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The beginning of the end of FRS 139

Author: Dr. Nordin Zain

Dr. Nordin ZainMalaysia has just made the Financial Instruments Standard FRS 139 effective from 1 Jan 2010. Yet, the world is changing it, which eventually would lead to the demise of FRS 139, (known internationally as IAS 39). This change was the result of the global financial crisis, where in the aftermath of it, world leaders had called on the accounting profession to improve the accounting standards.

Just when Malaysia had only started making FRS 139 mandatory from 2010 onwards, this change would mean that the companies are now applying a recently effective standard which would become obsolete in a very near future.

A key implication of this change would be whether companies are able to take heed of this change so soon after they had just started adopting FRS 139. After all, companies here are already 5 years behind the international community in adopting IAS 39, and this begs the question; are we actually ready for another significant change?

Both the FASB and IASB are the key proponents towards the revamp of the standard, with the first of the three phase project issued by the IASB late last year, and the other 2 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 required would be radical in nature, 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 as though the IASB is merely providing a knee-jerk response to the criticisms leveled at the accounting profession due to the global financial crisis. In order to portray themselves as parties making a concerted effort to stave off the criticisms, the IASB & FASB had joined hands in this move, which would radically change the way financial instruments are dealt with.

To further rub salt into the wounds of the local accounting scene, this change has been mooted whilst the country is in the midst of bracing themselves for the impending implementation of the GST sometime next year. The added pressure of ensuring companies adapt to the GST rulings, as well as to take 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. Whilst the heaviest hit parties would undoubtedly be the ones with heavy reliance on financial instruments (banks, insurance companies, etc.), virtually no industries will be left untouched. This merely means that nobody can afford to turn a blind eye towards 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 in 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-bloc countries, who are pressing for convergence with the US GAAP 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, as 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 simpler, it remains to be seen whether companies are able to brace themselves for 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 is interesting to see how the regulators will address this challenge, knowing full well that FRS 139 had only come into force on January 1st 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.

Dr Nordin Zain is an Executive Director with Deloitte Malaysia. He specialises in advising companies on FRS implementation and Islamic Accounting Standards. He can be contacted at


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