Sample Disclosure – Change In Accounting Policy Adoption Of FRS 140 Investment Property (30 October 2009)

Change In Accounting Policy As A Result Of Adoption Of FRS 140: Investment Property

The adoption of this new FRS has resulted in a change in accounting policy for investment properties. Investment properties of the Company are now stated at fair value, representing the open-market value determined by external professional firm of valuers engaged by the Company. Gains or losses arising from changes in the fair values of investment properties are recognised in the income statement in the period in which they arise.

Prior to 1 January 2006, investment properties of the Company were stated at valuation amounts as a result of revaluation exercises carried out by the Company. The revaluation exercises were carried out at least once every five years and any revaluation increase arising from the revaluations is credited to equity revaluation reserve account, except when the increase is recognised in the income statement to the extent that it reverses a revaluation decrease of the same investment properties previously recognised in income statement. Any revaluation decrease arising from the revaluation is recognised in income statement, except when the decrease is debited to the equity revaluation reserve account to the extent of any credit balance existing in the revaluation reserve account in respect of that investment property.  The balance of equity revaluation reserve amount is transferred directly to retained earnings when the property is retired or disposed of.

The investment properties of the Company were last revalued in Year 2005. In accordance with the transitional provisions of FRS 140, this change in accounting policy is applied prospectively and the comparatives as at 31 December 2005 are not restated. Instead, the changes have been accounted for as an adjustment to the current year opening balances as at 1 January 2006:





Decrease in revaluation reserve account


Increase in retained earnings



Sample Disclosure – Change In Accounting Policy Of Inventories Valuation Method (29 October 2009)

Change in Accounting Policy – Valuation Method of Inventories

Prior to 1 January 2009, the cost of inventories was determined on the weighted average basis.

The directors consider that the change to the first-in, first-out method gives a fairer presentation of the results and the financial position of the Company. This change in accounting policy has been accounted for retrospectively and the relevant effect of this change is shown below:

Effects on retained earnings:



At 1 January:-



As previously stated



Effects of change in accounting policy



As restated



Effects on net profit for the year:
Net profit before change in accounting policy



Effects of change in accounting policy



Net profit for the year



Comparative amount for inventories of the Company has been restated as follows:

Inventories amount as at 31 December 2008


As previously stated


Effects of change in accounting policy


As restated


Sample Disclosure – Note On Contingent Asset (29 October 2009)

Contingent Asset

The Company has made a claim of RM15,000,000 (2008: RM15,000,000) against the State Government in respect of an award by the Government for land expropriated from the Company in Year 1999. The directors are of the opinion that the results of recent negotiations with the government have given strong indications that this claim is probable to be met in full in the near future.

Sample Disclosure – Accounting Policy On Property Construction-in-progress (28 Ocotber 2009)

Property construction-in-progress

Property construction-in-progress is stated at cost and not depreciated. The property would be transferred to property, plant and equipment or investment property (depending on the intended purpose and use of the property) upon completion.

Note: The balance of unrecognized amount of property construction-in-progress compared to the contracted full price is disclosed as capital commitment

Sample Disclosure – Accounting Policy On Capital Work-in-progress (27 October 2009)

Capital work-in-progress

Capital work-in-progress is stated at cost and not depreciated. Depreciation on capital work-in-progress commences when the assets are ready for their intended use.

Note: This is usually disclosed as an asset category of property, plant and equipment. The balance of unrecognized amount of capital work-in-progress compared to the contracted full price is disclosed as capital commitment

Write up on IFRS 4 Insurance Contracts (23 October 2009)

This is an interesting article on IFRS 4 that I have read from the Star newpaper today:

Challenges in implementing new financial reporting standards


The Star, 23 October 2009


FINANCIAL Reporting Standards No. 4 (FRS 4), or IFRS 4 as it is known internationally, has been issued for adoption by the Malaysian Accounting Standards Board and will be effective for insurance companies in Malaysia effective Jan 1, 2010.

This is the first standard issued by the International Accounting Standards Board (IASB) that deals with insurance contracts.

The key reasons for this standard are to make limited improvements to accounting for insurance contracts, until IASB completes Phase II of its project on insurance contracts and also to require any entity issuing insurance contracts to disclose information about those contracts.

What does it apply to?

FRS 4 applies to insurance contracts that an entity issues and to reinsurance contracts that an entity issues and holds. It, however, does not apply to insurance contracts held by policyholders, other than holders of reinsurance contracts.

FRS 4 focuses on the type of contracts rather than the type of entities. This actually means that it addresses the accounting and disclosure requirements for insurance contracts with regards to their contractual rights and obligations arising from these contracts.

What is an insurance contract?

An insurance contract is defined as a contract where the insurer accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if an unspecified future event adversely affects the policyholder.

This specified uncertain future event is known as the “insured event” while the uncertain future event that is covered by an insurance contract creates “insurance risk”.

The good news is that, upon adoption of FRS 4, Malaysian insurers are generally allowed to continue using existing accounting practices for insurance contracts. Meanwhile, an entity is only permitted to change its accounting policies for insurance contracts if the changes improve either the relevance or the reliability of its financial statements.

The issue of insurance liabilities measurement is currently being addressed in Phase II of IFRS 4 project by the IASB, and an exposure draft is anticipated to be issued before year-end.

What are the key principles of FRS 4?

The first principle states that the insurer is required to disclose its accounting policies for insurance contracts, the key amounts of the recognised assets, liabilities, income and expenses arising from insurance contracts.

In addition, there is a need to disclose the significant assumptions used to measure these amounts and the effect of changes in these assumptions.

The second principle requires the disclosure of the risk management objectives, policies and methods for managing those insurance risks, such as credit, liquidity and market risks.

Nature of insurance risks in terms of their sensitivities, concentrations and claims development information are also needed.

Key challenges insurers need to consider

As Phase I of FRS 4 is focused on the disclosure requirements, insurers need to consider the involvement of senior management, as they would be deciding on what is to be disclosed, especially in the first year of implementation. Getting the right key resources could also be an issue, as expert resources could be scarce internally and to maintain them would be relatively costly.

Therefore some companies are expected to depend on external resources. Reinsurance is something else that needs to be considered, especially as insurance assets and liabilities are required to be disclosed gross and net of reinsurance, including gross and net incurred but not reported claims reserves.

This will also mean that actuarial calculations need to be reconsidered to align it to provide the necessary information to meet the disclosure requirements.

There will be increased financial reporting risk due to the technical complexities or staff’s non-familiarity with the Standard. This is further compounded by continued reliance on manual workarounds such as spreadsheets. To ensure accuracy and timeliness of the financial reporting, companies may need to look at the alignment of automation of their systems.

Finally, insurance companies should ideally use this disclosure as a tool to communicate the philosophy and performance of the business to its users and stakeholders instead of treating it as a compliance issue.

The enhanced disclosures will obviously allow stakeholders to ascertain the type of risks the insurers underwrites, how these risks are managed by the insurers and the impact on financial performance.

The disclosure requirements are principles based, and the guidance included in the standard is non-prescriptive.

At the end, the discretion is left to the management and directors of insurance companies to decide on how much detail should be given to satisfy the disclosure requirements and how the aggregate of these disclosures would have an impact on the overall picture of the business philosophy and performance of the company.

All these can only be achieved with early planning and with the effective date of FRS 4 looming near, that time is now.

● The writer is head of KPMG Financial Services Audit.”