MALAYSIAN PRIVATE ENTITIES REPORTING STANDARD (MPERS)

BT NEWS BRIEF AUGUST 2016 MALAYSIAN PRIVATE ENTITIES REPORTING STANDARD (MPERS) THE NEW FINANCIAL REPORTING FRAMEWORK FOR PRIVATE ENTITIES HIGHLIGHTS WHAT SHOULD WE KNOW? 1 January 2016 marked an important date for all private entities in Malaysia. This was the date when the application of the Malaysian Private Entities Reporting Standard ( MPERS ), became mandatory for private entities in Malaysia. New areas covered in MPERS: MPERS is a new financial reporting framework based on the International Financial Reporting Standards for Small and Medium Enterprises ( IFRS for SMEs ) issued by the International Accounting Standards Board ( IASB ) in 2009. MPERS replaces the existing Private Entity Reporting Standards ( PERS ) and has been described as a simplified version of Malaysian Financial Reporting Standards ( MFRSs ) framework. It is a self-contained Standard that comes in 35 sections covering all the relevant areas for financial reporting by private entities. MPERS was first released by MASB on 14 February 2014, with a further 63 amendments issued in October 2015 in line with the Amendments to the IFRS for SMEs. The 2015 amendments are effective for annual periods beginning on or after 1 January 2017, with early application is permitted. In this BT News Brief, we provide an overview of key differences between MPERS and PERS as well as the key steps for first-time adoption of MPERS. Financial instruments Intangible assets other than research and development costs Business combination and goodwill Share-based payments Related party disclosures Extractive activities Service concession arrangements Areas that have significant differences between MPERS and PERS: Presentation of financial statements Accounting policies, estimates and errors Consolidated financial statements Separate financial statements Inventories Income taxes Property, plant and equipment Investment properties Foreign currency translation Intangible assets other than goodwill (research and development cost) Employee benefits Borrowing costs Transition to the MPERS

WHY MPERS? The existing PERS was developed based on accounting standards issued by the IASB prior to 2006 and also contains local accounting standards developed by the MASB. The recent dynamic developments in the International Accounting Standards and business environment have led to a demand for an up-to-date accounting standard that is compatible with international norms for private entities in Malaysia. Given that the MPERS is an international standard, the adoption of MPERS by Malaysian private entities will certainly contribute to enhancing the comparability, quality and transparency of their financial reporting globally, encouraging cross-border activities and opening up an exciting new opportunities for private entities in Malaysia. IS MPERS THE ONLY OPTION FOR PRIVATE ENTITIES? Although MPERS replaces the PERS, private entities are given the option to apply in its entirety, either MPERS or MFRS, for annual periods beginning on or after 1 January 2016 (early application is permitted). Refer diagram below. Private Entity PERS Framework Mandatory Transition on 1 Jan 2016 Option MPERS Framework MFRS Framework Additionally, private entities that are currently applying the Financial Reporting Standards ( FRSs ) framework instead of PERS in their financial reporting, have been given the option to transition to either MFRS or MPERS for annual periods beginning on or after 1 January 2018. Early application is permitted. With the options above, it is therefore important now for private entities to evaluate and decide on the most appropriate framework in their financial reporting. WHAT ARE THE KEY DIFFERENCES BETWEEN MPERS AND PERS? As the PERS framework has not been revised since its issuance, there are undoubtedly many significant differences between the requirements of MPERS and PERS. For example, the following areas covered in MPERS but not in PERS: (i) Financial instruments (ii) Intangible assets other than research and development costs (iii) Business combination and goodwill (iv) Share-based payments (v) Related party disclosures (vi) Extractive activities (vii) Service concession arrangements

Table below provides an overview of some other key differences: TABLE 1 KEY DIFFERENCES BETWEEN THE REQUIREMENTS IN THE PERS AND MPERS (*Note) AREAS PERS MPERS PRESENTATION OF FINANCIAL Presentation of Other Comprehensive Income ( OCI ) components and subsequent reclassification adjustments are not relevant. No requirement to disclose judgements and estimation uncertainties. Allows extraordinary items. A new requirement to segregate items of OCI into those that may or may be not reclassified to profit or loss. (Additional requirement in 2015 Amendments) Disclosure of judgements applied in the selection of accounting policies and estimation uncertainties. No extraordinary items. ACCOUNTING POLICIES, ESTIMATES AND ERRORS In the absence of specific transitional provisions in new or amended standards and for all other changes in accounting policies, PERS has an alternative benchmark treatment which allows the resulting adjustment to be included in current period s profit or loss if the amount of adjustment to prior periods is not reasonably determinable. If this amount is still not reasonably determinable, apply the new policy prospectively. In the absence of specific transitional provisions in the new or amended standards and for all other changes in accounting policy, MPERS requires only retrospective application with impracticability exemption provided. CONSOLIDATED FINANCIAL Accounting for investment in associates and jointly controlled entities: Equity method. Accounting for investment in associates and jointly controlled entities: i) Cost model; ii) Equity method; or iii) Fair value model SEPARATE FINANCIAL INVENTORIES Accounting for investment in subsidiary, associates and jointly controlled entities: ii) Revaluation model. Allows LIFO as one of the cost formulas to measure the cost of inventories. Accounting for investment in subsidiary, associates and jointly controlled entities: i) Cost model; ii) Fair value through profit or loss; or iii) Equity method (Additional option in 2015 Amendments) LIFO is not permitted by MPERS. INCOME TAXES PROPERTY, PLANT AND EQUIPMENT ( PPE ) INVESTMENT PROPERTIES ( IP ) No explicit requirement on investment property measured at revalued amount, which means that the normal expected manner of recovery by use is applied. Requires numerical reconciliation of the differences between the tax expense and the applicable statutory tax. A policy choice in measurement: ii) Revaluation model Applies two recognition principles: i) Initial recognition; and ii) Subsequent expenditure that enhances the performance of the asset is added to the carrying amount (enhancement principles). A free choice is given to account for: i) As PPE The measurement is the depreciated cost model or depreciated revaluation model. ii) As a long-term investment The measurement is either at cost or revalued amount with change in value recognised in revaluation reserve. There is no depreciation but impairment test is required. For investment property measured at fair value, there is a rebuttable presumption that the carrying amount of the investment property will be recovered through sale. Requires an explanation of any significant differences between the tax expense and accounting profit multiplied by the applicable tax rate. However, the form is not prescribed. A policy choice in measurement: ii) Revaluation model (Additional option in 2015 Amendments) Applies components approach to separately recognise and account for each significant part of an item of PPE. Enhancement principle of a subsequent expenditure is not relevant. Each significant replacement is a new or new component of an item of PPE. Not a policy choice: i) Fair value model An IP whose fair value can be measured reliably without undue cost or effort shall be measured at fair value through profit or loss. ii) As PPE All other IP shall be accounted for as PPE using the depreciated cost model. FOREIGN CURRENCY TRANSLATION Concept of currencies: i) Reporting currency; and ii) Foreign currency PERS allows an entity to use the contracted or forward rate for unsettled monetary items. Concept of currencies: i) Functional currency; ii) Presentation currency; and iii) Foreign currency No option of using contracted or forward rate for unsettled monetary items.

AREAS PERS MPERS INTANGIBLE ASSETS OTHER THAN GOODWILL PERS deals only with research and development costs. Only development costs that meet the recognition criteria are capitalised. The amount of development costs recognised as an asset should be amortised and recognised as an expense on a systematic basis so as to reflect the pattern in which the related economic benefits are recognised. All research and development expenditure and all internally generated intellectual property incurred should not be capitalised due to the assumption that the probability recognition criteria is not met. If useful life of an intangible asset cannot established reliability, the life shall be determined based on management s best estimate but shall not exceed 10 years. EMPLOYEE BENEFITS Uses the projected unit credit method to measure obligations and costs. Generally requires engagement of independent actuary to perform the comprehensive actuarial valuation. Recognises a portion of the net cumulative actuarial gains and losses that exceed the greater of a 10% corridor rule as income or expense in profit or loss. Uses the projected unit credit method to measure obligations and costs with simplification due to undue cost or effort. Does not require an entity to engage an independent actuary to perform the comprehensive actuarial valuation. A policy choice to recognise all actuarial gain/loss in either: i) Profit or loss; or ii) OCI BORROWING COSTS Benchmark treatment of borrowing cost is expensed but capitalisation is allowed. Borrowing costs must be expensed as incurred. Note: This article is for those who wish to gain a broad understanding of the significant differences between MPERS and PERS. It is not comprehensive. It focuses on a selection of those differences most commonly found in practice. When applying the individual accounting frameworks, companies should refer to all accounting standards in its entirety. BY FOR ADOPTION OF MPERS First-time adoption of MPERS 1 2 3 Identify the date of transition to MPERS Prepare the opening statement of financial position as at date of transition Provide disclosures to explain the effects of the transition to MPERS on its reported financial position, financial performance and cash flows Step 1: Identify the date of transition to MPERS Date of transition is the beginning of the earliest period for which full comparative information is provided in the first MPERS financial statements. Assuming a private entity s first MPERS financial statements are for its financial year ending 31 December 2016, the date of transition is on 1 January 2015 as shown in the following illustration. Comparative information presented for at least one year Financial year for which first MPERS financial statements are presented 1 JAN 2015 31 DEC 2015 31 DEC 2016 (Date of transition to MPERS) * Opening MPERS Statement of Financial Position (Reporting Date)

Step 2: Prepare the opening statement of financial position ( SOFP ) as at the date of transition In the opening SOFP, the entity shall: a) recognise assets and liabilities as required by the MPERS; b) derecognise items that are not permitted under MPERS; c) reclassify line items to be in accordance with MPERS; and d) measure all recognised assets and liabilities in accordance with MPERS. The general requirement is that all applicable MPERS standards must be applied retrospectively at the date of transition. If it is impracticable for an entity to make the above adjustments at the date of transition, the entity shall apply such adjustments in the earliest period for which it is practicable to do so, and shall identify which amounts in the financial statements have not been restated. Optional Exemptions To facilitate the transitioning to MPERS, Section 35.10 allows a first-time adopter to apply any of the exemptions from full retrospective application of MPERS. Mandatory Exceptions There are 6 mandatory exceptions in MPERS which prohibit retrospective application of MPERS in the following transactions: a) De-recognition of financial assets and liabilities; b) Hedge accounting; c) Accounting estimates; d) Discontinued operations; e) Measurement of non-controlling interest; f) Government loans at below market interest rates (2015 Amendments). Step 3: Provide disclosures to explain the effects of the transition to MPERS on its reported financial position, financial performance and cash flows An entity is required to explain the effects of transition in the form of reconciliations showing the effects on equity at the date of transition and the end of the previous comparative period, and on profit or loss of the comparative period. If it is impracticable for an entity to provide any of the disclosures required by MPERS including those for comparative periods, the omission shall be disclosed. However, the third statement of financial position as at the date of transition may be presented on a voluntary basis. CONCLUSION Companies should start their planning early to ensure successful transition to the new financial reporting framework without undue stress and costs. As of now, if you have not decided on the most appropriate financial reporting framework for your entity for annual periods beginning on or after 1 January 2016, it is imperative that you now conduct the gap assessment between PERS, MPERS and MFRS to assess the impact of the transition on your financial statements (including the opening balances), information system and operations, and to engage with your professional advisers for a transition and implementation strategy. An independent member of Baker Tilly International www.bakertillymh.com.my