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As mentioned earlier, this study focuses on the international harmonization perspective of two countries; Malaysia and Singapore, mainly due to time constraint and also because they have a more advanced accounting and regulatory institutions as well as the largest and most well developed capital markets in ASEAN (Saudagaran and Diga, 2000).
The main purpose of this chapter is to measure the degree of harmonization in Malaysia and Singapore. Data for this study is obtained from the website of companies listed in the stock exchange of their respective countries. The companies selected are from the electronics, information technology and telecommunications industries, firstly because these are the leading industries in both Malaysia and Singapore and secondly because these industries have faced tremendous growth over the last few decades. Moreover these industries are very significant for emerging markets in the ASEAN region as they are the largest exporters of electronic products in the ASEAN region.
To test the degree of harmonization in Malaysia and Singapore we used key assets and profit measurement practices. These measures were obtained from the book written by Radebaugh and Gray (1997). The key measurements used in this study is cost of inventory, valuation of non-current assets, goodwill, depreciation and research and development expenses.
This study is very much a qualitative one as such statistical knowledge is not the intention. The sampling techniques used is the non probability sampling instead of the probability sampling given the nature of the study. All companies within the electronic, information technology and telecommunication industries were looked at. In view of the time constrain, this study is based on data collected from companies that have their latest annual reports in their website. Data was collected from 30 companies from both Malaysia and Singapore (10 from Malaysia and 20 from Singapore). The names of the companies are listed in Appendix 1.
3.2 Empirical Research on Key Measurements in the Financial Statements of Malaysian and Singapore Listed Companies
The data gathered from the 30 companies allowed a better understanding and knowledge about the degree of accounting harmonization as well on the development of the standards setting process at the domestic level in both Malaysia and Singapore. It also allowed us to examine these countries compliance with IAS. The summary of the results are portrayed in the table below:-
International Accounting Standard
Companies' Accounting Policy
Malaysia (10 companies)
Singapore (20 companies)
Straight-line method or Reducing balance method (IAS 16)
Straight-line Method (9)
Reducing Balance Method (1)
Straight-line Method (15)
Reducing Balance Method (3)
Straight Line & Reducing Balance Method (2)
Amortization or Tested for impairment yearly (IFRS 3)
Amortization Method (2)
Test for impairment (4)
Amortization Method (3)
Test for impairment (12)
Valuation of Non- Current Assets
Historical Cost (3)
Historical Cost & Revaluation method (7)
Historical Cost (3)
Historical Cost & Revaluation method (17)
Research and Development
Charge of when incurred/write-off (IAS 38) or Amortization
Write 0ff (4)
Write 0ff (12)
Cost of Inventory
FIFO or weighted average basis (IAS 2)
Weighted average method (4)
FIFO & Weighted Average Method (4)
Weighted average method (12)
FIFO & Weighted Average Method (2)
In Malaysia, ten companies from the electronic, telecommunications and information technology industries were chosen in our sample. Only certain accounting methods were utilised rather consistently by these companies, however all the companies used the historical cost convention in the preparation of their financial statements. Some of the companies' also perform a revaluation of certain non-current assets to comply with the approved Malaysian Accounting Standards.
The results indicated that nine companies companies utilized the straight-line method in depreciating their assets. However the useful lifes of the assets are different depending on the individual company policies and assumption as well on the type of asset being depreciated. While the remaining one company uses the reducing balance method.
Only six companies disclose the treatment of goodwill in their financial statements. Two out of the six companies amortize the goodwill within a certain time frame while the other four companies recognizes goodwill as an asset and test yearly for impairment. However these practices are subject to yearly review by the Board of Directors in consultation with the Accounting an Audit Committee. Four companies do not reveal their treatment.
In the revaluation of non-current assets, seven companies use both methods which is at cost or revaluation value while 3 companies only value their non-current assets at cost.
The treatment of research and development expenses are only disclosed by six companies. Four companies expenses this cost directly to the income statement as and when incurred while the other two companies amortizes the expenses based on its own internal company policy. Four companies do not reveal their methods.
As for the cost of inventory, four companies use weighted average method, two companies use the First In First Out (FIFO) method and the rest of the four companies uses both the weighted average and the FIFO method.
In Singapore twenty companies from the electronic, telecommunications and information technology industries were chosen in our sample. Only certain accounting methods were utilised rather consistently by these companies, however all of them used the historical cost convention in the preparation of their financial statements. Some of the companies' also perform a revaluation of certain non-current assets to comply with the approved Singapore Accounting Standards.
The results indicated that fifteen companies utilize the straight-line method in depreciating their assets. However the useful lifes of the assets are different depending on the individual company policies and assumption as well on the type of asset being depreciated. Three companies used the reducing balance method while the remaining two companies used both the straight line and reducing balance method.
Only fifteen companies disclose the treatment of goodwill in their financial statements. Three of these companies amortize the goodwill within a certain time frame while the other twelve companies recognises goodwill as an asset and test yearly for impairment. However these practices are subject to yearly review by the Board of Directors in consultation with the Accounting an Audit Committee. Five companies use other methods and the remaining five companies do not reveal their treatment.
In the revaluation of non-current assets, seventeen companies use both methods which is at cost or revaluation value for certain assets while three companies only value their non-current assets at cost.
The treatment of research and development expenses are only disclosed by fifteen companies. Twelve companies expense the cost directly to the income statement as and when incurred while the other three companies amortizes the expenses based on its own internal company policy. Five companies do not reveal their methods.
As for the cost of inventory, twelve companies use weighted average method, six companies use the First In First Out (FIFO) method and the remaining two companies uses both the weighted average and the FIFO method.
3.4 Results Analysis
Based on the results, it is quite obvious that companies in both Malaysia and Singapore prepare their financial reports/statements in accordance to their respective country's approved accounting standards. Malaysia and Singapore's accounting principles are very much in compliant with IAS, i.e very much principle based (users are strongly encouraged to used their own judgement), and certain accounting methods are used rather consistently. For example, most companies in Malaysia and Singapore use the straight-line method in depreciating their assets, historical cost and in some cases the revaluation value for the non-current assets. They use FIFO and weighted average method in evaluating their cost of inventory and none of the companies use the LIFO method which is prohibited by the IAS 2. As for research and development expenses and goodwill, it is a little more difficult to analyze as not all the companies in our sample have revealed their treatment for these costs.
Our results indicate that most companies in our sample use methods which are very much in compliant with IAS while the rest of the companies in our sample, although not significant, use other methods. As such it might to be too premature to conclude that international accounting harmonization has been fully embraced in the light of the Malaysian and Singapore environment.
CHAPTER FOUR - DISCUSSION & ANALYSIS
The outcome of the study in chapter three clearly shows that despite there being some degree of accounting harmonization in the emerging markets (Malaysia and Singapore), there is still not enough evidence to conclude for certain that accounting harmonization is fully embraced by the aforementioned countries. This chapter analyzes international accounting harmonization from four broad perspectives namely, the barriers to international accounting harmonization, its advantages and disadvantages, degree of accounting harmonization, and finally the mechanisms needed to pursue accounting harmonization.
4.1 The Barriers to International Accounting Harmonization
According to Nobes and Parker (2002), the most fundamental obstacles to international accounting harmonization are as follows:-
Size of present differences between the accounting practices of different countries;
Lack of strong professional accounting bodies in some countries; and
Differences in political and economic system.
The significant economic and cultural differences that exist amongst various countries are a major impediment in international accounting harmonization. The differences are so vast that even a straight forward accounting standards can have various interpretations. It is a well known fact or an unwritten rule that politics do indeed play a very important role in the establishment of an accounting standard in most countries. While it can be argued that many national and international standard setters are independent self-regulating bodies and by right should not be influenced by the political regime, in reality, the standards set is a result of a complicated political process (Saudagaran 2001). This is mainly because; the standard setters would require strong support and buy in from the politicians, as they have a vested interest in national standards. Another barrier facing the government of various countries is the coordination and their ability to synchronize their domestic accounting policies with policies of other countries to ensure they have the best of both worlds, i.e to eliminate or minimize the negative influence and to retain the positive influence from the other countries.
The stage of uniformity of financial reporting under the same international standards crucially depends on the institutional environment in which companies operate. It is not practical to apply the same accounting standards in different jurisdictions to achieve genuine value and comparability of financial statements across the world. Examples of institutional differences across jurisdictions are auditing, enforcement, and litigation practices (Ball et al., 2003; Daske et al., 2008). To see how institutions and accounting standards unite, consider a standard that places large emphasis on relevance and assumes that relevance requires management's estimate for the measurement of certain assets. If such a standard is applied in an environment with weak review and enforcement, it is improbable that the standard will make applicable accounting numbers. In such a setting, a standard that places more emphasis on reliability and reduces the need for allowance of estimates in getting the numbers will result in higher value financial reporting.
The different needs and requirements of users of financial statement in various countries is also another barrier to international accounting harmonization. Depending on the significance of accounting in a particular country, the accounting system can be categorized either as a macro-user or micro user oriented system (Saudagaran and Diga, 1998). The more developed countries in ASEAN such as Malaysia and Singapore realized the importance of capital markets and reinforced a preference for micro-user oriented accounting approach, requiring more information and extensive financial disclosures similar to the accounting approach in the UK and USA. However, this does not mean that the needs of smaller family owned businesses prevalent in the two countries would be met. The smaller family owned businesses prefer not to divulge too much information to the public about their business because of the countries weak legal system, which does not provide adequate protection for businesses as a whole. Moreover, it would be a very expensive affair for them to keep "separate set of books" merely to comply with the international accounting standards. This would hamper the growth of local businesses or would force existing companies to take their business elsewhere. These barriers emphasizes the believe that international accounting harmonization may not be desirable after all.
4.2 The Advantages and Disadvantages of International Accounting Harmonization
Earlier chapters of this study found that there are plenty of advantages to international accounting harmonization such as cost savings for international corporations, enhanced comparability of cross-border financial reports, widespread dissemination of high quality accounting standards and practices and provision of low cost accounting standards to countries with limited resources. These advantages are also applicable to countries in the emerging markets such as Malaysia and Singapore.
With globalization, the ASEAN markets are not to be ignored. Despite going through tough times during the Asian financial crisis in 1997/98, the ASEAN region have very strong growth potential. This region continues to be the centre of attraction of many international corporations and investors. For countries with more developed capital markets such as Malaysia and Singapore, international accounting harmonization would bring about huge benefits. First and foremost it would reduce the expense and the time taken to create their own domestic accounting standards. There would also be cost savings for the international corporations established in these countries as they would not have to adjust their financial reports to adhere to the local standards.
Globally it is a well known fact that a country is not able to survive on its own without international trade and by having a close-door policy. Even the Chinese government realized this and open China's doors to the world about a decade ago. However, adequate and orderly financial reporting is required to encourage international trade and investments. International accounting harmonization can aid this purpose by reducing the difference in financial reporting requirements for participants in the capital markets. The ability to compare and contrast financial information of various companies would elevate investors' confidence in doing business and making adequate investment decisions. It would also be easier on the investors as they only have to understand and apply a single set of international standards in making their investment decisions.
Another major benefit of international accounting harmonization is to promote high quality accounting standards and practices. Given that Malaysia and Singapore are the more developed countries within ASEAN, they are able to lead the regional accounting harmonization in ASEAN, simultaneously taking the ASEAN financial reporting standards to greater heights while being in congruence with international standards. Once again, high quality, comprehensive and comparability of accounting standards will boost investor confidence and contribute towards the overall economic growth of the ASEAN region.
On the flip side, opponents of international accounting harmonization believe that harmonization is an imposition of standards by the first world countries upon the third world and developing countries. It is impossible to have a "one size fits all" standard, as these standards would not be flexible enough to cater to the differences in culture, legal systems and national circumstances. Users of financial information also differ considerably from country to country. While in some countries the main users are the investors, for other countries the main users could the government or the tax authorities and all these users require different type of information for various purposes. It is not easy to create a standard that is able to cater to the requirements of all users.
Another impediment in pursuing accounting harmonization in Malaysia and Singapore is their historic background or culture. Despite the fact that Malaysia and Singapore were both previously colonized by the British and both countries closely follow the accounting standards of the U.K. , there are still differences both countries institutional mechanisms, which results in the differences in accounting practices. There is a vast difference in the way the governments of these two countries operate, and the priorities of these two governments differ considerably, automatically leading to different accounting practices.
These obstacles would somehow affect Malaysia and Singapore when adopting IAS. Nevertheless, after the weighing the pros and cons of international accounting harmonization, it is in the best interest of these two countries to continue to pursue international accounting harmonization given that its advantages far outweigh its disadvantages.
4.3 Degree of Harmonization in Malaysia and Singapore
Given that Malaysia and Singapore were previously colonized by the British, their respective accounting practices are very influenced by the British accounting standards. Both Malaysia and Singapore began adopting IAS as their national accounting standards in the 1970's. The adoption of IAS was recognized as one of the methods to boost international trade and to encourage foreign investment into their respective countries. Moreover, the ASEAN region lacked the resources and research capabilities in developing their own standards and by adopting IAS seemed like their best way forward. They also did not have a specific organization focusing purely on developing accounting standards for their respective countries. For instance, in Malaysia, the MASB was only established in 1997 as the primary body for producing accounting standards. Despite establishing the MIA and MACPA in the 1950's, their role was purely a registration body as oppose to a standard setting one. Moreover, being developing nations, the government of these countries had rather dedicate the resources they had to other socioeconomic objectives than to establish accounting standards. There are also other reasons for this two countries to adopt IAS, firstly is because IAS has been tried and tested globally with not much resistance. Secondly, for Malaysia and Singapore to be the leading financial centers in the ASEAN region, it is crucial for them to have accounting standards that are internationally recognized and trusted.
From the various levels of discussions in this study, it is obvious that both Malaysia and Singapore are on the right path towards international accounting harmonization. However, the results of the empirical study indicates that there is still much more to be done to achieve complete harmonization or if complete harmonization is attainable. Nevertheless, despite the difference in accounting standards used by these companies, in general majority of them comply with IAS. Moreover, the number of companies that use other methods not stipulated by the IAS are not significant.
As discussed in chapter two, there are various bodies' i.e government and private bodies involved in the standard-setting process in Malaysia and Singapore. Each of these organizations carry out their respective function in their efforts toward standard setting and international accounting harmonization. In order to facilitate and to ensure the success of the standard setting and harmonization process, a high level of collaboration is needed between them. Given that the standard-setting process is very political in nature, the private sector bodies require the buy in of the government to ensure successful implementation of the national standards set. The government would also ensure that the standards set are suitable to meet national economic objectives. On the other hand, the government looks to the private sector bodies to ensure that the standards set would increase public sector accountability. Although there are plenty of efforts toward international accounting harmonization, it is still difficult to conclude if Malaysia and Singapore will effectively attain harmonization by merely just being IAS compliant (in most cases).
4.4 Mechanisms to Pursue International Accounting Harmonization
To aid the pursuit toward international accounting harmonization, a set of institutional mechanism is needed. Saudagaran and Diga, 1998 outlines four options available for pursuing ASEAN accounting harmonization: merger of national standard setting agencies; adoption of an European Union (EU) harmonization model; adherence to IASC pronouncements; and free market approach. Each mechanism will be discussed in turn.
4.4.1 Merger of National Standard-setting Agencies
The first measure suggests for ASEAN standard setting agencies to merge to form a supranational body. In reality a body of such nature is already in existence; the ASEAN Federation of Accounting (AFA). For the AFA to play a more effective role in international accounting harmonization, they need to be a part and parcel of the standard setting process and not merely an organization for accountants. As such there is a need for the standard setting bodies of each ASEAN country to be apart of AFA to facilitate the standard setting process within the ASEAN region. Despite the difference in culture, the union of ASEAN standard setters under one umbrella would ensure the standards set would take into considerations all the needs and views of its members countries and focus on the ASEAN needs on a collective basis. They would also be able to respond quickly to the evolving economic conditions happening in the ASEAN region.
4.4.2 European Union (EU) Harmonization Model
The second measure is to adopt the EU Harmonization Model. The harmonization process starts with the harmonization of the legal system, which includes company law, business law, accounting and financial reporting of all EU member countries. These initiatives take the form of directives, which then becomes a legal instrument for the adherence of EU member countries.
This option would allow for the ASEAN secretariat to be the main actor in pursuing international accounting harmonization within the ASEAN region. This Secretariat would be responsible to propose Directives and Regulations for its member countries. However, the drawback of this option is that the ASEAN region does not possess a well-developed political infrastructure, which is a requirement for achieving regional harmonization. As a result, the move towards regional harmonization would be slow.
In the ASEAN region, the AFA, could play a more active role in pursuing international accounting harmonization. At present, this task may seem impossible for AFA as they do not have adequate support from other influential parties such as the stock exchanges, financial analysts etc. However, ASEAN can learn from the EU experience on how to overcome the obstacles in achieving accounting harmonization.
4.4.3 IASC Based Harmonization
The third measure is to adhere to all the IASC initiatives. With this option, IASB becomes the main actor in the international accounting harmonization process and all the ASEAN countries would have to adopt IAS. If this measure is adopted, the role of AFA would become insignificant as the government and the national professional accounting body of each country would take over the role of AFA. This is a low cost institutional option.
Despite the many benefits of IASB harmonization, there are drawbacks to this mechanism. First and the most crucial drawback is the potential conflict between the adopted IAS and domestic legislation. Not all countries would benefit equally from international accounting harmonization, as some IAS might not be appropriate for all ASEAN countries. Countries such as Malaysia and Singapore are very selective when adopting IAS and have made changes to the IAS as and when necessary to suit their economic environment. For the ASEAN region to fully enjoy the benefits of IAS, there should participate more active participation from these ASEAN countries in the IASB discussions to ensure the needs of their individual countries are taken into consideration (Saudagaran and Diga, 1997b).
4.4.4 Free Market Approach to Harmonization
The fourth measure is the free market approach to harmonization, which allows the market forces to decide which financial reporting practices would prevail. This measure provides full flexibility for companies to decide what they want to report depending on the demand for information. This option is very much in the favor of investors as they are the main players in the capital market who demand financial information to make investment decisions. The drawback of this measure is that companies in different countries may opt to follow different standards depending on the need of their various stakeholders, which would defeat the purpose of international accounting harmonization. It is also difficult to use this option as not all ASEAN countries have active capital markets.