Malaysia has made the financial instruments standard FRS 139 mandatory from Jan 1 this year. Yet in the aftermath of the global financial crisis, the rest of the world is looking at changing the standard — a change that will lead to the demise of FRS 139 (known internationally as IAS 39). This change comes after world leaders had called on the accounting profession to improve accounting standards in the wake of the crisis.

So, just when Malaysia is making FRS 139 mandatory, this change would mean that companies are now applying a standard which will become obsolete in the very near future.

A key implication would be whether companies are able to take heed of this change so soon after they have adopted FRS 139. After all, companies here are already five years behind the international community in adopting IAS 39. This begs the question: are we actually ready for another significant change?

Both the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are the key proponents of the revamp of the standard, with the first of the three-phase project issued by the IASB late last year, and the other two phases expected to be finalised this year. By the end of this year, the entire IAS 39 will be replaced. It has been suggested that the changes will be radical due to the manner in which financial instruments will be accounted for.

Interestingly, the speed at which the change in standards has taken place seems to imply a knee-jerk reaction on the part of the IASB to the criticism levelled at the accounting profession due to the global financial crisis. To portray themselves as making a concerted effort to stave off the criticism, the IASB and FASB have joined hands in this move.

To add insult to injury, this change has been mooted while the country is bracing for the impending implementation of the goods and services tax (GST) sometime next year. The added pressure of ensuring companies adapt to the GST, as well as taking into account the changes made to the way financial instruments are treated, will inevitably cause more than a few headaches for the standard setter, the regulators and the preparers in particular.

Having said that, the proposed change to FRS 139 should not be written off before a proper assessment of the merits of such a move is made. While the hardest-hit parties will undoubtedly be the ones with heavy reliance on financial instruments (banks, insurance companies and so on), virtually no industry will be left untouched. This means that nobody can afford to turn a blind eye to the implications of the intended change, which may potentially be far-reaching.

Back in November 2009, the IASB issued a new standard on the classification and measurement of financial assets, known as IFRS 9 financial instruments, which represented the completion of the first part of a three-part project to replace IAS 39, financial instruments: recognition and measurement.

Generally, IFRS 9 is a simplification of IAS 39 and adopts a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39. The approach to IFRS 9 is based on the reporting entity’s business model and the contractual cash flow characteristics of the financial assets. The new standard also requires companies to use a single impairment method rather than allowing the many methods in IAS 39. As a result, the IASB says IFRS 9 will improve comparability and make financial statements easier to understand for investors and other users.

It has been said that the IASB has received broad support for its approach. This is mainly from the European countries, which are pressing for convergence with the Generally Accepted Accounting Principles (GAAP) of the US to enhance comparability.

How­ever, the IASB also realised that changes were required to accommodate stakeholder concerns.

As it stands, the implementation of IFRS 9 would benefit both the preparers and users of the financial statements because the new standards are meant to be simpler due to the elimination of options and alternatives, which in the past only served to confuse users. Whilst the first phase in the move to replace IAS 39 seems simple, it remains to be seen whether companies can handle the potential complexities that may arise when the second and third phases of IFRS 9 come into play by the end of this year.

Nevertheless, the world has moved on because the IASB has permitted countries to adopt Phase 1 of IFRS 9 earlier than the mandatory date of January 2013. At the moment, Malaysia has not decided whether to adopt the first phase of IFRS 9. It will be interesting to see how the regulators address this challenge, knowing full well that FRS 139 only came into force on Jan 1 this year, with the added problems faced by some companies struggling to ensure compliance with FRS 139, and yet acknowledging that this may be the beginning of the end of FRS 139.