Tuesday, 20 October 2009

Is your firm ready for FRS 139?

WE are now 72 days away from the day when the Financial Reporting Standards No 139 (FRS 139), or IAS 39 as it is internationally known, would be effective in Malaysia.

Given that this standard has been around for close to 10 years, its adoption will bring Malaysia a step closer to full convergence with the International Financial Reporting Standards (IFRS), presently targeted by 2012.

Dubbed “the mother of all standards” by some commentators, IAS 39 deals with the recognition and measurement of financial instruments, the category of assets and liabilities which appear on the balance sheets of most companies irrespective of their sizes.

The fair value concept which requires these financial instruments to be marked to their market prices is the pillar of IAS 39 and has been the bone of contention by its opponents.

As the fair value concept replaces the historical cost convention, the adoption of IAS 39 is considered “the test” to ascertain whether or not a jurisdiction has adopted IFRS. This is critical as other IFRS are anchored around IAS 39.

The accounting standard for agriculture, IAS 41, is an example. Although the concept introduces more volatility of financial results, the proponents of fair value argue that it provides a better picture of the financial position of reporting entities and reflects the market valuation of assets and liabilities.

The recent global financial crisis has brought IAS 39 on the global spotlight, even being accused as the trigger for the financial market meltdown in the US and Europe.

Even the French president is familiar with IAS 39! Simplifying IAS 39 is now placed on one of the agendas of the Group of 20 nations (G20). In fact, in ensuring a level playing field between European and US companies, the G20 is pushing for the convergence of the financial instruments standards as applied in the US and the rest of the world.

So, instead of having IAS 39 shelved, its position is now enhanced through the support of G20, although work to improve the standard is required.

As it is, FRS 139 has been approved although the effective date in Malaysia is Jan 1, 2010. Nevertheless, companies are allowed to adopt the standard early and some had done so.

For example, AirAsia and Malaysia Airlines have adopted the standard to ensure their financial statements are on par with other global airlines. Such comparison is important particularly for companies who wish to attract global investors and those with stakeholders around the globe.

The effective date of FRS 139 is determined after due consideration of its impact and the state of readiness of Malaysian companies which will be required to apply the standards.

Financial services companies such as banks and insurance providers are the ones that will be impacted most as their assets and liabilities are largely in the form of financial instruments.

Beyond that, the implementation of FRS 139 requires systems and processes to be put in place to ensure the necessary information is available, particularly those relating to market values. This requires a lot of planning and substantial monetary investment as well.

Other companies without derivatives on their balance sheets cannot assume that they need not worry about FRS 139 either.

Those with foreign currency receivables and inter-company loans, for example, need to access how far the standards would affect them.

Responding to calls from G20, regulators and other stakeholders, the International Accounting Standards Board (IASB) announced the IAS 39 simplification project which is intended to be completed by the end of the year.

The first cut of this project has been exposed. Financial assets and liabilities are now measured either on amortised cost or fair value. Exposure draft on Impairment Methodology is expected to be issued in October and the one on Hedge Accounting should be available in December.

Given the above effort, some groups in Malaysia are asking whether FRS 139 will be deferred again. Why should we move on with the implementation next year when IAS 39 will be further amended?

Why not allow Malaysian companies to apply the simplified standard instead of the one adopted right now? So far, the Malaysian Accounting Standards Board (MASB) seems to be firm on the implementation deadline. Based on the discussions in public forum, the stand is supported by at least two arguments.

First, the effective date for the revised IAS 39 to be adopted globally will be around 2012, which is more than two years away. Second, some of the concepts, such as expected loss provisioning, are quite new and could be challenged further.

Bursa Malaysia recently advised companies to be prepared for the FRS 139 implementation. The exchange expects that any potential challenges arising from the implementation will be effectively addressed by the listed companies with adequate preparation and a better understanding of the issues.

With such expectations, directors of public-listed companies should by now be clear of the issues and challenges of implementing FRS 139 and their companies should already be in the implementation mode. Anything short of that should trigger the alarm bell. After all, 72 days are only slightly more than 10 weeks away!

This article was also published by the Edge Malaysia here:

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