Question

Question 1 The international financial reporting standards (IFRS) are playing an increasingly important role in global financial reporting. What are the benefits and challenges of adopting IFRS in Malaysia? Explain. (20 marks)

please make the answer long and more detail

Answer 1

1 Benefits of Adopting the IFRS:

In Malaysia, starting from 1 January 2005, the MASB accounting standards was renamed FRS to reflect

Malaysia’s commitment to align with global accounting standards. However, companies in Malaysia are only

required to implement all FRS in their financial statements starting from 1 January 2006.

Several prior studies from other countries have suggested that adoption of IFRS standards is usually related

to several benefits. For example, Leuz and Verrecchia (2000) found out that in Germany the shift from local

GAAP to IFRS reduces cost of capital. Leuz (2003), Hope, Kang and Zang (2005) suggested that potential long-

term benefits of IFRS adoption may include lower cost of capital, positive valuation effect, increased

shareholder base and trading volume.

According to the Chairman of MASB, Dato’Zainal Abidin Putih (MASB, 2004), the change to IASB

standards would enhance the quality of reporting thus results in greater reporting transparency in Malaysia. A

study by Barth, Landsman and Lang (2005) in USA found out that IFRS adoption increases firms’ financial

reporting quality.

Apart from that, Aljifri and Khasharmeh (2006) examined the suitability of the implementation of IFRS)

based on questionnaire sent to preparers of major companies in United Arab Emirates (UAE). Their findings

suggested that among the advantages of adoption of IFRS as stated by the respondents are “enhance

comparability of financial statements”, “improve the perception of accounting profession across the world” and

“provide better information for government for economic planning”. In Bahrain, Joshi et al. (2008) found that

most of the respondents who are accountants and auditors perceived that by applying IFRS would lead to greater

comparability of financial performance, followed by greater relevance, reliability and transparency of financial

information of companies.

In addition, adopting IFRS is also improves access to foreign capital. El-Gazzar, Finn and Jacob (1999)

suggested that firms voluntarily comply with IFRS in order to obtain greater exposure to new financial markets.

Anticipation of improved communication with information users is also reported to be one of the motivations to

use IFRS (Tarca, 2004). Finding based on Finnish data suggested that predecessor of IFRS, International

Accounting Standards (IAS) help firms to supply information that meet foreign investor’s information needs

(Kinnunen, Niskanen and Kasanen, 2000).

Bhattacharjee and Islam (2009) highlighted the vulnerability of small investors which has been a long time

established problem and has been a big impediment for the stock market development in Bangladesh. IFRS

adoption which improves financial reporting quality helps the small investors to compete better with informed

professionals and hence reduces their trading risk.

The Chairman of the oversight body of the MASB, the Financial Reporting Foundation, Datuk Ali Tan Sri

Abdul Kadir, also said that Malaysia move to fully converge with IFRSs in 2012 is a landmark achievement

where Malaysian must equip themselves with adequate IFRS knowledge so as to position themselves in the

global market environment (MASB, 2011).

In addition, during the recent Accountants in Business Symposium organised in March 2012, Mohammad

Faiz Mohammad Azmi, Chairman of MASB cited credibility on the global stage is a key driver for convergence

by referring to Korea where the Korean companies which were experiencing rapid expansion found they lacked

international credibility until Korea decided to adopt international standards. Mohammad Faiz also added that

Malaysia decided to take the same route and there are medium and long-term benefits especially when Malaysia

is expanding regionally. Extra training for local staff is not needed, if everything is already conforming to

internationally accepted standards and those who understand and implement these accounting standards would

in terms of career, almost immediately attain international marketability (Accountants Today, 2012). Based on

the literature above, the prior research supports the view that the adoption of IFRS is beneficial. .

2 Challenges of Adopting the IFRS:  

According to PricewaterhouseCoopers Senior Executive Director and Corporate Reporting Leader, Ng Mi

Li (PWC Alert, 2005), the new FRS would result in greater volatility of company results. This is due to the

adoption of fair-value accounting in business combinations, share-based payments, assets held for sale and

equity and debt investments in the new FRS regime. Thus, it will introduce significant volatility in the balance

sheet and also in earnings.

Apart from that, Ng Mi Li (PWC Alert, 2005) also stated that new FRS would also result in changes in the

presentation of financial statements. This is because new FRS will bring new rules on the recognition and

valuation of assets. Besides, certain ‘off balance sheet’ items like derivatives, leases and asset-backed

securitisation will be brought onto the balance sheet.

The introduction of new FRS may involve higher costs. Jermakowicz and Tomaszewski (2006) examined

the implementation of IFRS by European Union (EU) companies based on quescompanies in 2004. The findings from 112 respondents indicated the following: (1) majority of the respondents

have adopted IFRS for more than just consolidation purposes; (2) the process of adoption to IFRS is costly,

complex and burdensome; (3) companies do not expect to lower their cost of capital by implementing IFRS; (4)

respondents tend to agree with the benefits and costs of transition; (5) companies expect increased volatility in

financial results; (6) the complexity of IFRS as well as lack of implementation guidance and uniform

interpretation are key challenges in convergence; and (7) majority of the respondents would not adopt IFRS if

not required by the EU Regulation. The results of the questionnaire were confirmed by several personal

interviews with finance and accounting executives of EU publicly traded companies.

In another study conducted in Belgium by the Belgian Commission of Banking, Finance and Insurance

(CBFA3, 2004 as cited in Veerle, 2005) a survey of 73 listed Belgian companies, examined the difficulties and

costs in relation to convergence with IFRS. Although a majority of the firms (62 per cent) stated that they have

no problems in obtaining the necessary data to report under IFRS, the respondents find it costly to implement

IFRS and the estimated costs of convergence for the BEL-20 companies range between 600 thousand and 6.2

million Euro. Moreover, only 22 per cent of the respondents stated that the value added of IFRS financial

statements is positive for the majority of users of financial statements.

In addition, the relative implementation cost will be even larger for smaller companies. As there are fewer

potential users of the financial information disclosed by small firms, this would result in fewer potential benefits

and higher accounting costs per users (Bollen, 1995). The notion of applying IFRS across the board to all

companies irrespective of their size (in terms of market capitalisation and turnover) might appear to be the right

solution for investors, but could also be difficult to implement and enforce, especially in the case of smaller non-

listed companies (Blewitt, 2005 as cited in Lazar, et al., 2006).

Another challenge in adopting IFRS is the complex nature of some of the IFRS. Larson and Street (2004)

reported, based on the data collected by the largest international accounting firms during their 2002 convergence

survey, one of the most significant impediments to convergence appeared to be the complicated nature of

particular IFRS. In another study, Jermakowicz (2004) who examined the adoption of IFRS by BEL-20

companies in Belgium found that 75 percent of the respondents agree some of the IFRS are difficult. Among the

standards that are complex in nature are standards related to hedge accounting (IAS39) and impairment tests

(IAS 36).

In Spain, Navarro-Garcia and Bastida (2010) found out that their respondents, preparers of 63 Spanish

listed firms, perceived IFRS to be a high quality regulation but it is significantly different from Spanish

standard, troublesome and failed to meet a cost-benefit trade-off in some cases. Thus, applying IFRS could lead

to less compliance, and therefore lower quality financial reports would be produced.

The convergence with IFRS though past literatures highlighted the benefits of convergence no doubt

represents one of the biggest challenges to the business reporting entitie