The Malaysian Accounting Standards Board has announced that Transitioning Entities (TEs) shall be required to apply the Malaysian Financial
Reporting Standards (MFRS) Framework for annual periods beginning on or after 1 January 2017.
TEs comprise entities that are within the scope of MFRS 141 Agriculture and/or IC Interpretation 15 Agreements for the Construction of Real Estate, including the parent, significant investors and joint venturers.
Generally, TEs are entities involved in the real estate and agriculture industries that had been given the option to continue applying the Financial Reporting Standards (FRS) Framework.
The Board has also issued MFRS 15 Revenue from Contracts with Customers, and Agriculture: Bearer Plants (Amendments to MFRS 116 and MFRS 141).
MFRS 15 is effective for annual periods beginning on or after 1 January 2017 while the Bearer Plants amendment is effective for annual periods beginning on or after 1 January 2016.
They are word for word that of the International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB).
Transitioning Entities and the MFRS Framework
In 2012, non-private entities were required to adopt the MFRS Framework, an IFRS-compliant framework.
While a substantial number of entities of the capital market did so, the Board at that time concluded that it would be reasonable to allow TEs to defer the adoption of the MFRS Framework in view of the imminent changes to the agriculture and revenue standards by the IASB.
With the issuance of MFRS 15 and the Bearer Plant amendment, all TEs would be required to adopt the MFRS Framework latest by 1 January 2017 even though the effective date of the latter requirement is a year earlier.
The Board believes, after consulting with stakeholders, it would be pragmatic to prescribe a single date, i.e. 1 January 2017, as the mandatory date to changeover to the MFRS Framework for both industries.
This is to avoid confusing users with TEs financial statements prepared using different frameworks for the year 2016; in particular those entities involved in both property development and plantations.
A single date would mitigate potential complexity in preparing consolidated financial statements by TEs that are involved in both of these industries.
The Board likewise believes it would be rational to accord the agriculture industry the same preparation timeframe as the real estate industry given that the Board granted both industries the transitional arrangement at the same time.
MASB's chairman, Dato’ Mohammad Faiz Azmi explains, “A single date would avoid the need for diversified TEs of having to reconcile FRS and MFRS numbers when preparing consolidated financial statements which could be complex and costly.
“Nevertheless, the Board encourages TEs to consider early adoption of the MFRS Framework, especially TEs that are neither affected significantly by MFRS 15 nor the Bearer Plants amendments. Financial statements prepared using the MFRS Framework would be able to assert IFRS-compliance and
TEs would certainly receive the due recognition that they deserve.”
Better clarity on revenue recognition
The objective of MFRS 15 is to improve the financial reporting of revenue and comparability of the financial statements among companies globally.
The new standard is expected to provide better clarity on revenue recognition especially on areas where existing requirements unintentionally created diversity in practice. It also provides new guidance for transactions that were not previously addressed comprehensively.
The core principle of MFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
For the real estate industry, MFRS 15 is expected to enable property developers to recognise revenue progressively. For many straightforward retail transactions, the Board expects IFRS 15 to have little, if any, effect on the amount and timing of revenue recognition.
For other contracts, such as long-term service contracts and multiple-element arrangements (e.g. telecommunications and automobile sectors), MFRS 15 could result in some changes either to the amounts or timing of the revenue recognised.
MFRS 15 includes new disclosures (quantitative and/or qualitative information) to help investors better understand the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers.
The new comprehensive disclosures are in response to investors’ comments that companies present revenue in isolation which made it difficult for them to relate to the company’s financial position.
MFRS 15 is effective for annual periods beginning on or after 1 January 2017, with earlier application being permitted. An entity may choose to adopt MFRS 15 retrospectively or through a cumulative effect adjustment as of the start of the first period for which it first applies the Standard. The retrospective application would provide investors and analysts trend information about an entity’s revenue.
Bearer Plants amendments
With the Amendments, bearer plants would come under the scope of MFRS 116 and would be accounted for in the same way as property, plant and equipment.
A bearer plant is defined as a living plant that is used in the production or supply of agricultural produce, is expected to bear produce for more than one period and has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
The Amendments are principally based on the Board’s Issues Paper on IAS 41 Agriculture. The Issues Paper revealed that mature bearer biological assets such as oil palms are similar to that of manufacturing.
Consequently, a cost model under MFRS 116 should be permitted for such bearer biological assets, because it is permitted for property, plant and equipment.
In addition, MFRS 141 fair value model is based on the principle that biological transformation is best reflected by fair value measurement. However, once bearer plants mature, their biological transformation is no longer significant and they are held by an entity solely to grow produce.
Accordingly, bearer plants should be accounted for under MFRS 116 instead of MFRS 141.
Nevertheless, the produce growing on the bearer plant would remain within the scope of MFRS 141. This is because the growth of the produce directly increases the expected revenue from the sale of the produce.
Moreover, fair value measurement of the growing produce provides useful information to users of financial statements about future cash flows that an entity will actually realise as the produce will ultimately be detached from the bearer plants and sold separately.
The Amendments are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.