Thursday, 30 March 2017

Are Malaysian companies being too laid back with MFRS 15?

I’ve been attending a few seminars recently in Malaysia on various current issues, such as the new Companies Act 2016, the Finance Act 2017 as well as transfer pricing developments. I was able to touch base with a few fellow delegates and we talked in general about the challenges facing their companies in this day and age. One topic that somehow kept being brought up was the implementation of MFRS 15 Revenue from Contracts with Customers.

I was rather astonished that most of their respective companies had not even started planning for it, despite the fact that we are now only nine months away. If you remember, MFRS 15 was originally slated to come into effect on 1 January 2017 before it got pushed back to 1 January 2018. Why was it pushed back? The International Accounting Standards Board acknowledged the complexity of the revenue standard and to allow more time for companies to properly implement it. Yet here we are, at the end of the first quarter of 2017, and many have still not started.

No doubt MFRS 9 Financial Instruments, also coming into effect on 1 January 2018, is by far the more complex standard of the two in terms of its technical aspects. However, companies cannot underestimate the impact of MFRS 15 and the effort required to implement it. It requires careful change management across the organisation. It's not just a financial reporting issue.

For instance, one of the key areas that will impact revenue recognition is the collectability criterion. To apply MFRS 15, the company needs to assess whether it is probable that the company will collect the consideration to which it will be entitled. It needs to apply considerable judgment based on its understanding of the client’s industry, the client’s history and background, what their plans are. In short a credit risk assessment is needed to determine whether the contract is valid, i.e. whether it’s probable that the consideration to which the entity is entitled in exchange for the goods or services will be collected.

If there is significant doubt of the collectability, the revenue cannot be recognised and any consideration received must then be recorded as a liability, i.e. unearned revenue until circumstances change. Previously, it was a case of booking the revenue based on the contract, and what the company is entitled to, but no longer.  The risks and rewards model has been thrown out the window in favour of a transfer of control approach.

Such judgment calls will be required on many areas, not just on collectability. The more complicated your contracts, and by extension, your operations, are, the more time you’ll need to invest to sort everything out.

Will there be additional costs if you start work early on implementing IFRS 15?

Yes, that is inevitable not just in terms of money but time as well. And it won't be easy.

But these costs will pale in comparison to the costs you end up incurring if you only start work when MFRS 15 comes into effect. Renegotiation of contracts. Restructuring of processes. Rectification work. Loss of customers. A lot of professional judgment is required to address each revenue stream you have, and if you end up doing it in a rush, errors and mistakes will pile up faster than you think. The disruption to your business will be incredible if you don’t start early. 

There are plenty of articles and advice out there on the need to prepare early for MFRS 15, and it’s worrying to hear that companies here are still a long way away from working on its implementation. As a result, the typical pattern we might see for many Malaysian companies in 2018 is an abnormal increase in costs to deal with, what is, ironically, a revenue standard.

Do not be part of that pattern. Prepare now.

Azmin Mohd Khalib
Senior Editor
Wolters Kluwer Malaysia

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