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International Convergence of International Convergence of Accounting Standards: Accounting Standards:

A Case Study of Malaysia A Case Study of Malaysia

23 May 200623 May 2006

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How A Developing Economy How A Developing Economy Embraces IFRS: Malaysia Embraces IFRS: Malaysia

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How Malaysia Embraces IFRSHow Malaysia Embraces IFRS

Embrace: “Integral part of …”Embrace: “Integral part of …” IFRS an integral part of the capital market & corporate IFRS an integral part of the capital market & corporate

governance structuregovernance structure

Malaysia’s experience vs Asia’s experienceMalaysia’s experience vs Asia’s experience Historical, structural, political (will)

Looking back 1972 - 2001Looking back 1972 - 2001 Strategy & ChallengesStrategy & Challenges

Looking forward 2006 - beyondLooking forward 2006 - beyond Strategy & ChallengesStrategy & Challenges

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Degre

e o

f in

tegra

tion

Profession Legal CapitalGovernance

1972 1997 2000 2001

MasterPlans

2006

7 & 8 Malaysia Plan (1996-2005) 9 Malaysia Plan

Adoption 1978

Integral part of the capital market & corporate Integral part of the capital market & corporate governance structuregovernance structure

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1978 – 1997 Adoption of IAS

1973 IASC Formed

1972 Presentation of Accounts

Malaysia has a history of a formal integration of accounting standards into the professional fabric since 1972

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1978 Adoption of first 4 IAS by MACPA1978 Adoption of first 4 IAS by MACPA

1986 Next 13 IAS adopted1986 Next 13 IAS adopted

1992 All IAS adopted by MACPA and MIA1992 All IAS adopted by MACPA and MIA

1997 Accounting standards setting function taken over by 1997 Accounting standards setting function taken over by

Malaysian Accounting Standards Board under Act of Malaysian Accounting Standards Board under Act of

ParliamentParliament

1978 - 19971978 - 1997Profession

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Degre

e o

f in

tegra

tion

Profession Legal CapitalGovernance

1972 1997 2000 2001

MasterPlans

2006

7 & 8 Malaysia Plan (1996-2005) 9 Malaysia Plan

Fin Rpt Act

Adoption 1978

Integral part of the capital market & corporate Integral part of the capital market & corporate governance structuregovernance structure

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Financial Reporting Act 1997Financial Reporting Act 1997

Financial Reporting Act passed by Parliament in March Financial Reporting Act passed by Parliament in March 1997 (prior to Asian financial crisis) 1997 (prior to Asian financial crisis)

Formation of Financial Reporting Foundation and Formation of Financial Reporting Foundation and Malaysian Accounting Standards BoardMalaysian Accounting Standards Board

New to Malaysia and the regionNew to Malaysia and the region Dedicated independent bodyDedicated independent body First time accounting standards has the force of lawFirst time accounting standards has the force of law Non-compliance means breach of lawNon-compliance means breach of law Stringent enforcement infrastructure by Securities Commission, Stringent enforcement infrastructure by Securities Commission,

Central Bank and Registrar of CompaniesCentral Bank and Registrar of Companies

Legal

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Compliance is MandatoryCompliance is Mandatory

Compliance with FRS Mandatory for:

Publicly Listed Companies under Exchange– 1,000 Companies registered with the Registrar – 701,000 !! Financial Institutions under Central Bank – 23

Dedicated Enforcement Infrastructure:

Publicly Listed Companies – Securities Commission Registered companies – Companies Commission Financial Institutions – Central Bank MASB does not have enforcement power

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Malaysian Accounting Standards Malaysian Accounting Standards BoardBoard

Mandate: Develop financial reporting standards

Develop Islamic accounting standards

Extensive consultative process

Funded by: Securities Commission (1/3)

Stock Exchange (1/3)

Ministry of Finance (1/3)

Public, accounting firms, NGOs (Nil)Public, accounting firms, NGOs (Nil)

Independence

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MASB Working Group

1

IAS

IFRS

2

MASB

3

Public

Working Group

7

MASB

8

FRF

9

MASB *

6

FRF

Public

4 5

MASB

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Discussion Paper prepared

Review of DP

Review of DP

Finalise DP into ED

Public Exposure

Final review

Review of comments

FRS issued Approval

9-15 months

Consultative Process & Autonomy

* No need for Parliamentary approval

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• MASB Standards vs International Accounting Standards

• MASB Standards are IAS Plus• Similar to IAS, plus• Guidance added, plus• Other requirements added

Harmonization

1997 – 2001: Harmonization1997 – 2001: Harmonization

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Degre

e o

f in

tegra

tion

Profession Legal CapitalGovernance

1972 1997 2000 2001

MasterPlans

2006

7 & 8 Malaysia Plan (1996-2005) 9 Malaysia Plan

Fin Rpt Act

Corp Gov Code

Adoption 1978

Capital

Financial

Integral part of the capital market & corporate Integral part of the capital market & corporate governance structuregovernance structure

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Integration with Master Plans Integration with Master Plans

Malaysia’s 5-year Master PlansMalaysia’s 5-year Master Plans

Code of Corporate Governance issued in 2000Code of Corporate Governance issued in 2000

Capital Market MasterplanCapital Market Masterplan

Financial Sector MasterplanFinancial Sector Masterplan

““Recommendations for achieving highest standard Recommendations for achieving highest standard for financial reporting for corporate governance for financial reporting for corporate governance among capital and financial market players in among capital and financial market players in Malaysia”Malaysia”

Governance & Capita

l

issued in 2001issued in 2001

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2005: Convergence2005: Convergence

Harmonization

Convergence

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MalaysiaMalaysia Support convergence. IFRS Convergence not an issue. Support convergence. IFRS Convergence not an issue. Question of managing implementationQuestion of managing implementation Sufficient buy-inSufficient buy-in Discretion to determine implementation dateDiscretion to determine implementation date Participate early in standards setting developmentParticipate early in standards setting development Alliance with recognized bodies, lead if necessaryAlliance with recognized bodies, lead if necessary

AsiaAsia Developing economies seem to have no choice but to convergeDeveloping economies seem to have no choice but to converge

participate in free trade/globalizationparticipate in free trade/globalization

funding for industrializationfunding for industrialization

No choice but to participate regionally, greater representationNo choice but to participate regionally, greater representation

No choice but to have regular discourse to identify No choice but to have regular discourse to identify commonalities, or diversitiescommonalities, or diversities

StrategyStrategy

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MalaysiaMalaysia Managing changeManaging change Mindset – old habits die hard, price for having long historyMindset – old habits die hard, price for having long history InterpretationsInterpretations Cost of complex standards vs benefits to owner manager companiesCost of complex standards vs benefits to owner manager companies

RegionRegion Lack of regional participationLack of regional participation Lack of voice, representationLack of voice, representation

Where problems are common, countries must be forthcomingWhere problems are common, countries must be forthcoming Where problems are not common, endeavour to find a consensusWhere problems are not common, endeavour to find a consensus

IASBIASB Developed economies focusDeveloped economies focus Board representationBoard representation Changing goalpostChanging goalpost

ChallengesChallenges

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Convergence impact:Convergence impact: Tough for many countriesTough for many countries Suddenly have to migrate to new environmentSuddenly have to migrate to new environment Accounting standards are now law of these countriesAccounting standards are now law of these countries

Europe (2005), Philippines (2004)Europe (2005), Philippines (2004) Language mattersLanguage matters

Malaysia – not as bad …relativelyMalaysia – not as bad …relatively Have been on IAS all alongHave been on IAS all along Standards are law in 1997Standards are law in 1997 Standards in English, no need for translationStandards in English, no need for translation

Addressing Challenges – Changing mindset

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Addressing Challenges - Interpretations

Discourse with Affected Parties

Degre

e o

f B

uy-

in

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Australia - intangibles China/HK - state controlled entities, leases N. Zealand - agriculture, leases Singapore - leases Malaysia - related party, agriculture

Addressing Challenges – Sharing with others

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In Malaysia, 95% of 701,000 companies are SMEs. In Malaysia, 95% of 701,000 companies are SMEs. Initial intent to cover ALL companies was noble.Initial intent to cover ALL companies was noble.

But as Standards become more complex… But as Standards become more complex…

Burden of compliance by SMEs becomes main issueBurden of compliance by SMEs becomes main issue

MASB announced 2 – tier reporting standard 1.1.2006MASB announced 2 – tier reporting standard 1.1.2006

IFRS (international GAAP) for PLCs, subsidiaries, assoc., IFRS (international GAAP) for PLCs, subsidiaries, assoc., JVJV

Choice of IFRS or MASB Standards (which are IAS Choice of IFRS or MASB Standards (which are IAS compliant) for private entitiescompliant) for private entities

Currently working on private entity reporting standards Currently working on private entity reporting standards (PERS)(PERS)

Addressing Challenges – Costs vs Benefits

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Moving Forward

Convergence is the way forward Understanding the needs of developing economies

important for significant buy-ins in the region Challenges: Regional diversity remains a challenge Help is needed:

IFRS likely to remain complex Goalposts keeps changing Implementation remains an issue

Malaysia stands ready to offer: MASB has significant learning curve MASB is active in Islamic accounting standards MASB has a good understanding about SMEs in the region MASB has models to follow

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Conclusion

Success of convergence contingent upon how developing economies “embrace” IFRS

Malaysia fortunate to have: a history infrastructure political will

… to drive international convergence Others may not be as fortunate, but

Asia can learn from each other

Asian diversity is a beauty

Malaysia stands ready to offer assistance