2021 is a busy year for some entities in Malaysia as they are preparing their transition to MPSAS framework. Transitioning from one financial reporting framework to another financial reporting framework can be a challenging task for any entity. Regardless of the reasons for changing the financial reporting framework, it is important for an entity to strategise its transition work in order to have a smooth transition.
This round, we discuss the key principles that entities may need to consider when moving from either Malaysian Private Entities Reporting Standards (“MPERS”) or Malaysian Financial Reporting Standards (“MFRS”) to Malaysian Public Sector Accounting Standards (“MPSAS”). Discussion regarding which financial reporting framework should an entity apply when preparing their financial statements is covered in Financial reporting frameworks in Malaysia.
Let’s now go straight to the key considerations to focus on when moving to MPSAS.
1. Determine the date of adoption of MPSAS
It is important for entities to determine what is the date of adoption of MPSAS. Date of adoption of MPSAS is the date when an entity adopts and presents its accrual MPSAS financial statements for the first time. This date could either be the date when entity presents its first transitional MPSAS financial statements or its first MPSAS financial statements.
Transitional MPSAS financial statements vs MPSAS financial statements
What is the difference between first transitional MPSAS financial statements and first MPSAS financial statements? The main difference between the two relates to the type of transitional exemptions and provisions adopted when entities move to MPSAS framework. This will be explained in the later part of this article.
It is a general requirement for entities to explicitly state whether the financial statements prepared comply with the financial reporting framework adopted. This provides sort of assurance to the users that the financial statements are in accordance with the prescribed standards. However, for transitional MPSAS financial statements, entities are not able to make an explicit and unreserved statement of compliance with accrual basis of MPSAS during the transition period.
Accordingly, it is important to communicate to your stakeholders what is the date of adoption and whether the first financial statements prepared and presented is a transitional MPSAS financial statements. In fact, it is a requirement in MPSAS 33 First-time Adoption of Accrual Basis of Malaysian Public Sector Accounting Standards (MPSAS) for first-time adopter to disclose their date of adoption of MPSAS and a statement if an entity is able to assert an explicit and unreserved statement of compliance with accrual basis of MPSAS.
2. Consider, select and assess your transitional exemptions and provisions
MPSAS 33 provides first-time adopters various transitional exemptions and provisions in the process of transiting or moving to MPSAS. Some of the transitional exemptions affect the fair presentation and compliance with accrual basis MPSAS during the period of transition. Some other exemptions do not affect fair presentation and compliance with accrual basis of MPSAS. Entities need to carefully consider, select and assess transitional exemptions that they wish to utilise. This includes how they affect their ability to assert an explicit and unreserved statement that the financial statements are in compliance with accrual basis MPSAS.
MPSAS 33 provides the list of transitional exemptions and provision. They are extracted here for your reference. The list provides you a quick snapshot and ability to strategise your transition work. Some of the transitional exemptions and provisions have to be applied by entities – i.e., entities must apply them, marked in *. Nevertheless, they do not affect fair presentation and compliance with accrual basis MPSAS.
| Transitional exemptions and provisions | Do not affect fair presentation and compliance with the accrual basis of MPSAS | Affect fair presentation and compliance with the accrual basis of MPSAS |
|---|---|---|
| MPSAS 1 – Presentation of comparative information | x | |
| MPSAS 4 – Cumulative transitional differences at the date of adoption | x | |
| MPSAS 5 – Allowed alternative treatment and has taken advantage of relief period – Adopt allowed alternative treatment on the date of adoption – retrospective application* – Adopt benchmark treatment on the date of adoption – retrospective application of costs incurred before and after date of adoption | x x | x |
| MPSAS 6 (MPSAS 35) – Relief to recognise and/or measure interests in controlled entity – Elect not to eliminate inter-entity balances, transactions, revenue and expenses – Controlled entity becomes first-time adopter later or earlier than its controlling entity* – Not present financial statements as consolidated financial statements if 3 year relief for recognition and/or measurement and/or elimination option was adopted – Assess if investment entity on date of adoption and determine fair value at that date* | x x | x x x |
| MPSAS 7 (MPSAS 36) – Relief to recognise and/or measure interest in associate – Elect to eliminate share in associate’s surplus and deficit – Associate becomes first-time adopter later or earlier than its controlling entity* – Not present investment in associates in consolidated financial statements if 3 year relief for recognition and/or measurement and/or elimination option was adopted | x | x x x |
| MPSAS 8 (MPSAS 36) – Relief to recognise and/or measure interest in joint venture – Elect to not eliminate balances and transactions with jointly controlled entities – Joint venture becomes first-time adopter later or earlier than its controlling entity* – Not present interest in joint venture in consolidated financial statements if 3 year relief for recognition and/or measurement and/or elimination option was adopted | x | x x x |
| MPSAS 37 – Measure investment in joint venture previously accounted for using proportionate consolidation* | x | |
| MPSAS 9 – Relief for recognition and/or measurement of revenue related to adoption of 3 year relief period for recognition and/or measurement of financial instruments | x | |
| MPSAS 12 – 3 year relief for recognition and/or measurement of assets and changing the accounting policy to measure assets | x | |
| MPSAS 13 – No recognition and/or measurement of finance lease liability and finance lease asset if relief period for recognition and/or measurement of assets is adopted – Classification of lease based on circumstances at adoption of accrual basis MPSAS* | x | x |
| MPSAS 16 – 3 year relief for recognition and/or measurement of assets and changing the accounting policy to measure assets | x | |
| MPSAS 17 – 3 year relief for recognition and/or measurement of assets and changing the accounting policy to measure assets | x | |
| MPSAS 19 – No recognition and measurement of liability relating to initial estimate of costs of dismantling and removing item if relief for recognition and/or measurement of assets are adopted | x | |
| MPSAS 20 – No disclosure of related party relationship, related party transactions and information about key management personnel | x | |
| MPSAS 21 – Apply impairment provisions prospectively on date of adoption or when assets are recognised when relief period was applied* | x | |
| MPSAS 25 – 3 year relief for recognition and/or measurement of assets and/or liabilities and changing the accounting policy to measure assets and/or liabilities – Determine initial liability for defined benefit and other long-term employee benefit plans on date of adoption or when relief period expired* – Recognise increase/decrease on date of adoption or when relief period expires in opening accumulated surplus/deficit* | x x | x |
| MPSAS 26 – Apply impairment provisions prospectively on date of adoption or when assets are recognised when relief period was applied* | x | |
| MPSAS 27 – 3 year relief for recognition and/or measurement of assets and changing the accounting policy to measure assets | x | |
| MPSAS 28 – Determine if financial instrument has liability and net asset/equity component on date of adoption* – Do not separate compound financial instrument if no liability exists on date of adoption* | x x | |
| MPSAS 29 – 3 year relief for recognition and/or measurement of assets and/or liabilities and changing the accounting policy to measure assets and/or liabilities – Designate financial asset or liability at fair value through surplus or deficit on date of adoption* – Apply impairment provisions prospectively on date of adoption* – Apply derecognition provisions prospectively on date of adoption* – Apply derecognition provisions retrospectively if information is available as at the date of initial accounting – Measure derivatives at fair value* – Eliminate all deferred losses and gains* – Only reflect hedges that qualify for hedge accounting on date of adoption* – Discontinue hedge transaction if conditions of hedge accounting on date of adoption are not met* | x x x x x x x x | x |
| MPSAS 30 – No disclosure of information about nature and extent of risks | x | |
| MPSAS 31 – 3 year relief for recognition and/or measurement of assets and changing the accounting policy to measure assets – Recognise all internally generated intangible assets* | x | x |
| MPSAS 32 – 3 year relief period for recognition and/or measurement of assets and/or liabilities and changing the accounting policy to measure assets and/or liabilities – Measure liability either under financial liability model or grant of a right to the operator model on date of adoption or when asset is recognised if relief period is adopted* | x | x |
| Applying deemed cost to assets and/or liabilities | x | |
| Applying deemed cost to assets acquired in a non-exchange transaction | x | |
| Using deemed cost for investments in controlled entities, jointly controlled entities and associates | x | |
| Preparing reconciliations during transitional period* | x |
3. Disclosures and communication on the impact of MPSAS transition
Next, let’s talk about what are the information required to be disclosed and communicated in the financial statements regarding the transition to MPSAS.
Disclosures on the transitional exemptions and provision chosen that impact fair presentation of financial statements
After selecting the transitional exemptions and provisions to be adopted, entities must disclose information about the exemptions chosen that impact fair presentation of the financial statements. The disclosure also does not stop there – entities must also disclose the entity’s progress towards fair presentation and compliance with accrual basis MPSAS. This includes an indication of how and by when entities intend to comply in full with the requirements of the applicable MPSAS.
Entities will only be able to assert an explicit and unreserved statement of full compliance with accrual basis MPSAS when the exemptions that provided the relief have expired and/or when the relevant items are recognised, measured and/or the relevant information has been presented and/or disclosed in accordance with the applicable MPSAS (whichever earlier). It is also important for entities to disclose specifically:
- The assets, liabilities, revenue and/or expenses that have been recognised and measured under an accounting policy that is not consistent with the requirements of applicable MPSAS.
- The assets, liabilities, revenue and/or expenses that have not been measured, presented and/or disclosed in the previous reporting period, but which are now recognised and/or measured and/or presented and/or disclosed.
- The nature and amount of any adjustments recognised during the reporting period.
The disclosures required above allows users of the financial statements to track the progress of the first-time adopter in conforming its accounting policies to the requirements in the applicable MPSAS during the period of transition.
Disclosures on the transitional exemptions and provision that do not affect fair presentation of financial statements
Entities that take advantage of transitional exemptions that do not affect fair presentation will still need to disclose to what extent they have taken advantage of the transitional exemptions. This is beside the fact that entities would still be able to assert their compliance with accrual basis MPSAS.
Transitional reconciliation
The last aspect that entities transitioning to MPSAS will need to focus is on the preparation of transition reconciliation. There are two reconciliations need to be prepared to reflect the transition effects to the numbers reported in the financial statements. They are:
- A reconciliation of entity’s net assets/equity reported in accordance with entity’s previous basis of accounting to its opening balance of net assets/equity at the date of adoption of MPSAS.
- A reconciliation of entity’s surplus or deficit in accordance with the entity’s previous basis of accounting to its opening balance of surplus or deficit at the date of adoption of MPSAS.
Conclusion
We hope this article is helpful for you and entities that are in the midst or planning to move to MPSAS. If you are not sure why MPSAS is relevant to your entity, the details are covered in Why there is a need for public sector accounting standard?
You may be also interested in various MPSAS related information, including comparison between MPSAS, MFRS and MPERS. Understanding the differences between the entity’s current financial reporting framework of either MPERS or MFRS and MPSAS is also crucial for the transition process. This helps entities to get the required information ready, to quantify the financial impact and the required disclosure to be included in the MPSAS financial statements. So, head out to Financial Accounting section or ask your queries by Joining the Community. It is free and open to join for all, now.