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MFRS are financial report standards followed by listed companies in Malaysia. It sets up guidelines how financial results are reported. Therefore knowledge about significant changes about MFRS is important to investors to correctly interpret financial reports.

What is MFRS?

MFRS stands for “Malaysian Financial Reporting Standards”. MRFS are accounting standards introduced by Malaysian accounting standards board (MASB). All non-private entities in Malaysia have to apply MFRS framework. More information is available at official website of MASB here.

As investors, why do we need to know about this? Well, we do not need to know about every bit of MFRS. On the other hand, when there are significant changes that will affect how listed companies prepare their financial reports, we need to know so that we can interpret the financial results correctly.

This article is not intended to explain from accounting perspective. Instead, I prepared this article from investor perspective. Standards covered in this article include– MFRS 9, 15,16,17. The terms are sometimes quoted in financial reports / news / research report from trading houses, so it is good that you understand what they actually mean.

MFRS 9 – Financial Instruments

Effective date of : 1^st January 2018.

It is important to take note on the effective date . This will tell from which financial report that the impact of it kicked in.

Changes from MFRS 9

MFRS 9 particularly hit banks and financial institutions that provided loan. Compared to old standard (MFRS 139), MFRS 9 is based on forward looking model. Under old standard, banks & financial institutions only make provisions when losses are incurred. On the other hand, based on this new standard, banks and institutions need to make provision for expected credit loss in the future.

To give an example, Bank A is having total loan size of $1million.

• Based on old standard, no impairment or loan loss provision is done at the beginning. If the loan is non-performing, Bank A may lose money on this loan so accordingly Bank A needs to make provision of loss in their account.

• Based on new standard, Bank A needs to make partial loss provision from the beginning based on probability on how likely the loan will turn badly. The probability is calculated through a model called ECL (expected credit loss) model. Bank A needs to continue monitoring quality of loan. If quality of loan is deteriorating, Bank A needs to increase amount of loss provision. Finally, if the loan is non-performing, outstanding loan amount out of $1million will go into loan loss provision or impairment loss.

MFRS 9- When reading past financial reports

Loan loss will be captured in profit and loss (P&L) of company. As explained above, because of the difference how loan loss is calculated, investors need to take note when comparing financial results before and after implementation of MFRS 9.

In the annual report, details of MFRS impact is normally given under “changes in accounting policies”. A chapter that most of the retail investors would skip through.

If you are interested to know more, article from The Edge here is a good reading material.

MFRS 9- When evaluating future of company

As explained above, MFRS 9 is based on forward-looking model. One of the factors being considered in this model is expected GDP growth.

In the midst of on-going COVID-19 pandemic, GDP of the country is expected to contract. So accordingly, banks and financial institutions will need to make more loan loss provision in the model, even the borrowers have not shown sign of financial trouble.

Take RCE Capital as example, the company borrows money to civil servants which should not face any job loss or salary reduction due to COVID-19. However due to credit risk signaled by small GDP growth or GDP contraction, they have to make addition loan loss provision (i.e. less net profit). I’ve written an article about this company, you can read here.

Benefits of MFRS 9 to investors

While this new standard may make loan loss and profit of banks and financial institutions more volatile, generally it is still a good thing for investors. First it makes companies more prepared for bad times. Secondly it also prevents companies lend money to bad borrowers for a temporary boost in profit for good-looking financial reports.

Below are some news/articles that quoted MFRS 9 (note that these may not be the latest news/information, just real-life examples to help you to understand the term better).

• Maybank
• RHB bank
• Aeon Credit
• RCE Capital

MFRS 15 – Revenue from contract

Effective date of : 1^st January 2018.

It is important to take note on the effective date. This will tell from which financial report that the impact of it kicked in

Changes from MFRS 15

MFRS 15 affects companies having contracts with customers to earn profit, such as property developers, construction companies and telecommunication companies.

The old standard (MFRS 118) has much simplified guidance on revenue recognition from contracts. In comparison, the new MFRS 15 provides a more comprehensive guideline. Because MFRS is to do with revenue recognition (i.e. when & how much value from the contract can be entered into income statement), it will have impact on income statement of affected companies during start of implementation.

MFRS 15 – When reading past financial reports

As examples, when it started to take effect, Digi and Cypark recorded higher income because some revenue can be recognized earlier. In contrast, it negatively impacted Sunway because some revenue can only be recognized at later stage.

There is no one rule that fits all with regards impact to companies during initial adoption Investors need to look into details in the financial reports when comparing financial reports before and after MFRS 15. In this case, revenue and profit should be adjusted to understand whether business of a company is growing.

Below are news related to companies referenced above.

• Digi
• Cypark
• Sunway

MFRS 15 – When evaluating future of company

Impart of MFRS 15 should be more limited to initial phase when it first adopted. There is nothing that investors should be too concerned for future financial reports.

Benefit of MFRS 15 to investors

Because MFRS 15 is more comprehensive, it is expected that companies will need to provide more disclosure in the financial reports for better understanding by investors. In addition, this standard should improve comparability from companies within industry or even across industries, enabling investors to make a better judgement.

MFRS 16 – Leases

Effective date of MFRS 16: 1^st January 2019

It is important to take note on the effective date. This will tell from which financial report that the impact of it kicked in.

Changes from MFRS 16

MFRS 16 affects companies that are leasing assets to do business. When an asset is leased (for instance aircrafts for Airasia, shop lots for Padini), there is an expense. Under old standard, this expense is captured in profit or loss statement. Based on this new standard, in addition to expense in income statement, companies are also required to record as asset and liability in their balance sheet.

Note for lessor, it is the other way around, lease contract will be recorded as asset in balance sheet. This standard affects leasee (borrower) more than leassor (lender).

MFRS 16 – When reading past financial reports

Investors need to take note when comparing balance sheet (especially liabilities) before and after implementation of MFRS 16. Increase of liability could be due to least contracts adding to the liability.

In the annual report, details of MFRS impact is normally given under “changes in accounting policies”. A chapter that most of the retail investors would skip through.

MFRS 16 – When evaluating future of company

For lease expense, old standard used straight-line expense profile. However with this new standard, a lease would incur higher expense at the beginning in profit & loss (P&L), and gradually reduces towards the end of lease term.

Eventually the total lease expense remains the same. In overall over the years, there is no impact to the income statement. However under circumstance say company is having multiple lease contracts starting at the same time (e.g. rapid expansion of business), high lease expense initially could hit the profit temporarily. 

If you are interested to know more, article from The Edge here is a good reading material.

Benefit of MFRS 16 to investors

With the lease liability is now in balance sheet, it provides investor better visibility into financial health of the company. In addition, investors can make better prediction of future lease expense for a more accurate analysis. It may also prompt companies to look into their lease portfolio for optimization.

Below are some news/reports that quoted MFRS 16 (note that these may not be the latest news/information, just real-life examples to help you to understand the term better).

• Airasia
• Padini
• Parkson

MFRS 17 – Insurance contract

Effective date of : 1^st January 2023

MFRS 17 will impact all insurance companies, such LPI, Takaful, Manulife etc.

Currently for insurance contract with customers, most of the profit is recognized in day 1. After adoption of MFRS 17, profit earned from insurance contracts will need to be spread across the coverage period. Therefore it will be a big impact to insurance industry.

More content about this new standard will come later.

For readers interested to know more, article from The Edge here is a good reading material.

Effective date of MFRS

It is very common for many companies that financial year is different for calendar years. After a new MFRS is effective, it will only be applicable in the following financial year.

As a example, MFRS 16 is effective on 1st Jan 2019. For companies with their financial year ended in June, it is not required to comply with MFRS 16 for 1st and 2nd quarters of the year. Adoption of MFRS should start from new financial beginning from July.