IFRS Convergence - implications on the industry and the academics
By Ng Kean Kok and Tuam Kwok Choon (Universiti Tunku Abdul Rahman

INTRODUCTION
On 1 August 2008, the Financial Reporting Foundation (FRF) and Malaysian Accounting Standards Board (MASB) announced their plans to bring Malaysia to full convergence with International Financial Reporting Standards (IFRS) by 1 January 2012.

Among the many justifications put forth then (and which are still equally applicable today) is that there would be one common accounting and reporting language adopted. Full compliance with IFRS would thereafter facilitate comparability of financial statements prepared by firms and increase transparency.

MASB had opted for a phased changeover to IFRS, together with a proposed calendar of adoption of IFRS. As a start, Malaysia began with the application of FRS 139 Financial Instruments: Recognition and Measurement with effect from 1 January 2010 with the remaining standards progressively adopted over the next two years, 2010 – 2011. The phased changeover is argued to allow firms sufficient time to prepare themselves for the changeover.


BENEFITS OF ACCOUNTING CONVERGENCE
The convergence with IFRS is expected to bring forth the following benefits:

a. Reduce reporting costs for cross-border reporting. This is because IFRS is widely accepted globally by more than 100 countries (that have officially adopted or are planning to adopt IFRS as their reporting regime. There is hence, no further need to prepare reconciliations of financial statements between one country’s Generally Accepted Accounting Principles (GAAP) against another. In particular, consolidation of financial statements of subsidiaries in different countries is made a lot easier.

b. Increased creditability of local markets in the eyes of the foreign investors. This increased creditability is ensured that the consistent and comparable reporting made by firms across different countries. Investors are then better able to identify investment opportunities as they are then able to explain and justify why investing in Firm A is better than in Firm B, as decisions made by stakeholders will be made based on the same numbers.

c. Develop capital markets. Arising from b. above, firms are expected to find it easier to undertake cross-border listing and raise capital in different capital markets. This fact is supported and promoted by the Securities Commission and Bursa Malaysia, as they seek to increase the size and robustness of the Malaysian capital market. Being able to attract multinationals to set up businesses in Malaysia and hopefully, seek listing in Malaysia continues to be of importance to Malaysia.

d. Increase mobility of accountants. It is very much hoped that accountants in Malaysia become able to work anywhere in the world since there shall be use of converged accounting standards. Firms, especially multinational firms, can then better respond and manage the human capital needs of the subsidiaries around the world.

e. Quality reporting. It increases reporting consistency and pave the way for high quality reporting that is principles-based, internally consistent and internationally converged.



PROPOSED CALENDAR OF ADOPTION OF IFRS
MASB has prepared a proposed calendar of adoption of IFRS to provide an adoption timeline of IFRSs issued by the International Accounting Standards Board (IASB). The timeline is based on due process and is subject to change. The timeline concerned may be found in the Appendix.


CHALLENGES FACING FIRMS
a. Need for clear understanding of IFRS
Many of the challenges due to the implementation of IFRS are seen as implementation in nature.

For example, in the case of the proposed revised standard on financial instruments, IFRS 9, classification of financial assets shall be based on the business model and characteristics of contractual cash flows. Management judgement would hence be required to establish and determine whether the financial assets held by the firm meet the criteria of the business model as prescribed in IFRS 9.

Since judgement shall play a key role when IFRS is fully implemented, there is hence a need for a clear understanding and appreciation of the requirements of IFRS, to ensure a smooth transition towards full IFRS adoption.

b. Do stakeholders understand the impending changes?
The application of accounting standards that use fair value basis can result in the reported profits of firms to be volatile from period to period. This poses a challenge to the management of listed firms in particular, as there is a need for clarity in reporting to stakeholders as they require an understanding of the volatility of results. Firms must improve on their communication skills and be fully prepared to have proper communication lines with stakeholders, especially shareholders.

Many firms question whether investors in themselves understand the implications of IFRS to the financial statements. Will investors be able to correctly interpret the results and performance of firms under the new accounting framework? Firms feel that they should not be penalised for reporting volatile results just because investors do not understand the implications of IFRS.

The question that should be asked: how then shall investors become more appreciative of the reported changes in financial results? The answer therefore lies in better communication and dialogue with the investors.

c. Impact on other regulatory requirements
Concern will need to be addressed in terms of impact of other regulatory requirements. For example, how would the existing tax laws treat fair value changes – taxable? Deductible? What would be the resulting impact arising from fair value changes on the amount of realised and unrealised profits and hence, the consequential impact on the amounts of distributable profits for dividend payment purpose. Would this be in line with the expectations and requirements of the Securities Commission and Bursa Malaysia?

d. Key functions in the firm
Top management must ask questions of the key functions in their firms, such as accounting and finance, IT, human resource etc:
• Are the employees adequately trained and knowledgeable of the requirements of IFRS?
• Are the reporting systems ready for implementation of IFRS?
• Is there a need for major or minor reconfiguration of systems? Are information systems aligned with the requirements of IFRS?
• Does it necessitate an extensive capital expenditure to be incurred by firms?
• What is the current state of stakeholder communications?
• Are stakeholder communications adequate? What improvements are required (this should address the concern raised in part b. above)
• How can the Human Resource (HR) department assist in the recruitment of the necessary expertise to implement IFRS?
• What would be the impact on a firm’s performance based compensation scheme? This may be a concern as reported results of firms are expected to be volatile from time to time

Have these and many more questions been asked? Given that most parties are indeed aware of the 2012 deadline for IFRS adoption and accounting convergence, it is expected that these questions have indeed been asked. Nonetheless, such questions should still be revisited to identify whether these concerns have been adequately addressed, at what stage of resolution the firms are at now and what further action needs to be taken.

e. Ensuring proper and appropriate disclosures
Concern and complaints are still aplenty as to the quality of financial reporting by listed firms around the world. Firms are still said to fail to deliver good, proper and appropriate disclosures despite complying with the requirement of accounting standards. Financial statements nowadays run into pages of disclosures that investors claim not to understand.

IFRS aims to improve on the quality of the measurement and recognition of financial items, and also on the disclosures and transparency of financial statements. Firms must hence ensure that corporate reporting should aim for greater focus and preferably, shorter length relative to the current scenario. Investors seek better information on remuneration and risk management strategies of firms, reporting on mergers and acquisitions, total costs of M&As and hence, return on investments, better information that links strategies of firms to the actual performance. Better reporting of future risks are expected of firms, in particular as firms are required to quantify their exposure by assessing the impact on the financial statements of key variables that affect the risks identified. Such disclosures are expected to assist portfolio managers to make better investment decisions and increase fund managers’ appreciation of risks and leverage in firms.


STEPS FOR SUCCESSFUL TRANSITION TO IFRS
a. Need for top management commitment
The conversion effort can only be successful if there is adequate understanding and support from top management. Commitment from the highest level of authority in a firm can then ensure that the firm is moving in the firm direction, with lead to a more concerted effort to arrive at a realistic project management plan of implementation and monitoring mechanisms, thus, ensuring that the firm will then be able to properly make the transition on a relatively smooth basis. Otherwise, firms that fail to have a smooth transition will have to explain to investors and regulators for the delays and thereafter, incur unnecessary costs.

b. Situation analysis
Most listed firms in Malaysia have already undertaken this step. Nonetheless, it is still not too late to consider this if there still exist firms that have not done so, that is there is a need for firms to undertake an initial assessment of the differences between the accounting standards that are applied in Malaysia and the IFRS.

Fortunately, most of the accounting standards applied in Malaysia are based on accounting standards issued by IASB, tailored for the Malaysian environment, where necessary. Hence, in the main, the difference would mainly lie in the standards that are already issued internationally but not yet adopted in Malaysia and the areas where modifications have been made in the past to adopted standards.

The situation analysis process therefore allows for firms to identify the extent to which changes would be required in terms with regards to the firms’ accounting policies, information systems (hardware and software), human resource policies and practices and so on.

c. Possess the necessary talent and put in a strong project management team
As mentioned earlier under the section of ‘challenges’, firms must resolve the problem of adequacy of employees being knowledgeable in the requirements of IFRS either through training of their existing accounting employees or through the recruitment of the appropriate talent from the job market place. At the end of the day, firms must ensure that they have the necessary skilled finance staff that are able to handle the changing and complex requirements of IFRS in an adequate and timely manner.

Skill building exercise must be planned for over an extended period of time to equip all employees with knowledge of all the technicalities of IFRS, as required by the new global accounting regime. Top management must understand that in recent years, the IASB has been churning out new / revised accounting standards at quite a rapid pace. Such developments point to the fact that the body of accounting knowledge is ever changing and refined. A new breed of accountants and finance experts are required to better face the challenges of IFRSs in the future.

Additionally, there should be a strong IFRS convergence project management team. This should consist of people from various departments with various skills set. Co-opting staff from various departments is one way of ensuring the buy-in and cooperation of employees from other departments within the firm.

d. Engage assistance of external consultants
It is imperative for firms to appreciate the requirements of the new accounting standards even before the standards have been issued and adopted in Malaysia. This is because some of the standards are indeed complex, for instance the proposed new Revenue standard can impact significantly the revenue reported, especially for those involving long term contracts. Firms should hence engage consultants to train their accounting, finance and treasury staff as soon as IASB and MASB have issued a new exposure draft. This then prepares the employees of the firm to better meet the reporting requirements of the relevant standards become effective. This then can address the concern in part c. above.

This step is also useful as it helps firms to undertake a gap analysis between what IFRS skills and capabilities a firm should possess and what it currently has, based on the situation analysis that it has performed in part b. above.

e. Have a proper implementation plan
Having a proper implementation plan and starting the plan now itself allows firms to spread the costs over a period of time. Some argue that it also allows the firm to get a jump on the competition and reel in scarce resources before it is taken up by others. Proper thought through milestones allow for firms to implement the necessary changes and improvements at a pace that it feels most comfortable with, as opposed to a last minute cut-over to full IFRS implementation. Also, difficulties may be identified early and the necessary follow up action can be planned for.

Late or lack of proper preparation for the IFRS implementation by firms in those jurisdictions that have fully adopted IFRS (such as the EU) have shown that this can result in convergence costs escalating beyond initial estimates. Malaysian firms ought to pay heed to such lesson.

f. Coordination with other parts of the firm
It would be wrong to make the presumption that IFRS is the sole concern of the finance team of the firm. The truth is that the finance team members would need to work very closely with other departments of the firm as IFRS requires appropriate judgements be made based not only on accounting knowledge, but also based on the appreciation of the business model of the firm.

g. Leverage on Information Technology
Firms should leverage on the use of appropriate IT as it serves as a facilitator towards better and smoother implementation of IFRS. This becomes especially necessary as fair value accounting for instance, would require proper monitoring of the firm and its environment, sufficient data gathering and use of various modelling techniques to identify fair values. This can lead to significant number crunching, which cannot be done manually.

The information systems applied must be aligned with IFRS. This may mean that the systems for tracking, recording, calculating and reporting transactions may need to be modified to prepare for the changes under IFRS. Once again, the situation analysis undertaken in part b. above allows firms to perform a gap analysis in respect of the information systems capability of the firm, and the improvements / changes that would be required.

h. Identify risk areas
As with any significant change that is implemented by any firm, there will always be risk that things may not turn out as expected. All firms must not underestimate the time and effort required for the proper implementation of IFRS. This then means that there is always the risk of underestimating the cost of implementation. There should be consideration of potential impact on strategic investments, distributable reserves, tax planning, performance measures, key performance indicators, remuneration schemes that are based on performance, customer and supplier contracts, lenders’ covenants and so on.

Sustaining the initiative becomes a challenge in itself. There will definitely be problems when changing over to IFRS. Hence, top management commitment (refer to part a. above) becomes an enabling factor to ensure that the efforts of staff can be sustained over a long period until the final objective of accounting convergence is achieved.

i. Firms should be ready to be audited
Firms are advised to be ready to be audited, reviewed and challenged under the IFRS regime. This will require a significant mindset change in the top management, more so as IFRS are supposed to be principle-based. Top management would be required to exercise more judgement when making decisions. This means that they must always be ready to defend their decisions.

To be able to do this, there must exist proper documentations of bases for such decisions, proper management information systems to garner the appropriate information and appropriate firm policies and internal controls. Top management are also encouraged to ensure that there exist adequate disclosures of non financial information, prepare regular proforma financial statements, perform sensitivity analysis and perform stress tests of financial results, review the potential impact and identify the appropriate solutions thereon.

j. Investor relations
As explained earlier, care must be taken to ensure that stakeholders, in particular the investors know of the changes that will take place and how these changes will impact the reporting of the firm’s performance. There should be initial and continuous communiqués with investors. Appropriate media platforms ought to be considered. This then helps the management to better manage the expectations of investors.

CHALLENGES FACING ACADEMICS
While the business community is geared towards accounting standards convergence as part of globalization, academic institutions play a pivotal role in training and milling out competent future accountants who are user-friendly and user-ready for the accounting reform that is currently taking place. It will be a sad day for the accounting fraternity to welcome on board half-cooked fresh graduates who are not prepared for the changes in the accounting frontline. Already, we are seeing textbooks getting obsolete which are based on old accounting frameworks and standards.

While the business industries and professional bodies of sorts, from accountants to valuators, from private to public sectors, from non-governmental to governmental organizations, are actively engaging themselves with the accounting reforms, rigorously responding to discussions papers, roundtables, and exposure drafts, it has been statistically known that the academics constitute the minority in this rigorous engagement with the accounting setters.

How far Malaysian institutions of higher learning are ready in preparing students on this new accounting onslaught is a worthy research material to be considered for academic research. Our field observations show that much needs to be done and quickly done to prepare our students. To stay relevant, academics can no longer depend on textbook authors to update their work. There need to be proactive measures. Accounting academics have to be self-motivated to keep abreast with the developments of IFRSs and national accounting standards.

a. Need for clear understanding of IFRS
To have a clear understanding of the development of IFRSs, the most basic approach is to log in to IFRS and national accounting setters websites to check for updates, and to read up materials available on the web.

In additional, with the aid of the internet, one can also log in to the other accounting standards bodies all over the world to compare notes and the check on the responses of these institutions/bodies towards IFRSs.

Academics must also self-indulge in engaging professional bodies, accounting firms, industry preparers, representative groups for investors, directors, shareholders, etc to hear out their views. In addition there are the regulators and the governmental authorities who respond to the accounting reforms. Listen to them.

b. Need for a strong accounting academic forum
Academicians must inform each other on the accounting development that is happening on the financial reporting superhighway. Internally, within the academic institutions, accounting academics should participate actively in accounting forum, whether physically as a focus group or online. The advantage of online forum is that shared information is readily available to all participants without restriction of time or place. Regular forums organized by the academics to inform one another is also effective to generate interest and active and critical discussions and responses to, say, discussion papers and exposure drafts issued by the IFRS Foundation.

c. Need for academic training
Thanks to the accounting professional bodies and the national accounting standards setter, academics now have many opportunities to attend training, seminars, roundtable discussions, practical and hands-on workshops to stay informed of the standards development. The requirement for accounting academics to have working experience in the field of accounting, auditing, taxation and finance is very valuable. Accounting is a very practical discipline. While the accounting standards provide the roadmap and guide to quality financial reporting, it is the practitioners and standards preparers who understand the practical challenges confronting the operational aspect of accounting.

Perhaps academic institutions which are serious and committed to churning out top business professionals to meet the needs of the industry should reconsider their recruitment policy and plans and remuneration policy to ensure a stay-motivated and sustainable academic force to provide quality teaching and training of accounting students. A sensitive but necessary question to ask is “how many of the current accounting staff members have no industry experience?” and “shouldn’t accounting staff be sent back to the industry for the industry experience and to catch up with understanding the industry needs?”

d. Need for student exposures
Needless to say, students must be exposed to talks and seminars by industrialists and accounting professional bodies on the latest accounting development so that academic learning is healthily matched with practical exposures.

e. Need for institutional commitment
Management of the academic institutions must stay committed to making the accounting career a coveted profession for the students. As accounting is both theoretical and practical, the management should manage the accounting course with professionalism. For example, non-accounting academics should not be loosely assigned to teach accounting subjects if they have not been given the required training. Often the failure to understand why certain accounting concepts are put in place will confuse the students and even give students the misguided perception that the concepts taught have not been properly thought through by the accounting standard setters.

The management should also provide the necessary incentives to accounting staff to become members of professional bodies, and to actively participate in these bodies and the industry to play an advisory and consultative role.

In addition, the management will ensure that the library and resource centre be updated with the latest and updated accounting materials, textbooks, journals and online databases and references. These are important for continuing accounting education and research.

f. Need for accounting syllabus review
Accounting syllabus must be reviewed from time to time to ensure that it is in line with the accounting standards development. This is also required by the Malaysian Qualifications Agency (MQA). This is all the more necessary as accounting reform is moving so speedily. Even professional bodies giving accreditation to accounting programmes demand this approach.

Also deserving mention is the need for students to be exposed to IFRS-ready accounting software which they may apply when they enter the industry.

g. Need for academia-industry collaboration
With IFRS convergence, there is so much of changes going on in financial reporting that theoreticians need to know that an academia-industry collaboration should be the way forward to close the gap between the two. Academic institutions should make academia-industry collaboration a priority in the accounting faculty and department. Constant dialogues and meetings with the industry keep the academic relevance alive.

Such collaboration will help the parties to resolve some of the real world issues and provide opportunities for collaboration in so many ways, including research collaboration, which could inform standard setters, not to mention the many benefits this can bring to the students, including industrial training and providing research grants.

h. Need for accounting research to inform accounting setters
This is the most needed area as a contribution to accounting reform. IFRS was borne out of accounting research. It is not ad hoc, nor was it politically motivated. The IFRS convergence is the result of due diligence process which is rigor with academic research and discussions with constituents from all over the world. It is a global standard that requires informed research.

The International Association for Accounting Education and Research (IAAER), a global not-for-profit organization, was formed to provide opportunities for research which will lead to the development and maintenance of high quality, globally recognized standards of accounting practice.

Academic institutions should engage research organizations that aim to promote quality global accounting standards for the benefits of investors and other capital providers.

Conclusion
The benefits of adopting IFRS far outweigh the costs. Bursa Malaysia has already come out strongly in favour of the adoption of IFRS, arguing that the growing global marketplace demands high quality financial information. Investors continuously seek new investment opportunities and financial markets seek new capital and investors. To ensure that Malaysia’s relevance in the global market remains, it is imperative for firms in Malaysia to be able to provide effective and efficient access to information that are comparable and of high quality. A common accounting standard, being IFRS, is seen as the answer. Malaysian firms that implement IFRS would then be seen as being on par with overseas businesses. This leads to expectations of an environment of higher levels of disclosures, better corporate governance and transparency.

Similarly, the IFRS convergence has a great impact on academic institutions as providers of human capital. It is this gap between the industry and the academics that provides opportunities for the accounting reform towards quality financial reporting to meet the needs of global investors and capital provider. It is perilous to ignore this gap.


The roadmap to accounting convergence in Malaysia has long been announced by FRF and MASB. Come what may, firms in Malaysia have no choice but to take the necessary steps to be fully prepared for the IFRS convergence come 2012. . Likewise, academic institutions cannot afford to adopt the wait-and-see attitude in order to stay relevant.

Assistant Professor Ng Kean Kok and Assistant Professor Tuam Kwok Choon lecture accounting and finance at Universiti Tunku Abdul Rahman.