Malaysia is a country which located in the continent of Asia, region of Southeast Asia. The formation of Malaysia consist of 5 elements which are ancient Malaya, Hindu kingdom, Islam and the golden age of Melaka, colonial Malaya, and independence.
In ancient Malaya, orang asli in Peninsula, Penan of Sarawak and the Rungus of Sabah are the earliest group of people inhabitant in. Their presence results in the second wave of movement into Malaya, the Malays. Proto-Malays were formed and they are made up of farmers and seafarers. Few centuries later, Deutero-Malays also move into Malaya, with a more advanced farming technology and proficient in use of irons.
Secondly, during the Hindu kingdom in 100 BC-1400 AD, the arrivals of Indians had greatly influence the Malaya's culture. While the Indians are searching for gold, spices and aromatic wood, they also established Hinduism and Buddhism in Peninsula by introducing temples and other cultural traditions from India.
Islam and the golden age of Melaka
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Melaka was founded by Parameswara, a Sumatran prince in 13th century. A regional navy that policed the local waters and convoyed friendly ships makes Melaka become a safe and secure port city for trading. In this case, the incoming Arab traders who wanted to barter goods and spices had indirectly brought Islam to Melaka. As a result, Islam breaks through the cultural influences of Hinduism and Buddhism to Malaya and became a main influence with the conversion of the Malay-Hindu rulers of Melaka.
During the early 16th century, the rising European powers discovered the need to establish an own trade patch to India and the Far East for spice trade. Thus, Alfonso de Albuquerque led a team of Portuguese navy and captured Melaka harbor including the city with canon fire in 1511. A Famosa was built by the Portuguese after that but it was occupied by the Dutch in 1641. However, Melaka was handed over to the British by the Dutch in 1795. In 1874, Sultans are forced by the British to sign the Pangkor peace treaty due to the civil war among the Malay sultans. This gave Britain a great chance to monitor the vast tin and rubber resources until World War 2 (WW2). However, Britain was forced to surrender in 1942 due to the invasion of Japanese. In 1945 after WW2, Britain resumed control of Malaya.
In 1957, the British granted the independence to Malaya in Kuala Lumpur's Merdeka Square. Tunku Abdul Rahman became the first prime minister of Malaya. After Tunku Abdul Rahman persuaded Singapore, Sabah, and Sarawak to join Malaya in a federal union in 1961, Malaysia was borned.
2.0 Culture and Classification
According to Bozyk (2006), Malaysia is considered as an open state-orientated, newly industrialized market economy. Malaysia has a diversified and rapidly expanding manufacturing sector which contributes 35% of the GDP. On the other hand, service sector in Malaysia is contributing 49.7% of GDP. Based on Economy Watch (2010), Malaysia had an annual growth rate of 6.5% in GDP for more than 50 years and it is one of the Asia countries with best economic records
Malaysia is a country which adopted a mixture of legal system. English common law is the main law in Malaysia as a result of Britain colonial in early 1800s to 1960s. Besides, Islamic law and customary law are also practiced in Malaysia. Islamic Law is compulsory to be follow by the Islam and customary law is generally applied to all as it is traditional rules which has become an accepted conduct in a community treated as a legal requirements.
Political system practise in Malaysia is the parliamentary democracy. Since independence, Malaysia is led by the same coalition government of the National Front (Barisan National and the United Malays National Organisation (UMNO) and other parties representing other main etnic group in Penisular Malaysia. In addition, enhancing national unity and economic development with equity are the two main long term goals which are being focus by the political leadership. (EU-Malaysia Chamber of Commerce and Industry, n.d.)
Education system in Malaysia is not well developed. According to National Economic Advisory Council (2010), the human capital in Malaysia is not improving and education system failed to deliver the required talent. For instance, 80% of Malaysia's workforce received education only up to Sijil Pelajaran Malaysia based the the Department of Statistic in 2007 and the government and they are not skilled anough.
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Malaysia is a multi culture society in Asia. According to Census (2000), it is made up with 65% of malays and other bumiputra, 26% of Chinese follow by 8% of Indians. Consequently, the main religions in Malaysia are Islam, Buddhist and Hindu. People are freedom in practising their own religion without discriminatory to other religions.
Mueller and Gray Classification
Based on Mueller's classification of development patterns, Malaysia can be classified under independent discipline approach where accounting is viewed as a service function that derives its concepts and principles form the business process it serves, but not from a discipline such as economy. (Mueller, 1967). However, it is not always appropriate to use Mueller classification towards Malaysia accounting development. In this case, Gray's cultural framework for classifying accounting system has to be taking into account. (Gray, 1988). Refer to Gray's classification, Malaysia is categorized under Asian-Colonial with lower level of flexibility and high level of statutory control in terms of authority and enforcement. Besides, in terms of measurement and disclosure, Malaysia is grouped under low level of optimism and less transparency.
3.0 Regulatory framework of accounting
In Malaysia, every public listed company are required to presents their yearly financial report to the shareholders. This is because financial reports allowed the external users to obtain information about the financial performance and position of an organisation and it act as a communication tools between the two parties. (Collis and Hussy, 2007) However, it is important to prepare a financial report which is standardising so that it is easier for external user to make comparison. Thus, in order to ensure all the financial statements are prepared according to developed framework, the process of financial reporting is monitored by a regulatory framework according to Collis and Hussy (2007). For instance, accounting profession, auditing, company law, taxation and stock exchange requirements are some of the provider of regulatory framework.
Initially, According to Jamaludin (2008), there are 3 regulatory bodies in Malaysia. They are the Malaysian Institute of Accountants (MIA), Malaysian Institute of Certified Public Accountants (MICPA), Malaysian Accounting Standard Board (MASB) together with Financial Reporting Foundation (FRF). MIA was established in 1967 under Accountants Act 1967. Next, MICPA is previously known as "the Malayan Association of Ceritfied Public accountants" and it is established in 1958 under the Companies Ordinances. Then, MASB and FRF were established in 1997 under the Financial Reporting Act 1997.Secondly, in terms of auditing, the auditors in Malaysia are regulated by Audit Act 1957 and the Auditing and Assurance Standards Board (AASB) which established by MIA in the year 2009. (Tan, 2011) Thirdly, companies in Malaysia are regulated by the Companies Act 1965. Besides, income tax, corporate tax, sales and service tax are the three main taxes which need to be paid by an entity or an individual in any area of business. On the other hand, Income tax 1967 is introduced to ensure that the tax system is operating effectively in Malaysia. In terms of stock exchange, all the stocks of listed companies are traded in Malaysia Stock Exchange named "Bursa Malaysia".
Again, MIA, MICPA, and MASB together with FRF are the accounting profession in Malaysia. These regulatory bodies play several important roles in accounting development of Malaysia. For instance, they are responsible to implement professional standards and practises according to internationally accepted guidelines and standards. Secondly, they also in charge in developing a strict disciplinary system for those parties who fails to adopt or comply with the implemented accounting standards. In particularly, MIA is the main regulatory body in Malaysia. For instance, MIA involvement in Asean Federation of Accountants (AFA) and International federation of Accountants (IFAC) enables Malaysian accountants to have a voice on these global and regional platforms. It also enables the latest overseas development to be brought home to improve the local profession. In this case, MIA becomes the backbone of accounting development in Malaysia. Furthermore, none of the people can be an accountant whithout registered as a member of MIA as provided under the provision of Accountants Act 1967. (MIA Official Web)
All the business operations as well as financial reporting requirements of the companies in Malaysia are regulated by Companies Act 1965. In particularly, Section 166A until Section 171 of Companies Act 1965 stated the accounting regulations which need to be followed by the companies in Malaysia. If any of the company did not follow the accounting regulations, penalty will be given.
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As above, MIA established AASB which is actually a functionally independent standard setting-body that govern the auditing standards in Malaysia. Roles of AASB towards accounting development in Malaysia are significant. This is because AASB highly encourage on the adherence of international convergence of standards and compliances to the high quality professional standards. Besides, AASB support the accounting profession through continuous developing and spreading of guidance for auditing and assurance services. Moreover, any other issues and new developments in other jurisdictions that is link to auditing practices in Malaysia will be review and consider by AASB to strengthen the auditing standards. Other than AASB, Audit Act 1957 also acts as a rule to monitor the way on how auditors conduct their duties. It is compulsory for the auditors to follow what has been included in the Act or else penalty will be given to the auditors.
In Malaysian taxation, income tax, corporate tax, sales and service tax are the general taxes which have to be paid. In terms of income tax, whatever income earned by an individual from the businesses or by an organisation from the businesses must be taxed in Malaysia. Consequently, Income Tax Act 1967 is introduced to act as a guideline and ensure that the amount of tax paid by an individual is reasonable. For instance, resident in Malaysia with chargeable income, RM16,667 and above annually after deduction of personal reliefs is required to pay 1%-26% of income tax whereas a non-resident is required to pay 26% without any reliefs benefits.(Malaysian Investment Development Authority, 2012). In terms of corporate income tax, either an organisation is resident or non-resident, it is required to pay a 25% of corporate tax. For sales tax, the tax rate range from 5% to 10% and it is usually applied in imported or locally manufactured goods based on Sales Tax Act 1972. On the other hand, the service tax is at a fixed rate of 6% and it is imposed on taxable services provided by taxable persons such as restaurants. (Malaysian Investment Development Authority, 2012).
Previously, the stock exchange of Malaysia is known as Kuala Lumpur Stock Exchange (KLSE). It is renamed into Bursa Malaysia in the year 2004. Wikipedia, 2012. Bursa Malaysia is an approved exchange holding company that offer varieties range of investment choices globally such as offer equities, derivatives, offshore, bonds and Islamic products. The company is limited by shares under Companies Act 1965. Bursa Malaysia and established under Section 15 of the Capital Markets and Services Act 2007. Based on Bursa Malaysia, a total of 923 companies are listed in bursa Malaysia in year 2012 where 811 companies are listed in main markets while the other 112 companies is listed in ACE market. The role of bursa Malaysia is to keep a fair and orderly market in securities and derivatives which are traded though its facilities. Besides, bursa Malaysia also responsible to ensure that the dealing, clearing and settlement arrangement for transactions is monitored orderly, clearly and efficiently. In terms of company objectives, bursa Malaysia considers investor protection, market integrity, transparency, and corporate governance so that the investors are confidence at participating in the investment.
In terms of presentation of financial statements, all the public listed companies that operate in Malaysia are required to present balance sheet, income statement, statement showing changes in equity and notes to the account in their annual report according to the national standards, MFRS 1. In addition, compliance with national standards will automatically ensure the conformity with all aspect of IAS 1.
4.0 Accounting principles
As mentioned above, MASB together with FRF is one of the main authorities in regulating accounting standards in Malaysia. The accounting standards adopted in Malaysia is known as Financial Reporting Standards (FRS). It was first implemented in 1 January 2006 and it had brought a significant effect to the companies in Malaysia. Some of the FRS is discussed as below:
FRS 5 Non-current assets held for sale and discontinued operations:
Requirement in classification, presentation and measurement under this standard is applied to all recognised non-current assets and also all the disposal groups within an organisation. FRS 5 is complied with IFRS 5 except for the effective date of the transitional provision where FRS 5 should be applied prospectively to the non-current asset that is classified as held for sale and operations that is classified as discontinued after the effective date of FRS.
FRS 101 Presentation of financial statements:
This standard requires entities in Malaysia to prepare and present general purpose of financial statements in accordance with requirements of FRS. FRS 101 is complied with IAS 1 (2003) but not IAS 1 (2005). This is because amendments to IAS 1 (2005) on capital disclosure have not been included in FRS 101.
FRS 102 Inventories:
This standard applies to all inventories except work in progress under construction contracts, biological assets relating to agricultural activity and financial instruments. FRS 102 is consistent with IAS 2 (amended in 2005).
FRS 107 Cash flow statement:
Entities in Malaysia are required to prepare cash flow statement showing inflow and outflow of cash and cash equivalents within an organisation with the requirements under this standard as it is part of the complete set of financial statements.FRS 107 is complied with IAS7(amended in 2005).
FRS 116 Property, plant and equipment:
This standard should be incorporated in accounting for property plant and equipment unless another standard indicated a special or different accounting treatment. However it does not apply in items which are classified as held for sale, biological assets related to agriculture activities, the recognition and measurement of exploration and evaluation assets as well as natural resources such as mineral and oil. FRS 116 is consistent with IAS 16 except for the transitional provision for those entities that had recognised their property plant and equipment at revalued amounts MASB Approved Accounting Standards IAS 16 for the first time upon the implementation in 1998.
FRS 117 Leases:
Accounting on leases should follow the requirements under this standard except leases to explore natural resources and licensing agreements. FRS 117 is complied with IAS 17 except that leasehold land which is previously revalued should hold the unamortised revalued amount as the alternative carrying amount for prepaid lease payments.
FRS 123 Borrowing costs:
Entities are required to apply this standard in accounting for borrowing costs. However, an entity need not to adopt this standards for those borrowing costs that directly attributable to the acquisition, construction or production of qualifying assets which are measured according to fair value and inventories that are manufactured. FRS123 is consistent with IAS23
FRS 136 Impairment of assets:
This standard should be adopted while preparing account for impairment loss of assets. However it is not applied in inventories, assets from construction contracts, deferred tax assets, assets from employee benefits, assets used for financial instrument, investment property at fair value and so on. FRS 136 is complied with IAS 36.
FRS 138 Intangible assets:
This standards should be apply in accounting preparation for intangible assets except intangible assets that are within the scope of another standard, financial assets which is a financial instrument, recognition and measurement of exploration and evaluation, and expenditure on the development of minerals industry. FRs138 is consistent with IAS 38 except the prohibition of the initial recognition of government grant at nominal value.
FRS 140 Investment property:
The recognition, measurement and disclosure of investment property of an entity in Malysia must be based on requirements under this standard. Yet, this standard does not applied in biological assets from cultural activities and assets used in mineral and natural resources extracting activities. FRS 140 is complied with IAS 40 except the accounting treatment of those entities which has recognised its investment properties based on MASB Approved Standards IAS 16 and has utilized themselves in the transitional provision in that standards.
5.0 Consolidated accounts
In Malaysia, parents companies with subsidiaries are required to prepare consolidated financial statements in respect of a group based on uniform accounting policies under FRS127. Consolidation of a subsidiary take placed from the date when the parents company buy over the subsidiary. After the acquisition, parent company may have power to control the financial and operating policies of the subsidiary and this power is suspended when the parents company lost control towards the subsidiary. If a losses of control occurred, they should derecognises the assets and liabilities of the subsidiary from the consolidated accounts, recognises any investment retained in the subsidiary at fair value as well as the gain or loss related with the loss of control adscription to the former controlling interest. Thus, the purpose of consolidated statement is to show the effect as if the parent and the subsidiaries are one entity. If the subsidiary is not fully control by the parents company, non-controlling interests should be presented in the consolidated statement of financial position under equity but separately from the equity of the owners of the parent. (MASB,2011). Generally, FRS 127 is consistent with IAS 27 except that FRS 127 explained that in order for a parent company to be exempted from presenting consolidated financial statements, other intermediate parents company are required to be incorporated in Malaysia.
6.0 Foreign currency translation
To remain competitive in the market or increase market share, many businesses in Malaysia may deal with overseas supplier and customer or even have a subsidiary in foreign countries. It is known as foreign currency translation. When a foreign transaction take places, different entities from different countries may recognise the transaction based on their own functional currencies. In this case, it is important to translate the functional currency into presentation currency for financial reporting purposes. For instance, the currency used in Malaysia is known as Ringgit Malaysia (RM) which is different from the international approved currency. Compare FRS 121 the effects of changes in foreign exchange rates with IAS 21, both are similar except that FRS 121 requires financial statement presented in Malaysia to use Ringgit Malaysia unlike IAS 21 which allowed the entities to use different currency to present its financial statement. Besides that, the effective date of the transitional provision where the entities is required to make use of paragraph 47 in FRS 121 prospectively to all acquisition occuring after the beginning of financial period if FRS 121 is first adopted.
7.0 Business ownership
Generally, there are 3 main types of business ownership in Malaysia. They are sole proprietor, partnership and company. Sole proprietor is the simplest form of business in Malaysia. It is not necessary to have only one person in the business as sole proprietor. Secondly, partnership is a joint business owned by minimum two person but not more than 20 people. Thirdly, companies are formed by several people and it is a separate legal entities with the owner. There are 2 types of companies in Malaysia which are the public company and private company. A private company consist of minimum 2 and maximum 50 members while public company can have any number of members. Besides distinguish company into private and public, it can also be separate into company limited by shares and company limited by guarantee in Malaysia. Despite sole proprietor, partnership and company, holding company is also another form of business ownership which can be found in Malaysia. (Companies Commission of Malaysia, 2012)
8.0 Corporate governance
Due to the collapse of Enron case, corporate governance has become of of the issues in most of the countries. The main source of corporate governance reforms agenda in Malaysia came from the Malaysian Code on Corporate Governance which is established by the Finance Committee on Corporate Governance (FCCG) in March 2000. The code adopted is based on hybrid approach which is similar to the Combined Code on Corporate Governance in United Kingdom where it prescribes the best practices in order to set relevant standard for governance practice in Malaysia. (Journal of Money, Investment and Banking, 2009). Yet, the organisation enjoys the flexibility to develop their own approach in implementing corporate governance practices. In addition, the code is made up with 4 parts which are principles, best practices, exhortations to other participants and explanatory note. For instance, principles in the code discuss about the statutory duties of board of directors, directors' remuneration, shareholders and accountability and audit while the best practises explain the best conduct of board of director and accountability and audit to help an organisation in designing their corporate governance. Development of corporate governance in Malaysia also results in the establishment of Malaysian Institute of Corporate Governance (MICG). MICG was formed in March 1998 by the high level of FCCG with the purpose of raising and enhancing the awareness and practices of good corporate governance in Malaysia.
Based on Nobes (1992), harmonization is a process of increasing the compatibility of accounting practices by setting bounds to their degree of variation. Even though Malaysia is considered as an Islamic country, the recent development of FRS to comply with IFRS had brought Malaysia closer to the process of harmonization. Furthermore, this can be explained through the announcement made by MASB on 17 November 2011 where the FRS will be replaced by Malaysian Financial Reporting standard (MFRS) from January 2012 onwards in order to converge with the IFRS standards issued by International Accounting Standard Board (IASB).(Geoffrey, 2011). However, these standards are poorly adopted and utilized by all the companies in Malaysia. For instance, some of the small and medium enterprises (SMEs) are still following their own accounting standards. In this case, relevant actions such as setting rules and regulations or provide workshop for these organisations should be taken by the accounting profession in Malaysia so that the harmonization is completely achieved.
To sum up, the accounting development in Malaysia over the last 15 years had change significantly since the year 2006 with the adoption of FRS to MFRS in 2012. Malaysia had made a lot of adjustments and changes relating to the accounting improvement while converging FRS with IFRS or IAS. After some times, it had also taken the full set of IFRS without hesitation by developing the MFRS which are word-by-word equivalent to IFRS issued by IASB. In other words, Malaysia had break through the obstacles to harmonization as it is getting closer to the road of achievement. Only when harmonization is achieved, some benefits such as greater transparency, greater understandability, ease to compare financial data across borders, lower susceptibility to political pressures than national standards as well as profitability of knowledge and education across national boundaries can be enjoyed by the user of financial report in Malaysia.