International Convergence of Accounting Standards: A Case Study of Malaysia 23 May 2006 I’m honoured to be standing here, before the distinguished guests and members of the ASEM to share with you Malaysia’s experience in the international convergence with the IFRS. Before I proceed with sharing Malaysia’s strategies we adopted and challenges we face, it may be proper to indicate in broad terms that: Asia is a huge sum of developing economies, diverse in their political, social, legal and structure. What I am going to share with you is merely a small component of the diversified aggregation of the economy which may not represent a developing economy in Asia. But one which we in Malaysia believe form one of the many pillars in the promotion of corporate governance in the country.

How A Developing Economy Embraces IFRS: Malaysia I’m honoured to be standing here, before the distinguished guests and members of the ASEM to share with you Malaysia’s experience in the international convergence with the IFRS. Before I proceed with sharing Malaysia’s strategies we adopted and challenges we face, it may be proper to indicate in broad terms that: Asia is a huge sum of developing economies, diverse in their political, social, legal and structure. What I am going to share with you is merely a small component of the diversified aggregation of the economy which may not represent a developing economy in Asia. But one which we in Malaysia believe form one of the many pillars in the promotion of corporate governance in the country.

How Malaysia Embraces IFRS Embrace: “Integral part of …” IFRS an integral part of the capital market & corporate governance structure Malaysia’s experience vs Asia’s experience Historical, structural, political (will) Looking back 1972 - 2001 Strategy & Challenges Looking forward 2006 - beyond Embrace: To illustrate how Malaysia integrates IFRS into the overall framework of capital market This is perhaps the main point of difference with other Asia member countries

Integral part of the capital market & corporate governance structure Degree of integration Adoption 1978 Embrace: To illustrate how Malaysia integrates IFRS into the overall framework of capital market This is perhaps the main point of difference with other Asia member countries 1972 1997 2000 2001 2006 Profession Legal Governance Capital MasterPlans 7 & 8 Malaysia Plan (1996-2005) 9 Malaysia Plan

1972 Presentation of Accounts 1973 IASC Formed 1978 – 1997 Adoption of IAS Malaysia has a history of a formal integration of accounting standards into the professional fabric since 1972

1978 - 1997 1978 Adoption of first 4 IAS by MACPA Profession 1978 Adoption of first 4 IAS by MACPA 1986 Next 13 IAS adopted 1992 All IAS adopted by MACPA and MIA 1997 Accounting standards setting function taken over by Malaysian Accounting Standards Board under Act of Parliament

Integral part of the capital market & corporate governance structure Degree of integration Fin Rpt Act Adoption 1978 Embrace: To illustrate how Malaysia integrates IFRS into the overall framework of capital market This is perhaps the main point of difference with other Asia member countries 1972 1997 2000 2001 2006 Profession Legal Governance Capital MasterPlans 7 & 8 Malaysia Plan (1996-2005) 9 Malaysia Plan

Financial Reporting Act 1997 Legal Financial Reporting Act passed by Parliament in March 1997 (prior to Asian financial crisis) Formation of Financial Reporting Foundation and Malaysian Accounting Standards Board New to Malaysia and the region Dedicated independent body First time accounting standards has the force of law Non-compliance means breach of law Stringent enforcement infrastructure by Securities Commission, Central Bank and Registrar of Companies

Compliance is Mandatory Compliance with FRS Mandatory for: Publicly Listed Companies under Exchange– 1,000 Companies registered with the Registrar – 701,000 !! Financial Institutions under Central Bank – 23 Dedicated Enforcement Infrastructure: Publicly Listed Companies – Securities Commission Registered companies – Companies Commission Financial Institutions – Central Bank MASB does not have enforcement power 701,000 companies are required under the law to comply; enforced strictly by other regulatory agencies than MASB.

Malaysian Accounting Standards Board Mandate: Develop financial reporting standards Develop Islamic accounting standards Extensive consultative process Funded by: Securities Commission (1/3) Stock Exchange (1/3) Ministry of Finance (1/3) Public, accounting firms, NGOs (Nil) Independence

Consultative Process & Autonomy IAS IFRS Discussion Paper prepared Finalise DP into ED Public Exposure Review of DP Review of DP 1 2 3 4 5 Working Group Public MASB MASB FRF MASB 6 Final review Review of comments FRS issued Approval No need for parliamentary approval to issue standards. Board has full discretion. 10 9 8 7 9-15 months MASB * Working Group Public FRF MASB * No need for Parliamentary approval

1997 – 2001: Harmonization MASB Standards vs International Accounting Standards MASB Standards are IAS Plus Similar to IAS, plus Guidance added, plus Other requirements added Harmonization

Integral part of the capital market & corporate governance structure Financial Corp Gov Code Degree of integration Fin Rpt Act Adoption 1978 Embrace: To illustrate how Malaysia integrates IFRS into the overall framework of capital market This is perhaps the main point of difference with other Asia member countries 1972 1997 2000 2001 2006 Profession Legal Governance Capital MasterPlans 7 & 8 Malaysia Plan (1996-2005) 9 Malaysia Plan

Integration with Master Plans Governance & Capital Malaysia’s 5-year Master Plans Code of Corporate Governance issued in 2000 Capital Market Masterplan Financial Sector Masterplan “Recommendations for achieving highest standard for financial reporting for corporate governance among capital and financial market players in Malaysia” issued in 2001

2005: Convergence Harmonization Convergence Accounting std - stmts of standards of acctg practices used in the preparation of F/S. Approved acctg std - acctg std that are issued or approved by MASB under sec 7(1) Sec 7(1)

Strategy Malaysia Asia Support convergence. IFRS Convergence not an issue. Question of managing implementation Sufficient buy-in Discretion to determine implementation date Participate early in standards setting development Alliance with recognized bodies, lead if necessary Asia Developing economies seem to have no choice but to converge participate in free trade/globalization funding for industrialization No choice but to participate regionally, greater representation No choice but to have regular discourse to identify commonalities, or diversities No choice – Philippines formally announced convergence from 1.1.2005; Malaysia 1.1.2006; Thailand 1.1.2007; China aggressively working towards that.

Challenges Malaysia Region IASB Managing change Mindset – old habits die hard, price for having long history Interpretations Cost of complex standards vs benefits to owner manager companies Region Lack of regional participation Lack of voice, representation Where problems are common, countries must be forthcoming Where problems are not common, endeavour to find a consensus IASB Developed economies focus Board representation Changing goalpost

Addressing Challenges – Changing mindset Convergence impact: Tough for many countries Suddenly have to migrate to new environment Accounting standards are now law of these countries Europe (2005), Philippines (2004) Language matters Malaysia – not as bad …relatively Have been on IAS all along Standards are law in 1997 Standards in English, no need for translation

Addressing Challenges - Interpretations Discourse with Affected Parties Degree of Buy-in

Addressing Challenges – Sharing with others Australia - intangibles China/HK - state controlled entities, leases N. Zealand - agriculture, leases Singapore - leases Malaysia - related party, agriculture

Addressing Challenges – Costs vs Benefits In Malaysia, 95% of 701,000 companies are SMEs. Initial intent to cover ALL companies was noble. But as Standards become more complex… Burden of compliance by SMEs becomes main issue MASB announced 2 – tier reporting standard 1.1.2006 IFRS (international GAAP) for PLCs, subsidiaries, assoc., JV Choice of IFRS or MASB Standards (which are IAS compliant) for private entities Currently working on private entity reporting standards (PERS)

Moving Forward Convergence is the way forward Understanding the needs of developing economies important for significant buy-ins in the region Challenges: Regional diversity remains a challenge Help is needed: IFRS likely to remain complex Goalposts keeps changing Implementation remains an issue Malaysia stands ready to offer: MASB has significant learning curve MASB is active in Islamic accounting standards MASB has a good understanding about SMEs in the region MASB has models to follow

Conclusion Success of convergence contingent upon how developing economies “embrace” IFRS Malaysia fortunate to have: a history infrastructure political will … to drive international convergence Others may not be as fortunate, but Asia can learn from each other Asian diversity is a beauty Malaysia stands ready to offer assistance