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How A Developing Economy Embraces IFRS: Malaysia 25 March 2006 1 How A Developing Economy Embraces IFRS: Malaysia 25 March 2006 1

How A Developing Economy Embraces IFRS: Malaysia n Embrace: “Integral part of …” n How A Developing Economy Embraces IFRS: Malaysia n Embrace: “Integral part of …” n n Malaysia’s experience vs Asia’s experience n n Historical, structural, political (will) Looking back 1972 - 2001 n n IFRS an integral part of the capital market & corporate governance structure Strategy & Challenges Looking forward 2006 - beyond n Strategy & Challenges 2

Integral part of the capital market & corporate governance structure n Malaysia has a Integral part of the capital market & corporate governance structure n Malaysia has a history of a formal integration of accounting standards into the economic fabric since 1972 n Integration into law of the country in 1997, earlier than many others n Integration into governance structure in 2000 within Code of Corporate Governance n Integration into capital market in 2001 within: n n Capital Market Masterplan, and Financial Market Masterplan 3

Integration Strategy Degree of integration Capital Financial Corp Gov Code Fin Rpt Act Adoption Integration Strategy Degree of integration Capital Financial Corp Gov Code Fin Rpt Act Adoption 1978 1972 1997 2000 2001 Economic Legal Governance Capital 7 & 8 Malaysia Plan (1996 -2005) 2006 Master. Plans 9 Malaysia Plan 4

Relatively long history of adoption 1972 Presentation of Accounts 1973 IASC Formed 1978 – Relatively long history of adoption 1972 Presentation of Accounts 1973 IASC Formed 1978 – 1997 Adoption of IAS 5

om Econ ic 1978 - 1997 n 1978 Adoption of first 4 IAS by om Econ ic 1978 - 1997 n 1978 Adoption of first 4 IAS by MACPA n 1986 Next 13 IAS adopted n 1992 All IAS adopted by MACPA and MIA n 1997 Accounting standards setting function taken over by Malaysian Accounting Standards Board under Act of Parliament 6

l ega L Financial Reporting Act 1997 n Financial Reporting Act passed by Parliament l ega L Financial Reporting Act 1997 n Financial Reporting Act passed by Parliament in March 1997 (prior to Asian financial crisis) n Formation of Financial Reporting Foundation and Malaysian Accounting Standards Board n New to Malaysia and the region n n Dedicated independent body First time accounting standards has the force of law Non-compliance means breach of law Stringent enforcement infrastructure by Securities Commission, Central Bank and Registrar of Companies 7

Compliance is Mandatory l Mandatory for: l l Publicly Listed Companies under Exchange– 1, Compliance is Mandatory l Mandatory for: l l Publicly Listed Companies under Exchange– 1, 000 Companies registered with the Registrar – 701, 000 !! Financial Institutions under Central Bank – 23 Dedicated Enforcement Infrastructure: l l l Publicly Listed Companies – Securities Commission Registered companies – Companies Commission Financial Institutions – Central Bank 8

Malaysian Accounting Standards Board n Mandate: n n n Develop Islamic accounting standards n Malaysian Accounting Standards Board n Mandate: n n n Develop Islamic accounting standards n n Develop financial reporting standards Extensive consultative process Philosophy: independence Funded by: n Securities Commission (1/3) n Securities Exchange (1/3) n Ministry of Finance (1/3) n Public, accounting firms, NGOs (Nil) Indep e nden ce 9

Consultative Process & Autonomy IAS Discussion Paper prepared IFRS 1 MASB Review of DP Consultative Process & Autonomy IAS Discussion Paper prepared IFRS 1 MASB Review of DP 2 3 Working Group Finalise DP into ED Review of DP 4 MASB Public Exposure 5 FRF Public MASB 6 FRS issued Final review Approval 10 9 Review of comments 8 7 9 -15 months Public MASB * FRF * No need for Parliamentary approval MASB Working Group 10

1997 – 2001: Harmonization • MASB Standards vs International Accounting Standards Harmonization • MASB 1997 – 2001: Harmonization • MASB Standards vs International Accounting Standards Harmonization • MASB Standards are IAS Plus • Similar to IAS, plus • Guidance added, plus • Other requirements added 11

al an & ce rn ve C it ap Integration with Master Plans Go al an & ce rn ve C it ap Integration with Master Plans Go n Malaysia’s 5 -year Master Plans n Code of Corporate Governance issued in 2000 n Capital Market Masterplan n Financial Sector Masterplan n “Recommendations for achieving highest standard for financial reporting for corporate governance among capital and financial market players in Malaysia” Issued in 2001 12

2005: Convergence Harmonization Convergence 13 2005: Convergence Harmonization Convergence 13

Strategy n Malaysia n n n n Support convergence. IFRS Convergence not an issue. Strategy n Malaysia n n n n Support convergence. IFRS Convergence not an issue. Question of managing implementation Participate early in standards setting development Objective: Ownership. Strictly adhere to due process, buy-in Discretion on implementation date for each standard Alliance with recognized bodies, lead if necessary Asia n Developing economies seem to have no choice but to converge n participate in free trade/globalization n funding for industrialization n No choice but to participate regionally, greater representation n No choice but to have regular discourse to identify commonalities, or diversities 14

Challenges n Malaysia n n n Changing mindset – old habits die hard, price Challenges n Malaysia n n n Changing mindset – old habits die hard, price for having long history Interpretations Managing change Cost of complex standards vs benefits to owner manager companies Region n n Lack of regional participation Lack of voice, representation n Where problems are common, countries must be forthcoming Where problems are not common, endeavour to find a consensus IASB n n n Developed economies focus Board representation Changing goalpost 15

Addressing Challenges – Changing mindset n Convergence impact: n n n Tough for many Addressing Challenges – Changing mindset n Convergence impact: n n n Tough for many countries Suddenly have to migrate to new environment Accounting standards are now law of these countries n n n Australia (2002) Spore (2003) Phil (2004) Europe (2005) Language matters Malaysia – not as bad …relatively n n n Have been on IAS all along We made standards a law in 1997 Standards in English, no need for translation 16

Addressing Challenges - Interpretations Degree of Buy-in Discourse with Affected Parties 17 Addressing Challenges - Interpretations Degree of Buy-in Discourse with Affected Parties 17

Addressing Challenges – Sharing with others n n n Australia Hong Kong Hong. Kong Addressing Challenges – Sharing with others n n n Australia Hong Kong Hong. Kong NZealand Singapore Malaysia - eliminate choices redefine subsidiaries State controlled entities, leases agriculture, leases leasehold land implementation dates 18

Addressing Challenges – Costs vs Benefits n In Malaysia, 95% of 701, 000 companies Addressing Challenges – Costs vs Benefits n In Malaysia, 95% of 701, 000 companies are SMEs. Initial intent to cover ALL companies was noble. n But as Standards become more complex n Burden of compliance by SMEs becomes main issue n MASB announced 2 – tier reporting standard 1. 1. 2006 n PLCs, subsidiaries, assoc. , JV must comply IFRS n Other private entities: A choice of IFRS or MASB Standards (which are IAS compliant) 19

Moving Forward n Convergence is the way forward n Understanding the needs of developing Moving Forward n Convergence is the way forward n Understanding the needs of developing economies important for significant buy-ins in the region n Challenges: Regional diversity remains a challenge n Help is needed: n n Goalposts keeps changing n n IFRS likely to remain complex Implementation on the ground Malaysia stands ready to offer: n Significant learning curve n Active in Islamic accounting standards n Common understanding about SMEs n Models to follow 20

Conclusion n Success of convergence contingent upon how developing economies “embrace” IFRS n Malaysia Conclusion n Success of convergence contingent upon how developing economies “embrace” IFRS n Malaysia fortunate to have: n n a history infrastructure political will to drive international convergence n Others may not be as fortunate, but Asia can learn from each other n Asian diversity is a beauty n Malaysia stands ready 21