prior
year adjustments.
Further FRSs were detailed by Tan
Chin Fook, Managing Director of Mazars
Taxation Services. He covered FRS 119, 2,
102, 6, 116 and 117. “FRS 119 pertains to
unutilised sick or annual leave, retrenchment, gratuity or termination benefits,” he
explained. “Are these tax deductible, and
how? Are they actually incurred or a
mere provision? Their treatment should
be clear.”
Applying strict standards
Employees’ share option schemes (ESOS)
and share-based payments were covered
under FRS 2. “Besides the need to determine fair value on options granted, what is
and is not tax-deductible must also be clear,”
he continued. “For instance, are payments
made by a subsidiary company to the holding company deductible to the subsidiary
and taxable on the holding company? There
has been no decision on this yet.”
On Inventories under FRS 102, he
said that the measurement of inventory
should be based on the lowering cost and
net realisable value (NRV), and that cor-
48
accountants today | MAY / JUNE 2012
rect tax treatment was imperative as this
could result in lower costs while maintaining market value as under certain circumstances NRV may not be equivalent to
market value. Tang also covered inventories purchased with deferred settlement
under this standard. Other standards that
he mentioned were FRS 6 which deals
with Exploration For and Evaluation of
Mineral Resources (E&E); FRS 116 for
Property, Plant and Equipment (PPE);
and FRS 117 on Land and Building Leases.
Underscoring the importance of
replacement of major parts from the tax
exemption perspective, he said, “Is it
repair or purchase of an asset? The cost
of major inspection is recognised as PPE,
and once you recapitalise replaced parts,
you have to derecognise the parts which
have been replaced.” FRS 117 has separate classification for leased land and
buildings. Finance leases are usually considered as PPE while operating leases are
seen as prepaid lease rentals. Initial direct
costs such as commissions and legal fees
are not deductible, but may qualify for
capital allowance.
The final speaker for the session, Neoh
Beng Guan, covered FRS 123, 136, 138,
5 and 139. “Traditionally, we considered
carrying costs but now we look at fair
value,” said Neoh, Executive Director of
KPMG’s Corporate Tax Services. “It has
been two years since papers on this were
put out to authorities, but they are yet
to respond with the relevant guidelines.
For instance, can we claim on borrowing
costs incurred in the same year? What
about pre-commencement interest? We
do know that costs incurred during construction cannot be capitalised as part
of construction costs. How do we treat
impairment of assets, especially intangible assets – how do we treat software,
which is considered intangible?”
Under FRS 139 – Recognition and
Measurement, Neoh discussed the fair
value concept, computation of efficient
interest rate, impairment loss for Loans
and Receivables (LARs), interest-free
loans, non-arm’s length loans, transaction
costs, hedging instruments, hedged items,
hedge accounting, derivatives, transitional
rules and prior year adjustments.
In conclusion, there needs to be clarity
on tax treatments and issues arising from
convergence and the matter is urgent. If
tax issues are properly managed, they
can save a lot of heartache – and if problems are ignored at the initial stages, they
will snowball into long-term problems
with serious repercussions. n
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economy
Preparing
forCalamity
Natural disasters are critical business risks threatening the performance and survival of
companies everywhere. Most recently, Japan and Thailand have learnt costly lessons from
their own environmental crises. Companies need to be prepared for natural disasters to ensure
the sustainability and longevity of their enterprise, said experts at the recent Accountants
in Business Symposium, speaking on the topic of “Natural Disaster – is your organisation
prepared?
Majella Gomes
N
Adam Zechariah, Director in the Risk practice
of Ernst & Young.
50
accountants today | MAY / JUNE 2012
atural disasters are critical
business risks threatening the performance and
survival of companies ever ywhere. Most recently,
Japan and Thailand have learnt costly
lessons from their own environmental
crises. Companies need to be prepared
for natural disasters to ensure the sustainability and longevity of their enterprise,
said experts at the recent Accountants
in Business Symposium, speaking on the
topic of “Natural Disaster – is your organisation prepared?
Everywhere we turn, a natural disaster
seems to be brewing. Hard on the heels
of the recent Acheh earthquake, experts
issued a warning of a looming tsunami
that is projected to wipe Padang off the
map and could have repercussions on
Penang and Kedah as well. Macabre
shades of the Boxing Day tsunami of
2004?
Knowing how critical it is for businesses to assess and manage natural dis-
aster risks, MIA organised a session on
“Natural Disaster – is your organisation
prepared?” at the recent Accountants in
Business Symposium, aimed at creating
awareness of crisis management among
accounting and finance professionals.
One key point stressed by experts was
that there is no escaping disaster and
crisis. “When disaster hits, you just have
to live with it,” said Adam Zechariah, a
Director in the Risk Practice of Ernst &
Young frankly. “And it will hit, whether
you like it or not. No business is immune.
The disaster itself is just one element; its
impact can be costly and have repercussions. Some events are predictable and
may be an annual occurrence. Mitigating
measures can be put in place for these,
but others – like drought, hurricane and
flash floods – are unpredictable. However,
from previous experience we know what
can happen, so to a certain extent, we can
take steps to ensure that our organisation is resilient enough to weather the
disaster.”
PREPARING FOR CALAMITY
More Looming Disasters
n We have to be prepared for crisis because
there is no escaping disaster regardless of
one’s location on Planet Earth. According
to a recent global survey, natural disasters
are classified as “very likely to happen,”
remarked Zechariah. “More are likely to
happen in the future, so what does this
mean for risk practitioners? Natural disasters are considered, but they are not
considered enough within the context of
a company’s strategy. A case in point is
the 2011 earthquake and tsunami that
hit Japan – widely regarded as the worst
natural disaster in recent history.” These
calamities caused an estimated US$220 -
US$250 billion in damage, and the world
is still feeling its knock-on effects in
ways that were completely unanticipated.
Another example is the most recent flood
in Thailand, which also cost billions in
damage. Thailand is the largest producer
of hard disk drives (after Taiwan), and
manufactures for Japanese automotive
giants Toyota and Honda as well – so
two major industries have been affected
worldwide.
It is worthwhile to note that the number
of disasters was much lower, on average, in the past ten years, but the cost
of recovery is escalating. In fact, 2011
was reported by the UN as the costliest
In fact, 2011 was
reported by the UN as
the costliest year in history
where catastrophes were
concerned. Economic losses
from three hundred natural
disasters affecting 206
million people worldwide
amounted to almost
US$366 billion.
MAY / JUNE 2012 | accountants today
51
PREPARING FOR CALAMITY
year in history where catastrophes were
concerned. Economic losses from three
hundred natural disasters affecting 206
million people worldwide amounted to
almost US$366 billion. The impact has
been prolonged and even greater because
of the growing phenomenon of globalised
trade and the practice of Just-In-Time
(JIT) production among many companies and economies. But even before
the earthquake, tsunami and floods, the
world had a taste of how natural disasters
today can impact the globe. In late 2010,
Iceland’s Eyjafjallajokull volcano erupted,
sending clouds of ash over Europe causing the most extensive shutdown of air
space since World War Two.
The volcano certainly put Iceland, until
then a relatively low-profile country, on the
map – and almost put many airlines permanently out of business! Clouds of volcanic
ash made air travel hazardous, and this
in turn impacted on the tourism industry worldwide as many cancelled holiday
plans. This is only one example of how a
natural occurrence in one out-of-the-way
location can produce a domino effect of
global proportions. “Similarly, when one
link in the supply chain is affected, the
entire chain is compromised,” Zechariah
continued. “Prolonged bad weather that
leads to flooding can cause people to
52
accountants today | MAY / JUNE 2012
“If all your customers come from
a single area, you are in trouble.
Just imagine if your main market
is in an area prone to cyclones, or
affected by typhoons on a regular
basis! Diversified distribution
channels are as important as
reliable supply chains.You need to
identify areas within your business
that cannot afford to fail, and
ensure that they can be sustained
as long as possible in the event of
natural disasters.”
miss work, and when this happens, who
runs the business? Who monitors the
production lines? Who does deliveries?
JIT manufacturing is one of the aspects
of production that is based on economies of scale, and doing business in this
manner has led to the evolution of new
risks.”
What is required, then, is a different
perspective of existing systems. “Our
systems need to be more robust, in particular our IT systems. These events are
costly, but not totally unexpected; we
know that they will occur, but not when.
Natural disasters sit along a continuum
of risk events, all of which the organisation can control its reaction to. We do not
know the likelihood, but we can ascertain
the impact.” A case in point (again) is the
flooding in Thailand, in late 2011. It didn’t
happen suddenly or without warning; it
was almost gradual, and the authorities
actually had time to institute mitigating
measures that somewhat eased its impact.
Despite this, economic losses were still
massive and costly. Some estimates put
these at US$1.6 billion, and many consider these the worst floods Thailand has
experienced in five decades.
Taking Action
n Firstly, businesses with subsidiaries outside the country of origin should be conversant with the regulations pertaining to the
various types of insurance. According to
studies, up to 30% of losses stemming from
earthquakes, for instance, can be recovered through insurance in some countries.
Zechariah recommended that businesses relook at their JIT/zero inventory policy and practices; ditto succession
planning and supply chain sustainability.
Channel management is another area
that bears scrutiny because the markets
where you sell are as important as the
markets from where you buy. “If all your
customers come from a single area, you
are in trouble,” he stated flatly. “Just
imagine if your main market is in an
area prone to cyclones, or affected by
typhoons on a regular basis! Diversified
distribution channels are as important
as reliable supply chains. You need to
identify areas within your business that
cannot afford to fail, and ensure that they
can be sustained as long as possible in the
event of natural disasters.”
The old adage of saving for a rainy day
still rings true despite today’s myriad new
ways of doing business. He underscored
the fact that companies which survived,
and sometimes even prospered in the
face of disaster were the ones which
had carefully built up their reserves. In
tough times, being liquid is really helpful. Building up and maintaining liquid
reserves therefore have to be part of the
back-up plan. “Keep building reserves,”
he advised. “This should be an ongoing
exercise, and should be seen as part of
the mitigating measures and business
strategy to ensure resilience in the face
of natural disasters.” He urged a practical
approach to recovery, saying that businesses should not be overly concerned
with analysing probabilities. Instead, they
should analyse and determine what can
happen in the event of a natural disaster,
and how things are affected.
C
At the other end of the scale, they
should refrain from hedging, particularly
in the case of maintaining a level of inventory which will carry them through the
rough patch. “Don’t dabble in things you
don’t understand,” cautioned Zechariah.
“Do not hedge as a ‘gamble’. Remember,
you are keeping inventory in order to
continue operating or survive, not to
make additional profit. Get the basics
right, but look beyond your organisation,
and build these mechanisms into your
operations. Ask yourself, “If my business
cannot produce what it is supposed to
when disaster strikes, what do I do?” If
your answer is, “I have a lot of money”
then you may still be okay. But if you have
to honestly say “I don’t know” then you
are really in trouble!”
There is nothing to be gained from
fear and hand-wringing in anticipation of
a disaster. “Stop worrying and learn to
live with it,” was his concluding advice.
“Frankly, whether natural or humanmade, disasters can hit a business any
time. We still fear them, but at the end of
the day, the businesses that survive will
have demonstrated two characteristics:
the ability to change, and the flexibility
that allows them to do this. Ultimately,
you will have to decide how best to grow
from the disaster, and move on.” n
M
Y
CM
MY
CY
CMY
K
management+business
FAQs on Professional
Indemnity Insurance
To clarify an upwards revision in minimum professional indemnity coverage
to enhance partners’ liability and risk protection, MIA has prepared these
Frequently Asked Questions on Professional Indemnity Insurance (PII).
54
accountants today | MAY / JUNE 2012
FAQs on Professional Indemnity Insurance
T
he MIA Council has approved a revision in the minimum coverage of Professional Indemnity Insurance
(PII) from RM100,000 to RM250,000 per partner per
firm, with effect from 1 July 2012. Where a member
carries on practice under more than one firm, he or
she will be required to have separate policies for professional
indemnity insurance with a minimum of RM250,000 in each of
these firms.
To help provide clarity to the justification behind our decision to increase the minimum coverage of PII, please see the
Q&A below. We hope this will help to explain the reasons
for the changes. However, if we have not answered all your
questions, please contact the MIA Membership Department
at 03-2279 9200. Alternatively, email us at memberfirm@mia.
org.my
Why is there a need to buy PII?
Section 510 of the Institute’s By-Laws (on Professional Ethics,
Conduct and Practice) stipulates that every member in public
practice is required to ensure that his or her firm carries and
maintains a policy of PII which has to be insured with a licensed
insurance agency.
Professional indemnity insurance is a policy taken to protect the insured against any liability against the person, who,
due to the nature of his work, may be exposed to the likelihood of lawsuits for professional negligence for what he had
done or said.
Why is there a need to increase the mandatory
limit for PII?
PII was first made mandatory for all members in public practice on 1 October 1998 where the minimum mandatory limit
of indemnity was set at RM100,000 per partner per firm. The
limit of indemnity has remained constant since its inception.
A review conducted after 14 years of implementation recommended that there is a need to increase the mandatory limit
based on the following reasons:
• The PII mandator y limit is too low in Malaysia compared with other jurisdictions
It would seem prudent for us to look towards increasing our
mandatory limit as our peers in the accountancy profession
have done. Malaysian limits are considerably the lowest
among peer group jurisdictions and among other professions in Malaysia.
• Feedback from Insurers
There is feedback from Marsh Insurance Brokers that
some of the insured members bought PII at the minimum
limit even though their annual gross income is higher.
This is not a healthy phenomenon as most jurisdictions
require their members to be insured for 2.5x their annual
gross income.
• Higher costs of civil liabilities
The increase also takes into consideration the need to have a
higher insured policy limit to cater for the higher costs of civil
liabilities, mainly due to an increasingly litigious society.
How many member firms will be affected?
The impact of the revision will not be huge as, based on the
statistics from insurers, currently 52% of firms have bought
PII with limits in excess of the mandatory minimum of
RM100,000.
What is the additional premium for this new
mandatory limit?
Depending on insurers, the premium for all amounts of coverage might be slightly lower for all ranges of gross income, due
to economies of scale. The additional minimum coverage could
be more competitively priced than open market quotes due to
bulk purchasing.
For more information on the premium, you may contact our
appointed broker Marsh Insurance Brokers (Malaysia) Sdn
Bhd at 03-2302 8488 or email to: miapii.malaysia@marsh.com
Does the premium warrant a tax deduction?
Generally, the premium paid on professional indemnity
insurance is not tax deductible as the policy is taken to cover
a personal liability or risk. In simple terms, it is to cover a
claim made against the personal assets of a person and is not
wholly and exclusively incurred in the production of income
as stipulated under Section 33 of the Income Tax Act 1967.
However, as a concession, premium expenses paid for professional indemnity insurance will be allowed as a deduction for a
practicing professional who is a member of a professional body
which represents his profession, provided the professional
carries on the business of his profession. This is regardless
of whether the purchase of the professional indemnity insurance is a requirement regulated by the profession’s by-laws or
statue.
I have renewed my PII policies earlier at
RM100,000. What should I do now?
For those who have renewed their policies earlier, please
contact your insurance broker / company to increase the sum
insured and notify the Institute thereafter.
You must provide the Institute with a copy of your firm’s
revised PII policy latest by 31 July 2012. The policy can be faxed
to 03-2279 9386 or emailed to memberfirm@mia.org.my
For further clarifications, please contact our membership department at 03-2279 9200.
MAY / JUNE 2012 | accountants today
55
management+business
Helping SMPs thrive
Giancarlo Attolini (picture) Chair,
IFAC Small and Medium Practices (SMP)
Committee talks about how to help small
and medium-sized practices (SMPs) meet the
challenges and seize the opportunities of
tomorrow.
How important are small and mediumsized accountancy practices?
ll Small and medium-sized practices
or SMPs constitute the vast majority of
accountancy practices worldwide and, in
many areas of the world, are believed
to employ the majority of professional
accountants working in practice. SMPs
provide a broad range of high-quality professional services - from the traditional
audit, accounting, and tax ser vices, to
value-adding business advisory - to meet
the needs of their clients who are typically
small and medium-sized entities (SMEs).
SMEs are crucially important to the health
and stability of the global economy: SMEs
account for the majority of private sector
GDP, employment, and growth globally,
and, moreover, hold the key to the global
economy’s recovery from one of the deepest economic downturns in modern times.
IFAC (the International Federation of
Accountants) recognises that addressing
the needs of SMPs and SMEs is important. And its members echo this sentiment.
The most recent IFAC Global Leadership
Survey, which polls the presidents and chief
executive officers of IFAC member bodies, found that addressing the needs of
SMPs and SMEs is the second most important issue facing the Global Accountancy
Profession in 2012.
Why do SMEs often choose SMPs for various professional services?
ll Our global research as summarised
in the IFAC information paper The Role
of SMPs in Providing Business Support to
SMEs, has indicated that SMEs look to
SMPs for a range of professional services
for various reasons, most notably their reputation for competency and trust, responsiveness, and geographical proximity.
56
accountants today | MAY / JUNE 2012
Helping SMPs thrive
Why did IFAC establish the SMP Committee? What is its role?
ll In recognition of the importance of SMPs, especially in supporting SMEs,
IFAC created the SMP Committee in 2006. Since then IFAC, largely at the behest
of its member bodies, has increased its commitment to helping cultivate robust
SMPs. Today the SMP Committee supports SMPs in various ways. It does this
primarily through IFAC member bodies - helping them support their SMP stakeholders. The committee develops guidance and tools and works to ensure the
needs of the SMP and SME sectors are considered by standard setters, regulators, and policymakers. The committee also speaks out on behalf of SMPs to
raise awareness of their role and value and the importance of the small business
sector overall.
What changes do you see in the global landscape in so far as SMPs are concerned?
ll The global economy has changed a lot in the past few years and the accounting
industry has not escaped these changes. Hence, it’s no surprise to find that SMPs
are facing a changed economic and regulatory landscape - one characterised by
significant challenges, but also with great opportunities if the results of the fourth
quarter IFAC SMP Quick Poll are anything to go by. The poll revealed that regulatory burdens and economic woes continue to top the list of challenges faced by
SMPs and their small business clients. Of course, the overall results mask some
significant regional variations. But a key lesson, if there is one, for SMPs is that they
are best placed to thrive in the new global economy by changing with the times.
What are the key challenges that SMPs are facing?
ll The fourth quarter IFAC SMP Quick Poll pulled in over 2,400 responses
from around the world thanks to the promotion efforts of many IFAC member
bodies. In all regions barring Europe, burden of regulation ranked as the top challenge faced by practitioners’ small and medium-sized entity clients. Meanwhile,
economic uncertainty ranked as the top challenge in Europe. When accountants
were asked to name the biggest challenge facing their practices, keeping up with
new standards and regulations ranked first, followed by attracting and retaining
clients in almost all regions (in Asia, these top two were reversed).
The poll showed that respondents were generally more positive about 2012
compared with 2011, though Europeans were noticeably less optimistic about the
future than those from other regions. As the global economy starts to pick up,
SMPs should adapt to capitalise on the emerging opportunities.
How can SMPs best overcome economic uncertainty and other challenges?
ll While SMPs are facing significant challenges, the poll showed that respondents were generally more positive about 2012 compared with 2011. As the global
economy starts to pick up, there will be emerging opportunities and SMPs
should be ready to adapt to embrace them.
First, boost marketing and promotion efforts – According to the poll, growth in
practice fees will be driven primarily by winning business from new clients. This
will demand more and smarter promotion and marketing efforts that should focus
on what distinguishes SMPs - as mentioned before, most notably their reputation
for competency and trust, responsiveness, and geographical proximity. Accounting
and compilation services are perhaps worth special focus as poll respondents saw
this as the fastest growing source of revenue, and the marketability of compilations should increase with the release of the International Auditing and Assurance
Standards Board’s new standard on compilation engagements.
The poll showed that
respondents were generally
more positive about 2012
compared with 2011, though
Europeans were noticeably
less optimistic about the future
than those from other regions.
As the global economy starts
to pick up, SMPs should adapt
to capitalise on the emerging
opportunities.
MAY / JUNE 2012 | accountants today
57
Helping SMPs thrive
Second, focus on advisory/consulting
services – These services, ranging from
tax consulting and financial management
to newly emerging services like wealth
management and advice on sustainable
business practices, are a crucial growth
area for SMPs. The poll found it was the
second fastest growing source of revenue
after accounting and compilation. But
perhaps most telling was the finding that
insufficient partner time and marketing
services to clients jockeyed for the position as the top challenge in building advisory/consulting services work. This suggests SMPs need to free up partner time
to make it work, perhaps use value-based
pricing to ensure a good return, and,
as mentioned previously, increase their
marketing and promotion. The poll also
revealed that an existing client relationship is the main reason that SMEs seek
advisory/consulting services, suggesting practices should, where ethical rules
allow, promote them to existing clients.
In what ways has the world changed and
how can SMPs change with it?
ll First, internationalise - Cross-border
trade, in goods and services, and investment is growing exponentially and great
advances in transportation, IT, and communications infrastructure are making the
world a smaller place. As a result, SMEs
are increasingly doing business internationally. SMPs will, therefore, need to internationalise themselves if they are to effectively support these SMEs. A good place
to start is to have a strategy, which might
include joining an international network or
association of practices, possibly to affiliate with a national firm with international
connections. The value of an international
network or association comes from the
local knowledge that member firms can
offer to clients. This means even a small
practice can help a client go global and
may help the practice retain clients that
might otherwise choose a larger firm.
+
The poll also revealed that an existing client relationship
is the main reason that SMEs seek advisory/consulting
services, suggesting practices should, where ethical rules
allow, promote them to existing clients.
58
accountants today | MAY / JUNE 2012
Second, exploit emerging technologies – Emerging technologies like cloud
computing offer the opportunity to both
increase your practice’s service offerings
and, generally, do more with less. From a
remote location, SMPs can now provide
SMEs with a full range of services, from
basic bookkeeping and payroll to virtual
CFO, in a way that is safe, secure, and
more cost-effective than traditional faceto-face delivery. SMEs can thus enjoy
many of the same benefits of having an inhouse professional accountant that larger
entities enjoy.
What are the potential implications for
policymakers, regulators, and standardsetters?
ll Even at a time of global economic
uncertainty, concerns around regulation
and standards are still uppermost in the
minds of SMPs and SMEs for whom
compliance may be disproportionately
burdensome. And according to an earlier
poll, the nub of this concern seems to be
the pace or speed with which regulation
and standards are changing, more than
complexity and volume.
Regulation is intended to bring benefits,
for example by helping markets operate
fairly and efficiently. We somehow need
to ensure that these benefits outweigh
the burden and are widely recognised.
IFAC has spoken out on these issues.
IFAC believes that regulatory reform
should not create unreasonable obstacles
for the progress of SMEs: costs and complexities that will impose burdens on, and
threaten the sustainability of the small
business sector must be carefully examined. In addition, international standards
should be applicable, accessible, and
cost-effective for SMPs and SMEs. The
committee plays a pivotal role here by
stressing the need for a stable platform of
regulation and standards that are relevant
to SMEs and SMPs and capable of being
applied in a manner proportionate to size
of practice or entity.
Helping SMPs thrive
What role can individual SMPs play in
shaping the global policy, regulation and
standard-setting agenda?
ll While an individual SMP may feel
that it is too small to make a difference or that it lacks the capacity to
contribute in a significant way, it needs
to be remembered that the strength of
the SMP voice comes from their sheer
numbers. Therefore, it is important
that we all play our part, no matter
how small, and get involved in some
way, be that by writing a comment letter on an exposure draft, responding
to a sur vey or poll, or participating in
the initiatives of the SMP Committee.
The challenge, however, is to ensure
one cohesive, clear, and collective message. The SMP Committee aims to
act as a mouthpiece for the voice of
SMPs. The Committee has an online
Discussion Board and conducts regular
polls, which we encourage our member
bodies to promote to their SMPs so that
we can channel the voices from a global
representation of this sector. n
Giancarlo Attolini became chair of the
Small and Medium Practices Committee in
January 2012, having served as deputy chair
in 2010-11. Nominated by the Consiglio
Nazionale dei Dottori Commercialisti e
degli Esperti Contabili (CNDCEC), he has
been a member of the Committee since
January 2008 and served as deputy chair
in 2010.
Visit www.ifac.org/SMP to learn more about the IFAC SMP Committee and its support for SMPs through
collaboration with IFAC member bodies.
Copyright © March 2012 by the International Federation of Accountants (IFAC). All rights reserved. Used
with permission of IFAC.
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trends
The Future of
Islamic Finance
Ambiguous shariah interpretations are bogging
down the growth and credibility of the global
Islamic finance industry. How can it move forward?
Dr. Hassan Ali
60
accountants today | MAY / JUNE 2012
The Future of Islamic Finance
T
he growth of the Islamic
finance industr y has been
remarkable over the last
three decades. The total
invested assets in 2011 were
estimated to be about US$2.5 trillion,
up from a meagre US$10 billion back
in 1980s. The fact remains that the
tenets of Islamic principles embodied
into banking activities have successfully
attracted many investors beyond the
Muslim world. In Malaysia, about 80%
of shariah-compliant investment products are held by non-Muslim investors,
and surprisingly cities like London,
Luxembourg, Dublin, Singapore and
Cayman Islands are now competing
neck-and-neck with other Islamic financial cities for a slice of the cake.
Last year, almost 33.5% of the estimated assets were invested in deposits
and short-term money market instruments, another 6.5% were held in dedicated Islamic funds and the remaining
60% were held in sukuk (bond), takaful
lll
Currently, Malaysia is the
market leader in sukuk and
has successfully created the
world’s largest Islamic bond
market, while Saudi Arabia
and Bahrain are at the
forefront in bank deposits and
takaful.The rest are spread
across other global cities.
(insurance) and other equities products.
Currently, Malaysia is the market leader
in sukuk and has successfully created
the world’s largest Islamic bond market,
while Saudi Arabia and Bahrain are at the
forefront in bank deposits and takaful.
The rest are spread across other global
cities.
Yet the entire Islamic financial industry is not without its weaknesses. Since
its rapid growth, the industry faced its
real test as a new player in the global
economy during the financial crisis in
2009. The first shock came when the
Dubai-based Nakheel sukuk came close
to near-default and, like a viral infection contaminating diseases across the
region, the effect soon spread across
other Middle-eastern countries with
Islamic investment products yielding
one of their lowest profits since inception. The Kuwait-based investment Dar
was delisted from NASDAQ Dubai in
May 2009 because of its default on payments followed by defaults by Abu Dhabibased DANA Gas and a near-default by
Kuwait International Investment Group.
The storm however subsided in 2010
when the International Monetary Fund
published a report declaring that most
of the Islamic banks “outperformed” the
conventional banks during the crisis.
MAY / JUNE 2012 | accountants today
61
The Future of Islamic Finance
Competitive Fray
Moving for ward, the entire industr y
is set to change and there appears
to be unprecedented fierce competition among major financial cities. The
Saudi-based Islamic Development Bank
has begun embarking aggressively
to promote the insurance on sukuk.
Dubai is joining the fray by signing
bilateral agreements with the US-based
global standard-setter International
Organisation of Securities Commissions
(IOSC). Bahrain has introduced a new
regulatory framework for investments
to allow a wide range of activities into its
investment portfolios including hedging,
derivatives, swaps and future options.
To lend more credence to its Islamic
legitimacy, the Bahrain International
Islamic Financial Market has issued
its own “Master Agreement” on hedging activities describing in detail the
mechanics of its operations, perhaps to
allay any negative connotation of being
non-compliant. This concern came amid
a series of fatwa (rulings) issued by
scholars that most sukuk are non-shariah compliant.
Indeed, one major problem facing the
Islamic financial system is the ambiguous
interpretation on what actually constitutes shariah-compliance. Malaysia has
always adopted a liberal edict on shariahcompliant financial products while Saudi
Arabia falls at the other extreme with its
strict Wahhabi interpretation of Islam.
Other Muslim countries tend to fall into
one of two camps.
These shariah interpretations are
supposedly under the watchful eyes
of the Bahrain-based Accounting and
Audit Organisation for Islamic Financial
Institutions (AAOIFI), a non-profit international standard-setter that is responsible for maintaining shariah standards for Islamic financial institutions
worldwide. The board is a replica of
the UK-based International Accounting
Standards Board (IASB) and comprises
18 Trustees who in turn appoint its 17
board members. But unlike IASB which
has 21 members from 15 countries as its
Trustees, and 15 board members from
62
accountants today | MAY / JUNE 2012
lll
The ambiguity on the
interpretation of several
provisions of Islamic financial
principles has reached a stage
where several conventional
bankers have boldly declared
shariah-compliant investments
as “non-consequential’
because of the blurred
line between Islamic and
conventional banking.
11 countries that are appointed based on
geographical representation, AAOIFI is
completely dominated by Arab-speaking
countries and clearly does not represent the global Muslim community.
Almost all of its 18 Trustees are from
Arab-speaking countries except for two
members - one each from Pakistan and
Malaysia. Likewise, all of its 17 board
members are from Arab-speaking countries except for one representative from
Malaysia.
The ambiguity on the interpretation
of several provisions of Islamic financial
principles has reached a stage where
several conventional bankers have boldly declared shariah-compliant investments as “non-consequential’ because
of the blurred line between Islamic and
conventional banking. Taking the sukuk
as an example, under shariah principles
an investor should be granted a share
of the asset or business that is directly
linked to the investment cash flows
as well as the need for the investor to
assume the business risk. Meanwhile,
conventional banking offers interestbased funding which is generally nonasset backed. In reality, sukuk is offered
based on the same structural funding as
conventional banking without the banks
even mentioning the element of risk.
Thus, one would espouse that there
is some truth to suggest that the line
between Islamic and conventional banking is blurring as the industry becomes
more mature.
The essence of Islamic finance – the
Mudaraba (cash deposits), Musharaba
(partnerships), Salam (short-selling),
Arbun (share purchase), Tahawut (hedging) and Wa’ad (options purchase) - offers
its own distinctiveness and should be
marketed as such without replicating the
Western-conventional financial system. The
primary mission is to ensure that the entire
Islamic financial system is shariah-compliant and this has to be supported by an international regulator like AAOIFI to represent
the global Muslim community’s interest.
The competition for shariah-compliant investments will become more
intense as the market share grows bigger. International financial cities like
Luxembourg, London, Zurich, Cayman
Islands, Dublin and Sydney are already
offering shariah-compliant specialised
investments which are tax free. Dubai
has strengthened its financial sector
by signing 46 agreements with other
Western-based regulators to ensure efficiency and transparency in its securities
exchange boards while Bahrain has committed itself with a bilateral agreement in
collaboration with the New York-based
International Swap and Derivatives
Association (ISDA) to ensure “efficiency,
certainty and liquidity to the Islamic
finance markets”.
It is high time for Malaysian regulators to begin strategising the future of
Malaysia’s Islamic Financial system to
maintain its global dominance over the
Islamic financial market. Malaysia will
succeed in its path so long as it adopts
and maintain liberal policies on its shariah-compliant products and services diligently. It has done well over the past by
adopting such policies and it will perform
even better by improvising and innovating more ingeniously. n
Associate Professor Dr. Hassan Ali teaches
at Universiti Sains Malaysia’s Graduate
School of Business. He can be contacted at
hasanali@usm.my.
BOOK Review
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