Use Of Fair Value Accounting In Emerging Economies Asia Pacific Countries

Adoption of IFRS in Asia Pacific Countries and Its Challenges

Discuss About The Emerging Economies Asia Pacific Countries?

Chand (2005) stated that the need for harmonisation of accounting standards has arrived due to developing single set of high-quality accounting standards that can be used by business corporations around the world. The harmonisation of accounting standards will help in achieving congruence between the financial reporting systems of different business entities that making it easy for the end-users to analyse and interpret the financial information disclosed by any business entity. The IASB (International Accounting Standards Board) has directed the business corporations around the world to prepare their financial reports as per the IFRS (International Financial Reporting Standards). However, the adoption of IFRS in different countries is largely influenced by the country-specific contextual issues that are restricting the harmonisation of IFRS. As such, it can be said that the harmonisation of IFRS is possible with the combined efforts of regulators, standard-setters, financiers, business community and the accounting professionals. The various countries in the Asia-Pacific region have successfully adopted IFRS for enhancing the global competitiveness of their business corporations (Chand, 2005).

As per the Albu, Albu, and Alexander (2014), the implementation of the IFRS standards by the Asia-Pacific countries has presented various challenges in front of the accounting professionals regarding the use of fair value accounting. As such, the use of fair value accounting in Malaysia has reported many challenges due to country-specific issues. The IFRS 13 standard has directed business entities to use fair value accounting as it provides realistic information about the current market price of assets and liabilities. The fair value accounting is regarded to be better method as compared to historical cost approach that records the historical price of assets and liabilities. The accounting-standard setting bodies in Malaysia are emphasising on the use of fair value accounting with the increasing need for protecting the interests of the end-users. There are various other emerging Asia-Pacific economies that are adopting the use of fair value accounting approach besides Malaysia such as Australia, New Zealand and Singapore with the only exception of Bangladesh (Albu, Albu, and Alexander, 2014).

According to He, Wong and Young (2012), the historical cost accounting method reflects the initial price of assets and liabilities at the time of their purchase and does not provide any information relation to the current market valuation. As such, it lacks reliability and therefore fair value accounting method is largely preferred by the business corporations in the Asia-Pacific countries to match the needs and expectations of the end-users of realising reliable information to be used in making investment decisions. The use of fair value measurement techniques by the business entities in Malaysia has facilitated the easy comparison and evaluation of assets and liabilities through the general purpose financial statements. It has helped in developing a systematic approach for valuing the financial instruments of a business entity that provides reliable and comparable information about its financial performance. Also, the fair value of assets and liabilities also help in estimating the predicting their future values that can help the investors and creditors to make informed decisions (He, Wong and Young, 2012).

Benefits of Fair Value Accounting

Qu et al. (2012) stated that the regulatory Authority of Malaysia and the Malaysian Accounting Standards Board has mandated the public listed companies under the securities commission Malaysia for the use of fair value accounting but still it remains optional for private companies. Thus, it can be said that fair value accounting is still not adopted completely in the business corporations of Malaysia. This is due to some criticism regarding the use of fair value approach during the preparation of the general purpose financial statements. The major criticism as argued by many accounting professionals regarding the use of this approach is that it introduces high volatility in the financial statements. This is because the valuation provided by this approach is not adequate sometimes and thus it is said that volatility is the price of investor confidence (Qu et al., 2012).

In order to analyze the use of fair value accounting in the 2 Australian companies and 2 Malaysian companies, there is need to select such companies from the list available from the respective countries stock market. The 2 Australian companies selected for this purpose are Wesfarmers and Woolworths and 2 Malaysian companies selected are BERHAD and MISC BERHAD.

There is need to understand the adoption of IFRS by the Malaysian Accounting Board before comparing the accounting of two countries. Before the adoption of IFRS, Malaysian Accounting Board follows the US GAAP to perform their accounting reporting work. After the implementation of IFRS by the IAB for all the countries and made them mandatory for all, Malaysian Accounting Board has decided to take IFRS and made their own country Malaysian GAAP which will be applicable on the listed companies under the Malaysian stock exchange. The standards referred to in the Malaysian GAAP are known as Malaysia Financial Reporting Standards. In Australia, AASB takes care of the adoption of the accounting standard and their implementation in their financial reporting guidelines. After the introduction of IFRS, AASB has decided to make changes in their AASB (Accounting standard) so that there will similarity between them. The use of fair value of measurement as described under IFRS 13 has helped a lot in valuing the assets and liabilities in the books of accounts (AASB13, 2015). This has enhanced the capability of users of the annual report to interpret the financial information and to measure the profitability of the company. There is almost similarity between the Australian GAAP and Malaysian GAAP regarding the disclosures made for the fair value measurement as both the countries has adopted the standards defined in IFRS. After looking at the financial reports of both the companies of Malaysian companies (Pensonic Holding BERHAD and MISC BERHAD) it has been found that MFRS 13 is used for measuring the fair market value of assets and liabilities. MFRS 13 (Accounting of Financial Instruments) has been upgraded in year 2011 keeping in view the IFRS 13 standards regarding the same (MASB, 2017). MFRS 139 allows the mixed measurement of the three main categories and they are measurement of comprehensive income, realized profit or loss and amortized cost (MISC BERHAD, 2016). In relation to measurement of the financial instruments, the higher of cost or last known market price in case the active market quotes are not known to the company. In addition to this there are many assumptions that are needed to make by the company before presenting the financial report (Pensonic Holding BERHAD, 2016). This includes use techniques of valuation that is related to use of inputs from market and other estimates. The fair value accounting used by both the Malaysian companies is given under notes to accounts with detailed description of each measurement (MISC BERHAD, 2016 and Pensonic Holding BERHAD, 2016).

Regulatory Framework and Accounting Standards in Malaysia and Australia

On the other hand, Australian GAAP (AASB 13) defines the concept of fair value measurement. Mostly all the points have been copied from the IFRS 13 with some small differences to adjust with requirement of Australian companies. In order to better present the difference, the following table will help a lot (Wesfarmers, 2016 and Woolworths Group, 2016).

Difference between Fair Value Measurement by the Australian Companies and Malaysian Companies
Component of Income Statement of balance sheet	AASB 13 implication upon and as implemented by the Australian Companies	MFRS 13 implication upon and as implemented by the Malaysian Companies
Preparation of Consolidated Financial Statements	Australian companies have presented their financial items at historical cost basis other than the financial instruments that are available for sale (Wesfarmers, 2016 and Woolworths Group, 2016).	Malaysian Companies have also presented their financial items at historical cost basis but their no description about the financial instruments (MISC BERHAD, 2016 and Pensonic Holding BERHAD, 2016).
Items related to business combination	Australian Companies use the fair market value concept to measure the value of company to be acquired but there are no defined guidelines regarding the same, such as if business combination has been carried out in installment than there will no concept of revaluation of assets or financial instruments.	Malaysian companies have followed the set of clearly defined assumptions regarding the cost of acquisition and their measurement in books of accounts.
Goodwill and other intangible assets	There is separate accounting standard that deals with the accounting of intangible assets. Goodwill is measured after the business combination at cost (initially) and after that it is treated with any impairment loss (Wesfarmers, 2016 and Woolworths Group, 2016).	Here, goodwill is measured in same way as Australian companies do but there is difference of presentation under notes to accounts.
Depreciable Assets	Assets that are presented under the non-current assets section are measured after deducting the depreciation for the year from their book value. There is also a concept of charging depreciation according to their remaining useful life in some cases (Wesfarmers, 2016 and Woolworths Group, 2016).	Malaysian Companies follows same concept as Australian companies do, but depreciation is charged at predefined rate without giving effect of useful life of year (MISC BERHAD, 2016 and Pensonic Holding BERHAD, 2016).
Financial Assets	These assets are measured according to the risk management system and are divided on the basis of years of maturity (Wesfarmers, 2016 and Woolworths Group, 2016).	Separate accounting standard (MFRS 139) is used to measure these assets (MISC BERHAD, 2016 and Pensonic Holding BERHAD, 2016).

Here are some of pictures from the Annual reports that provide use of fair value measurement concept by the Australian companies

Measurement of Financial Assets

Goodwill and Other Intangible assets

Property, Plant and Equipment

Here re some of pictures from the Annual reports that provide use of fair value measurement concept by the Malaysian companies

Business Combination

Depreciation rate of fixed assets

Goodwill and other intangible assets

Financial Assets

The publicly-traded firms are adopting the use of fair value accounting (FVA) approach since IFRS harmonisation for improving the quality o their financial reports. The FVA is being widely recognised as a method of providing more accurate, comprehensive and timely information relative to the asset price by incorporating the effect of market movements during their valuation. The increasing complexity and volatility in the markets is causing the need for investors to determine the actual worth of an asset. The use of fair value accounting method is advocated by the accountants who seek implementing more precision in the assets and liabilities valuation. As such, it has improved the quality of financial disclosure by depicting the value of assets and liabilities as per the economical conditions.  The business entities operating in Malaysia are subject to their different accounting frameworks, that are, old Financial Reporting Standards (FRS), private equity reporting standards (PERS) and Malaysia Financial Reporting standards (MFSR). The MFRS has only achieved congruence with the IFRS standards and is presently implemented only by the publicity-listed companies in Malaysia (Dignah et al., 2016).

As such, it can be said that integration of IFRS by Malaysia has increased the reliability of accounting through the use of fair value accounting approach. The FVA approach has improved the quality of disclosure by decreasing the trading risk and thereby enhancing the trading volume. The increased transparency in the business operations through the use of fair value accounting approach has resulted in improving its shareholder base and also promoting foreign direct investment. Besides, this it has helped to large extent to the Malaysia government for economic planning through improving the interpretation of the financial accounting by the regulators, businesses and professionals (Alaryan et al., 2014). It has facilitated in developing a positive business environment and improved the global competitiveness of the Malaysian business entities. Also, the FVA approach as improved the direct investment by achieving the trust and confidence of foreign investors and thereby leading to business expansion. The expansion of business firms has helped in improving the job opportunities in Malaysia and thereby promoting the economic growth and development of the country (Hassan Percy and Stewart, 2006).

Fair Value Measurement Implemented by Malaysian and Australian Companies

However, the use of fair value accounting in the publicly traded companies is regarded to be difficulties it requires gaining large number of assumptions and disclosing the information relating how they are derived. Also, there exists a possibility of underlining the overall worth of a business entity at the expenditure of assessing the performance of the management. The approach continuously assesses the influence of market fluctuations on the assets and liabilities thereby resulting in incorporating high volatility in the financial reports (Hanefah and Singh, 2012). The use of fair value approach through regarded to a better technique for predicting the realistic value of assets at a time for investors but they allow want historical value of assets for measuring the cash flows. Also, historical method helps the management in accurately determining whether it has achieved its stated operational goals and objectives. Thus, the improvement in quality of financial disclosure by the use of fair value accounting is still a topic of debate. The accounting-standard setting bodies is recommend to adopt the use of both the fair value and historical cost accounting method for achieving the stakeholder trust and confidence. Also, the regulators need to emphasize on the use of fair value accounting in private companies for promoting transparency in their business operations as well (Sidik, and Rahim, 2012).

References

AASB13. 2015. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf  [Accessed on: 20 September, 2017].

Alaryan, L. A., et al. 2014. The Relationship between Fair Value Accounting and Presence of Manipulation in Financial Statements. International journal of accounting and financial reporting 4 (1), pp. 221-237.

Albu, C. t. l. N., N. Albu, and D. Alexander. 2014. When global accounting standards meet the local context? Insights from an emerging economy. Critical Perspectives on Accounting 25 (6), pp. 489-510.

Chand, P. 2005. Impetus to the success of harmonization: the case of South Pacific Island nations. Critical Perspectives on Accounting, 16(3), pp. 209-226.

Dignah, A., et al. 2016. Fair Value Accounting and the Cost of Equity Capital of Asian Banks. Jurnal Pengurusan 48, pp. 125 – 135.

Hanefah, H. M. M. and Singh, J. 2012. Convergence towards IFRS in Malaysia: issues, challenges and opportunities. International Journal of Business, Economics and Law 1, pp. 43-47.

Hassan, M. S., Percy, M.,and Stewart, J.  2006. The value relevance of fair value disclosures in Australian firms in the extractive industries. Asian Academy of Management Journal of Accounting and Finance 2 (1), pp. 41-61. 

He, X., T. J. Wong, and D. Young. 2012. Challenges for Implementation of Fair Value Accounting in Emerging Markets: Evidence from China. Contemporary Accounting Research 29 (2), pp. 538-562.

MASB. 2017. [Online] Available at: https://www.masb.org.my/pages.php?id=19 [Accessed on: 20 September, 2017].

MISC BERHAD. 2016. Annual Report 2016. [Online] Available at: https://www.misc.com.my/media/1554/misc-ar-31-12-2016.pdf [Accessed on: 20 September, 2017].

Pensonic Holding BERHAD. 2016. Annual Report 2016. [Online] Available at: https://www.pensonic.com/phocadownload/Annual-Report/PENSONIC%20Annual%20Report%202016-Part%202.pdf [Accessed on: 20 September, 2017].

Qu, W., et al. 2012. Does IFRS convergence improve quality of accounting information? – Evidence from the Chinese stock marketing. Corporate Ownership & Control 9 (4), pp. 187- 196.

Sidik, M. H. J., and  Rahim, R. A. 2012. The Benefits and Challenges Of Financial Reporting Standards In Malaysia: Accounting Practitioners’ Perceptions. Australian Journal of Basic and Applied Sciences 6 (7), pp. 98-108.

Wesfarmers. 2016. Annual Report 2016. [Online] Available at:  https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4[Accessed on: 20 September, 2017].

Woolworths Group. 2016. Annual Report 2016. [Online] Available at:   https://wow2016ar.qreports.com.au/xresources/pdf/wow16ar-financial-report.pdf [Accessed on: 20 September, 2017].