PAS 3363: Accounting Theory & Practices

CHAPTER 6
Accounting Standard Setting
in Malaysia
 CHAPTER OVERVIEW
Development of
Accounting Standards

Financial Reporting Act 1997

& Accounting Standards

Standards Setting
Bodies
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PAS 3363: Accounting Theory & Practices
 ACCOUNTING STANDARDS
DEVELOPMENT
 Differences of accounting standards development between pre and post-
1997:
  BEFORE 1997 AFTER 1997
Professional a) Malaysian Institute of Malaysian Accounting
body issuing Accountants (MIA) Standard Board (MASB)
accounting b) Malaysian Institute of
standard Certified Public
Accountants (MICPA)
Accounting IAS & MAS MASB (1997), FRS (2005),
standards MFRS (2012), MPERS (2016)
Act related to The is no Act Financial Reporting Act 1997
the issuance of
standard

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PAS 3363: Accounting Theory & Practices
 ACCOUNTING STANDARDS
DEVELOPMENT
 In 2006, Malaysia introduced the Financial Reporting Standards (FRS)
which has been adopted from IFRS issued by IASB.
 The convergence would enable to localise the Malaysian companies &
capital market.
 Majority of the accounting practitioners support the adoption of FRS.
 In the early adoption of FRS, most of them revealed that they are
“moderately understood” the FRS.
 The move by MASB to adopt IFRS is a reflection of Malaysia’s commitment
to align with global accounting standards in order to converge to one
common set of accounting standards for the entire developed world in this
age of cross-border trading.

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PAS 3363: Accounting Theory & Practices
 FACTORS AFFECT THE DEVELOPMENT
OF ACCOUNTING STANDARDS
 Culture
 Managers from different countries have different value sets which can
impact the reliability of financial information.
 There are four accounting values arising directly from prevailing social
values. These points are:
a) professionalism vs. statutory control;
b) uniformity vs. flexibility;
c) conservatism vs. optimism; and
d) secrecy vs. transparency.
 International Political
 Political environment specifically stability and extent of freedom can and
does influence accounting doctrine.
 For example the level of freedom has a direct influence on the extent of
financial information disclosure; evidence shows that less free countries
have less extensive disclosure.
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PAS 3363: Accounting Theory & Practices
 FACTORS AFFECT THE DEVELOPMENT
OF ACCOUNTING STANDARDS
 Economic
 A more developed economic system requires an accounting structure
that captures the necessary relevant information about the productivity &
performance of various sectors.
 For example, Australia (well developed economy) has well developed
accounting practices whereas Libya, with a stagnant ill-defined economy
has little accounting regulations or guidelines.
 Legal Systems
 Variety of standard setting models grouping countries based on legal
systems similarities.
 Most of these models seek to divide countries based on whether or not
they are common law or code laws states.
 For example in the US, as a common law country, accounting rules are
not laws but standards or recommendations; whereas in Taiwan (code
law country), accounting practice is part of the legal system.
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PAS 3363: Accounting Theory & Practices
 FACTORS AFFECT THE DEVELOPMENT
OF ACCOUNTING STANDARDS
 Structure of Capital Markets
 Accounting data is pivotal in creating a level of confidence for working
capital market structure.
 Thus the structure of capital markets influences the nature of accounting
standards in different countries.
 For example in Germany, most of the financing for capital markets came
from creditors, mainly banks. Thus, the main purpose of financial
reporting in Germany is protection of creditors and capital maintenance.
However, in the US, where the capital market is equity based, the main
purpose of financial reporting is the protection of investors.

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PAS 3363: Accounting Theory & Practices
 FINANCIAL REPORTING ACT 1997
 Financial Reporting Act 1997 was gazetted on 6 March, 1997.
 Under this Act, two bodies were established to be responsible for
setting accounting standards, i.e.
 Financial Reporting Foundation (FRF); &
 Malaysian Accounting Standards Board (MASB).
 Financial Reporting Act 1997 provides the enforcement authority to
the standard issue by MASB.
 Currently, the latest version of the Act is the Financial Reporting
(Amendment) Act 2012 & deem to be effective on 1 January 2012.

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PAS 3363: Accounting Theory & Practices
 ACCOUNTING STANDARDS
Accounting standards as defined by Financial Reporting Act 1997 is a
“Statements of accounting practices used for the preparation of financial
statements”.

1) MALAYSIAN FINANCIAL REPORTING STANDARDS (MFRS)

 MFRS framework is mandatory for all entities other than private entities
for annual periods beginning on or after 1 January 2012.

2) MALAYSIAN PRIVATE ENTITY REPORTING STANDARDS (MPERS)

 MPERS framework is to be applied only by private entities.

3) FINANCIAL REPORTING STANDARDS (FRS)

 FRS framework which is the Malaysian version of IAS, which has been
the main accounting standards framework for non-private entities before
the introduction of MFRS framework.
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PAS 3363: Accounting Theory & Practices
 LIMITATION OF ACCOUNTING
STANDARDS
 Some of the guidelines and standards adopted were impractical or irrelevant
in the context of Malaysian corporate environment.
 Hence, any approved standard should be more in tune with the local
environment.
 The inconsistencies in applying accounting standards to financial reporting
could be detrimental to the economic growth of the country;
 Alternative solutions to certain accounting policies may each have
arguments to recommend them. Therefore, the choice between different
alternative accounting treatments may becomes difficult;
 Generally, there may be a trend towards rigidity and away from flexibility in
applying the accounting standards;
 Accounting standards are such a boring subject & very technical. Only the
professionals in the field who practice them know it well & are really bother
about the accounting standards.
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PAS 3363: Accounting Theory & Practices
CHALLENGES OF ADOPTING IFRS BY
MALAYSIA REPORTING ENTITIES
 Higher challenges in preparing & presentation of FS
 Adoption to FRS will mean adopting a new set of accounting standards.
 The preparer of the accounts or accountants will be the most affected as
adoption to FRS will dramatically change the way in preparing the FS.
 Reason: majority of accountants have been very comfortable with the
previous MASB standards in preparing the financial.

 Increase volatility in entity’s earnings

 New FRS would result in greater volatility of company results due to the
adoption of fair-value accounting in business combinations, share-based
payments, assets held for sale and equity and debt investments in the
new FRS regime.
 Thus, it will introduce significant volatility in the balance sheet &
earnings.
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PAS 3363: Accounting Theory & Practices
CHALLENGES OF ADOPTING IFRS BY
MALAYSIA REPORTING ENTITIES
 Complex nature of some of the IFRS.
 Accounting standard is getting more complex with the introduction of the
FRS & it may not be easy for the practitioners to digest the new
standards.
 Among the most difficult and complicated standard is FRS 139 Financial
Instruments: Recognition and Measurement and FRS 136: Impairment
Tests.

 Certain “off balance sheet” items onto Balance Sheet

 FRS will bring new rules on the recognition and valuation of assets.
 Certain ‘off balance sheet’ items like derivatives, leases & asset-backed
securities will be brought onto the balance sheet.

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PAS 3363: Accounting Theory & Practices
CHALLENGES OF ADOPTING IFRS BY
MALAYSIA REPORTING ENTITIES
 High implementation costs
 Process of adoption to IFRS is costly, complex and burdensome. FRS
will lead to higher financial cost where
─ external specialist need to be engaged;
─ the need to upgrade the system;
─ the need to incur extra cost in auditing fees; and
─ The need to send the staffs for training.

 Troublesome & failed to meet cost-benefit trade-off

 Implementation cost will be even larger for smaller companies.
 As there are fewer small firms disclosed their financial information, this
would result in fewer potential benefits and higher accounting costs per
company.

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PAS 3363: Accounting Theory & Practices
 Mohamed Raslan Abdul Rahman
Chairman
Malaysian Accounting Standards Board
 

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 STANDARDS SETTING BODIES
MALAYSIAN ACCOUNTING STANDARDS BOARD (MASB)
 The MASB was established in 1997 under the Financial Reporting Act
1997.
 The functions of the MASB as set out in section 7(1) of the FRA shall be the
determination & issuance of accounting standards for the preparation of
financial statements.
 Other functions of MASB are as follows:
 To implement an efficient, effective structure, and “due process” for the
development of MASB Standards, a CF, & other forms of authoritative
guidance;
 to develop high quality, clear and enforceable national accounting
standards for financial reporting that benefit users, preparers, auditors &
the public.

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PAS 3363: Accounting Theory & Practices
 STANDARDS SETTING BODIES
 The MASB is made up of eight members who are appointed by the
Minister of Finance.
 At least five members should be members of Malaysian Institute of
Accountants (MIA).
 The composition of MASB members are as follow:
a) Chairman of the MASB (from an auditing firm);
b) The Accountant General of Malaysia;
c) Two members from auditing firms;
d) Three members from big public companies; and
e) One from the academic group.
 The accounting profession is seen by various interest groups as the 'best
man' still to do the standard setting job, along with other MASB's
constituents.

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PAS 3363: Accounting Theory & Practices
 STANDARDS SETTING BODIES
ISSUES COMMITTEE & WORKING GROUPS
 MASB established Issues Committee or Working Group in May, 2002 –
replace to Interpretation Committee.
 This Working Group is appointed by the MASB for every project of
accounting standard development it undertakes.
 The Working Group comprises twelve members, all appointed by the
MASB.
 A Working Group is chaired by one of the Board member & comprises
a project manager, representatives from industry associations,
professional bodies, regulatory authorities such as the SSM, BNM, the
SC, the Bursa Malaysia, practitioners, and the MASB technical staff.

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PAS 3363: Accounting Theory & Practices
 STANDARDS SETTING BODIES
 Working Groups set up by the MASB to :
 Carry out the development of accounting standards;
 Contributed actively for the comments on the discussion documents and
exposure drafts (ED) issued by the MASB;
 Reviewing accounting issues that have received or likely to receive
divergent views in interpretation;
 Provide recommendations to the MASB Board for decision; and
 Participated in standard setting at the international level.

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PAS 3363: Accounting Theory & Practices
 STAGES IN THE ISSUANCE OF
MASB STANDARDS
STAGE 1: MASB seeks public comments on IASB’s draft pronouncement
 The IASB’s draft technical pronouncements include Discussion Paper (DP),
Exposure Draft (ED), and Request for Views.
 MASB will disseminate the IASB draft pronouncements together with an
Invitation to Comment to local constituents & sending a copy of the
documents to the relevant authorities, professional bodies, accounting firms,
industry related associations, and PLCs.
STAGE 2: Deliberation at the Working Group (WG) level on IASB’s draft
pronouncements
 The IASB’s draft pronouncements will be discussed in WG meetings and to
provide comment/recommendation to the issues raised in the draft
pronouncements for the Board’s consideration.
 The WG will also consider public comments received and their views /
recommendations on those comments for the Board’s consideration.
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PAS 3363: Accounting Theory & Practices
 STAGES IN THE ISSUANCE OF
MASB STANDARDS
STAGE 3: Deliberation at the MASB (the Board)
 The public comments received, WG’s comments & recommendations will be
tabled at the Board for deliberation & consideration.
 During the discussion, the Board will consider all comments received and
thereafter, a comment letter to the IASB will be prepared and submitted to
IASB accordingly.
STAGE 4: Issuance of Standard by IASB
 Following publication of the final standard by the IASB (IFRS), the WG will
deliberate on the changes made, if any, from the draft pronouncements &
presented to MASB for consideration.
STAGE 5: Issuance of standard by MASB
 After due deliberation by the Board, copy of the MFRS would be presented
to the FRF members for their comments before it being issued as approved
accounting standards in Malaysia.
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PAS 3363: Accounting Theory & Practices
 CHALLENGES FACED BY MASB IN
PARTICIPATION IN IASB
 Providing technical expertise to provide high quality input to the IASB’s
deliberations
 Most of the technical work is provided by Working Groups & mostly
participate on a voluntary basis.
 Response from the apathetic Malaysian public on ED has been tepid &
sometimes, non-existent.
 Tension between the MASB Board’s desire to establish a CF aligned to the
IASB framework
 need to cater a narrow segment of users in the capital market; and
 to satisfy the needs of the business environment in Malaysia.
 Some misconceptions about MASB
 The notion that MASB standards are not globally acceptable & MASB
standards are not in compliance with IAS & are below par.

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PAS 3363: Accounting Theory & Practices
 MECHANISM TAKEN BY MASB IN IMPROVING
THEIR ROLES
 MASB should work closer and more openly with the interest groups,
through various channels for participation in the standard setting process.
 The MASB could learn from the FASB's experience in the US & the
ASB in the UK to play a proactive role in participating actively in the
international arena of standard setting.
 MASB should be open for improvement & one suggestion that could be of
practical use is to have more public hearings or discussions at the various
stages in the due process.
 IPTs students & academicians would be encourage to responds in the
exposure drafts.
 A more opened standard setting process could help reduce later
conflicts that could arise because some of the details in the accounting
standards were not acceptable to certain interest groups.

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PAS 3363: Accounting Theory & Practices
 MECHANISM TAKEN BY MASB IN IMPROVING
THEIR ROLES
 MASB could make use of the various lobbying methods to help improve the
level of involvement by interest groups.
 Currently, MASB depends heavily on the use of formal formatted
written submissions or comments on the draft accounting standards.
 One suggestion is to make use more of the mass media to "advertise"
and invite participation from the public, enlisting ways and procedures
that they could use to participate.
 It is easier for one to have options laid in front of one's eyes to choose
and use, than for one to think one's way to get things done from
scratch.

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PAS 3363: Accounting Theory & Practices
 TUTORIAL QUESTIONS
January 2016 (Q4)
a) Accounting standards as defined by Financial Reporting Act 1997 is a
“Statements of accounting practices used for the preparation of financial
statements”.
Required:
i. Discuss briefly TWO (2) limitations of accounting standards. (4 marks)
ii. Evaluate FOUR (4) environmental factors that influence the development
of accounting standards in Malaysia. (10 marks)

August 2015 (Q4)

ii. The MASB established a committee called Issues Committee & Working
Groups in dealing with standard setting related matters. Discuss the
function of ‘working group’. (4 marks)

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PAS 3363: Accounting Theory & Practices