BAO3309 Advanced Financial Accounting Management
Questions:
Topic: IFRS implementation in Malaysia
The use of fair value accounting has been debated in the current literature. Studies based in emerging economies, such as China South Pacific Island countries (Chand, 2005), have consistently reported the challenge of using fair value accounting in those countries due to country-specific contextual issues. However, recent studies based in Malaysia did not repport any similar the issues in the use of fair value accounting in Malaysian companies.
Required
- Explain the concept and the underlying assumptions of fair value accounting according to IFRS 13 Fair value measurement.
- Review relevant accounting research literature on the use of fair value accounting post IFRS harmonisation in Malaysia and a minimum of three other emerging economies in the Asia-Pacific countries.
- Compare the disclosures on the use of fair value accounting in the annual reports of four companies (two are Malaysian listed companies, and the other two are Australian companies) for the most recent financial year (2016).
- Discuss if your findings support (or reject) the view that the use of fair value accounting since IFRS harmonisation in Malaysia has improved the quality of information disclosure.
Answers:
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 revaluation of acquired assets and liabilities.
|
Malaysian companies have properly disclosed all the information regarding the valuing of assets and liabilities under business 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
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.
References
AASB13. 2015. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf [Accessed on: 20 September, 2017].
Alaryan, L. A., et al. 2014. The Relationship between Fair Value Accounting and Presence of Manipulation in Financial Statements. International journal of accounting and financial reporting 4 (1), pp. 221-237.
Albu, C. and Alexander, D. 2014. When global accounting standards meet the local context? Insights from an emerging economy. Critical Perspectives on Accounting 25 (6), pp. 489-510.
Caprio, G. 2013. Handbook of Key Global Financial Markets, Institutions, and Infrastructure. Academic Press.
Chand, P. 2005. Impetus to the success of harmonization: the case of South Pacific Island nations. Critical Perspectives on Accounting, 16(3), pp. 209-226.
Chorafas, D.N. 2006. IFRS, Fair Value and Corporate Governance: The Impact on Budgets, Balance Sheets and Management Accounts. Butterworth-Heinemann.
Dignah, A., et al. 2016. Fair Value Accounting and the Cost of Equity Capital of Asian Banks. Jurnal Pengurusan 48, pp. 125 – 135.
Hanefah, H. M. M. and Singh, J. 2012. Convergence towards IFRS in Malaysia: issues, challenges and opportunities. International Journal of Business, Economics and Law 1, pp. 43-47.
Hassan, M. S., Percy, M.,and Stewart, J. 2006. The value relevance of fair value disclosures in Australian firms in the extractive industries. Asian Academy of Management Journal of Accounting and Finance 2 (1), pp. 41-61.
He, X., T. J. Wong, and Young, D. 2012. Challenges for Implementation of Fair Value Accounting in Emerging Markets: Evidence from China. Contemporary Accounting Research 29 (2), pp. 538-562.
Krimpmann, A. 2015. Principles of Group Accounting under IFRS. John Wiley & Sons.
MASB. 2017. [Online] Available at: https://www.masb.org.my/pages.php?id=19 [Accessed on: 20 September, 2017].
Mirza, A. and Ankarath, N. 2012. Wiley International Trends in Financial Reporting under IFRS: Including Comparisons with US GAAP, China GAAP, and India Accounting Standards. John Wiley & Sons.
MISC BERHAD. 2016. Annual Report 2016. [Online] Available at: https://www.misc.com.my/media/1554/misc-ar-31-12-2016.pdf [Accessed on: 20 September, 2017].
Pensonic Holding BERHAD. 2016. Annual Report 2016. [Online] Available at: https://www.pensonic.com/phocadownload/Annual-Report/PENSONIC%20Annual%20Report%202016-Part%202.pdf [Accessed on: 20 September, 2017].
Qu, W., et al. 2012. Does IFRS convergence improve quality of accounting information? - Evidence from the Chinese stock market. Corporate Ownership & Control 9 (4), pp. 187- 196.
Sidik, M. H. J., and Rahim, R. A. 2012. The Benefits and Challenges Of Financial Reporting Standards In Malaysia: Accounting Practitioners’ Perceptions. Australian Journal of Basic and Applied Sciences 6 (7), pp. 98-108.
Uchenna and Efobi. 2016. Economics and Political Implications of International Financial Reporting Standards. IGI Global.
Wesfarmers. 2016. Annual Report 2016. [Online] Available at: https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4[Accessed on: 20 September, 2017].
Woolworths Group. 2016. Annual Report 2016. [Online] Available at: https://wow2016ar.qreports.com.au/xresources/pdf/wow16ar-financial-report.pdf [Accessed on: 20 September, 2017].
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