logo
MASB and IASB jointly held Discussion Forum in Kuala Lumpur (7 October 2010)

On 7 October 2010 the Malaysian Accounting Standards Board (MASB) and the International Accounting Standards (IASB), jointly held a public discussion forum at Bursa Malaysia. The forum had a favourable response of more than 190 participants which made up of representatives from professional accounting bodies, regulators, preparers and users of financial statements, and academia.

The IASB has in recent months issued a number of exposure drafts to amend its accounting standards (IFRSs) on areas that need improvement following the Global Financial Crisis and to help converge with the US accounting standards (US GAAP).  IFRSs, which are principle-based standards, have been adopted by many countries globally and Malaysia, together with many of its Asian neighbours, will be converging their local standards with IFRS's in the near future.

As part of IASB’s standard setting due process, outreach and stakeholder communication activities around the world are carried out with the aim to inform, educate and explain their proposals and also to provide opportunities to constituents to discuss and debate these proposals with them.

The Discussion Forum covered a few of IASB’s most recent proposals which may have significant impact on financial reporting of the local constituents, namely revenue, leases, a  forthcoming exposure draft (ED) on investment entities and a revised standard on consolidation. The IASB expects to issue the final standards in 2011 but the effective date has not been determined yet.

One thing was certain from the presentations: the proposals will have considerable accounting changes for certain entities for example those that have lease arrangements. Participants were encouraged to read the EDs and consider the potential effects on their existing practices and to provide their feedback to the MASB.

Wave of changes in IFRS in 2011

In addition to the technical sessions, the IASB technical team shared with participants the IASB revised work plan and the upcoming changes to IFRS in the coming year 2011.

In addition to the four areas highlighted above, the IASB plans to finalise another eight other projects in 2011, namely:

(1)  Financial Instruments (replacement of IAS 39 Financial Instruments: Recognition and Measurement);

(2)  Derecognition;

(3)  Presentation of Other Comprehensive Income;

(4)  Guidance on Fair Value Measurement;

(5)  Insurance Contracts;

(6)  Joint Ventures;

(7)  Income Taxes; and

(8)  Post-Employment Benefits.

With the numerous changes anticipated in 2011, participants noted that adequate transition time will be crucial to enable them to undertake an orderly transition to the new requirements.

Background

IASB ED on Revenue from Contracts with Customers

The ED uses a single contract-based ‘asset and liability approach’ as compared to the current revenue guidance which focuses on an ‘earnings process’. Under the proposals, revenue is recognised when an entity satisfies its obligations to its customers, which occurs when control of an asset (whether a good or service) transfer to the customer. The IASB believes its proposals would create a robust framework for addressing revenue issues, improve comparability across industries and markets and provide enhanced disclosure requirements to users.

The proposals could significantly change the way entities recognise revenue. Preparers will need to evaluate how the proposals might change their business activities beyond accounting, including contract negotiations, key metrics (including debt covenants), budgeting, controls and processes and information technology requirements.

IASB ED on Leases

The ED proposes a new approach to lease accounting for lessees and lessors. The proposal addresses the key concern of lessee accounting by eliminating the distinction of finance and operating lease. The IASB believes the proposals, if adopted, will greatly improve the financial reporting information available to investors about the financial effects of lease contracts.

Under current operating lease accounting, no asset or liability is recorded, while under finance lease accounting, only the contractual lease payments due over the initial lease term are included in the measurement of the recorded asset and liability. This model has been criticised for being complex as it is difficult to define the dividing line between finance and operating lease. In addition it failed to meet the needs of users of financial statements who have to adjust financial statements to recognise assets and liabilities arising from operating leases.

Instead, under the proposals, lessees would recognise an asset for its right to use the underlying asset with a corresponding liability for its obligation to make lease payments. This proposal would likely affect entities with significant operating leases as their financial statements would record an increase in assets and liabilities.

Lessors would also be impacted by the proposals. The accounting for the underlying asset would reflect the exposure of the lessor to the risks or benefits of that asset. When the lease transfers significant risks or benefits of the underlying asset to the lessee, the lessor would apply the derecognition approach. On the other hand, when the lessor retains exposure to significant risks or benefits of the underlying asset, the lessor would apply the performance obligation approach.

IASB Project on Consolidation

The IASB plans to issue a new standard on consolidation due to divergence in practice in application of the existing IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation—Special Purpose Entities. The new standard will also address the lack of transparency about the risks to which investors were exposed from their involvement with structured vehicles, including those that they had set up or sponsored, an issue highlighted in the financial crisis in 2007/2008.

The IASB tentatively decided that control should be the only basis for consolidation—and that an investor should consolidate an investee if an investor has the power to direct the activities of the investee that significantly affect the investee’s returns and can benefit by using its power.

To have control, an investor must have power, exposure to returns and be able to use that power to affect its own returns from its involvement with the investee. Thus, power and the returns to which an investor is exposed, or has rights, must be linked. The link between power and returns does not mean that the proportion of returns accruing to an investor needs to be directly correlated with the amount of power that the investor has. The IASB noted that many parties can have the right to receive variable returns from an investee (eg shareholders, debt providers, agents), but only one party can control an investee.

An investor that is exposed, or has rights, to variable returns from its involvement with the investee but does not have the ability to direct the activities of the investee so as to affect the amount of the investor’s return from its involvement with the investee does not control the investee.

IASB Project on Investment Entities

This project is in response to requests to IASB to consider whether investment entities should not consolidate investments in entities that it controls, but to measure those investments at fair value, with changes in fair value recognised in profit or loss.

The tentative proposals are similar to an existing exception to consolidation in US GAAP but would require an investment entity to provide additional disclosures about entities that it controls when it measures investments in those entities at fair value.