Accounting standards for financial instruments

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 [email protected].