KUCHING: A two-day seminar on “Recent Malaysian Financial Reporting Standards (MFRS) Developments and Updates, Accounting for Income Tax – Back to Basics, and Malaysian Anti-Corruption Commission (MACC) (Amendment) Act 2018” will be held by Ernst & Young (EY) on September 11 and 12 at Hilton Kuching here.
“Property developers and contractors will be those industries that will be significantly affected by new developments in accounting standards in Malaysia,” said Head of Assurance of EY East Malaysia Steven Low.
Prior to the clarification made by the International Financial Reporting Standards (IFRS) Interpretation Committee last year, property developers in Malaysia had been including interest costs incurred on borrowings used to finance the construction cost of properties and the cost of acquiring land as either cost of sales (for those property development units that have been sold) or as part of cost of inventories (for those property development units that have not yet been sold).
It is not uncommon for property developers to borrow to acquire land and to fund construction costs.
“Going forward, for property development projects that have been launched for sale, such borrowing costs can no longer be capitalised as part of the cost of inventories. All such borrowing costs will have to be expensed as and when incurred.
“The accounting implications arising from this clarification is that property developers in Malaysia will be expected to report significantly lower profits due to the expensing of borrowing costs as and when incurred – and an increase in their reported gross profit margin since borrowing costs will no longer be considered as cost of sales,” added Low.
Likewise, for companies involved in construction activities, their reported gross profit margin will also be expected to increase and the interest costs line item in their statement of profit or loss will show a corresponding increase.
Michelle Au-Yong, an Assurance partner in EY Kuching, shared another area where property developers in Malaysia will be affected which arose from a Frequently Asked Question (FAQ) issued by the Malaysian Accounting Standards Board (MASB) early this year.
“In some situations, as part of the conditions for the approval of development plans to build premium housing by the regulatory authorities, property developers are required to construct public infrastructure and/or affordable housing in addition to the premium housing”, explained Au-Yong.
Such public infrastructure is not for sale to customers but is to be handed over to the government for no consideration when completed. In most instances, the affordable housing will also be sold at prices below cost since the selling prices are predetermined by the authorities.
Prior to the FAQ issued by MASB, the loss or the shortfall (difference between the selling price and the cost of the affordable houses) will have to be recognised upfront once the property developers start selling the houses under the development plan, which includes the premium houses.
This accounting treatment can create a large liability upfront even though the property developers have not incurred any costs on the affordable housing and the public infrastructure.
According to the FAQ issued by MASB, the costs to be incurred on the public infrastructure and the shortfall to be incurred on the affordable housing will only need to be recognised progressively in proportion to the stage of completion of the premium houses. Accordingly, the corresponding liabilities are also recognised progressively.
“With this accounting change, property developers are expected to see a reduction in such liabilities in their financial statements,” stated Au-Yong.
Another significant accounting change that will affect many Malaysian companies this year is the new accounting standard on lease accounting.
Prior to 2019, operating lease transactions were off balance sheet. That means that if a company rented a building for three years, no assets or liabilities are recognised in the balance sheets. The company will only need to expense the rental paid as and when incurred.
However, under MFRS 16 Leases (the new leasing standard), all operating lease transactions will have to be recognised on the balance sheets of the lessees. “When a company rents a building from the owner (lessor) for three years, the company (lessee) now has an asset representing the right-to-use the building for three years. At the same time, the company now also has an obligation to pay the owner for this right-to-use for the next three years, which is a liability,” elaborated Low.
As a consequence of these accounting changes, companies are expected to see an increase in their liabilities and this may affect their debt covenant ratio unfavourably. “Hence, it would be advisable for such affected companies to talk to their lenders/bankers early to avoid any possible default in their loan agreements,” Low cautioned. The two-day EY seminar will also cover a session on the recent MACC (Amendment) Act 2018 which has been gazetted and would be effective June 1, 2020.
In Malaysia, the MACC has implemented the MACC Act 2009 and the MACC (Amendment) Act 2018 wherein the latter introduced Section 17A (extension of Section 17) – a new provision on criminal liability whereby commercial organisations are subjected to corporate liability if an employee and/or person associated with the organisation conducts corrupt and/or bribery acts, whether or not its top management is aware of such acts.
“Given the strict provisions of the MACC (Amendment) Act 2018, commercial organisations should re-assess their anti-bribery framework, policies and procedures for the implementation of adequate internal controls (i.e. T.R.U.S.T.) as a defence against prosecution under this Act,” suggested Joyce Lim, Partner, Forensic and Integrity Services, EY.
The EY MFRS seminar series is organised by EY annually in East Malaysia to share with users of financial statements the latest developments in MFRS, IFRS and other developments of interest to companies in Malaysia.
EY is a global leader in assurance, tax, transaction and advisory services. In Malaysia, EY is one of the largest professional services organisations with more than 3,900 employees in 16 locations throughout the country.
