How A Developing Economy Embraces IFRS: Malaysia 25 March 2006

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How A Developing Economy Embraces IFRS Malaysia
25 March 2006
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How A Developing Economy Embraces IFRS Malaysia

• Embrace Integral part of
• IFRS an integral part of the capital market
  corporate governance structure
• Malaysias experience vs Asias experience
• Historical, structural, political (will)
• Looking back 1972 - 2001
• Strategy Challenges
• Looking forward 2006 - beyond
• Strategy Challenges

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Integral part of the capital market corporate
governance structure

• Malaysia has a history of a formal integration of
  accounting standards into the economic fabric
  since 1972
• Integration into law of the country in 1997,
  earlier than many others
• Integration into governance structure in 2000
  within Code of Corporate Governance
• Integration into capital market in 2001 within
• Capital Market Masterplan, and
• Financial Market Masterplan

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Integration Strategy
Capital
Financial
Corp Gov Code
Degree of integration
Fin Rpt Act
Adoption 1978
1997
2000
2001
2006
1972
Economic
Legal
Capital
Governance
MasterPlans
7 8 Malaysia Plan (1996-2005)
9 Malaysia Plan
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Relatively long history of adoption
1972 Presentation of Accounts
1973 IASC Formed
1978 1997 Adoption of IAS
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1978 - 1997
Economic

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

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Financial Reporting Act 1997
Legal

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

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Compliance is Mandatory

• 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

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Malaysian Accounting Standards Board

• Mandate
• Develop financial reporting standards
• Develop Islamic accounting standards
• Extensive consultative process
• Philosophy independence
• Funded by
• Securities Commission (1/3)
• Securities Exchange (1/3)
• Ministry of Finance (1/3)
• Public, accounting firms, NGOs (Nil)

Independence
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Consultative Process Autonomy
IAS IFRS
Discussion Paper prepared
Finalise DP into ED
Public Exposure
Review of DP
Review of DP
1
2
3
4
5
Working Group
Public
MASB
MASB
FRF
MASB
6
Final review
Review of comments
FRS issued
Approval
7
8
9
10
9-15 months
MASB
Working Group
MASB
FRF
Public
No need for Parliamentary approval
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1997 2001 Harmonization

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

Harmonization
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Integration with Master Plans
Governance Capital

• Malaysias 5-year Master Plans
• Code of Corporate Governance issued in 2000
• Capital Market Masterplan
• Financial Sector Masterplan
• Recommendations for achieving highest standard
  for financial reporting for corporate governance
  among capital and financial market players in
  Malaysia

Issued in 2001
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2005 Convergence
Harmonization
Convergence
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Strategy

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

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Challenges

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

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Addressing Challenges Changing mindset

• Convergence impact
• Tough for many countries
• Suddenly have to migrate to new environment
• Accounting standards are now law of these
  countries
• Australia (2002) Spore (2003) Phil (2004) Europe
  (2005)
• Language matters
• Malaysia not as bad relatively
• Have been on IAS all along
• We made standards a law in 1997
• Standards in English, no need for translation

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Addressing Challenges - Interpretations

• Discourse with Affected Parties

Degree of Buy-in
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Addressing Challenges Sharing with others

• Australia - eliminate choices
• Hong Kong - redefine subsidiaries
• HongKong - State controlled entities, leases
• NZealand - agriculture, leases
• Singapore - leasehold land
• Malaysia - implementation dates

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Addressing Challenges Costs vs Benefits

• In Malaysia, 95 of 701,000 companies are SMEs.
  Initial intent to cover ALL companies was noble.
• But as Standards become more complex
• Burden of compliance by SMEs becomes main issue
• MASB announced 2 tier reporting standard
  1.1.2006
• PLCs, subsidiaries, assoc., JV must comply IFRS
• Other private entities A choice of IFRS or MASB
  Standards (which are IAS compliant)

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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 on the ground
• Malaysia stands ready to offer
• Significant learning curve
• Active in Islamic accounting standards
• Common understanding about SMEs
• 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