By The Star
MUCH has been said about corporate misdeeds, which are now considered to be more worrisome than in the past. There have been concerns raised over corporate governance, questions as to the role of management, directors and shareholders in running listed companies, as well as the role of auditors and regulators.
Equally, there has been a growing list of companies missing debt repayment and companies falling into the financially-troubled category of Practice Note 17 (PN17).
Shouldn’t alarm bells sound for these corporate misdeeds or failure to repay debt before the companies fall into the PN17 category and face the risk of being delisted? Would adequate disclosures in the financial statements have provided those alarm bells?
On the Malaysian accounting scene, there has been a big wave of change, with the requirement for full convergence with the International Financial Reporting Standards (IFRS) by 2012.
While this means more difficult times for the preparers of financial statements in terms of compliance with new standards and disclosure requirements, one also wonders whether this additional information would in turn benefit the investors and shareholders.
Let’s look at the arrival of FRS 7: Financial Instruments: Disclosures that have been effective from Jan 1, 2010.
FRS 7 is based on IFRS 7, which replaces IAS 32 (the Malaysian equivalent of FRS 132) Financial Instruments: Disclosure and Presentation and IAS 30, Disclosures in Financial Statements of Banks and Similar Financial Institutions (not adopted by the MASB or Malaysian Accounting Standards Board).
It provides an overview of the entity’s use of financial instruments and the exposure to risks they create. While some of the disclosures previously required by FRS 132 have been eliminated, FRS 7 introduces a number of additional and far-reaching disclosure requirements.
FRS 7 requires qualitative and quantitative information about the exposure to risks arising from financial instruments, including specified minimum disclosures to describe management’s objectives, policies and processes for managing those risks.
The quantitative disclosures provide information about the extent to which an entity is exposed to risk, based on information provided internally to the entity’s key management personnel with the most significant additions discussed below:
i) Credit risk disclosures have been beefed up, with more detailed disclosure being required on the credit quality of financial assets that are not impaired as at the balance sheet date, and the carrying value of renegotiated assets that would have been past due or impaired as at the balance sheet;
ii) Inclusion of sensitive analysis of the financial risks inherent in financial instruments through disclosing, for each type of market risk, effect on profit or loss and equity of a change in the relevant risk variable (eg an increase/decrease in interest rates by certain basis points, or a change in foreign exchange rates by certain percentage).
An entity is required to disclose, not only the methods and assumptions used in preparing the sensitivity analysis but also any changes from the prior period and the reasons for the changes;
iii) Disclosure of the carrying amounts of financial assets and financial liabilities under each of the classifications of FRS 139, Financial Instruments: Recognition and Measurement, together with the net gains and losses of each of those categories; and
iv) Disclosure of the hedge ineffectiveness.
The diagram depicts the changes in the requirements of FRS 7:
Collating these data to comply with this standard will be challenging, as it is imperative that the accounting function becomes fully aware of all quantitative data being reported to key management personnel since such information will be reported externally.
It is imperative that both the accounting and treasury functions ensure that the nature and extent of the information that is reported internally forms an appropriate and meaningful basis on which the disclosures in the financial statements will be derived from. The quality and depth of such information will reflect the strength and operational effectiveness of this relationship.
One of the many issues to consider is to strike a balance of the disclosures – too much or too little. One needs to guard against disclosing insufficient information, as the shareholders, analysts or users of the financial statements may interpret this as a sign of poor financial management.
Similarly, one needs to ensure that internal risk and financial reporting provides an appropriate base, in terms of quantity, quality and depth of information, on which externally provided financial information can be generated.
In this regard, two questions arise. Will the internal reporting stand up to external scrutiny? How does the internal reporting benchmark against other similar entities?
Looking at the requirements under FRS 7, one would agree that such disclosure enables users to evaluate the significance of financial instruments on the financial position and performance of an entity and to provide stakeholders with greater transparency with regard to the manner in which financial risk is monitored, measured and managed.
To the preparers, the requirements under this standard would be more onerous and subject to scrutiny.
Written by Teresa Chong, an audit partner of KPMG in Malaysia.
* As i have mention on my previous post in June. Will FRS 7 stand up to be the transparency of accounting and gives investor a better and clearer picture of corporate's health check?
Source/ Rumour: A high ranking officer in one of malaysia local banking industry has de-value the bank's assets on the previous year, making it a nett lost. The next year, the officer re-value again the bank's assets and making a tremendous profit making player in the industry. Does FRS 7 will able to overcome this?
MUCH has been said about corporate misdeeds, which are now considered to be more worrisome than in the past. There have been concerns raised over corporate governance, questions as to the role of management, directors and shareholders in running listed companies, as well as the role of auditors and regulators.
Equally, there has been a growing list of companies missing debt repayment and companies falling into the financially-troubled category of Practice Note 17 (PN17).
Shouldn’t alarm bells sound for these corporate misdeeds or failure to repay debt before the companies fall into the PN17 category and face the risk of being delisted? Would adequate disclosures in the financial statements have provided those alarm bells?
On the Malaysian accounting scene, there has been a big wave of change, with the requirement for full convergence with the International Financial Reporting Standards (IFRS) by 2012.
While this means more difficult times for the preparers of financial statements in terms of compliance with new standards and disclosure requirements, one also wonders whether this additional information would in turn benefit the investors and shareholders.
Let’s look at the arrival of FRS 7: Financial Instruments: Disclosures that have been effective from Jan 1, 2010.
FRS 7 is based on IFRS 7, which replaces IAS 32 (the Malaysian equivalent of FRS 132) Financial Instruments: Disclosure and Presentation and IAS 30, Disclosures in Financial Statements of Banks and Similar Financial Institutions (not adopted by the MASB or Malaysian Accounting Standards Board).
It provides an overview of the entity’s use of financial instruments and the exposure to risks they create. While some of the disclosures previously required by FRS 132 have been eliminated, FRS 7 introduces a number of additional and far-reaching disclosure requirements.
FRS 7 requires qualitative and quantitative information about the exposure to risks arising from financial instruments, including specified minimum disclosures to describe management’s objectives, policies and processes for managing those risks.
The quantitative disclosures provide information about the extent to which an entity is exposed to risk, based on information provided internally to the entity’s key management personnel with the most significant additions discussed below:
i) Credit risk disclosures have been beefed up, with more detailed disclosure being required on the credit quality of financial assets that are not impaired as at the balance sheet date, and the carrying value of renegotiated assets that would have been past due or impaired as at the balance sheet;
ii) Inclusion of sensitive analysis of the financial risks inherent in financial instruments through disclosing, for each type of market risk, effect on profit or loss and equity of a change in the relevant risk variable (eg an increase/decrease in interest rates by certain basis points, or a change in foreign exchange rates by certain percentage).
An entity is required to disclose, not only the methods and assumptions used in preparing the sensitivity analysis but also any changes from the prior period and the reasons for the changes;
iii) Disclosure of the carrying amounts of financial assets and financial liabilities under each of the classifications of FRS 139, Financial Instruments: Recognition and Measurement, together with the net gains and losses of each of those categories; and
iv) Disclosure of the hedge ineffectiveness.
The diagram depicts the changes in the requirements of FRS 7:
Collating these data to comply with this standard will be challenging, as it is imperative that the accounting function becomes fully aware of all quantitative data being reported to key management personnel since such information will be reported externally.
It is imperative that both the accounting and treasury functions ensure that the nature and extent of the information that is reported internally forms an appropriate and meaningful basis on which the disclosures in the financial statements will be derived from. The quality and depth of such information will reflect the strength and operational effectiveness of this relationship.
One of the many issues to consider is to strike a balance of the disclosures – too much or too little. One needs to guard against disclosing insufficient information, as the shareholders, analysts or users of the financial statements may interpret this as a sign of poor financial management.
Similarly, one needs to ensure that internal risk and financial reporting provides an appropriate base, in terms of quantity, quality and depth of information, on which externally provided financial information can be generated.
In this regard, two questions arise. Will the internal reporting stand up to external scrutiny? How does the internal reporting benchmark against other similar entities?
Looking at the requirements under FRS 7, one would agree that such disclosure enables users to evaluate the significance of financial instruments on the financial position and performance of an entity and to provide stakeholders with greater transparency with regard to the manner in which financial risk is monitored, measured and managed.
To the preparers, the requirements under this standard would be more onerous and subject to scrutiny.
Written by Teresa Chong, an audit partner of KPMG in Malaysia.
* As i have mention on my previous post in June. Will FRS 7 stand up to be the transparency of accounting and gives investor a better and clearer picture of corporate's health check?
Source/ Rumour: A high ranking officer in one of malaysia local banking industry has de-value the bank's assets on the previous year, making it a nett lost. The next year, the officer re-value again the bank's assets and making a tremendous profit making player in the industry. Does FRS 7 will able to overcome this?
