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International Convergence of Accounting Standards: A Case Study of Malaysia 23 May 2006. How A Developing Economy Embraces IFRS: Malaysia . How Malaysia Embraces IFRS. Embrace: “Integral part of …” IFRS an integral part of the capital market & corporate governance structure

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International Convergence of Accounting Standards: A Case Study of Malaysia 23 May 2006

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International convergence of accounting standards a case study of malaysia 23 may 2006 l.jpg

International Convergence of Accounting Standards: A Case Study of Malaysia 23 May 2006


How a developing economy embraces ifrs malaysia l.jpg

How A Developing Economy Embraces IFRS: Malaysia


How malaysia embraces ifrs l.jpg

How Malaysia Embraces IFRS

  • Embrace: “Integral part of …”

    • IFRS an integral part of the capital market & corporate governance structure

  • Malaysia’s experience vs Asia’s experience

    • Historical, structural, political (will)

  • Looking back 1972 - 2001

    • Strategy & Challenges

  • Looking forward 2006 - beyond

    • Strategy & Challenges


  • Integral part of the capital market corporate governance structure l.jpg

    Integral part of the capital market & corporate governance structure

    Degree of integration

    Adoption 1978

    1997

    2000

    2001

    2006

    1972

    Profession

    Legal

    Governance

    Capital

    MasterPlans

    7 & 8 Malaysia Plan (1996-2005)

    9 Malaysia Plan


    Slide5 l.jpg

    1972 Presentation

    of Accounts

    1973 IASC Formed

    1978 – 1997 Adoption

    of IAS

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


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    1978 - 1997

    Profession

    • 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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    Integral part of the capital market & corporate governance structure

    Degree of integration

    Fin Rpt Act

    Adoption 1978

    1997

    2000

    2001

    2006

    1972

    Profession

    Legal

    Governance

    Capital

    MasterPlans

    7 & 8 Malaysia Plan (1996-2005)

    9 Malaysia Plan


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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

    Compliance with FRS Mandatory for:

    Publicly Listed Companies under Exchange–1,000

    Companies registered with the Registrar –701,000 !!

    Financial Institutions under Central Bank –23

    Dedicated Enforcement Infrastructure:

    Publicly Listed Companies – Securities Commission

    Registered companies – Companies Commission

    Financial Institutions – Central Bank

    MASB does not have enforcement power


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    Malaysian Accounting Standards Board

    • Mandate:

      • Develop financial reporting standards

      • Develop Islamic accounting standards

      • Extensive consultative process

  • Funded by:

    • Securities Commission (1/3)

    • Stock Exchange (1/3)

    • Ministry of Finance (1/3)

    • Public, accounting firms, NGOs (Nil)

  • Independence


    Slide11 l.jpg

    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

    10

    9

    8

    7

    9-15 months

    MASB *

    Working Group

    Public

    FRF

    MASB

    * 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


    Integral part of the capital market corporate governance structure13 l.jpg

    Integral part of the capital market & corporate governance structure

    Capital

    Financial

    Corp Gov Code

    Degree of integration

    Fin Rpt Act

    Adoption 1978

    1997

    2000

    2001

    2006

    1972

    Profession

    Legal

    Governance

    Capital

    MasterPlans

    7 & 8 Malaysia Plan (1996-2005)

    9 Malaysia Plan


    Integration with master plans l.jpg

    Integration with Master Plans

    Governance & Capital

    • Malaysia’s 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


    Strategy l.jpg

    Malaysia

    Support convergence. IFRS Convergence not an issue.

    Question of managing implementation

    Sufficient buy-in

    Discretion to determine implementation date

    Participate early in standards setting development

    Alliance with recognized bodies, lead if necessary

    Asia

    Developing economies seem to have no choice but to converge

    participate in free trade/globalization

    funding for industrialization

    No choice but to participate regionally, greater representation

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

    Strategy


    Challenges l.jpg

    Malaysia

    Managing change

    Mindset – old habits die hard, price for having long history

    Interpretations

    Cost of complex standards vs benefits to owner manager companies

    Region

    Lack of regional participation

    Lack of voice, representation

    Where problems are common, countries must be forthcoming

    Where problems are not common, endeavour to find a consensus

    IASB

    Developed economies focus

    Board representation

    Changing goalpost

    Challenges


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    Addressing Challenges – Changing mindset

    • Convergence impact:

      • Tough for many countries

      • Suddenly have to migrate to new environment

      • Accounting standards are now law of these countries

        • Europe (2005), Philippines (2004)

    • Language matters

  • Malaysia – not as bad …relatively

    • Have been on IAS all along

    • Standards are law in 1997

    • Standards in English, no need for translation


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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 -intangibles

    • China/HK -state controlled entities, leases

    • N. Zealand -agriculture, leases

    • Singapore -leases

    • Malaysia -related party, agriculture


    Slide21 l.jpg

    Addressing Challenges – Costs vs Benefits

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

    • But as Standards become more complex…

    • Burden of compliance by SMEs becomes main issue

    • MASB announced 2 – tier reporting standard 1.1.2006

      • IFRS (international GAAP) for PLCs, subsidiaries, assoc., JV

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

      • Currently working on private entity reporting standards (PERS)


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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


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