Keeping Pace with Change: An Introduction to the MFRS Annual Improvements
As part of its commitment to maintaining a high-quality and up-to-date set of accounting standards, the Malaysian Accounting Standards Board (MASB) periodically issues Annual Improvements to the Malaysian Financial Reporting Standards (MFRS). These are a collection of narrow-scope amendments designed to clarify wording, correct minor oversights, and resolve inconsistencies between standards. While not as transformative as a new standard, these improvements are an important part of the financial reporting landscape.
What's New in Annual Improvements to MFRS—Volume 11?
Issued on September 19, 2024, the Annual Improvements to MFRS Accounting Standards—Volume 11 will be effective for annual reporting periods beginning on or after January 1, 2026, with earlier application permitted. Here’s a breakdown of the key changes:
- MFRS 1 First-time Adoption of MFRS: The amendments provide clarifications on the application of hedge accounting for companies that are adopting MFRS for the first time, ensuring a smoother transition process.
- MFRS 7 Financial Instruments: Disclosures: This standard sees some of the more significant changes in this volume. The amendments introduce new disclosure requirements for:
- Equity instruments that are designated at fair value through other comprehensive income (FVOCI).
- Financial instruments that have contractual terms with features linked to Environmental, Social, and Governance (ESG) factors that could change the timing or amount of contractual cash flows.
- MFRS 9 Financial Instruments: The amendments to MFRS 9 provide important clarifications on:
- The derecognition of financial liabilities that are settled via electronic payment systems.
- The assessment of the contractual cash flow characteristics of a financial asset (the 'SPPI' test), particularly for assets with ESG-linked features.
- MFRS 10 Consolidated Financial Statements: A minor amendment clarifies the assessment of whether one entity is acting as a 'de facto agent' for another, which is important for determining control in complex group structures.
- MFRS 107 Statement of Cash Flows: A simple terminology change, replacing the term 'cost method' with 'at cost' to improve consistency across the standards.
Practical Implications for Malaysian Companies in 2025
While the effective date for these amendments is in 2026, companies should be assessing their impact in 2025. Key considerations include:
- ESG-Linked Financing: Companies with loans or other financial instruments that have ESG-linked features (e.g., an interest rate that changes based on the achievement of certain sustainability targets) will need to prepare for the new disclosure requirements under MFRS 7.
- Electronic Payment Systems: The clarification on the derecognition of financial liabilities settled via electronic payment systems will be relevant for many companies and may require a change in accounting policy.
- First-Time Adopters: Companies planning to transition to MFRS in the near future should take note of the clarifications to MFRS 1.
Preparing for 2026
To ensure a smooth transition, companies should:
- Review the Amendments in Detail: The first step is for the finance team to review the specific wording of the amendments and assess their potential impact on the company's financial statements.
- Update Accounting Policies: Where necessary, accounting policies should be updated to reflect the new requirements.
- Communicate with Auditors: It is always a good practice to discuss the company's approach to implementing new amendments with its external auditors at an early stage.
Conclusion
The Annual Improvements to MFRS—Volume 11 are a good example of the continuous evolution of accounting standards. While the changes are narrow in scope, they address important practical issues and reflect the changing nature of business and finance. By taking a proactive approach to understanding and implementing these amendments, Malaysian companies can ensure that their financial reporting remains compliant, transparent, and of the highest quality.