The Effectiveness of Risk Management Committee and Hedge Accounting Practices in Malaysia By: Azrul Abdullah Faculty of Accountancy, Universiti Teknologi Mara, Perlis Branch, Arau Campus Ku Nor Izah Ku Ismail School Of Accountancy, Universiti Utara, Malaysia

Introduction The issue of accounting for derivatives and hedging activities has been a subject of concern for accountants, auditors and academicians. Hedge accounting requirements are complex and offer choices for companies to use hedge accounting as to report their usage of derivatives for hedging activities. As a result-some companies avoid from applying hedge accounting/ apply hedge accounting, but accept sub-optimal risk management strategies (see Glaum & Klocker 2011; Pollock 2005). Manager may abuse the exceptions from general recognition and measurement principles rules for earnings management purposes/manipulation The firm value is likely to suffer.

Research Motivation There is very little empirical evidence on the application of hedge accounting in Malaysia. A high level of compliance was reported towards the accounting standards for financial instruments ( Abdullah& Chen 2010; Hassan et al., 2012; Adznan & Puat Nelson 2014)- none of these studies reported the use of hedge accounting. Although the company was not violating the current financial reporting standards for derivatives and hedging activities; This study argued that it did not represent the real quality of derivatives information if the hedge accounting practice was avoided by a company in the first place Less information can be expected; applying hedge accounting would affect the entities’ financial statement as well as performances, and risks associated with the use of derivatives (see Hausin et al., 2008; Stulz 2004).

Research Motivation(Cont) There was no clear evidence whether the monitoring control (i.e RMC) is the optimal means of dealing with the hedging accounting. Previous studies proposed that RMC could influence the level of transparency, compliance and quality of financial instrument reporting (Hassan et al. 2012; Abdullah and Chen 2010; Birt et al. 2013)- Mixed evidence Hence, the existence of the RMC alone can be argued as insufficient to explain the level and quality of financial instruments reporting especially on the choice to apply hedge accounting-lead this study to deal with the effectiveness of RMC.

Research Objectives To examine the application of hedge accounting by non- financial Malaysian listed companies. To determine the relationship between the effectiveness of the RMC and the choice of hedging accounting practices of non-financial Malaysian listed companies.

Methodology (Cont) Data and Sample Selection This study use secondary data collected from two separate sources: DataStream and the Malaysian listed companies’ annual reports. The population setting for this study is all public listed companies on the Main Market of Bursa Malaysia except the financial services sector companies. 500 large companies, listed in 2013 are selected based on their total assets as a sample for this study. large companies is found most likely to engage in derivatives usage(Hassan et al. 2012, Ammer et al. 2011) However, we ended up with 166 companies since not all the sampled companies use derivatives to mitigate their financial risk exposure and establish an RMC.

Methodology (Cont) Model Specification To examine the relationship between the application of hedge accounting and RMC effectiveness, we employed a binary choice logit model (i.e. Logistic regression). HACCi=α+β1REFFi+β2CSIZEi+β2PROFi+β3LEVi+β6AUDITi+ εi

Methodology (Cont) RMC effectiveness index The RMC’s effectiveness is aggregately measured based on the score of the RMC’s characteristics-DeZoort et al. (2002) audit committee effectiveness framework. Based on four dimensions of effectiveness (composition, authority, resources and diligence) A score of will be given if a company fulfills the RMC’s characteristics. The score of all the RMC’s effectiveness components will be summed up to the total score. The maximum possible score for each company will be 12 - a higher score is indicative of an effective RMC.

Components of the RMC’s effectiveness index

Descriptive Statistics Findings Descriptive Statistics

Findings Regression results

Conclusion The choice to use hedge accounting among non-financial Malaysian listed companies is unsatisfactory. The complexity of the accounting standards appears to hamper companies from applying hedge accounting The regression results show that RMC effectiveness do not significantly influence the decision to choose hedge accounting Limitation: Cross sectional data may not provide a dynamic results This finding may provide useful insights to other researchers, regulators and standard setters as the preliminary view regarding the choice to apply hedge accounting in Malaysia and the effectiveness of RMC Future research: should consider examining longitudinal data and testing some other factors that may influence the choice of hedge accounting.

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