Financial Accounting Report: IFRS Implementation in Malaysia Analysis

This report provides an analysis of the implementation of International Financial Reporting Standards (IFRS) in Malaysia, with a specific focus on the challenges and implications of adopting fair value accounting. It explores the issues faced by Malaysia and other Asia-Pacific countries in harmonizing with IFRS, particularly concerning the use of fair value accounting and its impact on tax liabilities, profit distribution, and compliance with regulatory bodies. The report delves into the concept of fair value accounting according to IFRS 13, the standards, and its application within Malaysia, comparing its adoption with other countries like Australia. It also examines the adoption of fair value accounting by Malaysian and Australian companies, providing insights into the practical application of IFRS in financial reporting. The report highlights the complexities and debates surrounding the adoption of fair value accounting, emphasizing the need for a balance between global standards and country-specific requirements.

Advance Financial Accounting: IFRS implementation in Malaysia

Executive Summary
This report has been prepared for illustrating the accounting issues that are arising
since the adoption of IASB approach for IFRS harmonisation. The most important issue faced
by the IASB in this context is the use of fair value accounting indifferent countries. The
different accounting-standard setting bodes have not completely adopted the use of fair value
approach as it doe not fulfil the legal and tax obligations of a specific country. As such, the
report has examined the issues faced by Malaysia and other Asia-Pacific countries in relation
to the adoption of fair value accounting approach. It has been inferred from the report that it
impacts the tax paid by a business entity and therefore is not yet approved by the regulatory
bodies of Malaysia. Similarly, the presence of country-specific issues are impacting the large-
scale adoption of fair value accounting in other Asia-Pacific countries such as Australia,
Singapore, New Zealand and others.

Introduction
This report has analysed and examined the issues related with the use of fair value
accounting approach by the countries across the word after the harmonisation of International
Financial Reporting Standards (IFRS). The harmonisation of IFRS is presently aimed by
International Accounting Standard (IASB) so that the financial statements of different
business corporations around the world can be easily compared and evaluated. However,
there are numerous issues that are faced by IASB for attaining congruence between the IFRS
and other accenting standards such as the use of fair value accounting approach. This is
because the use of this approach has resulted in creating some issues for the business entities
as the results obtained through its use are not aligned with the requirements of different
regulatory bodies in some countries (Caprio, 2013). As such, the report has illustrated the
problems faced by Malaysia and other Asia-Pacific countries in adoption of fair value
accounting due to the presence of contextual issues.
Concept and the underlying assumptions of fair value accounting according to IFRS 13
Fair value measurement
The IASB has developed the accounting standards for fair value measurement for
improving the quality of financial disclosure. The IFRS 13 standard has developed by the
IASB in relation to the Fair Value Measurement in the year 2011. The standard provides a
definition of the fair value, provides a framework for the measurement of fair value and
disclosures that are required to be done in relation to the fair value measurement. The main
objective behind the development of the standard is to enable the use of fair value accounting
approach in business entities easily (Caprio, 2013). The standard has provided a common
framework for measuring the fair value through removing all the inconsistencies that exist
previously in relation to the use of fair value. As per the standard, the fair value can be
defined as the price realised or given by selling or transferring an asset or a liability in a
structured accounting transaction involving the participation between the market members.
As such, the fair value measures the value of an asset or liability on the basis of the market
condition and is not dependent upon the entity condition and therefore reflects the risk
associated with them. The fair value measurement provides the value of assets or liabilities in
relation to the market risk through including all the conditions related to an asset location at
the time of its sale or usage (Chorafas, 2006).

The fair value assesses of an entity through the use of the standard cannot be regarded
by a business entity to be either high or low as compared to their own valuation. The ordered
transaction assumed during measuring the value of an asset or liability that has taken into
account all the market exposure before the date of measurement and ensure that there is no
forced transaction. As such, it is essential that transaction carried out is ordered so that all the
market factors such as competition are taken into account while assessing the market value of
an asset or a liability. However, the standard has not specified the measurement unit that
should be used for measuring an asset value. The fair value measurement approach assumes
that the accounting translations related to an asset sale has occurred in the principal market or
in the most advantageous market in relation to an asset or a liability. The principal market
refers to market that carries out largest number of transactions in relation to an asset or a
liability to be easily recognised by an entity (Mirza and Ankarath, 2012). The following there
levels are identified and provided by the IFRS 13 standard in relation to the measurement of
an asset or a liability:
 The business entities are required to use the quoted prices of the asset or liability
without nay modification on the date of measurement that are present in the active
market. The active market is where large volume of transactions takes place in
relation to a specific asset or a liability.
 The quoted price of assets and liabilities present in the similar active market should be
supported by the market data
 The business entity should incorporate the use of observable inputs and should restrict
the use of inputs that are not observed during assessing the price of assets and
liabilities
The fair value for a non-financial asset is assessed through its best usage as depicted by
the market conditions. Thus, the value depends on the use of the non-financial asset by the
market participants for maximising the value. The market participants can realised the best
value of a non-financial asset through using it in combination with financial assets. As per the
standard, the best usage of a non-financial asset should be permitted under law and is as per
its physical capacity. Therefore, the process of determination of the fair value of a non-
financial asset involves examining its physical conditions or any type of legal rules relating
with its usage. Therefore, the IFRS 13 standard adopted for improving the consistency and
comparability in the fair value measurements through the development of a hierarchical
system related to the determination of fair value of an asset and liability. The hierarchy

begins with recognising the quoted prices for the assets and liabilities in active market and
the lowest priority is given to the inputs that are still not observed (Krimpmann, 2015).
Use of fair value accounting post IFRS harmonisation in Malaysia and in three other
emerging economies in the Asia-Pacific countries
Alaryan et al (2014) stated that the IASB is currently emphasising on achieving
harmonisation in accounting standards for developing a set of internationally accepted
accounting standards that is applicable to all the business entities across the world. The need
for harmonisation of IFRS has occurred for improving the quality of financial reporting
through implementing the international accounting standards in the development of financial
statements by all the business entities. This would help in increasing the global
competitiveness of the business entities and improving the competitiveness of the global
market. However, the use of fair value accounting has become an important subject of
concern for the accounting professionals since the harmonisation of IFRS standards. For
example, the Asia-Pacific countries are facing large challenges in relation to the use of fair
value accounting approach due to presence of country-specific issues. The use of fair value
accounting in Malaysia is a topic of debate since the year 2008 when the Malaysian
Accounting Standard Board (MASB) has announced the convergence between the MASB
and the IASB (Alaryan et al., 2014).
According to Sidik and Rahim (2012), as compared to the use of fair value accounting
model, the historic cost approach records the actual price of an asset or liability without
incorporating nay changes based on the market fluctuations. As such, it doe snot provide
reliable information to the investors reading the assets and liabilities value. The fair value
accounting approach has incorporated all the market fluctuations in the fair value accounting
model and therefore depicts the actual price of an asset or liability. The IASB has emphasised
on the use of fair value accounting post IFRS harmonisation for enriching the quality of
disclosure by providing relevant and reliable information to the end-users. The accounting
standard setting bodies of Malaysia and other Asia-Pacific countries such as Australia, New
Zealand and Singapore is largely emphasising on the sue of fair value accounting model for
securing the interests of the end-users (Dignah et al., 2016). The fair value accounting
approach will help in adopting a heretical system for measuring the assets and liabilities value
in relation to the market changes. Also, it will help the investors to predict the future

performance of an asset and therefore supporting their decision-making process (Sidik and
Rahim, 2012).
In the views of He, Wong, and Young (2012) at present, the business entities in
Malaysia are following three set of accounting frameworks that are, the old financial
reporting standards, private equity reporting standards and Malaysian financial reporting
standards. The adoption of the legally frameworks are approved by the MASB and thus can
be applied to Malaysia corporations on the basis of their operations. As such, the MFRS
standards that have attained convergence with the IFRS are not applicable to the public
entities except the private entities. Thus, all the entities other than private are required to the
incorporate the use of fair value accounting approach during the development of their general
purpose financial reports (He, Wong, and Young, 2012).
As per Albu and Alexander (2014), the MFRS incorporates the use of fair value
accounting but it is largely impacting the tax liabilities of a business entity. The fair value has
incorporated large changes in the amount of tax deductable expenses and therefore impacting
the tax paid by an entity to large extent. In addition to this, the use of fair value accounting
will also have a large impact on the profits distributed to the shareholders as dividend and
also on the value of realised and unrealised profits. These complications arising from the fair
value accounting use regarding the tax and profit amount also does not effectively comply
with the requirements of regulatory bodies of Malaysia. Thus, it can be said that due to
presence of such issues the fair value accounting approach is still not completely
implemented by the business entities in Malaysia (Hanefah and Singh, 2012). Apart from
Malaysia, other Asia-Pacific countries are also facing the problems in the use of fair value
accounting as it tends to increase the volatility in the financial reporting. The future assets
and liabilities value are largely based on assumptions and therefore increase the volatility in
financial statements (Hassan, Percy and Stewart, 2006). Also, the cost of adopting the fair
value approach in such countries is exceeding the benefits that would be realised by its usage
to the end-users (Albu and Alexander, 2014).
Fair Value measurement accounting standard applied in 2 Malaysian Companies and 2
Australian Companies
In order to evaluate the use of the fair value measurement of assets and liabilities
concept in more detail, there is need to compare the use of this accounting standard in
Malaysian companies and in Australian Companies. In order to perform this evaluation four

companies have been selected and among them 2 are from Malaysia and rest 22 are from the
Australia. So two companies that are taken for review in Australia are Wesfarmers and
Woolworths and two companies taken in Malaysia are MISC and Pensonic Holding. All the
four companies have implemented the use of fair value measurement concept while preparing
their books of account.
In order to understand the adoption of IFRS by the Malaysian Board of Accounting
there is need to know the history. Malaysian Board of Accounting follows the accounting
standard as prescribed in the US GAAP before the implementation of IFRS has been made
compulsory for the countries. After adoption of the accounting standards prescribed in the
IFRS, Malaysian Board of Accounting has decided to make their own Malaysian GAAP that
is truly based on the accounting standard given in the IFRS. In case of Australia, Australian
Accounting Board takes care of accounting framework in Australia. The Board has adopted
the IFRS and made proper changes in their Australian GAAP in order to have full compliance
with the International Accounting Standards (AASB13, 2015).
So it can be said on the basis of above review that both the countries have
successfully adopted the IFRS and make proper changes to their individual GAAP. When
talking about the Fair value of measurement Standard, both countries have taken same
guidelines as described in IFRS 13 Fair Value Measurement. So it is true that both the
countries use same guidelines as prescribed in IFRS 13 with few changes in regards to
disclosure requirement and method used. It can be easily understand through evaluating the
annual reports of the companies selected above.
Fair value measurement concept as given in IFRS 13 provides the detailed format for
measuring the assets and liabilities presented in the financial statements. The detailed
information regarding the valuing the assets and liabilities have made to understand the
financial statements more clearly. It can be said that there are almost similarity between the
procedure followed under Australian GAAP and Malaysian GAAP regarding the calculation
of value of assets and liabilities under fair value measurement concept. There can be change
in disclosure requirement and other items of presentation that can be understand through the
below comparison table. On reviewing the annual reports of both the Malaysian companies it
has been that both companies has made the proper calculation of assets and liabilities as
provided under the IFRS 13. In Malaysia there is use of MFRS (Malaysian Financial
Reporting Standards) to prepare the financial statements. MFRS 13 is related with the fair

value measurement of assets and liabilities. There have been many changes made to the
MFRS 13 after applying the IFRS new fair value measurement standard. Similarly Australian
GAAP (AASB 13) provides the detailed concept of fair value measurement and it is almost
derived its guidelines from the IFRS 13.
Below table provides the detailed comparison of MFRS 13 and AASB 13 (Fair Value
Measurement) in the selected four companies:
Comparison of the Fair Value Measurement accounting standard under Australian
Companies and Malaysian Companies
Different
concepts of the
financial
reporting
Implication of AASB 13 and use of it
by the Australian Companies
Implication of MFRS 13
and use of it by the
Malaysian Companies
Basis of
preparing the
consolidated
financial
statements
There is mainly difference of disclosure
requirements. Both the Australian
companies have prepared the financial
statements according to the historical
cost basis and also provided the details
regarding the financial instruments in the
notes to accounts (Wesfarmers, 2016 and
Woolworths Group, 2016).
Similarly Malaysian
Companies have prepared
their financial statements on
the historical cost basis but
there is no disclosure of
financial instruments in the
report (MISC BERHAD,
2016 and Pensonic Holding
BERHAD, 2016).
Measurement
and disclosure
regarding the
business
combination
Fair market value concept is used to
value the assets and liabilities of the
acquired company but in case when the
business combination is performed in
installments there is no concept of
Malaysian companies have
properly disclosed all the
information regarding the
valuing of assets and
liabilities under business

revaluation of acquired assets and
liabilities.
combination and there has
been assets and liabilities
revaluation in case company
is acquired in installments.
Valuing goodwill
and other
intangible assets
In Australian GAAP, there is separate
accounting that is used to measure the
value of goodwill and other intangible
assets. Goodwill is measured after the
business combination has been carried
out and there is excess payment than the
net worth of the acquired company, in
this case it is valued at amount paid
under business combination less the fair
market value if assets and liabilities (Net
Worth). There is improper disclosure of
goodwill calculation and other
information regarding the intangible
assets (Wesfarmers, 2016 and
Woolworths Group, 2016).
In case of Malaysian
Companies goodwill is
calculated in same way as it
was done in Australian
GAAP but there is proper
disclosure of information
under notes to accounts
(MISC BERHAD, 2016 and
Pensonic Holding BERHAD,
2016).
Infromation from the Annual reports that provide use of fair value measurement concept by
the Australian companies
Measurement of Financial Assets

Goodwill and Other Intangible assets
Property, Plant and Equipment

Information from the Annual reports that provide use of fair value measurement concept by
the Malaysian companies
Business Combination

Depreciation rate of fixed assets

Goodwill and other intangible assets
Financial Assets

Improvement in the quality of information disclosure through the use of fair value
accounting in Malaysia
The use of fair value accounting has been incorporate mainly in the public companies
of Malaysia. However, it has been observed that the implementation of the approach by the
MASB since IFRS harmonisation has enhanced the quality of financial reporting. It has
facilitated in providing more realistic and practical information regarding the assets and
liabilities value of a firm to the investors. It has helped in reducing the trading risk and as
such leading to development of stock market of the country. It is also promoting the foreign
investment through improving the transparency in the business operations (Qu et al., 2012).
The competitive position of the business entities adopting the use of fair value accounting has
also improved in the global market. As such, the business growth realised by seeking large-
scale foreign investment has resulted in developing employment opportunities about resulting
in the country’s economic prosperity (Chand, 2005).
The use of fair value accounting though has improved the consistency and reliability
of financial statements has also resulted in creating some problems in the general purpose
financial reports. This is because the investors are not able to compare the increase or
decrease in an asset or liability value in the absence of historical cost. Besides investors, the
management of business entities are also not able to determine the achievement of its gaols
and objectives in absence of historical records of the financial instruments. Therefore, in this
context, it is highly recommend to the MASB for developing the use of fair value accounting
approach in addition with historical cost model for meeting its corporate goals adequately.
The accounting standard setting bodies of the developed countries such as the UK and the US
have adopted the use of both historical and fair value model in determining the assets and
liabilities value (Uchenna and Efobi, 2016). This is essential to protect the investor’s
confidence and the same time facilitating an easy comparison of the attained corporate
objectives with those that are pre-determined.
Conclusion
Therefore, it can be said on the basis of overall discussion held in the report it can be
stated that the business corporations globally are adopting the use of fair value accounting for
improving the quality of financial reports. However, there still exist some problems regarding
its greater adoption in the measurement of financial instruments due to difference in the legal
requirements of different countries. The use of fair accounting has large impact on the tax

paid by a business entity and therefore its use is not aligned with the requirements of
regulatory bodies. Thus, the IASB need to develop better approaches so that fair value
accounting is largely used by the business corporations around the world as it tends to
improve the quality of financial reporting.

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