Cut off for IFRS implementation draws nearer

CORPORATE Malaysia has to start planning for the fast approaching deadline of 2012 for International Financial Reporting Standards (IFRS) convergence.

From January 2011, Malaysian companies are expected to be preparing their first set of IFRS-based comparative financial statements while March 2010 is the target date for first interim financial statements based on FRS 139 financial instruments standard.

Working backwards, companies are effectively 18 months away from applying the full blown set of IFRS similar to the ones used by major corporations in the world.

Interestingly too, corporate Malaysia will start to produce the first set of financial statements in full compliance with FRS 139 in less than six months!

These dates are getting uncomfortably close for those who have not invested towards convergence. Despite the relatively long lead-time provided by the Malaysian accounting standard setting body, MASB, there seems to be little appreciation of the complexity of work required to get the set of standards implemented properly.

Many companies could have sensed the urgency of the mandatory implementation and reporting requirements by the Securities Commission and Bank Negara but may be struggling to find a reference point to start from.

A potential hurdle in meeting the 2010 and 2012 deadline is the availability of finance staff skilful enough to handle the complex requirements of the set of standards by both dates.

Many companies are faced with a staff skill set which necessitates further skill building exercises over an extended period to equip them with the level of breadth and depth required by the new global accounting regime.

The rate the international standards setting body, International Accounting Standards Board (IASB), had been issuing the new standards in recent years clearly indicates that the body of knowledge in accounting has been changing, and strongly points towards a new breed of accountants and financial experts.

This new skill set is crucial for adequate handling of the complex standards related to FRS 139 and the whole set of IFRS. The amount of knowledge necessary to handle such work should not be underestimated.

Companies that have taken a longer term view by investing early in capacity building have been ahead in their state of readiness. Some companies are known to have engaged consultants to train their accounting, finance and treasury staff early – almost immediately after MASB issued the exposure drafts of some of the complex standards.

Obviously, they have seen this initiative as an investment and this has enabled them to stand ready to meet the financial reporting requirements as they become effective.

Malaysian companies also face several hurdles to full convergence, one of which is the cost of convergence. This is where there has been a lot of pushback from many companies.

In the United States, the Securities and Exchange Commission has estimated that IFRS conversion could cost companies about 0.13% of revenue. A giant like Wal-Mart could face convergence costs of up to US$400mil. No Malaysian data is publicly available but if the average cost of US conversion figure is to be used, a conversion cost in Malaysia could range from a few million ringgit for the top market capitalised company to close to a million ringgit for a Mesdaq company.

There are three areas where these costs may reside. First, systems changes to capture data. Second, the reporting system would require changes because of significant changes in the quality of data and depth of disclosure, and third, a large amount of investment may be required in skill building exercises to handle IFRS.

Skill building is a necessary investment companies have to overcome. Recent years have seen a major shift in the body of knowledge in accounting from that based on historical cost to that on fair value. This new concept is a big thing in the market; however, it has also resulted in much uneasiness amongst many corporate leaders as the concept is new and challenging (and oftentimes unknown) in terms of its application.

Up until today, there has been a large amount of debate in the industry on how fair value should be measured and on how reliable those measured values are.

While evaluating the cost impact and determining how to overcome the hurdles to convergence, it is important not to underestimate the time frame to prepare for convergence. FRS 139 alone requires a long preparation lead time as it transcends wide areas, from debt covenants, compensation plans and contracts, to investor communications.

There is a genuine need to look at implementation of FRS 139 and the full set of IFRS from a holistic point of view. This presents not only an accounting issue, but a strategic one for companies today.

Some have the view that small listed companies would take a minimum 12 months to fully prepare for FRS 139 whilst large firm would require at least 18 months. Whatever the time it takes to comply, the board of directors should take action now while there is still time and opportunity to work within the available period left.

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