Comparison of PERSs, MPERS and MFRSs in Malaysia
In February 2014, the MASB issued Malaysian Private Entities Reporting Standard (MPERS) and this sets a new milestone for financial reporting of private entities in Malaysia. MPERS is based substantially on the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) issued by the IASB in July 2009. The new reporting framework, known as the MPERS Framework, is effective for financial statements beginning on or after 1 January 2016, with early application permitted.
Private entities now have a choice of continuing with the existing Private Entity Reporting Standards (PERS) Framework, or apply the Malaysian Financial Reporting Standards (MFRS) Framework (mandatory for non-private entities, except transitioning entities), or by 1 January 2016, mandatory migration to the new MPERS Framework. As the requirement for first-time adoption of MPERS is retrospective, it is important the private entities prepare in advance if they have to migrate to the MPERS Framework or the MFRS Framework in the near future. A common question that private entities would ask is how far-off or how different is the current PERS Framework when compared with the newer MPERS Framework or the MFRS Framework.
Who should choose MPERS?
– Small SMEs emphasising on cost saving (less compliance cost involved compared to MFRS).
– Small SMEs that do not plan to go for IPO in the foreseeable future.
Who should choose MFRS?
– Company with holding company that needs to prepare a group consolidated accounts with with Full FRS standard (easier for consolidation and no major adjustment is required).
– Company planning for IPO.
The following table provides the key comparison of PERSs, MPERS and MFRSs for consideration by SMEs and also list down the transition requirements for SMEs when applying for the new standards to prepare their financial statements beginning on or after 1 January 2016. Early application for the transition is permitted.
1. Presentation, Policies, Estimates and Errors
|Presentation of Financial Statements|
|MASB 1 & MASB 3
1. Components of financial Statements
(i) Two statements each for balance sheet, income statement, changes in equity, cash flows and notes [MASB 1.8
(ii) No requirement for the 3rd balance sheet
1. Components of financial statements:
(i) Two statements each for financial position, comprehensive income, changes in equity, cash flows and notes.
(ii) No requirement for the 3rd statement of financial position.
1. Components of financial statements:
(i) Two statements each for financial position, profit or loss and other comprehensive income, changes in equity, cash flows and notes.
(ii) 3rd statement of financial position as at the beginning of the comparative period when this is a retrospective application, retrospective restatement or reclassification of line items, if material.
2. Business Combinations and Consolidation-Related Standards
|No equivalent PERS Standard on business combinations. Practices are based on GAAPs and the provisions of the Companies Act 1965 on merger relief.
Acquisition method for most business combinations, but requires merger method when the specified conditions are met. In a merger, an acquirer is not identified.
Allocate cost of combination to net assets acquired (but not contingent liabilities).
Expenses of combination are capitalised
Goodwill is the difference in the purchase price allocation. No goodwill is attributed to NCI. Goodwill is calculated on a piecemeal basis (step-by-step) in a step-acquisition. No remeasurement of previously held stake at the date control is obtained.
No requirement on amortisation of goodwill. May be held at cost, but must be tested for impairment.
Measurement period adjustment may extend more than one year if there are contingent considerations and profit guarantee agreements.
Scope covers all business combinations, except for combinations under common control, formation of a joint venture and acquisition of a group of assets that is not a business.
Application of the purchase method (also known as acquisition method). An acquirer must be identified. Acquirer allocates cost of combination to share of net assets acquired, including contingent liabilities [S19.6 & S19.7].
Cost of combination is generally measured at fair value of consideration transferred and liabilities assumed. Expenses incurred in connection with the combination are capitalised [S19.11].
Goodwill is initially measured at the difference between cost of combination and share of net assets acquired [S19.22]. No goodwill is attributed to NCI. Goodwill is subsequently measured at cost less accumulated amortisation and impairment. If unable to make reliable estimate of the useful life, the life is determined based
on man agement’s b est esti ma te but shall not exceed 10 years [S19.23].
No guidance provided for a step- acquisition and for increase in stake after the acquisition date. Measurement period adjustment is one year.
Same scope as in MPERS
Application of acquisition method. An acquirer must be identified. Requires reverse acquisition accounting if the former owners of a subsidiary gain control of the parent.
Acquirer allocates an aggregate of consideration transferred, fair value of previously held state and NCI to total net assets acquired, including contingent liabilities.
Expenses of business combination are generally expensed to profit or loss, except for transaction costs of issuing financial instruments. Goodwill calculation requires remeasurement of any previously held stake to fair value and NCI may be measured at acquisition-date fair value.
Goodwill is only calculated once
i.e. at the date control is obtained, and it may include
NCI’s p ortion.
Goodwill is not subjected to amortisation but it must be tested for impairment annually. Measurement period adjustment ends when the information is received, with a maximum period of one year.
Generally, all investments in associates must be accounted for under the equity method in the CFS of the investor.
For the measurement, a policy choice is given to account for all investments in associates using either: (i) the cost model, (ii) the equity method, or (iii) the fair value model [S14.4].
For the measurement, investments in associates must be accounted for under the equity method in the consolidated financial statements (or in the financial statements if the investor does not produce consolidated financial statements).
Uses the concept of “reportin g
currency” for the translation of foreign currency transactions and operations.
The requirements are similar to MFRS 121. Applies the concept of functional currency to measure results and financial position. The functional currency of a Malaysian entity is not necessarily the local currency as it depends on the primary economic environment in which the entity operates.
The presentation currency can be in any currency or currencies, which may not necessarily be the same as the functional currency.
The same requirements as described for MPERS, except for the treatment on disposal of a foreign operation.
3. Financial Instruments
|A||Recognition, Derecognition, Measurement & Hedge Accounting|
Classifies investments as current based on th e criteria of “ read i ly
realisab l e” and “ in ten tion” to hold for not more than one year [IAS 25.1]. By default, all other investments are classified as long-term investments.
Deals with basic financial instruments and is applicable to all private entities.
An accounting policy choice is provided for private entities to apply the requirements of Sections 11 & 12 in full, or the recognition and measurement requirements of MFRS 139 [S11.2].
Four categories of financial assets: (a) financial assets at fair value though profit or loss, (b) held-to-maturity investments,
(c) loans and receivables, and (d) available-for-sale assets. Classification depends on the type of instruments, the intention (such as held for trading or held to maturity) and by designation.
|B||Classification of Financial Liabilities and Equity|
|There is no equivalent PERS on the classification of financial liabilities and equity.
GAAPs used in practice must comply with local laws and regulations.
Uses the legal form as a basis for classifying capital and debt instruments.
Preference shares, regardless of types, are share capital.
The principles for classification of an instrument as liability or equity are similar to those in MFRS 132. Substance over form consideration is applied in the classification.
The Standard provides guidance and examples of some instruments, though meeting the definition of a liability are presented as equity because they represent residual interest in the net assets of the entity [S22.4]. It also provides some examples of instruments that are classified as liabilities although in form, they may be equity. These include puttable instruments and redeemable preference shares [S22.5].
The Standard provides guidance on the original issue of shares or other equity instruments and these include differences in date of issue and timing of payments [S22.7].
As described in MPERS.
Same requirements in MPERS.
|C||Disclosures about financial instruments|
|There is no equivalent PERS on disclosures about financial instruments.||Sections 11 & 12
Disclose the measurement basis (or bases) and other policies used for financial instruments [S11.40].
Disclose in total the carrying amount of each category of financial assets and financial liabilities [S11.41].
Disclose other information that enables users to evaluate the significance of financial instruments [S11.42].
If fair value is applied, disclose basis for determining fair value. When a valuation technique is used, disclose assumptions applied [S11.43].
No requirement to disclose fair value into measurement levels and transfers between levels. Disclose fact if reliable measure of fair value is no longer available [S11.44].
If hedge accounting is applied, disclose the details on hedge accounting [S12.27 – 12.29]. No disclosure requirement about an entity’s financial risk
management objectives, policies and strategies.
No disclosure requirement on the sensitivity of market risk variables.
Similar to MPERS.
Disclosure of fair value information is much more comprehensive in the MFRS, including sensitivity test, information of significant variables used in the fair value measurement, the levels in the hierarchy of fair value measurement, and transfers between levels.
MFRS has more detailed disclosure requirements on hedged accounting.
Must disclose the risk management objectives, policies and strategies.
Must disclose sensitivity analysis of market risks (currency risk, interest rate risk and price risk)
4. Standards on Assets
Requirements are generally similar to MPERS and MFRS. Measures inventories at the lower of cost and net realisable value [MASB 2.11]
For other inventories, the benchmark treatment is FIFO or weighted average [MASB 2.24]. The allowed alternative is the LIFO formula [MASB 2.26] Exempt entities are given the option of not complying with certain disclosure requirements [MASB 2.5].
Requirements are the same as MFRS 102.
Measures inventories at the lower of cost and estimated selling price less costs to complete and sell [S13.4]. Cost formulas:
Techniques using standard cost method or retail price method allowed if result approximates cost [S13.6].
All private entities must comply with the disclosure requirements.
As described in MPERS
|B||Property, plant & equipment (PPE)|
Applies two recognition principles, one on initial recognition and the other on subsequent expenditure (enhancement principle) to account for PPE [MASB 16.18 & 16.27].
Initial measurement is at cost [MASB 16.18].
Subsequent expenditure that enhances the performance of the asset is added to the carrying amount [MASB 16.27]. Replacements that are not enhancement are expensed.
The benchmark treatment in the subsequent measurement is at cost less depreciation and impairment [MASB 16.33].
The allowed alternative treatment is at revalued amount less depreciation and impairment [MASB 16.34].
Applies a “components” approach to separately recognise and account for each significant part of an item of PPE [S17.6].
Initial measurement is at cost [S17.9]
Enhancement principle of a subsequent expenditure is not relevant. Each significant replacement is a new or new component of an item of PPE.
Subsequent measurement is at cost or revalued amount less accumulated depreciation and accumulated impairment losses [S17.15].
Option for revaluation model is introduced in the amended MPERS.
Applies a “component s” approach to separately recognise and account for each significant part of an item of PPE
Initial measurement is at cost
Enhancement principle of a subsequent expenditure is not relevant. Each significant replacement is a new or new component of an item of PPE
Subsequent measurement – A policy choice, by class, to measure PPE at: (i) the depreciated cost model; or (ii) the depreciated revaluation model.
Deals only with research and development costs. The requirements are the same as MFRS in that only development costs that meet the recognition criteria are capitalised [MASB 4.17].
No equivalent PERS on other intangible assets.
The recognition criteria include a probability recognition criterion [S18.4]. The Standard makes an assumption that for all research and development expenditure [S18.14] and all internally generated intellectual property [S18.15], the probability recognition is not met. The expenditures incurred should be recognised as an expense.
Development expenditure of R&D activities that meets the recognition criteria must be capitalised. All research and other development expenditure are recognised as an expense. Internally generated intellectual property shall not be recognised as an asset.
|D||Investment Property (IP)|
A land or building that is not substantially owner-occupied. No threshold or bright lines provided on what is substantial. A free choice is given to account for IP as PPE or as a long-term investment.
If accounted for as a PPE, the measurement is the depreciated cost model or depreciated revalued amount [IAS 25.24].
If accounted for as a long-term investment, the measurement is either cost or revalued amount with changes in value recognised in revaluation reserve (note: the this no OCI for PERS yet) [IAS 25.25]. There is no depreciation if accounted as a long-term investment but impairment test is required.
Subsequent measurement An IP whose fair value can be measured reliably without undue cost or effort shall be
measured at fair value through profit or loss (includes interest in a leased property).
All other IP shall be accounted for as PPE using the depreciated cost model [S16.7] Measurement is not subjected to a consistent policy choice.
Transfers: If initially on a fair value model and reliable measure of fair value is subsequently no longer available without undue cost or effort, account for the IP as PPE until a reliable measure of fair value becomes available. The carrying amount of the IP on that date becomes the surrogate cost. This is a change of circumstances, not a change in accounting policy [S16.8].
Land or building, or both, or part of land or buildings.
Includes interest in an underlying operating leased asset.
Subsequent measurement: An accounting policy choice to measure IP at the fair value model or at the cost model.
Requirements include transfers from IP to inventories or to PPE and vice versa based on change in use.
Clarifies that if an entity had used the fair value model it is highly unlikely that a change to the cost model would result in a better presentation.
|E||Impairment of Assets (Other than Financial Assets)|
Impairment test required only if there is any indication of impairment [MASB 23.9].
Test of impairment is required at each reporting date only if there is any indication of impairment [S27.7].
If an entity carries goodwill or an intangible asset with indefinite useful life, impairment test must be performed annually or more frequently when impairment is evident, regardless of whether there is any indication of impairment. If without goodwill or intangible asset with indefinite life, test for impairment only if there is any indication of impairment.
5. All Other Standards in MPERS
Benchmark treatment – all borrowing costs should be recognised as an expense when incurred [MASB 27.6]
Allowed alternative treatment – borrowing costs directly related to a qualifying asset shall be capitalised [MFRS 27.10].
Recognise all borrowing costs as an expense in profit or loss in the period they are incurred [S25.2]
The option of capitalising borrowing costs on qualifying assets is not allowed.
Borrowing costs that are directly related to a qualifying asset shall be capitalised as part of the cost of that asset [MFRS 123.8].
|B||Related Party Disclosures|
|PERS does not have an equivalent standard on related party disclosures.
Practices on related party disclosures are based on the requirements of the Companies Act 1965, which requires disclosure of transactions with related corporations (parent, subsidiaries and fellow subsidiaries) and disclosure of directors’ remunerations and benefits in kind.
Disclose directors’ fees, emoluments and benefits- in- kind, and fees paid to a professional firm in which a director has an interest.
The requirements in this section are similar in all material respects to those in MFRS 124. As described in MFRS.
Uses the criteria of control, joint control and significant influence to identify a related party relationship [MFRS 124.9].
The scope of relationships is specified and it includes individual persons and close family members [MFRS 124.9]. Amendment now includes an entity that provides key management personnel services. Control relationships of parent and subsidiaries shall be disclosed regardless of whether there are related party transactions [MFRS 124.13].
Key management personnel compensation shall be disclosed in total and by categories [MFRS 124.17].
Other related party relationships are disclosed only if there are transactions between the reporting entity and its related parties.
Specifies the disclosure requirements on the amounts and types of transactions, balances outstanding including terms, etc. [MFRS 124.18].
Disclosure is made in nine categories of relationships [MFRS 124.19].
Transactions of a similar nature may be disclosed in aggregates [MFRS 124.24].
|Transition to the New Framework|
|There is no equivalent MASB Standard on transition.||Section 35
The requirements for first-time adoption of MPERS are essentially the same as those for first-time adoption of MFRSs.
The steps include:
(i) Identifying the date of transition to MPERS [S35.6].
(ii) Preparing the opening statement of financial position as of the date of transition to:
(a) recognise assets and liabilities that are required by the MPERS, (b) derecognise items that are not assets or liabilities in accordance with MPERS, (c) reclassify line items to be in accordance with MPERS, and (d) apply the measurement requirements for assets and liabilities in accordance with MPERS [S35.7].
(iii) Providing the disclosures to explain the effects of the transition to the MPERS [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 [S35.12] The overall principle is that changes in accounting policies on recognition and measurement resulting from the adoption of MPERS are to be applied retrospectively [S35.8]. The Standard provides for non- mandatory exemptions of the retrospective application in some specified areas [S35.10].
It further prescribes mandatory exceptions to the retrospective application in some other specified areas [S35.9].
The third statement of financial position as at the date of transition may be presented on a voluntary basis.
As described in MPERS. However, MFRS 1 requires an entity’s first MFRS financial statements must have three statements of financial position, including one as at the date of transition to MFRSs.
For detail comparison, please see A Comparative Analysis of PERS, MPERS and MFRS Frameworks
For MFRS, click here to download the full standard.
For MPERS, click here to download the full standard.