2 new proposed Standards for greater transparency (2 July 2007)

The Malaysian Accounting Standard Board (MASB) has released ED 56 Financial Instruments: Disclosures (ED 56) and ED 57 Operating Segments (ED 57) seeking greater transparency in ways companies manage their resources as well as their exposure to risks arising from their involvement in financial instruments.

ED 56 and ED 57 are virtually identical with IFRS 7 Financial Instruments: Disclosures (IFRS 7) and IFRS 8 Operating Segments (IFRS 8) respectively. 

IFRS 7 and IFRS 8 were issued by the International Accounting Standard Board (IASB) in August 2005 and November 2006 respectively. IFRS 7 replaced IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions and some requirements in IAS 32 Financial Instruments: Disclosure and Presentation. IFRS 8 replaced IAS 14 Segment Reporting (IAS 14).

MASB executive director Dr Nordin Mohd Zain says with the proposed disclosures, investors and other users of financial statements will be able to make informed judgement about the risks and returns in an entity. 

Financial instruments disclosures standard applies not only to financial institutions but also other entities that hold financial instruments. The degree of disclosures depends on how broadly the entity uses financial instruments. Amongst others, the Standard proposes disclosure of sensitivity analysis for each type of market risks to which the entity is exposed and disclosures of how an entity manages risks arising from financial instruments. With these disclosures, users are informed about the extent of financial risks involved in the entity's undertakings.

Simultaneously with the issuance of ED 56, there is a proposed limited amendment to FRS 101 Presentation of Financial Statements dealing with capital disclosures. The capital disclosure is important as it helps users to assess an entity's policies and processes for managing capital. Users will be able to assess the entity's risk profile as well as entity's ability to withstand unexpected adverse events and ability to pay dividends.

Another proposed Standard issued by MASB is on operating segments which requires management to report how it has used its resources to manage the entity. The Standard enables users of financial statements to see an entity through the eyes of management by requiring disclosure of information in the format and structure used by management. At present the Standard requires companies to disclose information based on products and services, and on geographical areas. The Standard, when finalized, is expected to reduce cost of reporting segment information as it uses information that is readily available and generated for management's use.

Dr. Nordin urges the professional accounting bodies, regulators, users and any other interested parties to review the proposed Standards and send their comments to the MASB before 28 September 2007. 

These proposed Standards are available on MASB website at http://www.masb.org.my. The public is encouraged to provide their comments electronically through ED Online on our website. Alternatively, copies of the exposure drafts are available free of charge at:

Suites 5.01-5.03, 5th Floor
No. 338, Jalan Tuanku Abdul Rahman
50100 Kuala Lumpur
Tel: 03-2715 9199
Fax: 03-2715 9212
E-mail: masb@masb.org.my


Press enquiries:

For enquiries, please contact:
Dr Nordin Mohd Zain
Executive Director
Malaysian Accounting Standards Board
Email: nordin@masb.org.my

Notes to the Editor

Background of IFRS 7

IFRS 7 introduces new requirements to improve the information on financial instruments that is given in entities' financial statements. It replaces IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions and some of the requirements in IAS 32 Financial Instruments: Disclosure and Presentation. Simultaneous to the issuance of IFRS 7, IAS 1 Presentation of Financial Statements is amended to introduce requirements for disclosures about an entity's capital.

IFRS 7 requires disclosures about the significance of financial instruments for an entity's financial position and performance. These disclosures incorporate many of the requirements previously in IAS 32 (whose title has been shortened to reflect the change). The IFRS also requires information about the extent to which the entity is exposed to risks arising from financial instruments, and a description of management's objectives, policies and processes for managing those risks. Together, these disclosures provide an overview of the entity's use of financial instruments and the exposures to risks they create.

In developing the proposals in IFRS 7, the IASB worked with an expert advisory group, the Financial Activities Advisory Committee. The Committee's members have experience and expertise in banks, finance companies and insurance companies and include auditors, preparers and regulators. Their role was to provide input from the perspective of preparers and auditors of financial statements of entities that have large exposures to financial instruments and to assist the IASB in developing an IFRS and Implementation Guidance for risk disclosures arising from financial instruments and for other related disclosures.

Background of IFRS 8

IFRS 8 arises from the IASB's comparison of International Accounting Standard (IAS) 14 Segment Reporting with the US standard SFAS 131 Disclosures about Segments of an Enterprise and Related Information. IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of SFAS 131.

The IFRS requires an entity to adopt the 'management approach' to reporting on the financial performance of its operating segments. Generally, the information to be reported would be what management uses internally for evaluating segment performance and deciding how to allocate resources to operating segments. Such information may be different from what is used to prepare the income statement and balance sheet. The IFRS therefore requires explanations of the basis on which the segment information is prepared and reconciliations to the amounts recognised in the income statement and balance sheet.

The IASB believes that adopting the management approach will improve financial reporting. First, it allows users of financial statements to review the operations through the eyes of management. Secondly, because the information is already used internally by management, there are few costs for preparers and the information is available on a timely basis. This means that interim reporting of segment information can be extended beyond the current requirements.

As part of its deliberations leading to IFRS 8, the IASB considered comments by a coalition of over 300 non-governmental organisations (NGOs) known as the Publish What You Pay campaign, which asked for the scope of the IFRS to be extended to require additional disclosure on a country-by-country basis. Because the IFRS was developed as a short-term convergence project, the IASB decided that country-by-country disclosure should not be addressed in the IFRS. Instead, the matter will be raised with international bodies that are engaged with similar issues.