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Fair Value Accounting and IFRS 13

Discuss about the IFSR Adoption in Malaysia for Pacific Countries.

The International Financial Reporting Standards (IFRS) were developed by the International Accounting Standards Board (IASB) in 2001. The IFRS provides a global guideline that helps the entities in preparing and disclosing their financial reports and statements. This report addresses the adoption of IFRS and IFRS 13 in Malaysia in comparison with other Asian and Pacific countries.

The concept and the underlying assumptions of fair value accounting according to IFRS 13 Fair value measurement.

According to IFRS 13, the Fair value is defined as to the price to be received when an asset is sold or the price paid when a liability is transferred between two market players in an orderly manner at the measurement date.

There are several assumptions that have to be considered when measuring a fair value according to IFRS 13. One, location, conditions and sale's restriction attached to the asset or liability to be measured should be included. Two, the disclosure of the principal market where the orderly transaction for asset or liability would be executed (Albu, Albu, & Alexander, 2014). Three, disclose the best or highest application of an asset especially when the asset is used for the non-financial purpose either as a stand-alone or in combination with other assets. And four, a disclosure of the market participants that would be involved in the pricing of the asset or liability (Yang, Clark, Wu, & Farley, 2015).

Conversely, the IFRS 13 involves detailed disclosures which assist the financial statement users to assess the techniques used for valuation inputs and techniques applied in measuring fair values. The fair value measurement techniques are updated regularly in line with the changes in the market. The IFRS 13 standards involve three hierarchical levels in establishing a fair value of an asset or a liability (KPMG, 2011).

Literature Review on the application of IFRS in Malaysia, Azerbaijan, India, and Australia.

This section discusses the existing literature on the adoption, implementation, and application of IFRS in Malaysia, Azerbaijan, India, and Australia.

The adoption of IFSR is Malaysia was intended to standardize the country's accounting standard to the rest of the world. Previously studies showed that there existed varying findings in establishing the fair value of assets or liabilities. The standardization of the accounting processes included both the reporting and environmental accounting. Previous studies established that accounting reporting standards in Malaysia still varied during the early stages of IFRS adoption (ACCA, 2013). However, many of these studies were adopted in the early phases of IFRS implementation. This has been proved by the recent studies where the adoption of IFRS is in its late phase. A comparison between the past and recent studies have shown a huge variance on the application of IFRS guidelines (Goyal, 2013).

Literature Review on IFRS Adoption in Malaysia, Azerbaijan, India, and Australia

In Malaysia environment has a major effect on economic growth and development. In other words, environmental accounting is fundamental to the country's economic development. Hence IFRS was adopted in Malaysia to help in addressing and standardizing the accounting issues surrounding the environmental accounting (Gan, Chong, & Ahmad, 2016). However, several studies have shown that the adoption of IFRS to, directly and indirectly, address environmental accounting disclosures have not fully proven to be fruitful. This is contrary to the European countries where the adoption of IFRS has become mandatory in enhancing information quality on environmental accounting. With the increasing global adoption of IFRS developing countries like Malaysia could not be left behind (Ismail, Kamarudin, Zijl, & Dunstan, 2013).

The use of IFRS techniques in reporting environmental financial practice in Malaysia is increasing on a daily basis. Studies have shown the importance of standardizing environmental reporting. Irrespective of the improved adoption of IFRS in Malaysia, there is still the need of tying the loose ends. IFRS has been accepted as the technology that can help in setting environmental reporting framework and principles. According to a study by He, Wong, & Young, (2012), there was a need to adopt a proper framework of treating environmental accounting. The study further conducted a comparative analysis on companies in Australia and Malaysia and their adoption of IFRS principles. The findings stated that the Australian countries reported a high rate of applying IFRS in the disclosure of environmental accounting as compared to those in Malaysia. Therefore, credible environmental accounting principles and framework should be implemented to eliminate the factors that hinder standardized reporting of environmental accounting (Kris & Andrea, 2016).

Despite the adoption of IFRS framework and principles in handling environmental reporting and accounting standards in Malaysia, there is still a variance to the global standards. There is still a lot to be done to fully implement IFRS after its adoption.

Prior to the full adoption of the IFRS in India, the country faced a lot of confusion over its implementation. The treatment of tax issues was a major factor that needed a lot of clarity considering that India had its own accounting system in place i.e. Indian Accounting standards (Ind-As). India was pushed to adopt the IFRS as a way of catching up with the global accounting trends. The country showed the need of adoption the IFRS in order to reform the processes involved in conducting businesses. The move would also ensure that its companies would remain competitive in the global market by enhancing their credibility (Negash, 2009).

IFRS in Malaysia

Many corporates objected the adoption of the IFRS in India before some accounting issues had been addressed. The issues were based on the existing differences between the IFRS and the Ind-As.  First when addressing the presentation of Financial Statements, the IAS (IFRS) allows entities to follow either single or two statement approach while the Ind-AS only allow the use of single statement approach (Albu, Albu, & Alexander, 2014). Second, Ind-AS states that unrealized exchange difference arising from the foreign exchange when recognized as Equity should be transferred to the Profit & loss account at the end of maturity period of the monetary item. On the other hand, IAS 21 states that unrealized exchange difference coming from long-term assets and liabilities monetary items should be recognized immediately as Profit & loss item.

Third, according to the Ind-AS, expenses should be classified based on the nature of such expenses when being presented to the Financial Statements. On the other hand, IAS states that expenses can be classified based on either function or nature of such an expense whichever the option that offers more relevant and reliable information (Lehman, 2006).

These are just but a few issues that lead to the conflict between the two accounting systems. Such differences between the two systems led entities to incur extra cost when converting their financial reports from one method to the other. Therefore, several corporates accepted the need to harmonize the Ind-AS with the IFRS. The objective was to eliminate the existing differences when reporting similar transactions.

To eliminate the existing discrepancy, accounting bodies around the world decided to come up with a uniform standard of accounting. This was the genesis of the IFRS developed by the International Accounting Standards (IAS) and was expected to be adopted globally. The Indian accounting body had no option but to adopt the IFRS method to maintain the credibility and competitiveness of its companies in the global market (Albu, Albu, & Alexander, 2014).

IFRS was adopted in Australia in 2005 because the country wanted to be part of the global countries that were advocating for high quality and consistent financial reporting. Before 2004, the country was using the Australian accounting standards (ASB). With the expansion of globalization, entities were advancing into foreign markets and Australia could not be left behind. IFRS would ensure that its corporations would receive global recognition as well as access the foreign capital markets easily. The adoption of IFRS guidelines would ensure independence, best practices and increased disclosure of entities annual reports (Wayne, 2004).

IFRS in India

Likewise, being among the founding members of the IASB in 1973, Australia had a mandate of participating and contributing to the development of a universally acceptable accounting standards. It would not be convenient to continue with its Australian accounting standards and at the same time remain a member of the IAS. Therefore it was an opportune time for Australia to harmonize its accounting guidelines by adopting the IAS' IFRS. The adoption also ensured that the Australian investors had access to credible financial information. Lastly, the adoption would ensure that companies save the cost of reconciling its financial reports between different accounting methods now that most countries were steadily adopting the IFRS method (KPMG, 2011).

Some studies were conducted to examine whether the Australian decision to adopt the IFRS was the right one. The studies found out that the advantages associated with IFRS are the growth of the country's capital markets, higher trade volume, and increase in the cash inflows. Likewise, the adoption made it easier for the Australian companies to expand their business both within the region and globally (Chand, 2005). However, there exists some argument against the adoption of IFRS. For instance, it has been stated that by adopting IFRS, the AASB lack the independence of accessing and controlling companies' financial reports. Definitely, the advantages outweigh the disadvantages on the adoption of IFRS.

In conclusion, Australia still use its AAS because it has a wide coverage on some parts missing from the IFRS. Full adoption of the IFRS is a process that would take sometimes. It should be agreed that with successful development and expansion of the IFRS, the disadvantages would not exist in the future. Whether or not Australia has benefited by adopting the IFRS is depend on the full development of the method in the future (Wayne, 2004).

The existing literature has outlined several advantages of IFRS adoption to the Azerbaijan Republic and its organizations. The basis of adopting IFRS in the country was to promote accounting transparency, high quality, and disclosure of financial reports in line with the globally accepted standards.

Adoption of IFRS accounting method is associated with several advantages. First, it has led to a stable financial system and economic growth in Azerbaijan. Second, it has enhanced the attraction of international investors to the economy (ACCA, 2013). Third, the country has been integrated into the global market. Local companies can now compete with foreign companies in the competitive global market. Companies from the Azerbaijan Republic can compete fairly in the market. Lastly, the adoption has enhanced the development of the country's stock exchange market.

Differences between IFRS and Ind-As

Organizations also stand to benefit more from the adoption of the IFRS methods. First, it promotes transparency of financial report disclosure. It has been proven that using IFRS method to prepare financial statement offer accurate and comprehensive financial information. Second, other advantages include effective use of resources, comparability, understandability, easier decision-making, and creation of new funds. For example, recognition of revaluation decrease or increase and impairment losses leading to an increase or decrease of a company's equity (Madah Marzuki & Abdul Wahab, 2016). 

However, the accounting board of Azerbaijan Republic has pointed out several challenges that are a hindrance to the proper application of IFRS. It has been stated that regulations such as impairment test, and hedge accounting within the IFRS are complex in nature. Companies and accoutring personnel might lack the expertise of addressing these regulations (KPMG, 2011).

The disclosures on the use of fair value accounting in the 2016 annual reports of four companies (two Malaysian and two Australian companies).

This section compares the application of fair value disclosure by Petron Malaysia Refining & Marketing BHD and the Boustead Heavy Industries Corporation Berhad (both in Malaysia) and ASX Limited and Brambles Company (both in Australia). The comparison is based on the four companies 2016 audited annual reports.

An analysis of the four companies' 2016 annual reports, it has been revealed that all of them use the IFRS method in their financial preparation and reporting. Likewise, the entities also use IFRS 13 for the disclosure of their financial assets and liabilities. The companies applied the three hierarchical level of fair value disclosure namely;

  • Level 1 consist of fair value realized from unadjusted quoted price in the active markets
  • Level 2 consist of fair value realized from inputs instead of quoted prices carried from level 1.
  • Level 3 consist of fair value realized from the unobservable inputs for financial assets and liabilities.

For instance, the Petron Malaysia Refining & Marketing BHD made no transfers between level 1 and 2 fair values during 2016. The Company's level 2 fair value was as follows;

The fair value of assets and liabilities realized from forwarding exchange contract stood at $ 2,336,000 and -$77,000 respectively. Likewise, the fair value of assets and liabilities realized from Commodity swaps were $622,000 and -$21,625,000 respectively. Lastly, the fair value of the company's liabilities realized from foreign exchange contracts fair value level 2 changed from -$ 8,000 in March 2016 to -$461,000 December 2016. Likewise, level 2 fair value from commodity swap liabilities changed from -$14,236,000 in March 2017 to $-10,668,000 in December 2016.

The Boustead Heavy Industries Corporation Berhad uses the market prices to determine the fair value of its assets and liabilities. However the company does not carry its trades and other receivables, amount arising from joint ventures, loans and borrowings, and trade and other payables at the fair value but rather it uses their carrying amounts. Notably, the company's long-term financial instruments are listed under level because they are determined using the discounting rate of their future cash flows. The company's estimated financial liabilities fair value changed from RM 207,000 in 2015 to RM 888,000 in 2016.

According to the ASX Limited's 2016 annual report, no assets or liabilities were measured at a fair value on a non-recurring basis. The company's level 1, level 2 and level 3 fair value assets stood at $548.2m, 3583.1m, and 23.3m in 2016 and 402.2m, 2798.5m and 0m in 2015 respectively. The total fair values increased from 3200.7m in 2015 to 4154.6m in 2016.

Lastly, the Brambles Company used the binomial valuation methodology in determining it's the fair value of its grant shares. The comparative analysis shows that the four companies use fair value techniques for the disclosure of their financial assets and liabilities.

Discuss if your findings support (or reject) the view that the use of fair value accounting since IFRS harmonisation in Malaysia has improved the quality of information disclosure.

Definitely, the adoption of the IFRS fair value accounting has not only helped in the harmonization of the entities financial reports but also maintain the credibility of the Malaysian companies in reporting their financial statements. The adoption of the IFRS have helped the country's accounting system to

  1. Address and standardize the accounting issues surrounding the environmental accounting,
  2. Help in setting environmental reporting framework and principles,
  3. Maintain the credibility and competitiveness of Australian companies in the global market,
  4. Led to stable financial system and economic growth in Malaysia,
  5. Enhance the attraction of international investors to the economy.
  6. Integration of the local companies into the global market. Companies can now compete fairly with foreign companies in the competitive global market Republic can compete fairly in the market,
  7. Enhance the development and strengthening of the country's stock exchange market.
  8. And, the IFRS method supports the preparation of financial statement in a more accurate and comprehensive manner.

References

ACCA. (2013). Environmental Accounting and Reporting. Retrieved 09 22, 2017, from https://www.accaglobal.com/my/en/student/acca-qual-student-journey/qual-resource/accaqualification/p1/technical-articles/environmental-accounting-and-reporting.html

Albu, C., Albu, N., & Alexander, D. (2014). When global accounting standards meet the local context? Insights from an emerging economy. Critical Perspectives on Accounting, 489-510.

ASX Limited. (2016). Annual Report 2016. Retrieved from https://www.asx.com.au/about/interactive-annual-report-2016/files/assets/basic-html/page-1.html

Brambles Limited. (2016). Anuual Report 2016. Sydney: Brambles. Retrieved from https://www.brambles.com/annual-reports

Chand, P. (2005). Impetus to the success of harmonization: the case of South Pacific Island nations. Critical Perspectives on Accounting, 16(3), pp. 209-226.

Gan, C. Y., Chong, L. L., & Ahmad, Z. (2016). Impacts of FRS139 adoption on value relevance of financial reporting in Malaysia. Managerial Finance, 42(7), pp. 706-721.

Goyal, N. (2013). Integrating Corporate Environmental Reporting & IFRS/IAS: Need of the hour. International Journal of Management and Social, 50-55.

He, X., Wong, J., & Young, D. (2012). Challenges for Implementation of Fair Value Accounting in Emerging Markets: Evidence from China. Contemporary Accounting Research , 29 (2), pp. 538-562.

Ismail, W., Kamarudin, W., Zijl, T., & Dunstan, K. (2013). Earnings quality and the adoption of IFRS?based accounting standards: Evidence from an emerging market. Asian Review of Accounting, 21(1), pp. 53-73.

KPMG. (2011). Insights into Malaysia's convergence with IFRS. KPMG.

Kris, P., & Andrea, W. (2016). Across the board-IFRS: reporting revolution or expensive distraction. KPMG, 1-13.

Lehman, G. (2006). International Differences on Corporate Environmental Disclosure Practices: A Comparison Between Malaysia and Australia. Adelaide: University of South Australia.

Madah Marzuki, M., & Abdul Wahab, E. A. (2016). Institutional factors and conditional conservatism in Malaysia: Does international financial reporting standards convergence matter. Journal of Contemporary Accounting and Economics, 12(3), pp. 191-209.

Mokhtar, N., & Sulaiman, M. (2012). Environmental Reporting Practices of Malaysian Governement Linked Companies (GLCs). International Journal of Economics and Management, 241-277.

Negash, M. (2009). FRS and Environmental Accounting. In: Management Research Review. Denver: Emerald Group Publishing Limited, 577-601.

Petron Malaysia. (2017). Petron Malaysia Refining & Marketing Bhd: Annual 2016 report. Malaysia. Retrieved from https://www.petron.com.my/web/site/annual

the Boustead Heavy Industries Corporation Berhad. (2016). 2016 Annual Report. Boustead.

Wayne, L. (2004). The Emasculation of Accounting Standard Setting in Australia.

Yang, H. H., Clark, C., Wu, C., & Farley, A. (2015). Insights from Accounting Practitioners on China's Convergence with IFRS. Australian Accounting Review, doi:10.1111/auar.12182.

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