International Financial Reporting Standards, known commonly by their acronym IFRS, are a product of the International Accounting Standard Board (IASB). They are meant to help harmonize basic guidelines on financial reporting throughout the world.
By adopting this common language, countries place themselves at a competitive advantage for investment by cutting down on due diligence and reducing compliance costs.
Although regional bodies such as the ASEAN Federation of Accountants (AFA) have made ground in standardizing accounting practices within the region, a fully harmonized system of accounting has yet to emerge.
With a diverse range of financial reporting standards, all at varying stages of cohesion with IFRS, it is recommended that those interested in establishing operations in ASEAN or expanding throughout the region fully comprehend the relevant compliance requirements.
In this article, we give an overview of IFRS adoption across ASEAN as the ten-member organization marches towards the formation of the ASEAN Economic Community on December 31, 2015.
Under the auspices of the Singapore Accounting Standards Council (ASC), Singapore Financial Reporting Standards (SFRS) guide reporting within the city state. These standards are closely modeled after IFRS, and in general only lag IFRS standards by three months.
However, there are a few key exceptions. For example, IFRIC 2 (Members’ Shares in Co-operative Entities and Similar Instruments) is yet to be adopted as SFRS.
Although understanding SFRS will be critical for many investors, it is important to note that accommodations made by regulators allow for IFRS to be substituted for SFRS in two cases:
- The company in question is also listed on another stock exchange outside of Singapore that requires IFRS financial statements.
- An exemption is granted by Authorities
Malaysian financial reporting standards are largely word-for-word in agreement with IFRS and IFRS for SMEs (Small and Medium Sized Enterprises).
Malaysian Financial Reporting Standards (MFRS). Regulation of financial reporting in Malaysia is carried out by the Malaysian Accounting Standards Board (MASB) and codified in Malaysian Financial Reporting Standards (MFRS) via the MFRS Framework.
As of 2012, Malaysian Financial Reporting Standards have been in agreement word-for-word with existing standards set by the International Accounting Standards Board.
As part of the MFRS Framework, the Malaysian Accounting Standards Board will continue to update MFRS to mirror relevant changes in International Financial Reporting Standards.
Recent MFRS alterations made by the Malaysian Accounting Standards Board pursuant to the MFRS Framework include:
- Adoption of MFRS 15 Revenue from Contracts with Customers, effective for annual periods beginning on or after 1 January 2017.
- Amendments to MFRS-116 and MFRS 141 – dealing with Agriculture and Bearer Plants in particular – which will be effective for annual periods beginning on or after 1 January 2016.
While IFRS have been transposed into Malaysian Standards and required since January 2012, authorities have made accommodations for certain “transitioning entities” – Agriculture (MFRS 141) and Construction of Real Estate (IC 15) – which have been, or are soon thought to be, affected by MFRS updates.
To allow transitioning entities time to effectively prepare and comply with newly established financial reporting standards, the MASB has set January 1, 2017 as the deadline for transitioning entity migration to MFRS.
With regard to all entities preparing financial statements in compliance with the MFRS, the MASB has also set in place a requirement that these statements include an “explicit and unreserved statement of compliance with IFRS.”
Malaysian Private Entities Reporting Standards (MPERS). In 2014, the Malaysian Accounting Standards Board issued accounting guidelines for Small and Medium Sized Enterprises through the establishment of Malaysian Private Entities Reporting Standards (MPERS).
While these standards are largely taken word-for-word from IFRS for SMEs, certain areas of divergence are observed:
- Section 1 (Small and Medium-sized Entities): Modified to prescribe the applicability of the MPERS in the Malaysian context. In this regard, all references to “SMEs” and “public accountability” in Sections 1-35 have been replaced by the term “private entities”
- Section 9 (Consolidated and Separate Financial Statements): Requires the ultimate Malaysian parent to prepare consolidated financial statements regardless of whether its ultimate parent that is not incorporated in Malaysia prepared consolidated financial statements
- Section 29 (Income Taxes): Revised to incorporate the principles in IAS 12 Income Taxes and the content therein is based on the income tax chapter in IASB ED/2013/9 IFRS for SMEs issued in October 2013
- Section 34 (Specialized Activities): Amended to provide guidance on the accounting for property development activities in Malaysia. Consequently, Example 12 on Agreements for the Construction of Real Estate contained in the Appendix to Section 23 Revenue has been removed.
Regulation of financial reporting in Indonesian is carried out by the Indonesian Financial Accounting Standards Board (Dewan Standar Akuntansi Keuangan – DSAK IAI) via a mandate from the Indonesian Institute of Accountants (IAI).
Pursuant to this mandate, the DSAK maintains Indonesian Financial Accounting Standards (Standar Akuntansi Keuangan – SAK),which remain the dominant form of financial reporting regulation within the archipelago.
Currently SAK is broken down in two tiers:
- Tier 1–SAK: applies to listed companies and other entities with significant public accountability.
- Tier 2–SAK ETAP: applies to entities with low public accountability.
Separate accounting standards set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) are also permitted for Sharia based companies.
SAK Convergence with IFRS. Following a public commitment to IFRS convergence in 2008, the Indonesian government has been in the process of harmonizing its standards with IFRS.
Current harmonization revolves around the chronological adoption of past IFRS with emphasis on closing the gap between Indonesia’s adoption status and the most up to date International standards.
As of 2015, Indonesia Financial Accounting Standards are equivalent to IFRS effective in 2014 and represent a one year delay with up to date IFRS.
Although this process of adoption has substantially reduced the gap between IFRS and SAK, a roadmap for full convergence has yet to be established and many areas of divergence remain.
In addition to substantive differences between SAK and IFRS, the issuance of Indonesian reporting standards in Bahasa Indonesian – without an official translation – creates serious concerns over the manner in which standards could be interpreted.
IFRS for SMEs. While IFRS for SMEs have yet to be implemented in Indonesia, and there are no plans to do so in the near future, it should be noted that Tier 2-SAK ETAP is largely based on the international standards for SMEs. In the event that convergence with IFRS for SME is attempted, it is highly likely that SAK ETAP would form the basis for this transition.
Established under the Accounting Professions Act of 2004, the Federation of Accounting Professionals of Thailand (FAP) is tasked with the regulation of financial reporting within the kingdom. Current standards are issued by the FAP’s Accounting Standards Committee (ASC) and codified in national GAAP – known commonly as Thai Financial Reporting Standards (TFRS).
IFRS and TFRS (Thai Financial Reporting Standards). TFRS have made great strides in harmonization with IFRS in recent years. As of January 1, 2014, the nation’s guidelines represent a near word-for-word compliance with IFRS (effective 2012).
Although the extent of Thai adoption is impressive, those considering investment should note the following standards that have yet to be adopted by the Accounting Standards Committee:
Industry specific standards – to be effective January 1, 2017
- IFRS 4 Insurance Contracts
- IAS 41 Agriculture
- Financial Instruments Standards – to be adopted in 2016 and effective from 2019
- IAS 32 Financial Instruments: Presentation,
- IAS 39 Financial Instruments: Recognition and Measurement,
- IFRS 7 Financial Instruments: Disclosures,
- IFRS 9 Financial Instruments
In addition to International Accounting standards currently pending adoption in Thailand, TFRS also contain many national elements that extend beyond the mandate set by the International Accounting Standards Board.
The following Thai Accounting Standards and Guidelines fall into this category and should be noted as they are not comparable to existing international standards:
- TAS 101 Doubtful Debt and Bad Debt
- TAS 103 Disclosures in the Financial Statements of Bank and Similar Financial Institutions
- TAS 104 Accounting for Troubled-Debt Restructurings
- TAS 105 Accounting for Investments in Debt and Equity Securities
- TAS 106 Accounting for Investment Companies
- TAS 107 Financial Instruments: Presentation and Disclosure
- Guideline on Accounting for Stock Dividend
- Guideline on Accounting for Business Combinations Under Common Control
- Guideline on Accounting for Treasury Stock
Future TFRS Convergence with International Standards. Concerning continuing convergence with IFRS, the Federation of Accounting Professionals of Thailand’s articulated harmonization policy commits to the adoption of international regulations no later than one year from their effective date.
This is largely a result of the significant time constraints that translation of IFRS into Thai has placed on the FAP. It should also be noted that Thailand has been actively cooperating with the IASB on this issue and looks ready to establish a translation license agreement in the near future.
Such an agreement could significantly reduce adoption times and possibly eliminate Thailand’s current one-year delay.
Pursuant to the aforementioned IFRS harmonization policy, the adoption of the following International Financial Reporting Standards (effective 2015) should be expected in TFRS from January 1, 2016:
- IFRS 10 Consolidated Financial Statements
- IFRS 11 Joint Arrangements
- IFRS 12 Disclosure of Interests in Other Entities
- IAS 27 Separate Financial Statements
- IAS 28 Investments in Associates and Joint Ventures
- IFRS 13 Fair Value Measurement
IFRS SME. SMEs in Thailand are required to prepare their financial information in accordance with one of the following sets of standards:
- Thai Accounting Standards (TAS)
- Thai Accounting Standard for Non-Publicly Accountable Entities (NPAEs)
Although existing regulations for SMEs are not harmonized with international standards, Thailand has committed to adopting IFRS for SMEs via upcoming legislation entitled: “Thai Financial Reporting Standard for SMEs”. As of 2015, the projected effective date for these regulations is slated for 2017.
While Thailand has committed to adopting IFRS for SMEs in full and without modifications, current discussions indicate the level of compliance with these standards would be contingent upon firm classification within a two-tiered system.
The exact criteria for this classification as well as exemptions from reporting that would be permitted are still under discussion and have yet to be announced.
Following the passage of the Philippine Accountancy Act of 2004, regulation of financial reporting has been tasked to the Board of Accountancy (BOA) and carried out by the Philippine Financial Reporting Standards Council (FRSC), which is an organ of the BOA. The standards are codified in Philippine Financial Reporting Standards (PFRS).
Jointly responsible for upholding the regulations of its predecessor (the Accounting Standards Council) and updating national GAAP, the FRSC is the most important actor to watch with regard to regulation of financial reporting within the Philippines.
While the FRSC acts as the guiding body for the creation and maintenance of PFRS, it is also important to note that the Philippine Securities and Exchange Commission (SEC) implements a separate accountancy framework – applied to listed and limited liability companies. This does allow for some degree independence from the FRSC and should therefore be considered when conducting due diligence.
Although opportunities for divergence between the SEC and FRSC do exist, SEC Rule 68 – 1(B) compels the Commission to mirror the FRSC whenever possible. Under this rule, the SEC is obligated to implement FRSC or IASB standards.
It is only permitted to deviate from this mandate in the event of a conflict between the aforementioned bodies. As a result, PFRS and the SEC’s framework for accounting are nearly identical.
Convergence with IFRS. Culminating a process of convergence initiated in 1996 under the ASC, financial reporting standards in the Philippines have achieved full compliance with current effective IFRS.
Despite such a high degree of harmonization, limited changes to IFRS have been made in the past by Philippine authorities. The vast majority of these alterations are in regard to changes to IAS effective dates and were implemented to optimize domestic industries’ transition to IFRS.
As of 2015, companies seeking to comply with PFRS should not be affected by any such alterations.
Alternatively, those seeking to comply with the SEC’s accountancy framework should note limited changes to effective dates and guidance resulting from the commissions limited independence from the FRSC.
As of 2015, the SEC has indefinitely deferred the mandatory effective date for IFRIC 15 – Agreements for the Construction of Real Estate (introduced by the IASB in 2014), pending an evaluation by the FRSC.
In addition to deferring effective dates, the SEC has also provided some implementation guidance that is not entirely consistent with that issued by the IASB.
Companies involved in the following industries should note that reporting guidance in the Philippines may differ from that of international standards:
- Insurance (pre-need)
- Recipients of government grants
Continuing Convergence. As the IASB updates its standards to meet the world’s evolving needs, subsequent alterations and additions will be systematically introduced to the Philippines under the following set of steps:
- FRSC creates plan to adopt new standards as PFRS, with minor amendments to effective date or transition provisions when necessary.
- FRSC submits plan for adoption to the Board of Accountancy (BOA) for approval.
- Upon approval, BOA publishes PFRS updates – or resolution to approve adoption of new international standards – in the official gazette
- The SEC adopts PFRS updates as part of its rules and regulations on financial reporting.
IFRS for SMEs. As of 2015, the Philippines has adopted the IFRS for SMEs without modifications. These standards are codified in Philippines Financial Reporting Standard for SMEs (PFRS for SMEs), which became optional in 2009 and mandatory as of January 1, 2010.
The state of IFRS harmonization in ASEAN’s frontier economies ranges widely. Some nations such as Laos have yet to establish a clear means of implementing International standards, while others have achieved full compliance with IFRS as well as IFRS for SMEs.
With the exception of Brunei, frontier economies in ASEAN are largely still undeveloped, both in terms of their regulatory infrastructure and firm complexity. This can present a number of challenges to potential investors.
With regard to financial regulation, the following issues should be noted when considering investment.
Translation of IFRS. As nearly all of ASEAN’s national business languages are not formally used by the IASB, which utilizes English, a substantial burden is placed on national authorities.
The time, resources, and expertise required to effectively translate IFRS into local dialects has led to delayed effective dates in ASEAN members such as Thailand, and presents an even larger burden for cash strapped frontier economies.
As of 2015, Cambodia is the only frontier economy with a framework in place to create comparable translations between its National Accounting Council’s (NAC) regulations and IFRS.
Without official translations, foreign investors are exposed to substantial regulatory uncertainty and or increased compliance costs. In conjunction with other environmental factors, and without effective legal guidance, this uncertainty can present a significant challenge to investment.
SME Support. In addition to translation, the underdeveloped nature of businesses within frontier economies, coupled with lagging adoption of IFRS for SMEs, greatly increases the burden placed on small and medium sized enterprises.
As a result, SMEs throughout frontier economies have been slow to implement standardized accounting practices and thus present challenges for companies seeking to find investment opportunities.
While SMEs comprise the majority of firms found within frontier economies, the conditions within individual markets are widely divergent.
Cambodia in particular, is among the best positioned to increase the use of standardized accounting within its borders. In recent years, full adoption of IFRS for SMEs has been achieved – allowing greater accommodations for small and medium sized enterprises.
Coupled with the introduction of SME accommodations on Cambodia’s securities exchange, there is every indication that an investment facilitating uptake in standardized accounting may be around the corner.
About the Author
Dezan Shira & Associates, a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in ASEAN Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com.