HIGHLIGHTS OF RECENT FINANCIAL REPORTING

STANDARDS AND THEIR IMPLICATIONS ON

FUTURE BREED OF ACCOUNTANTS

UNIVERSITY MALAYSIA SABAH – MAREF SEMINAR

23 June 2010

DR NORDIN MOHD ZAIN

Executive Director
Deloitte Malaysia
 Theme

• Change
• Tracking the rapids
• Recent standards
• Features of new breed of accountants
 Change: Global trends on Financial Reporting Adoption

Canada
2009/2011
Europe
2005
United States
China Japan
(2014)
2007 (2010/
2015?)

Malaysia,
Spore,
India Indonesia
2011 (2012)

Brazil
2010
Chile
2009
South Africa
2005 Australia
2005

Current or committed to using IFRS

 Malaysia’s position

• Pursuant to August 2008 announcement

that:

• 1 January 2010 – FRS 139 effective date

• Co-terminuous with Basel 2 implementation

• 1 January 2012 – Full blown IFRS in Malaysia

• Global trends

Deloitte @ 2009 4
 Southeast Asian countries follow suit

Indonesia Singapore

Malaysia Thailand

Philippines Vietnam

5
 GAAP gap POSITION @ 31 December 2009

MASB IASB
6 8 IFRS 1 2 3 4 5 6 7 8

27 29 IAS 1 2 7 8 10 11 12 16 17 18 19 20 21 23 24

33 (4) 37 26 27 28 29 31 32 33 34 36 37 38 39 40 41

6 (11) 17 IFRIC 1 2 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Deloitte @ 2009 6
 GAAP gap POSITION @ 1 January 2010 - narrowing

MASB IASB
8 9 IFRS 1 2 3 4 5 6 7 8 9

28 29 IAS 1 2 7 8 10 11 12 16 17 18 19 20 21 23 24

36 (2) 38 26 27 28 29 31 32 33 34 36 37 38 39 40 41

16 (1) 17 IFRIC 1 2 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Deloitte @ 2009 7
 Learning point

• Change has taken place globally & locally

• Inevitable
• So much to do
Tracking the Rapids
 37 Years and Forging Ahead

• 1973 - International • 2001 - International

Accounting Standards Accounting Standards
Committee (Committee) Board (Board)

• Historical cost regime • Fair value regime

• Accounting regime • Financial reporting regime

I AS I FR S
 Notable Changes

• Accounting standards have become a law of the country

– FRS
– PERS
• Mandatory for companies to comply with accounting
standards issued by MASB
• Applies to:
– Public Listed Companies
– Financial Institutions under Bank Negara Malaysia
– Companies registered with Companies Commission of Malaysia (Sdn Bhd
and Berhad)
• Not required but encouraged use by:
– Government agencies
– Cooperatives
 Notable Changes
• Emergence of a family of standards on Fair Value –
IAS 39 Financial Instruments Standards

• Change from Historical Cost to Fair Value

• Disclosure of market value in the notes to financial

statements

• And many more

FRS 139 family
 FRS 139 - a Standard never so popular

• Complex • If you have read it and understood . . .

• Changing • FRS 139 (IAS 39) IFRS 9

14
Focus for 2010

FRS 3
Business
combination

IFRIC 15
Property
dev
 What’s in store for 2012

(Phase 1)
FRS 4 FRS 141
Insurance Agriculture
(Phase 2)
FRS 7 Fin. FRS 3
instrument Business
disclosure combination
Financial FRS 139 IFRIC 4
statement financial Leases
presentation instruments

Income
taxes
 Deadlines

First Qtr
result on Opening IFRS
FRS 139 compliant
compliant Balance Sheet

2010 Qtr 1 Half 2 2011 2012

-6 -5 -4 -3 -2 -1 1 2 3 4 5 6 8 9 10 11 13 14 15 n n
0 7 12 24

FRS 139 FRS 3 Full suite IFRS

FRS 7 IFRIC 15 Full suite IAS
FRS 4 Amendments
Interpretations

Deloitte @ 2009 17
 Learning points

• Many more new things to come; exciting

• Train to be comfortable with pro-forma financial statements
• speak to CFOs to understand areas of compliance & potential risk areas of
non-compliance
• simulate impact – understand areas with most impact
• stress test results – organizational impact & investors reactions
• Ensure accuracy of FRS 139 financial statements
• Verification necessary before result is released to the regulators, public
• Balance Sheet remediation may be useful
• Lesson: Engage with professionals, practitioners
Communicate with them early

18
 Pressure Points And Beyond

•Exp Draft
IASB •Simultaneous
•Standard •adoption

IASB MASB

2011 2012 2013 2014

-6 -5 -4 -3 -2 -1 1 2 4 5 6 7 8 9 10 11 12 13 14 15 n n 24
24 3

First QTR
Full suite IFRS result on
Full suite IAS Full suite of
Amendments IFRS +
comparative

CAPACITY BUILDING – UNIV PLAYS A BIG ROLE

19
 Learning point

• Change is rapid; may be too rapid for some

• Skills building
• Nothing beats this

20
 Recent changes

• 1 July 2010 - Presentation of financial statements

– (see article)
• 1 July 2010 - IFRIC 15
– (see annexure)
• Agriculture
– (see article)
• IFRS 9
– (see annexure)
• Insurance Phase 2
 Features of new breed of accountants

• New things to learn

• Technically sound
• Quick
• Judgemental
• Soft touch
• Communication
 Implications on academics

• Keeping up with changes

• Research areas are abound
• Literature can be a challenge
• Quantum leap forward through frequent
engagements with practice
 Conclusion

• Change necessitate changes to the professionals in

the accounting profession
• Inevitable change but opportunities are abound
• Track these changes to be ahead
• Success for those who differentiates
• Skill building is a must
• Accountants are the new breed of financial reporters
of tomorrow
Deloitte @ 2009 25
 Annexure

IFRIC 15 Agreement for the

Construction of Real Estate
 Industry So Unique ….

• Sell OFF-plan
• Then construct
• Meanwhile, purchasers imagine
• Happy if completed…. or …. Sad & angry if not

vs

• Register interest, 10% down

• Wait for construction to complete
• Or, purchase completed house
• Happy
 So Unique …. with so many rules
• LAWS OF MALAYSIA FOR HOUSING DEVELOPMENT
• Principle Act 663 Building and Common Property (Maintenance and Management) Act 2007 12/04/2007 Principle Act 118 Housing
Development (Control and Licensing) Act 1966 29/08/1969 Amendment Act A402 Housing Developers (Control and Licensing)
(Amendment) Act 1977 10/06/1977 Amendment Act
A 703 Housing Developers (Control and Licensing) (Amendment) Act 1988 01/12/1988 Amendment Act A1142 Housing Developers
(Control and Licensing) (Amendment) Act 2002 01/12/2002 Amendment Act A1289 Housing Developers (Control and Licensing)
(Amendment) Act 2007 12/04/2007 Subsidiary PU (A) 58/1989 Housing Development (Control and Licensing) Regulations 1989
01/04/1989 Amendment PU(A) 446/1998 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT) REGULATIONS 1998
04/12/1998 Amendment PU(A) 473/2002 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT) REGULATIONS 2002
01/12/2002 Amendment PU(A) 42/2003 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT) REGULATIONS 2002-
CORRIGENDUM 07/02/2003 Amendment PU(A) 226/2003 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT)
REGULATIONS 2003 01/12/2002 Amendment PU(A) 395/2007 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT)
REGULATIONS 2007 01/12/2007 Amendment PU(A) 190/2008 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT)
REGULATIONS 2008 09/06/2008 Amendment PU(A) 200/2008 HOUSING DEVELOPERS (CONTROL AND LICENSING) (AMENDMENT)
REGULATIONS 2008 17/06/2008 Subsidiary PU (A) 231/1991 Housing Developers (Housing Development Account) Regulations 1991
26/08/1991 Amendment PU(A) 474/2002 HOUSING DEVELOPERS (HOUSING DEVELOPMENT ACCOUNT) (AMENDMENT) REGULATIONS
2002 01/12/2002 Order PU(A) 293/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) ORDER 2007
06/09/2007 Order PU(A) 294/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 2) ORDER 2007 06/09/2007
Order PU(A) 295/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 3) ORDER 2007 06/09/2007 Order
PU(A) 296/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 4) ORDER 2007 06/09/2007 Order PU(A)
297/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 5) ORDER 2007 06/09/2007 Order PU(A)
298/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 6) ORDER 2007 06/09/2007 Order PU(A)
299/2007 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 7) ORDER 2007 06/09/2007 Order PU(A)
017/2008 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) ORDER 2008 21/01/2008 Order PU(A)
109/2008 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 2) ORDER 2008 10/04/2008 Order PU(A)
111/2008 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 3) ORDER 2008 14/04/2008 Order PU(A)
120/2008 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 4) ORDER 2008 24/04/2008 Order PU(A)
111/2008 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) (NO 3) ORDER 2008 14/04/2008 Order PU(A)
063/2009 HOUSING DEVELOPMENT (CONTROL AND LICENSING) (EXEMPTION) ORDER 2009 16/02/2009 Subsidiary PU (A) 476/2002
Housing Development (Tribunal for Homebuyer Claims) Regulations 2002 01/12/2002 Subsidiary PU (A) 475/2002 Housing
Development (Compounding of Offences) Regulations 2002 01/12/2002 Supplement PU (B) 307/2004 DELEGATION OF POWERS UNDER
SUBSECTION 9(1) OF THE HOUSING DEVELOPMENT (CONTROL AND LICENSING) ACT 1966 05/08/2004 Principle Act 318 Strata Titles Act
1985 01/06/1985 Amendment Act A573 STRATA TITLES (AMENDMENT) ACT 1990 23/02/1990 Amendment Act A951 STRATA TITLES
(AMENDMENT) ACT 1996 02/08/1196 Amendment Act A1290 STRATA TITLES (AMENDMENT) ACT 2007 12/04/2007 Subsidiary PU (A)
164/1988 Strata Titles (Federal Territory of Kuala Lumpur) Rules 1988 23/04/1988 Subsidiary PU (A) 5/2003 Strata Titles (Federal
Territory of Putrajaya) Rules 2003 09/01/2003 Subsidiary PU (A) 503/2002 FEDERAL TERRITORY OF PUTRAJAYA (MODIFICATION OF
STRATA TITLES ACT 1985) ORDER 2002 27/12/2002 Principle Act 133 Street, Drainage and Building Act 1974
Supported by unique accounting standards

• MAS 7 issued by MICPA/MIA

• MASB adopted MAS 7 in 1998

• Revised in 2004 as FRS 201

– Percentage of completion
– Completed method allowed
alternative
– Matching
– Lots of guidance
Uniqueness given way to convergence
• IASB issued draft IFRIC 15 in March 2007
• Deliberation
• IASB issued IFRIC 15 in July 2008
• Deliberation

MASB issued IFRIC 15 on 1 Jan 2010, effective 1 July 2010

Supersedes FRS 2012004
 IFRIC 15 in essence

• IAS 18 (Revenue) and IAS 11 (Construction Contract)

as bases
• Is it a sale or an obligation to construct?
• Rights and obligations
• Compels players to take a look at the agreement
• New concept called ‘continuous transfer’
 IFRIC 15 in simple terms

IAS 18 revenue IFRIC 15 IAS 11

Agreement construction

risk & reward

rights & obligation
 IFRIC 15―Quick reminder
Agreement for construction of real estate

YES Agreement is a YES

IFRIC 15 construction
construction contract – % completion
contract?
IAS 11
NO

YES YES
Agreement only for Agreement is for
% completion
services? services – IAS 18

NO

Agreement is for sale of YES Criteria for goods met YES

% completion
goods – IAS 18 on continuous basis?

NO
Revenue when criteria
met
 Disclosure requirements
IFRIC 15 – ‘continuous transfer’

(a) How entity determines which agreements meet all the criteria in IAS 18.14
continuously as construction progresses.
(b) The amount of revenue arising from such agreements in the period.
(c) The methods used to determine the stage of completion of agreements in
IAS progress.
11 IAS 18 IFRIC 15
For agreements in progress:
(a) The aggregate amount of costs incurred and recognized profits (less
recognized losses) to date; and
(b) The amount of advances received.
 Implications

Quarterly submission

State of readiness

Readiness to change

Must change

Must bear with the change

 Summary

• IFRIC 15 driven by convergence decision

• Has impact on industry so unique to Malaysia
and to some others
• Since accounting is law in Malaysia, decision to
adopt makes IFRIC 15 mandatory for companies
sooner rather than later
• Implications can be significant on industry,
income taxes, systems and bottom line
 Annexure
The Beginning of the End for IAS 39
 The Beginning of The End for IAS 39

• IFRS 9 Financial Instruments is the first phase of a

complete rewrite of IAS 39

• Second phase covering amortised cost and

impairment

• Third phase, hedge accounting

3
8
 IFRS 9 Changes
• Debt instruments meeting both a “business model” test and a “cash flow
characteristics” test are measured at amortised cost
• Investments in equity instruments can be designated as “fair value through
other comprehensive income” with only dividends being recognised in profit
or loss
• All other instruments (including all derivatives) are measured at fair value
with changes recognised in the profit or loss
• The concept of “embedded derivatives” does not apply to financial assets
within the scope of the standard and the entire instruments must be
classified and measured in accordance with the above guidelines
• Unquoted equity instruments can no longer be measured at cost less
impairment (must be at fair value).

39
• In determinining amortised cost or fair value, an entity must use
two criteria:-
• a business model test
• a cash flow characteristics test

• If the financial asset satisfies the two criteria:-

• the financial asset must be measured at amortised cost

40
• Business Model Test
• to assess whether its business objective is to collect the
contractual cash flows of the assets
• rather than realise their fair value change from sale
• this determination is made at business unit level not an
individual financial instrument level
• therefore is not based on management’s intent for individual
instruments

41
 Key changes under IFRS 9
Investments in equity Often classified as ‘available for
instruments sale’ with gains and some losses
deferred in other comprehensive
income. Impairment losses
recognised in profit or loss.
Available for sale debt Recognised at fair value with
instruments gains/ losses deferred in other
comprehensive income.
Impairment losses and reversals
recognised in profit and loss
Convertible Embedded conversion option
instruments bifurcated and separately
recognised at fair value, underlying
debt instrument may be
measured at amortised cost
Measured at fair value with
gains/losses recognised in profit
or loss, unless designated at fair
value through other
comprehensive income in which
case only dividends recognised in
profit or loss
May be measured on amortised
cost basis if the ‘business model’
and ‘cash flow characteristics’ tests
are met, otherwise measured at
fair value through profit or loss
Entire instrument must be
classified and measured. Results in
measurement at fair value with
gains/losses in the profit or loss
 Key changes under IFRS 9
Other financial hosts with
embedded derivatives
Listed debt securities
Held-to-maturity investments
Bifurcation from underlying
instrument in many cases,
separately accounted for at
fair value with gains/losses in
profit or loss
Measured at fair value (unless
included in the held-to-maturity
category)
Measured at amortised cost with
a ‘tainting’ test
No bifurcation, entire instrument
classified and measured. Will
often result in entire instrument
being measured at fair value
through profit or loss
Measured at amortised cost if
‘business model’ and ‘cash flow
characteristics’ tests are satisfied
otherwise measured at fair value
through profit or loss
Must meet ‘business model’ and
‘cash flow characteristics’ tests
to be measured at amortised cost,
otherwise generally fair value
through profit or loss
 Summary

• Attempts to make IAS 39 simpler

• Phase 1 looks friendly
• Subsequent phases undergoing debate
• More to come
 Further technical resources

• Deloitte International Accounting Manual

• Deloitte IFRS model financial statements
• Deloitte IFRS Compliance Checklists
• IAS Plus website (www.iasplus.com)
• IFRS Knowledge Resource Centre
• Global Technical Library (techlibrary.deloitteaudit.com)
• iGAAP 2009
• IFRS Specialists
• IFRIC 15 – Agreements for the construction of real estate
• iGAAP 2009 – chapter 23 Revenue
 Contact

Dr. Nordin Zain

Executive Director / Client
Service Leader
Tel: +603 7723 6556
nordinzain@deloitte.com

Dr Nordin was formerly the Executive Director with the Malaysian

Accounting Standards Board for 9 years where he was responsible
for developing conventional and Islamic accounting standards for
Malaysia. He joined Deloitte in February 2009 and is responsible
for IFRS implementation and Islamic finance. He is a member of
the Malaysian Institute of Accountants, a Board member of AAOIFI
and sits on the Asia Pacific Financial Reporting Advisory Group in
Melbourne. He was formerly a corporate banker, an internal
auditor, a lecturer and a consultant to the United Nations.

Please request for permission from the author if you wish to

reproduce the materials herein.
© 2010 Deloitte Touche Tohmatsu
Deloitte @ 2009 46