Malaysia Issues New Standard Which Requires Lessees to Recognize all Leases on Balance Sheet

The Malaysian Accounting Standards Board (Board) has issued MFRS 16 Leases to replace the existing Standard on Leases, MFRS 117. MFRS 16 is word-for-word IFRS 16 Leases as issued by the International Accounting Standards Board, and has the same effective date of 1 January 2019. Earlier application is permitted provided MFRS 15 Revenue from Contracts with Customers is also applied.

Currently under MFRS 117, leases are classified either as finance leases or operating leases. A lessee recognises on its balance sheet assets and liabilities arising from the former but not the latter. As a result, many users have resorted to adjust the lessees’ financial statements for the effects of operating leases commitments to enable comparison with entities that borrow to buy assets.

MFRS 16 eliminates the distinction between finance and operating leases for lessees. All leases will be brought onto its balance sheet as recording certain leases as off-balance sheet leases will no longer be allowed except for some limited practical exemptions. In other words, for a lessee that has material operating leases, the assets and liabilities reported on its balance sheet are expected to increase substantially.

Addresses widespread criticism

MASB Chairman Encik Mohamed Raslan said, “This is necessary to address the widespread criticisms that MFRS 117 did not always provide useful information to users when lessees have substantial operating leases commitments, such as airlines that lease aircrafts and retailers that lease retail stores. I believe MFRS 16 will meet users’ needs as it provides greater transparency of a lessee’s financial leverage and capital employed.”

He adds, “While the effects on the balance sheet are expected to be significant for companies with material off balance sheet leases, the effects on the profit or loss depend on a number of factors. I encourage companies to quickly assess the extent of the Standard’s impacts so that the wider business implications, if any, can be addressed promptly.”

Regarding the cost of implementing the new requirements by lessees, Encik Raslan clarifies, “The extent of the implementation costs depends on the size of a company’s lease portfolio. In addition MFRS 16 does not apply to short-term leases of 12 months or less and leases of low-value assets, for example, leases of office furniture and personal computers. A company using these exemptions treats such leases as off balance sheet leases. Moreover, MFRS 16 provides substantive transition relief, one of which is that a lessee is not required to reassess existing lease contracts.”

MASB Executive Director, Tan Bee Leng said, “The new Leases Standard is only issued under the MFRS Framework. It is not issued under the transitional Financial Reporting Standards (FRS) Framework that some Transitioning Entities are currently applying. This is because some of MFRS 16 requirements refer to the requirements of MFRS 15 which was not issued under the FRS Framework.”

Transitioning Entities are entities within the scope of MFRS 141 Agriculture and / or IC Interpretation 15 Agreements for the Construction of Real Estate, including their parents, significant investors and joint ventures. Transitioning Entities have been given the option to continue applying the FRS Framework, the predecessor of the MFRS Framework, until the end of 2017 in view of the changes brought about by MFRS 15 and the Bearer Plant Amendments to MFRS 141. Transitioning Entities are required to adopt the MFRS Framework for annual periods beginning on or after 1 January 2018, being the effective date of MFRS 15.


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