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Market risk disclosure: evidence from Malaysian listed rms


Radiah Othman
Research Management Institute, Universiti Teknologi Mara, Shah Alam, Malaysia, and

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Rashid Ameer
Faculty of Accountancy, Universiti Teknologi Mara, Shah Alam, Malaysia
Abstract
Purpose The purpose of this paper is to investigate the market risk disclosure practices among Malaysian listed rms. Specically, it aims to examine the level of compliance with FRS132: Financial Instruments Disclosure and Presentation for nancial periods beginning or after 2006. Design/methodology/approach The approach taken is content analysis and coding procedure. Findings Although a large number of companies have shown compliance with FRS132 in relation to disclosing the nancial risk management policy, there are systematic differences across companies in terms of level of details (i.e. qualitative and quantitative) disclosure. Interest rate disclosure was the most mentioned category and the credit risk was the least mentioned category of market risk. There is telling evidence that most Malaysian rms did not engage in hedging any type of market risk over the reporting period of 2006-2007. Research limitations/implications There is a need for some standardized risk reporting format to achieve greater nancial transparency to make investors aware of the market risks. Originality/value This is believed to be the rst study to provide survey ndings on the use of derivatives instruments by listed rms in Malaysia. Keywords Disclosure, Financial reporting, Malaysia, Financial risk Paper type Research paper

1. Introduction Estimation, presentation and dissemination of nancial risk measures are the basis of risk reporting by nancial institutions and other organizations (Holt, 2006). Raghavan and Li (2006) argue that the structural economic environment and the regulatory changes have led to the evolution of the both qualitative and quantitative market risk reporting by the organizations. Market risk is dened as the risk of loss arising from adverse changes in market rates and prices such as interest rates, currency exchange rates, commodity prices, or equity prices. Derivatives are an integral part of market risk management policy. Derivatives are typically off-balance sheet items. Their accompanying rights and obligations (and hence gains and losses) usually circumvent nancial statement disclosure. In the absence of disclosure of these off-balance sheet items, it has been argued that investors are unable to assess all factors that affect a rms nancial condition[1]. On the other hand, according to proprietary costs theory, rms limit disclosure of potential risk information to the nancial market because of the existence of disclosure related, or proprietary, costs. Firms may not like to disclose extensive information that might have future repercussions for their bare existence due to sensitivity of such information.

Journal of Financial Regulation and Compliance Vol. 17 No. 1, 2009 pp. 57-69 q Emerald Group Publishing Limited 1358-1988 DOI 10.1108/13581980910934045

Electronic copy available at: http://ssrn.com/abstract=2162173

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This paper investigates the market risk disclosure of the rms listed on the three boards main, second and MESDAQ boards in Malaysia, respectively, for the reporting period of 2006-2007 (2006 is the rst reporting period following the release of the FRS132 or alternatively Malaysian Accounting Standards Board MASB 24). We believe that this is the rst study to examine FRS132 compliance in Malaysia. Previous studies (Lazar et al., 2006) have examined the adoption of FRS standards in general, and do not explore the compliance with one FRS standard in particular. Our paper is similar to Talha et al. (2007) who examined the competitive disadvantage of segmental disclosure for sample of 116 rms under the requirement of MASB 22 Segment Reporting, and the risk reporting issues in Islamic Banks in Malaysia examined by Arifn (2004). The following section discusses the specic requirements of the FRS132, while the ensuing sections discuss and illustrate the format, location, and exibility in providing disclosure. After discussing the requirements, we then identify the research questions followed by the results and discussion of the analysis. 2. Institutional setting in Malaysia The MASB (2005) is the standard setting body for Financial Reporting Standards (FRS), including standards for Islamic accounting and reporting in Malaysia. Prior to the setting up of the MASB, the accountancy bodies of the Malaysian Institute of Accountants and Malaysian Institute of Certied Public Accountants collaborated and issued FRS. The situation changed when in 2005, when MASB renamed and renumbered the MASB standards to FRS. This is to be in line with the objective of the International Accounting Standard Board, of which Malaysia is a member, to work towards convergence to a single set of accounting standards worldwide, (known as the International Financial Reporting Standards (IFRS). As MASB standards were adoption of IAS, there were no major areas of differences between the standards when the MASB standards were renumbered and renamed to FRS (Lazar et al., 2006). MASB introduced FRS132: Financial Instruments Disclosure and Presentation (IAS32) for the rst time to be adopted by Malaysian rms for nancial periods beginning or after 2006. This standard exposes the type of market risk being faced by listed companies in Malaysia, and it can be seen as an attempt to make FRS in Malaysia at par with IFRS. Although it has planned to introduce FRS139 that deals with principles governing the recognition and measurement of nancial assets and nancial liabilities but its implementation date has not been announced yet. 2.1 FRS132 disclosure requirements Financial instruments include nancial assets and nancial liabilities. Financial assets represent a contractual right to receive cash in the future and correspondingly nancial liabilities represent a contractual obligation to deliver cash in the future. Derivative nancial instruments meet the denition of the nancial instrument because these create rights and obligations that have the effect of transferring between the parties to the instrument one of more of the nancial risks inherent in an underlying primary nancial instrument. Derivative nancial instruments are used by rms for risk management purposes such as foreign exchange forward contracts, interest rate swaps (IRS), foreign currency swaps among others. On inception, some derivative instruments such as foreign currency swaps, embody both a right and obligation to make an exchange of foreign currencies in future, and as exchange rate changes those

Electronic copy available at: http://ssrn.com/abstract=2162173

terms may become either favorable or unfavorable represents the nancial gain (loss) to the rms. According to paragraph 56 of FRS132 Financial Instrument Disclosure and Presentation, there is a specic requirement that an entity shall describe its nancial risk management objectives and policies, including its policy for hedging each main type of forecast transaction for which hedge accounting is used. Similarly paragraph 58 of FRS132 Financial Instrument species that an entity shall disclose a description of hedge; nature of risk being hedged, and a description of the nancial instruments designated as hedging instruments and their fair values at the balance sheet date. For each type of market risk such as interest rate risk, an entity shall disclose information about its exposure to interest rate risk, including effective interest rates and maturity dates (or contractual re-pricing). On the other hand, for credit risk an entity shall disclose the amount that best represents its maximum credit risk exposure as at balance sheet date, without taking into account of the fair value of any collateral, in the event of other parties failing to perform their obligations under nancial instruments, and signicant concentration of credit risk. 2.2 Format, location and exibility in disclosure The standard prescribes that the disclosure may include a combination of narrative descriptions and quantied data, as appropriate to the nature of the instruments and their relative signicance to an entity. For instance, information about an individual nancial instrument may be important when it is a material component of an entitys capital structure. We present below suggested format for the foreign exchange (or currency risk), interest rate and credit risk by MASB. 2.3 Foreign exchange risk disclosure format When hedging instruments held or issued by an entity, either individually or as a class, creates a potentially signicant exposure to the foreign exchange, commodity and interest rate risks. Their terms and conditions that warrant disclosure are: the principal, stated face value, for derivative such as IRS, forwards and future contracts; date of maturity, early settlement option held by either party to the instrument, including the period in which, or date at which, the options can be exercised and the conversion or exchange ratio. 2.4 Interest rate risk disclosure format The carrying amount of nancial instruments exposed to interest rate risk may be presented in tabular form, grouped by those that are contracted to mature or be re-priced in the following periods after the balance sheet date. It can be one year or less; in more than one year but not more than two years; in more than two years but not more than three years; in more than three years but not more than four years; in more than fours but not more than ve years; and more than ve years. Interest rate information may be disclosed for individual instruments, or weighted average rates or a range of rates may be presented for each class of nancial instrument. 2.5 Credit risk disclosure format The disclosure of the nancial assets exposed to credit risk shall include the carrying amount of the assets in the balance sheet, net of any provisions for loss.

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For example, in the case of an IRS carried at fair value, the maximum exposure to loss at the balance sheet date is normally the carrying amount because it represents the cost, at current market rates, of replacing the swap in the event of default. Besides, that a nancial asset subject to legally enforceable right of set-off against a nancial liability shall be disclosed. It is intriguing to learn that even though MASB advise companies to disclose liquidity risk but no format has been suggested to date. We present evidence from Malaysian rms because there has been no comprehensive study on market risk disclosure. Furthermore, it has been suggested that the market risk disclosure is a topic of great economic signicance given the scale of global derivative trading (Seow and Tam, 2002). Previous studies on the market risk disclosure (primarily in the USA) have either focused on the different categories of market risk individually, or examined all such market risks but focusing on the nature of disclosure, i.e. qualitative and quantitative. For instance, Rajgopal (1999) examined the commodity price risk exposure of oil and gas producers, while, Blankly et al. (2002) examined the qualitative and quantitative market risk disclosure under SEC requirement. Recently, attention has shifted towards investigating the compliance with a particular derivatives reporting standard. Abdelghany (2005) examined quantitative and qualitative disclosure of market risk under FFR No. 48, and Bhamornsiri and Schroeder (2004) examined disclosure of information on derivatives under SFAS No. 133 using sample of DOW30 companies. Some studies have empirically investigated the value relevance of market risk disclosure (Lim and Tan, 2007; Seow and Tam, 2002; Venkatachalam, 1996). For instance, Lim and Tan (2007) adopted a novel approach to investigate the value relevance of the market risks quantied using value-at-risk technique as suggested by Choudry (2001), whereas Seow and Tam (2002) examined the relationship between share returns and the quantitative disclosure of derivatives notional amount, fair value, gains and losses for the US banks. Emm et al. (2007) examined the best choice and best practices of the corporate risk management disclosure using 10-k lings. They nd propensity of companies to use VaR, has been associated with greater use of derivatives and concerns about losing competitiveness from revealing proprietary information, whereas, propensity to use tabular method of presentation has been associated with greater exposure of interest rate and commodity risks as well as greatest demand for external nancing. Other non-US studies are Linsley and Shrives (2006, 2005, 2000) and Abraham and Cox (2007) for the UK. Linsley and Shrives (2006) found that there is a signicant association between the number of risk disclosures and company size for 79 UK listed rms; and the most important benet arising from improved risk disclosure by rms is a reduction in the cost of capital. They argue that if the market risks are disclosed, then the providers of capital may remove a part of the premium that is incorporated in the cost of capital for uncertainty concerning the rms risk position. Abraham and Cox (2007) report that long-term institutional investor in the UK has investment preference for rms with lower level of risk disclosure (which also include internal risk control ter (2001) found lack of systematic risk disclosure of German reporting). Kaju companies under the German Accounting Standard 5 Risk Reporting, which became effective after 31 December 2000. Beattie et al. (2004) examined in detail the narrative of forward looking risk-related disclosure in the UK using content analysis. Beretta and Bozzolan (2004) found signicant relationship between rm size and risk disclosure for Italian rms.

3. Research question The purpose of this paper is to determine the extent to which Malaysian rms are providing market risk-related disclosure (qualitative and/or quantitative) suggested under FRS132[2]. Thus, specic research questions are: RQ1. Do companies disclose nancial risk management objectives and policies? RQ2. Do companies disclose the purpose of using derivative instruments? RQ3. Do companies disclose the types of market risks faced by them? RQ4. Do companies disclose the type of hedging instrument used to minimize market risks? RQ5. Do companies provide qualitative and/or quantitative disclosure relating to the hedge instruments for each type of market risk? RQ6. Do companies provide additional voluntary disclosure on other market risks? 4. Sample and methodology The population consists of all rms listed on the main, second and MESDAQ boards of Bursa Malaysia. We selected top 500 rms ranked by market capitalization as of year end in 2005. The information on adoption (or otherwise) of FRS132 by these rms was obtained from their annual reports for the nancial year ended in 2006/2007. In some cases, we did not obtain annual report of the companies in English language from their investor relation Webpage, Company Announcement Page, and Audited Accounts Page of Bursa Malaysia, which reduced the number of sample to 429 rms. The nal sample of companies according to listing board classication is described in Table I. There is relatively higher number of companies from main board, followed by rms from the second board. There are a lower number of rms from MESDAQ in the sample. The annual reports were downloaded from Bursa Malaysia Company Announcement Webpage in Adobe PDF format. To locate a rms disclosure on FRS132, the Find option in Adobe PDF was used to search for key terms such as instrument, derivatives and hedges in the downloaded PDF les. In cases where an annual report of a rm was not available from Bursa Company Announcement page, we downloaded the latest annual report for the year ended in 2006/2007 from rm web site to execute our search. We found that these key terms were found in the section titled Financial Risk Management and Policies in notes to the accounts in the annual report. We coded the objectives of nancial risk management policy speculative/ non-speculative (i.e. no trading in derivatives); three main types of market risk
Listing board Second board MESDAQ 89 89 115 112

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Main board Overall Annual reports available for either 2006 or 2007 in English language 241 228

Total 445 429 Table I. Sample classication

Note: This table shows the number of rms in our sample distributed according to their listing board in Malaysia

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disclosure interest rate risk, foreign exchange risk and credit risk; type of hedge instrument used to hedge interest rate and foreign exchange risk, quantitative disclosure related to hedge instrument amount, currency denomination, maturity, and reported prot (loss) using a nominal coding procedure (Appendix for detail). This coding procedure effectively leads to 0 and 1 dummy type variables for descriptive analysis and therefore overcomes the problem associated with counting words in a sentence (Abraham and Cox, 2007). 5. Results We present results of our investigation according to questions mentioned above (and where necessary a distinction among companies based on their listing board is provided in the tables): RQ1. Do companies disclose nancial risk management objectives and policies? From Table II, it can be seen that 328 out of 429 rms in the sample have complied with FRS132 in relation to disclosing nancial risk management policy. The compliance level among the main board and MESDAQ rms is relatively higher than second board rms: RQ2. Do companies disclose the purpose of using derivative instruments? From Table II, it can also be seen that only main board rms (11 per cent, all listed banks) categorize the risk management policy into trading and non-trading categories. Besides, main board listed banks, 148 out of 429 rms (34.49 per cent) explicitly state that they do not engage in speculative or trading activities in their nancial risk management statement (see below), the number of such rms varies from a high of 90 on the main board to a low of 25 on the MESDAQ board:
The Group uses derivative nancial instruments in the form of forward foreign exchange contracts and interest rate swap contracts to hedge its exposure to foreign exchange arising from operating, nancing and investing activities. In accordance with its treasury policy, the Group does not hold or issue derivative nancial instruments for trading purposes (Kumpulan Guthrie Bhd, 2006).
Listing board Second board (per cent) 61(68.54) 28 (31.46) 89 25 (28.09) 64 (71.91) 89

Main board (per cent) Financial risk management statement and policy Yes 189 (82.90) No 39 (17.10) Total number of rms 228 Hedging objective Speculative 11 (4.82) Non-speculative 90 (39.47) No-disclosure 127 (55.70) Total number of rms 228

MESDAQ (per cent) 78 (69.64) 34 (30.35) 112 33 (29.46) 79 (70.54) 112

Total 328 101 429 11 148 270 429

Table II.

Note: This table reports the number of rms providing nancial risk management and policy in their annual report for the nancial year ending 2007 according to their listing on the main, second and MESDAQ boards, respectively

It is surprising to learn that 270 (62.93 per cent) rms do not exactly state that these rms are (are not) engaged in any speculative/trading activities using hedging instruments of any type. This lack of transparency might create ambiguities for nancial statement readers to assess the riskiness of a rm. As suggested by Bhamornsiri and Schroeder (2004), a desire to conceal potentially risky or unfavorable information could be one reason, among other several possible reasons for this nding: RQ3. Do companies disclose the types of market risks faced by them? As shown in Table III, there is remarkable variation in the market risk disclosure (according to type of risk), for instance, 154 (35.89 per cent) rms provide any kind of qualitative and/or quantitative disclosure for foreign exchange risk, 159 (37.06 per cent) for interest rate risk, and 111 (34.90 per cent) for credit risk, respectively. Hence, across the listing boards, we can conclude that interest rate disclosure was the most mentioned category and the credit risk was the least mentioned category of market risk. MESDAQ has the highest proportion of rms without any disclosure on foreign exchange risk and second board has almost no rm in our sample disclosing credit risk. The latter nding might seem to suggest a belief among companies that credit risk information was immaterial and therefore need not to be disclosed. We also further explore the qualitative and/or quantitative components of risk disclosure. It was noticed that overwhelming majority of the companies have followed MASB guidelines on reporting interest rate risk. The interest rate risk is shown as, re-priced in the following periods after the balance sheet date in one year or less and in more than one year but not more than two years; in more than two years but not more than three years; in more than three years but not more than four years; in more than fours but not more than ve years; and more than ve years. Interest rates information are disclosed for individual instruments, effective and/or weighted average rates or a range of rates are presented for each class of nancial instrument (Table IV). On the other hand, a relatively small proportion of companies have only relied on the qualitative narratives for the interest disclosure:
Listing board Second board (per cent) 35 (39.30) 54 (60.70) 89 25 (28.09) 64 (71.91) 89 89 (100) 89

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Market risks disclosure Foreign exchange risk Yes No Total number of rms Interest rate risk Yes No Total number of rms Credit risk Yes No Total number of rms

Main board (per cent) 93 (40.53) 135 (59.47) 228 101 (44.30) 127 (55.70) 228 13 (5.70) 215 (94.30) 228

MESDAQ (per cent) 26 (23.00) 86 (77.00) 112 33 (29.46) 79 (70.54) 112 9 (8.04) 103 (91.96) 112

Total 154 275 429 159 270 429 111 318 429 Table III.

Note: This table reports the number of rms providing qualitative and/or quantitative disclosure about the marker risk according to their listing on the main, second and MESDAQ boards, respectively

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At 31 October 2006 Financial asset Fixed deposits with licensed banks Financial liabilities Bankers acceptances Bank overdrafts Hire purchases liabilities Term loans Trust receipts Source: JAKS Resources Bhd (2006)

Effective interest rates (per cent) 2.50-3.70 3.50-5.28 7.00-8.00 3.20-6.54 7.50-7.75 7.25

Within one year 2,692,900 95,982,578 9,299,753 231,898 2,171,274 4,500,000

One to ve More than years ve years

Total 2,692,000

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416,151 2,528,061

95,982,578 9,299,753 648,049 4,699,335 4,500,000

Table IV.

The Groups policy on managing its interest rate risk is by maintaining a prudent mix of xed and oating rate investments and borrowings (Malaysian Airline System Bhd, 2006).

From Table V, there is a telling evidence that most Malaysian rms do not engage in hedging market risk, i.e. 290 (67.6 per cent) rms have not reported use of either a forward, swap, option, and/or futures contract over the reporting period of 2006-2007 in our sample. Overall, 18 per cent of the Malaysian listed rms in our sample use forward contract for the transaction exposure which is relatively lower than 31 per cent for Hong Kong (Hu and Wang, 2006) and 87 per cent for the UK (Joseph, 2000), respectively. The number of rms using swap contract (5.70 per cent) is also lower than reported for the UK rms (18.90 per cent): RQ4. Do companies disclose the type of hedging instrument used to minimize market risks? The main board rms are predominantly the main users of the hedging instruments; whereas, second and MESDAQ board rms have a relatively small following in the use of hedge instruments. Among the main board rms, forward contracts are used in high
Listing board Second board (per cent) 11 (12.40) 8 (9.00) 70 (78.60) 89

Hedging instrument Forward contract Swaps contract Forward and swaps contract Forward and options contract Forward, swaps, and options contract Forward, swaps, and futures contract Natural hedge Does not use any hedge instrument Total number of rms

Main board (per cent) 61 (26.80) 13 (5.70) 10 (4.40) 1 (0.40) 8 (3.50) 2 (0.90) 13 (5.70) 120 (52.60) 228

MESDAQ (per cent) 5 (4.50) 7 (6.25) 100 (89.25) 112

Total 77 13 10 1 8 2 28 290 429

Table V.

Note: This table reports the number of rms providing qualitative and/or quantitative disclosure about the use of hedge instrument for controlling market risk according to their listing on the main, second and MESDAQ boards, respectively

proportion to hedge market risks followed by swap, and/or both forward and swap contracts. Besides, forward and swap contract, it was found that natural hedge (an internal hedging technique) is also being employed by the rms across three boards. A natural hedge consists of matching inows and outows with respect timing of settlement in the same currency. Table VI shows that 83 rms have used forward contracts for foreign exchange and interest rate risk which is higher than 53 rms reported for Hong Kong (Hu and Wang, 2006). In general, if foreign currency forward contracts provide rms more security against future foreign exchange rate uncertainties, then one would expect their use to be more strongly associated with the foreign currency exposure. We used a x 2 test to test the null hypothesis of no association between utilization of forward contracts and hedging foreign currency risk. The hypothesis is rejected (overall x 2 35.19, p-value 0.0000) and using the Cramer test statistic, C (C 0.906) the association appears to be higher. On the other hand, foreign exchange futures contracts are not used by rms. Joseph (2000) suggests that low-utilization level of futures contracts may be due to the effects of daily resettlement which can adversely affect the liquidity of rms: RQ5. Do companies provide qualitative and/or quantitative disclosure relating to the hedge instruments for each type of market risk? We nd that nature of market risk disclosure in terms of qualitative and quantitative detail is not similar across rms. Those rms which report using derivative contracts such as forward contracts provide mainly quantitative disclosure. Examples of quantitative disclosure on the amount, denomination, maturity and prot (loss) for foreign exchange contracts and IRS are as shown in Tables VII and VIII. Table VII shows the foreign currency forward contracts which have been entered by the group for its trade receivables and trade payables. The group has entered into IRS to convert oating rate liabilities to xed rate liabilities and vice versa to reduce the groups exposure from adverse uctuations in interest rates on underlying debt instruments, as shown in Table VIII.
Listing board Second board Foreign exchange Interest risk rate risk 11 8 19

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Hedging instrument Forward contract Swaps contract Forward and swap contract Forward, swap, option, futuresa Natural hedge Total number of rms

Main board Foreign exchange Interest risk rate risk 5 12 9 8 34 58 3 10 11 13 95

MESDAQ Foreign exchange Interest risk rate risk 4 4 5 6 11

Notes: This table reports the number of rms using hedge instrument for controlling interest rate and foreign exchange risk according to their board listing on the main, second and MESDAQ boards, respectively. aFirm reporting combinations of hedge instruments are aggregated in this category

Table VI.

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2007 US$ Sterling US$ Sterling e US$ US$ e US$ US$

Amount in foreign currency (FC) 285,000 13,200 2,115,903 128,063 117,806 66,971 69,545 60,528 184,939 24,209

Contractual rate 1 FC/RM 3.4780 6.9150 3.4830 6.7650 4.6375 3.3805 3.4270 4.6330 3.4550 3.4550

Maturity 2 July 2007 9 July 2007 12 July 2007 16 July 2007 31 July 2007 1 August 2007 3 September 2007 14 September 2007 20 September 2007 28 September 2007

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Table VII.

Source: Dialog Group Bhd (2007)

Interest rate swaps US$ term loan

Notional amount in RM (and equivalent in US$) RM 741.30 million (equivalent to US$210 million)

Effective period 28 February 2006 to 28 February 2008 28 February 2008 to 28 February 2012

Weighted average rate p.a. 4.98-5.15 per cent for the entire tenor of liability 4.98-5.00 per cent for the entire tenor of liability provided the spread is in range 4.795-5 per cent for the entire tenure of liability Floating but capped at 6 per cent provided the six month LIBOR is within the specied ranges 6.425 per cent for the entire tenor of liability 5.6 per cent for the entire tenor of liability 5.6 per cent for the entire tenor of the liability, provided the spread is within the range Six months KLIBOR 1.80 per cent

US$ term loan

RM 529.50 (equivalent to US$150 million)

28 February 2006 to 28 February 2009 28 February 2009 to 28 February 2012

US$ term loan US$ term loan

RM 34.59 (equivalent to US$9.8 million) RM 34.50 (equivalent to US$9.8 million)

27 July 2006 to 26 July 2010 27 July 2006 to 26 July 2007 27 July 2007 to 26 July 2010

Ringgit ve-seven year Islamic bond Table VIII.

RM 40 million

28 February 2006 to 28 February 2008

Source: Kumpulan Guthrie Bhd (2006)

Some rms which choose to combine both qualitative and quantitative disclosure on the amount, denomination, and maturity for derivatives:
In April 2007, the Company entered into four swap transactions, each in a notional amount of USD55.0 million, and amounting to an aggregate amount of USD220.0 million, with the objective of reducing the interest cost on its USD220 million USD notes program (Note 42, Term Loan 16). The swaps, which are each for ve years terminating on October 2011, are structured with upfront savings to the Company, and depending on the individual structure, losses are capped at between 1.75 per cent and 3.50 per cent per annum, in order that any exposure of the Company is limited. On two of the swaps, Ranhill is obliged to pay a xed interest rate of 3.50 per cent and 3.35 per cent per annum in USD and is entitled to receive a oating interest rate per annum in USD, on a semi-annual basis, in April and October of each calendar year to termination. On the other two remaining swaps, Ranhill is obliged to pay a oating interest rate per annum in USD and will receive a xed interest rate of at least 12.50 per cent per annum in USD on a semi-annual basis in April and October of each calendar year to termination (Ranhill Bhd, 2006).

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RQ6. Do companies provide additional voluntary disclosure on other market risks? We also found that some rms have provided voluntary disclosure related to other categories of market risk for example:
The Group is exposed to a signicant concentration of credit risk, whereby signicant outstanding balance of trade receivables as at 30 June 2007 is due from three (3) customers, represent approximately 55 per cent or RM7,300,841 of the net trade receivables (Padini Holdings Bhd, 2006). The Groups investments in quoted securities are subject to uctuations in market prices. As and when necessary, the group should consider and if found to be feasible, engage in KLCI Future purely for hedging purposes to mitigate the impact arising from the uctuations in market price (MNRB Holdings Bhd, 2006). The market risk of the Groups trading and non-trading portfolio is managed using value-at-risk approach to compute the market risk exposure of non-trading and trading portfolio. Value-at-risk is a statistical measure that estimates the potential change in portfolio value that may occur brought about by daily changes in market rates over a specied holding period at a specied condence level under normal market conditions. For the Groups trading portfolio, the Groups value-at-risk measurement takes a more sophisticated form by taking into account the correlation effects of various instruments in the portfolio (AMMB Holdings Group Bhd, 2006).

6. Conclusion The aim of this paper is to investigate the market risk disclosure practices among Malaysian listed rms under FRS132: Financial Instruments Disclosure and Presentation, following its adoption in the year 2006. Our results show that though majority of the rms studied (328 out of 429) had complied with FRS132, the extent of compliance varied. The majority did not state whether they engaged in any speculative activities using any hedging instrument. Interest rate disclosure was favored as compared to credit risk among the market risks categories studied. Over half of the

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rms did not engage in hedging market risk and forward contracts are commonly used to minimize market risk. Our nding seems to suggest that the type of hedging instrument used by a rm determines its nature of disclosure (quantitative/qualitative) in the annual report. The variation in terms of nature and extent of compliance disclosure among Malaysian rms reects the critical need for some standardized reporting format or guidelines from the standard setting and regulatory bodies. While compliance is important; there is a greater need for nancial transparency on market risk to cater the needs of various stakeholders. This is to ensure that nancial information is of value and relevance, to the people relying on such disclosure.
Notes 1. In the US, SFAS Nos. 80, 105, 107, 119, and 133 were issued progressively requiring information on derivative notional principal amount, credit exposure, fair value and gain or loss. 2. Bhamornsiri and Schroeder (2004) have also used a similar approach to examine qualitative and quantitative disclosure under SFAS N0.133 for the DOW30 companies in the USA. References Abdelghany, E.K. (2005), Disclosure of market risk or accounting measures of risk: an empirical study, Managerial Auditing Journal, Vol. 20 No. 8, pp. 867-75. Abraham, S. and Cox, P. (2007), Analysing the determinants of narrative risk information in UK FTSE 100 annual report, The British Accounting Review, Vol. 39 No. 3, pp. 227-48. AMMB Holdings Group Bhd (2006), AMMB Holdings Group Bhd Annual Report 2006, AMMB Holdings Group Bhd, Kuala Lumpur. Arifn, N. (2004), Transparency in Islamic banks: risk reporting issues, paper presented at IIUM Accounting Conference II, Kuala Lumpur. Beattie, V., McInnes, W. and Fearnley, S. (2004), A methodology for analysing and evaluating narratives in annual reports: a comprehensive descriptive prole and metrics for disclosure quality attributes, Accounting Forum, Vol. 28 No. 3, pp. 205-36. Beretta, S. and Bozzolan, S. (2004), A framework for the analysis of rm risk communication, The International Journal of Accounting, Vol. 39 No. 3, pp. 265-88. Bhamornsiri, S. and Schroeder, G.R. (2004), The disclosure of information on derivatives under SFAS No. 133 evidence from the DOW30, Managerial Auditing Journal, Vol. 19 No. 5, pp. 669-80. Blankly, A., Lamb, R. and Schroeder, R. (2002), The disclosure of information on market risk: evidence from the Dow 30, Managerial Auditing Journal, Vol. 17 No. 8, pp. 438-51. Choudry, M. (2001), Bank risk exposure and value-at-risk, The Bond and Money Markets, Butterworth-Heinemann, Oxford, pp. 625-60. Dialog Group Bhd (2007), Dialog Group Bhd Annual Report 2007, Dialog Group Bhd, Petaling Jaya. Emm, E.K., Gay, D.G. and Lin, C-M. (2007), Choices and best practices in corporate risk management disclosure, Journal of Applied Corporate Finance, Vol. 10 No. 4, pp. 82-93. Holt, A.G. (2006), The evolution of risk reporting, in Ong, M.K. (Ed.), Risk Management A Modern Perspective, Academic Press/Elsevier, Burlington, MA, pp. 607-31.

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