This accounting standard is by far the most contentious, complicated and still in the process of updating and change, among all the other standards.

As frightful as it may sound, the Malaysian Accounting Standards Board (“MASB”) has announced the accounting standards relating to financial instruments shall be implemented and applicable for financial periods beginning on or after 1 January 2010. This will be the one of the most daunting tasks to all financial executives. Accounting standards applicable are as follows:-

1. FRS 139 – Recognition and Measurement
2. FRS 132 – Presentation
3. FRS 7 – Disclosures

Without going to the technicalities in detail (and start confusing everyone), we will just touch on the general area for each of the standards.

FRS 139 – Recognition and Measurement

• All entities other than private entities are affected. These are mainly public listed companies, and subsidiary/associate/joint controlled companies of public listed companies.
• Financial instruments cover both financial assets and financial liabilities. Examples of such assets and liabilities are trade receivables/payables, intercompany balances, bank facilities, debts, derivatives (forwards/futures/options)…. and the list goes on.

There are four (4) categories of financial assets:

1. Fair value though profit and loss (“FVTPL”) – assets held for trading (not designated for hedging).
2. Loans and receivables (“LR”) – fixed and determinable payments.
3. Available for sale (“AFS”) – non-derivative assets initially recognized as available for sale, and not classified as FVTPL or LR.
4. Held to maturity (“HTM”) – non-derivative assets with intention to hold until maturity, and not classified as FVTPL or LR.

Financial liabilities are categorized into either:-

1. FVTPL – held for trading or designated upon initial recognition
2. Others – not classified under FVTPL.

FRS 132 – Presentation

This standard establishes the principle whether the financial instruments are presented as liability or equity. Further, this standard prescribes the accounting for treasury shares as well as specific conditions for an asset or liability to be offset in the balance sheet.

In deciding whether the financial instrument is classified as a liability or equity depends very much on the substance of the contract.

FRS 7 – Disclosure

• In the Balance Sheet, the carrying amounts of the financial instruments are required to be separately disclosed according to financial assets and liabilities categories mentioned above. Further explanation and information on each and every item on the value measurement, amortization methods, and accounting concepts are required.
• For the Income Statement, there is also a requirement to disclose gains and losses arising from each of the financial assets or liabilities, with elaborated information on the accounting reasoning behind it.
• Other disclosures such as basis of measurements, and if hedge accounting is used, the description, nature and fair value of hedge accounting.
• Qualitative disclosures such as management’s objectives, policies and processes in managing the risk of each class of financial instruments.
• Quantitative disclosures such as credit risk, liquidity risk and market risk where various analysis are required to be disclosed within the financial statement.

Should you have any further questions regarding accounting standards for financial instruments, feel free to contact KL Management Services at +603-2282 0888 or email info@klmanagement.com.my.

At the end of 2009, Malaysia’s prime minister Datuk Seri Najib Tun Razak announced that a bill on the proposed introduction of Goods and Services Tax (“GST”) will be tabled at this year’s Budget 2010. Some indicated expectations about GST are as followed:

• GST is to be implemented from the 3rd quarter of 2011;
• The rate is set at 4%; and
• GST is applicable to all businesses with turnover above RM500,000.

What is GST?

GST is to set to replace the current Sales Tax and Service Tax systems in Malaysia and it is a multi-tier consumption tax; which simply means GST is applied at every stage of the supply chain; i.e. from raw material supplier, all the way until the retailers selling to consumers (or end-users). In a nutshell, the consumer bears the burden of the ultimatum tax figure.

The word “consumption tax” is used.

This indicates that GST is applied on consumption value, and not earnings or profits. GST is applicable on virtually all supplies of goods and services, except for this essential commodities such as rice, flour etc.

How GST works

It’s actually very simple. GST paid on purchases (are called “input tax”) shall be deducted from the GST charged to customers (called “output tax”). This offsetting mechanism is to ensure GST paid by businesses are incremental, based on value-added basis and do not end up being permanent cost…. well, consumers do not apply here.

Below is an illustration, showing how GST works:

GST mechanism in the Supply Chain

How does GST work? GST's mechanism in the supply chain for GST calculations and tax in Malaysia, for budget 2010

1. Let’s say the selling price from the supplier is RM100, and where 4% GST is charged.
2. The supplier then charges the tax to the manufacturer, where you can see “value added” is pushed on.
3. When the distributor receives and pays for the tax, it’s transferred to the consumer at the end price.

Payment of GST to the Government

1. Supplier will pay RM4 (output tax) to the Government.
2. Manufacturer will pay RM4 (output tax of RM8 less input tax of RM4) to the Government.
3. Distributor will pay RM2 (output tax of RM10 less input tax of RM8) to the Government.

At the end of the day, consumers are the ones who are paying for GST of RM10, and the Government, who eventually receives total GST of RM10.

Prior to 1 April 2007, Real Property Gains Tax (RPGT) has been in effect for quite some time already, and during that time, the RPGT rates are as follows:

Real Property Gains Tax (RPGT) rates in Malaysia prior to 1st April 2007

In summary, the RPGT during that time was applicable to all companies that disposed their properties, regardless of the duration of ownership.  As for individuals, there will be no RPGT is disposed after owning more than 5 years.

Due to the weak economy in 2006 and 2007, the government announced exemption of RPGT across the board, meaning for companies and individuals, and ignored the ownership period.  Exemption means “ignoring” the RPGT Act, not removing the Act.  All Malaysian citizens and companies lauded this move, and supported this exemption because the simple fact is, they benefit.

Now, in Budget 2010, this exemption is lifted.  RPGT will return effective 1 January 2010.  However, the RPGT rates have generally been lowered as followed:

Real Property Gains Tax (RPGT) rates in Malaysia starting January 1st, 2009

Companies and Malaysian individuals will share the same RPGT rates, fixed at 5%.  This is the part that caused dissatisfaction among the Malaysian individuals as it becomes more expensive for owners to sell their properties.

Furthermore, it is even harder for property companies to sell their properties as house buyers have slowed down their buying spree, especially those speculative house buyers who have intention to flip their properties.  Their costing have changed.

Nominating Committee

The nominating committee is responsible to identify, nominate and orientate new directors, both executive and non-executive. The main reason for delegating such responsibility is to ensure recruitment matters relating to directors are addressed in detail, allowing the Board to spend time on strategic matters. It is, however, the Board’s responsibility to appoint a candidate to be a director.

General duties and responsibilities

1. Recommend candidacy for directorship filled by shareholders, taking into consideration their knowledge, skills, experience, expertise, professionalism, integrity etc;
2. Assist the Board to review the required mix of skills, experiences and other qualities which non-executive directors should bring to the Board on annual basis;
3. Consider recommendations of candidates proposed by the CEO or other senior management or shareholders or directors;
4. Review annually, the effectiveness and contribution of the Board, each committee and each individual director; and
5. Review periodically, and report to the Board on succession planning, and to evaluate potential successors.

Additional tasks of the Nominating Committee, subject to approval of the Board, can be as follows:-

1. Assess the optimal balance for Board membership;
2. Assess the desirable number of independent directors; and
3. Consider possible representation of interest groups.

Composition

According to the Corporate Governance Code, the Nominating Committee should comprise wholly non-executive directors with a majority as independent. These persons are expected to be outspoken and frank.

There should also be rotating membership in the committee where all members are appointed for a fixed term of service. This is required to avoid complacency in the committee thereby affecting a drop in the committee’s performance.

Remuneration Committee

The main purpose of a Remuneration Committee is to ensure a proper balance between having a remuneration package that can attract and retain good directors, and not paying excessively.

Composition

Recommendation from Corporate Governance Code, this committee should be made up of wholly or mainly of non-executive directors. It also calls for the Board to disclose the committee membership in the directors’ report.

Same as the Nominating Committee, this Remuneration Committee should also appoint its members on rotation basis.

The Audit Committee

The third part of our Corporate Governance series, we will be covering the functions and responsibilities of an Audit Committee within an organization, which is fundamentally about accountability and good governance.

Pursuant to Paragraph 15.10 of the Listing Requirements, all listed companies in Malaysia must have an Audit Committee. This committee will provide the Board of Directors with assurance on the reliability and quality of the financial statements, which certain information shall also be made available to the public.

While the Board is responsible for the accuracy and reliability of the company’s financial information, it may not be practical for them to keep up with the continuous changes and complexities of financial reporting. The Audit Committee, therefore, functions as an additional and more specialized oversight reviewer of the financial reporting process.

An effective Audit Committee must be seriously aware of its position within the organization, and should assume the following key responsibilities:-

1. Assess risks and control environment – the Committee must determine that the management had implemented sufficient policies to identify and evaluate risks, and controls are in place to address these risks.
2. Oversee financial reporting – assess the appropriateness/relevancy of accounting policies and disclosures in compliance with approved accounting standards. Further, the Committee is also expected to assess whether the financial report presents a true and fair view of the company’s financial position and performance.
3. Evaluate the internal and external process – there are 2 parties involved, namely the external and internal auditors. The external auditors are responsible for auditing the financial statements of the company whereas the internal auditors are responsible for evaluating the risk management, control and governance process. The Committee, therefore, functions to coordinate both parties’ efforts and review their competencies.
4. Review conflict of interest situations and related party transactions – related party transactions may present potential conflict of interest and probably cause a company decision made based on a consideration not to the best interest of its shareholders. The Committee is responsible to determine the company’s policies with regards to these transactions, and ensure timely internal and regulatory disclosures are made, including appropriate review exercises and reporting.

While the size of the Audit Committee varies, the Listing Requirements requires a company to appoint minimum of 3 members. All members must be non-executive directors, with a majority being independent. At least one member of the committee must fulfill the financial expertise criteria of the Listing Requirements.

1. Clarify the roles, responsibilities and accountabilities of the board members and management team;
2. Enable the board to provide strategic guidance and effective oversight of the management; and
3. Ensure that no one single individual has too much power or influence on the organization.

Further to the above, the board’s main role is to protect the interests of the shareholders and other relevant stakeholders. At the same time, they have to ensure that the company is able to compete in the market. The directors are also expected to be able to have a firm grip on the company’s internal controls processes, to ensure operational and financial risks are identified, addressed and managed.

In a general context, the effectiveness of a board within an organization depends on a few factors, namely, size and composition, competencies, activeness and leadership qualities. These factors are non-exhaustive and non-conclusive whereby every organization should include relevant gauge wherever necessary.

Size and Composition

There is no such thing as the optimal size for the board, but the Companies Act 1965 determines the minimum number of directors and the Articles of Association normally specifies the maximum. However, instead of arriving at the absolute number, an organization should look into certain factors to gauge the optimum size of the board. Some of these factors include:-

• Size of the organization, scope of business and geographical diversity;
• There should be a balance between executive and non-executive directors as well as the independent elements of those non-executive directors. This is mainly to achieve the check and balance whereby no single individual has the ultimate control over the board;
• Whether the board has representation diversity in terms of professional experience, race, gender and technical know-how of the industry.

Competency

There should be a mixture of core competencies among the directors in the board to cover most aspects of the organization. Certain directors need to have relevant industry specific knowledge and experience whereas others are professionals having focused expertise in areas such as finance, accounting, risk management etc.

Activeness

The board is required to play an active role in directing the organization. Although they may not be playing an active role in the daily operational issues, the board is expected to be vigilant in ensuring the management is implementing the direction of the board.

In addition to playing the strategic role within the organization, the board is also expected to monitor the management’s decisions and actions, and if there are inconsistencies found, they should question the management based on factual knowledge. Furthermore, the board is also expected to ensure that the management conducts their tasks ethically and comply to all financial reporting and regulatory requirements.

Leadership Qualities

Being the driver of the organization, the board must should leadership qualities such as having ability to inspire talents and provide strategic direction and vision of the organization. They have to be able to evaluate strategic decisions, conceptualizing ideas and innovation to continually pressing for growth and address future challenges.

Whilst the board of directors plays a very big part in corporate governance, certain other factors like risk management, internal and external audits too affect the framework of corporate governance.

Corporate governance is defined as a set of policies and procedures affecting the way a corporation is administered. These policies and procedures are mechanisms required to ensure accountability of certain individuals who have great impact on the organization’s direction and goals.

The next question will be “Who are these individuals?” they are none other than the directors of the company. The role of the director is to design, develop and implement strategic plans for their organization in a cost-effective, time-efficient manner. Further to strategic plans, the director is also responsible for day-to-day operations of the organization. He/She will need to report the status and progress of the strategic plans to the Board of Directors of the company in a periodic basis.

“If directors are the controlling party of the organization, then why must there be corporate governance?”

Corporate governance comes into play when there are different stakeholders involved within and around the organization. Stakeholders are parties who have certain interest in the company, directly and indirectly, which means that a certain strategic decision by the organization may affect the position of some other parties. Examples of stakeholders are the shareholders, management, employees, customers, creditors, banker and regulators.

In essence, every organization need good corporate governance to ensure the interests and welfare of all stakeholders are protected. Some famous events of how bad corporate governance affected numerous stakeholders can be seen from the high profile collapse of some large US companies like Enron and WorldCom. More recent cases of bad corporate governance issues came about when the large US automakers seeking for government bailouts and the collapse of a 150-year old multinational company called Lehman Brothers.

From that moment on, I am pretty sure many people out there are very curious about the same question and here, I would like to share with you, the duties and responsibilities of a company secretary.

The Company Secretary

Every limited company must have a minimum of one Company Secretary, according to Section 139 of the Companies Act, 1965. The appointment of Company Secretary is decided by the directors of the company.

To qualify as a Company Secretary, he or she must be either a member of a professional body approved by the Ministry, or a licensed secretary granted by the SSM. Further, the person must not be a bankrupt and is not convicted of any offence under Section 130 (1) of the Companies Act.

Statutory duties of a Company Secretary

The duties of a Company Secretary as required by the Companies Act are generally as follows:-

1. Has to be present at all company meetings and recording minutes of the meeting. In this context, company meetings are mainly referred to directors’ and shareholders’ meetings. Operational meetings do not require a company secretary’s attendance.
2. Keep and maintain all the statutory books and records of the company, ie. Minutes book, register book, share register etc.
3. Ensure proper filing of all necessary returns with SSM such as annual return, forms etc.
4. Issue notices of meetings to shareholders as directed by the board of directors.
5. Process share transfers documentations and recordings.
6. Countersign essential company documents and certifying documents for certain matters such as banking matters etc.
7. Ensure safe custody of company seal.

Liabilities of a Company Secretary

Given the fact that a company secretary is an officer of a company, same as the directors, he or she has fiduciary duties to perform for the company. He or she is requires to act honestly and in good faith.

A company secretary is personally liable to criminal charges is he or she commits wrongful acts, and can also be penalized with a fine. Wrongful act is as simple as failure to lodge the annual return to SSM.

For many private limited companies, the shareholders of the company are often involved in the daily operations and management of the company, and therefore, usually appoint themselves to be the directors of the company.

In all limited companies, there must be at least 2 directors who each have his/her principal or only place of residence within Malaysia.

To qualify to become a director of a company, he must be:

1. A natural person
2. At least 18 years old
3. Of sound mind
4. Not disqualified under the Companies Act 1965

For a newly incorporated company, the first directors are named in the Memorandum of Association or Articles of Association and they will hold office until the first annual general meeting where they will retire. All persons who wish to be a director must first lodge with the Companies Commission of Malaysia (or SSM) a document called “Form 48A”. This form is a statutory declaration by the director, that he or she is not an undischarged bankrupt and has not been convicted of an offence.

Differences between executive and non-executive director

An executive director is a salaried director who works full-time and is appointed with managerial powers by the board to carry out the company’s daily operations.

A non-executive director does not work full time, receives a smaller director’s fees and functions as a policy maker for the company.

Duties and Responsibilities of Directors

Directors have fiduciary duties towards the company and their shareholders who appointed them. Fiduciary duties include:-

• Act bona fide in the interest for the company. Bona fide means “in good faith”;
• Avoid a situation where there is a conflict between duty to the company and personal interest; and
• Not to make any secret profit out of the position as director.

The statutory duties of the directors include:-

• Act honestly at all times and use reasonable diligence when discharging their duties;
• Avoid improper use of information obtained by virtue of position to gain personal advantage personally or to cause detriment to the company;
• Avoid improper use of sensitive, unpublished information to gain personal benefits;
• Before disposing of or executing any transaction for the disposal of a substantial portion of the company’s undertaking or property, obtain approval from the members in a general meeting;
• Disclose his shareholdings in the company and any changes thereof;
• Disclose his interest in any contract or proposed contract made by the company; and
• Ensure registers and statutory books are kept updated.

The directors’ responsibilities include ensuring the following requirements are complied with:-

• Record minutes of all directors’ meetings;
• Make annual return and lodge with SSM;
• Keep proper accounting records;
• Table accounts, balance sheet and directors’ report at AGM;
• Circulation audited accounts to members;
• Appoint auditors;
• Comply with restriction, limitation or prohibition of a private limited company;
• Appoint company secretary;
• Make declaration of solvency in the case of voluntary winding up by member;
• Ensure that dividend payments are from profits only

In most cases, the listed company will need to determine if it will trigger Cash Criterion when it disposes a major part of its group assets or core businesses.

While the definition of cash is easily understood, short term investments are those investments that are by their nature readily realizable and intended to be held for 12 months or less.

In general, Bursa will decide if the listed company’s level of operations is adequate to warrant continued trading or listing on the Exchange. If Bursa decides that the level of operations is inadequate, the listed company will be considered a Cash Company.

To determine if a listed company is having inadequate level of operations, possible circumstances are as follows:-

1. As mentioned above, the combination of cash and short term investments making up at least 70% of consolidated assets; or
2. The listed company has suspended or ceased all or major part of the business. Some examples include cancellation or non-renewal of licenses, concessions or any other rights, or a court judgment prohibiting the listed company to operate its major operations on grounds of copyright/patent etc.

Practice Note No. 16/2005 or PN16 in short, is issued by Bursa to address Cash Companies, deciding whether to maintain the company’s listing status or proceed with de-listing exercises. During this period as a Cash Company, the listed company is obliged regularize its condition by:-

1. Submiting a proposal to regularize its condition; and
2. Upon approval from relevant authorities, the listed company must implement its proposal within the timeframe approved by the relevant authorities.

A Cash Company that fails to regularize its condition or its proposal is rejected by the authority, will face the situation where its shares and securities will be suspended and subsequent de-listing procedures will commence.