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CPD technical article
In the first of two features on MPERS, Ramesh Ruben Louis explores the implications of transition for first-time adopters
This article was first published in the November/December 2015 Malaysia edition of Accounting and Business magazine.
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On 14 February 2014, the Malaysian Accounting Standards Board (MASB) issued a new financial reporting framework for private entities. The Malaysian Private Entity Reporting Standards (MPERS) will replace the current Private Entity Reporting Standards (PERS) and must be applied for financial statements beginning on or after 1 January 2016.
According to the MASB, the new standards were developed partly in response to the World Bank’s 2012 Report on the Observance of Standards and Codes (ROSC) – Malaysia, which observed that the current PERS were based on pre-2003 international accounting standards and therefore outdated, and should be reviewed as a priority.
A primary concern for those adopting MPERS for the first time is the transition from current accounting practices and treatment to the new requirements. To assist those preparing entities for first-time adoption of MPERS, section 35 provides guidance and is a useful starting point for accounting in accordance with the new rules. It also aims to ensure that the financial statements consist of high-quality information that is transparent for users, comparable over all periods presented and able to be generated at a cost that does not exceed the benefits to users.
In this first of our two features on the new framework, we will explore the key transitional provisions provided under section 35 of MPERS.
Date of transition
Paragraph 3.14 requires an entity to disclose, in a complete set of financial statements, comparative information in respect of the previous comparable period for all monetary amounts presented in the financial statements, as well as specified comparative narrative and descriptive information. An entity’s date of transition to MPERS is the beginning of the earliest period for which the entity presents full comparative information in accordance with MPERS in its first financial statements that conform to MPERS, as illustrated in the diagram above.
Assets and liabilities
The general principle underlying the recognition and measurement of assets and liabilities is that a first-time adopter should apply retrospectively all the sections of MPERS that are effective at the end of its first MPERS reporting period.
Consequently, the first MPERS financial statements are presented as if the entity had always applied MPERS. Exceptions to this general principle are provided in paragraphs 35.9–35.11.
There are a number of obligations an entity must comply with in its opening statement of financial position as of the date of transition to MPERS (ie, 1 January 2015):
a) It must recognise all assets and liabilities whose recognition is required by MPERS.
b) It should not recognise items as assets or liabilities if MPERS does not permit such recognition.
Example: Previously under PERS, an entity recognised research and development cost as an intangible asset. However, paragraph 18.14 of MPERS requires expenditure incurred internally on an intangible asset (including research and development) to be recognised in profit or loss when incurred. Consequently, in accordance with paragraph 35.8, the entity adjusts its opening balances from 1 January 2015 (the date of transition to MPERS) in order to derecognise the research and development intangible item incurred before 1 January 2015, with a corresponding adjustment to retained earnings. Furthermore, if any amortisation was previously recognised as an expense in 2015, the 2015 comparative figures prepared in accordance with MPERS exclude that amortisation.
c) The entity must reclassify items recognised under its previous financial reporting framework as one type of asset, liability or component of equity, which are recognised as a different type of asset, liability or component of equity under MPERS.
Example: Under PERS, an entity accounted for all preference shares issued as equity instruments, even though the entity must redeem its preference shares for RM10,000 on 31 December 2019. In accordance with paragraph 22.5(e) of MPERS, the preference shares are financial liabilities – with mandatory redemption by the issuer for a fixed amount at a fixed future date.
Consequently, in its opening statement of financial position (ie, at 1 January 2015) the entity must classify the preference shares as liabilities and re-measure the amount at amortised cost in accordance with section 11 of MPERS. The entity adjusts its opening balances at 1 January 2015.
The entity presents the preference shares as a liability in its statement of financial position at 31 December 2016 and in the comparative information presented for 2015. Similarly, the entity’s statements of comprehensive income for the year ended 31 December 2016 (including comparative information for 2015) include an expense for the finance costs arising on the financial liability (ie, the preference shares) as determined using the effective interest method.
d) The entity must apply MPERS in measuring all recognised assets and liabilities.
Example: Prior to 2016, in accordance with PERS, an entity presented its financial statements using the last-in, first-out (LIFO) cost formula for measuring inventories. MPERS does not permit the use of the LIFO cost formula (paragraph 13.18). Instead, in its opening statement of financial position, the entity measures its inventories using the first-in, first-out (FIFO) cost formula and adjusts its opening retained earnings at 1 January 2015 accordingly (see paragraph 35.8).
Consequently, cost of sales for the year ended 2015 is similarly adjusted when preparing comparative information in accordance with MPERS.
Therefore, in its financial statements for the year ended 31 December 2016 (and the comparative amounts for 2015) the entity measures inventories using the FIFO cost formula. The note to the entity’s 31 December 2016 financial statements that sets out the reconciliations from the equity and profit or loss determined in accordance with PERS to the equity and profit or loss determined in accordance with MPERS includes adjustments for the measurement of inventories because of the change from the LIFO to the FIFO cost formula.
Exceptions apply
While the general transitional requirements in the first-time adoption of MPERS are retrospective in nature (with certain exemptions provided), paragraph 35.9 lists five situations where retrospective application of MPERS is unlikely to be performed with sufficient reliability, or where there is potential for abuse due to the judgmental nature of a transaction. Thus, the following exceptions to retrospective application are mandatory for all first-time adopters of the MPERS.
- De-recognition of financial assets and financial liabilities: financial assets and liabilities derecognised under PERS before the date of transition should not be recognised upon adoption of the MPERS. Conversely, for financial assets and liabilities that would have been derecognised under MPERS in a transaction that took place before the date of transition, but that were not derecognised under an entity’s previous accounting framework, an entity may choose (a) to derecognise them on adoption of MPERS, or (b) to continue to recognise them until disposed of or settled;
- An entity is not permitted to change its hedge accounting before the date of transition to MPERS for the hedging relationships that no longer exist at the date of transition.
- Accounting estimates.
- Discontinued operations.
- The requirements of paragraph 5.6 to allocate profit or loss and total comprehensive income between non-controlling interest and owners of the parent must be applied prospectively from the date of transition to MPERS.
In part 2 of this feature on the transition to MPERS, we will explore the exemptions provided under paragraph 35.10 in preparing the first financial statements that conform to MPERS, especially on measurement issues relating to revaluation of assets.
Ramesh Ruben Louis is a professional trainer and consultant in audit & assurance, risk management & corporate governance, corporate finance and public practice advisory
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