Choosing the right financial reporting framework
Lock Peng Kuan, a partner of Baker Tilly Malaysia 
MFRS would be preferable for software development companies with high development costs
THE introduction of the new Malaysian Private Entities Reporting Standard (MPERS) by the Malaysian Accounting Standards Board (MASB) in 2014 set a new milestone for financial reporting of private entities in Malaysia.

Effective for financial statements with annual periods beginning on or after Jan 1, 2016, the private entities will no longer adopt the Private Entities Reporting Standards (PERS).

The misconception is that by default the adoption of MPERS is the only choice for private entities. In fact, a private entity has the option to either adopt MPERS or the Malaysian Financial Reporting Standards (MFRS) in its entirety.

There are many aspects to be considered before making a choice whether to switch to MPERS or MFRS.

Amongst key factors to be considered when choosing the appropriate financial reporting framework:
• Size of a private entity and the needs of the financial statements users;
• MPERS provides greater flexibility in choosing the measurement model and is less rule-based in some areas.

For example, MPERS allows the application of “undue cost or effort” concept for certain assets where exemption on the assessment of fair value can be applied under certain circumstances.

Industry of a private entity

A relatively small private entity may find the simplified, relevant and less costly MPERS (yet still comparable with international standards), as an attractive alternative to the complicated and voluminous MFRS.

Whereas a sizeable private entity may require a comprehensive MFRS report for the use of their sophisticated stakeholders.

The choice therefore depends very much on the need and intention of the users of the financial statements.

Depending on the industry that the private entity operates in, adopting MFRS may be a better option. For instance:

A property developer may opt for MFRS because MPERS requires all borrowing costs to be expensed in the profit and loss. The capitalisation of borrowing costs, subject to fulfilment of certain criteria, is allowed under MFRS framework.

MFRS may be the preferred option for a private entity that has a huge amount of intangible assets or goodwill because MPERS requires all intangible assets whose useful life cannot be established reliably to be amortised over 10 years. MFRS have a different accounting treatment in this area where goodwill is not amortised but tested for impairment annually.

Business plan of a private entity

MFRS would be preferable for software development companies with high development costs as MPERS makes a non-rebuttable presumption that research and development costs cannot meet the probability recognition criterion and thus capitalisation of such costs is not allowed. However, MFRS allows capitalisation of development costs that meets the specific recognition criteria.

It is important for private entities to consider their long-term business plan when making decisions, especially if listing on the stock exchange is in the plan.

If an initial public offering (IPO) is on the cards, it is important to consider adopting MFRS now as the accountants’ report for IPO submission purposes are required to be prepared under the MFRS framework for all the track record years.

For practical reasons, companies operating within a group are likely to adopt accounting policies consistent throughout the entire group.

The adoption of the same financial reporting framework may improve efficiency in terms of timeliness of financial reporting as well as reduce financial reporting costs.

For instance, a holding company adopts MFRS and applies the cost model in accounting for its investment properties while its subsidiary, a private entity which adopts MPERS, would measure the investment properties at fair value.

In this circumstance, the subsidiary is required to reinstate the carrying value to cost to be in sync with the holding company’s accounting policy.

Hence, for group reporting purposes, the subsidiary may incur unnecessary costs in obtaining a valuation report to comply with the fair value measurement requirement in MPERS.

In addition, additional time has to be incurred for group reporting purpose to realign the group’s accounting policies.

Private entities will have to make a choice on which financial reporting framework is most beneficial for them. This depends on the industry they are in and the other factors as discussed above.

Datuk Lock Peng Kuan is a partner of Baker Tilly Malaysia

This article first appeared in Focus Malaysia Issue 241.