TUNKU PUTERI INTAN SAFINAZ SCHOOL OF ACCOUNTING

BKAR3053 FINANCIAL ACCOUNTING AND REPORTING V

FIRST SEMESTER 2021/2022 (A211)

COMPREHENSIVE CASE 1
(MFRS 136)

GROUP I

PREPARED FOR:
DR. MUHAMMAD SYAHIR BIN ABD.WAHAD

PREPARED BY: GROUP 1

NAME MATRIC.NO
ZHU MEIYU 251209
NUR ARISSA DANIA BINTI MOHAMAD NASIR 272624
NUR AZRA BINTI M ABU ZAKI 272920
SHARRMINI A/P GANESAN 272999
SIEW HUI YEE 274022

SUBMISSION DATE:
16 DECEMBER 2021

TABLE OF CONTENT
1.0 Summary of MFRS 136………………………………………………………......................1
2.0 Theories to explain the development/formulation of the MFRS 136…………………….4
3.0 Main parties that involved in development/formulation of the MFRS 136……………..5
4.0 Bases used to verify MFRS 136…………………………………………………………….7
5.0 Nature of MFRS 136………………………………………………………………………..9
6.0 Limitation of MFRS 136…………………………………………………………………...11
7.0 Suggestions or recommendations to overcome the limitations………………………….13
8.0 Reference……………………………………………………………………………………15

1.0 Summary of MFRS 136

 Our group opted to use MFRS136 for research and analysis based on the group debate. We

feel, based on our study and analysis, that the MFRS 136 rules are quite precise, standardized, and

difficult in several areas. Our insights regarding MFRS 136 are intended to assist us in

determining how to make it quicker, thorough comprehension of the criteria outlined in MFRS

136. Enables us to better compile financial statements, be accountable for the reporting entity's

governance, and re-examine several areas that have been muddled in practice.

MFRS 136's purpose is to specify the processes that a company should follow to guarantee

that the book value of all its assets does not exceed the recoverable amount (amount recovered

through use or sale of assets). MFRS 136 use the following methods to attain this goal:

1. Impairment review (at the individual asset, cash-generating unit (CGU), or CGU group

level);

2.If and when quantitative impairment assessment is necessary, including intangible assets

with an indefinite service life for non-goodwill individual assets or assets that are not yet

available, Intangible asset indicator-based valuation;

3. How to do quantitative impairment testing by calculating the recoverable value of an asset

(or cash-generating unit);

4. How to recognize and reverse an impairment loss;

5. When and under what conditions must the company reverse impairment losses.

6. And specific disclosure requirements (both in the case of impairment and in the absence of

impairment).
 The main words defined in MFRS 136 are critical to comprehending its guidelines. The

following are the most significant definitions:

1. Book amount: the amount recognized after deducting cumulative depreciation

(amortization) and cumulative impairment losses;

2. Impairment loss: occurs when the asset's or cash-generating unit's book value exceeds its

market value and the quantity of recoverable funds;

3. The recoverable: the fair value of the asset or cash-generating unit minus the cost of

disposal (FVLCOD) and its value in use (VIU), whichever is greater;

4. Value in use: derived from assets or cash creation the unit's future cash flows are valued at

their present value.

2.0 Theories that explain the development/formulation of the MFRS 136

 MFRS 136 or IFRS 136: Impairment of Assets was developed in order to enhance the

standard of, or perceive international intersection or convergence on, the subsequent accounting

for intangible asset and goodwill obtained in business combinations and the accounting for

accounting for business combinations itself. The standard was also thrived to guarantee that the

asset bear does not exceeded their recoverable amount. A few accounting for impairment of asset

shall apply this standard. This includes MFRS 116: Property, Plant and Equipment, MFRS138:

Intangible Assets, MFRS 3: Business Combination, etc. With effect from 31 st March 2004, MFRS

136 is effective to apply.

Understanding accounting theory is very crucial with the aim of achieve the most effective

and efficient standards development. By acknowledging these theories, generalization of ideas or

expressions in words can be formed about events observed that occurred in the real world. These

theories also is a great tool to use as a fundamental principle to delineate on how or why certain

scenario happened the way they do. In Malaysia, these standards were approved and developed by

MASB or Malaysia Accounting Standard Board. In developing MFRS 136: Impairment of Assets,

there were few accounting theories were utilized in order to obtain the smoothest standards for

better accounting results. We can study these by lurking in their official website.

As stated in their official website, quote “In deciding whether to recommend any proposed

guidance to address an issue, the MAIC shall consider the following criteria: (a) is the issue

widespread and has, or is expected to have, a material effect on those affected?” This statement

hints that a normative theory has been maneuvered. A normative accounting theory is a theory

that pivots in policy advocates which includes standards, technical releases, codes, etc. This
theory leads into putting words in mind like what should be and what to do. Their criteria stated

above links to “what should be”, thus steer the conclusion of utilization of the accounting theory

of normative. The word “expected” in the statement above also indicates future; confirming this

statement is a normative accounting theory.

Next, we can also see ethical accounting theory has been used. We acquire this from

another statement made in their website, quote “Would financial reporting be improved through

the elimination of the divergence practice, bearing in mind that the accounting would depend on

the particular facts and circumstances?” Ethical accounting theory put stress on fair and value

concepts. This concept mark superiority in giving a financial statement that free of undue

influence, bias and any misinterpretation. The statement stated above shows how much MASB

weight the true and fair concept in their ways to solve problems and developing or approving new

standards. Thus, this shown MASB had used an ethical accounting theory.

Lastly, the third theory that had been used is authoritarian accounting theory. This was

perceived by us from the statement “Is the issue unique to Malaysia by virtue of the circumstance

prevailing in Malaysia, for example as a result of the local laws or prevailing Act?” Authoritarian

accounting theory is a theory employ primarily by professional organization and government.

This kind of theory main objective is to come up with a more practical solution. In the nutshell

MFRS 136 has been developed by using authoritarian, ethical and normative accounting theory as

this is the theory that had been used by the body that approved them.

3.0 Main parties that involved in development/formulation of the MFRS 136

 In every result, there must be a backbone in developing until it reaches one decision. As

for MFRS 136, one of the main parties involved in MASB ( Malaysian Accounting Standards

Board) whom established under Financial Accounting Act 1997 (Act) who is a standard-setting

body of Financial Reporting Foundation (FRF) which responsible in determining and issuance of

accounting standards for the preparation of financial statements Under any law controlled by the

Securities Commission Malaysia, Bank Negara Malaysia, or the Registrar of Companies, MASB

is required to lodge accounting standards. This makes MASB directly related to the development

of MFRS 136.

The second party is accountant of a company. Asset impairment happened when current

market value of an asset is less than the carrying value recorded on the company’s balance sheet.

Investors have to involves in developing this standard because the result from impairment can be

seen on financial reports of a company. A loss on impairment is recognized adds value to Loss on

Impairment and the asset’s amount will be credited. The loss will reduce total assets on the

balance sheet and reduce income in the income statement. Under any law controlled by the

Securities Commission Malaysia, Bank Negara Malaysia, or the Registrar of Companies, MASB

is required to lodge accounting standards which indicates a negative view of the company. It is

crucial for the accountant to involve in setting the standard to ensure that it is done without being

bias to any party.

Lastly, is auditor. This is because impairment testing are included in audit procedures

before auditors can audit any financial statement. Impairment test is important because there are

key assertions needed to be achieved by the auditors during the process such as completeness,

valuation and existence. Auditors need to know the standards in detail, to ensure that the audit

report later is reliable.

4.0 Bases used to verify MFRS 136

Firstly, the amount of money that can be recovered from an asset must be identified if

there is a suggestion that the property may be impaired, according to MFRS 136. The Standard

includes this criterion. The Standard does, however, require that the asset value of an impairment

loss with an unlimited useful life be assessed yearly, regardless of whether there is any sign that it

may be impaired. If specific requirements are fulfilled, the most recent detailed estimate of

recoverable amount performed in a previous time may be utilized in the impairments test for that

assets in the current period. The valuation of an intangible asset that is not yet ready for use has to

be assessed yearly, regardless of whether there is any evidence that it is impaired. Goodwill

needed for the company merger will be evaluated for impaired on an annual basis.

         Secondly, According to MFRS 136, cash flow estimates used to evaluate the value in use

must be based on rational and maintainable assumptions that constitute management's reasonable

guess of the economic circumstances that will persist during the asset's residual value (Malaysian

Accounting Standards Board 2010, 2010). The Standard, on the other hand, specifies that

management should examine the reasons for variations between prior cash flow estimates and

actual cash flows to determine the appropriateness of the principles upon which its present cash

flow forecasts are predicated. Should verify that the calculations behind its based on financial

predictions are compatible with prior actual results, provided that the consequences of future

events or circumstances that simply didn't exist when such cash flows inflows were created make

this reasonable.

         Thirdly, in such cases, MFRS 136 mandated that management's current estimate of future

market rates for the output be considered in predicting the upcoming cash flows utilized to assess
the unit's value in used. It also mandated whenever an organization estimated upcoming cash

flows to evaluate the value in the utilization of cash-generating equipment utilizing the output, it

should utilize management's highest prediction of upcoming market values for the output. If

indeed the cash flows generated by any asset or financing unit are directly impacted by internal

setting prices, an entity must also estimate the total revenue used to determine the asset's or

working capital unit's value in use, as well as the free cash flow outflows was using to assess the

premium in use of other investments or payment units affected by organizational transfer pricing,

using top management best estimation of future prices that could have been achieved in equal

distance transaction information.

         Fourthly, Goodwill implemented in the company combined was required to be examined

for impairments as part of the intangible assets of the cash-generating units to which it was tied

under MFRS 136. It used an 'underside' technique to test for impairments of goodwill by

assigning its carrying value to each money single or smallest set of capital units whereby a fair

and consistent portion of the carrying value might be attributed. The unit or group of units to

which property is assigned should generally have a lower level inside the entity where the

goodwill is tracked for strategic reasons.

5.0 Nature of MFRS 136

According to (Teeboom, 2019), auditors and accountants are using a principles-based

accounting system as an essential notion. By giving guidelines rather than rigorous laws, the

principles-based accounting system is meant to assist accountants in preparing financial

documents. A flexible accounting system is an important element of a principles-based

accounting system. Besides that, a 'compliance or justify' concept is suggested by principle-based

accounting (Staff, 2020). Any organization that subscribes to this system must follow to the

defined criteria, and if it does not, it must provide a valid rationale for the deviation. The term

"principles-based accounting standards" applies to a series of rules that businesses must adhere to

when preparing financial statements (Jason, 2021).

The accountant must use his and her own discretion in addition to fulfilling a lightly

regulated set of rules when making important decisions concerning the application of accounting

essentials in a principle-based accounting system. Besides that, organizations get more flexibility

with a principle-based accounting system because the principles can be changed to meet the

specific demands of each company if acceptable arguments are supplied. When applied the

principle-based accounting system, accountants and auditors must use their own accounting

knowledge based to given situation to make the best decision.

A rules-based accounting system is nothing more than a set of detailed standards that

accountants must follow while compiling financial statements. The Generally Accepted

Accounting Principles (GAAP) is an example of a rule-based accounting system and somehow it

was a system which used by United Stated (Barclay, 2021). Mostly the auditors and accountants

from United Stated used the rules-based system this is because when there was any related legal

case, they could point out which rules they followed and calculated the amount and present it in
the financial statement. When financial reporting, rules-based accounting establishes a precise and

verifiable approach. Furthermore, (Staff, 2020) also defined that like the term indicates, a rules-

based accounting system employs a 'check box' method.

A rule-based accounting system sets a set standards that compulsory be followed in all

circumstances, limiting accountants' ability to apply their own professional judgment. When using

GAAP, there is no tolerance for deviations other than rigorous adherence to the regulations.

Companies using a rules-based accounting system do not have this flexibility, and they must

follow all of the stated rules in all scenarios.

Numerous countries choose the International Financial Reporting Standards (IFRS)

system because it uses principles-based accounting (Barclay, 2021). Furthermore, financial

reporting by a company must be intelligible, legible, comparative, and the transaction in the

financial position is relevant, according to the International Financial Reporting Standards (IFRS).

Following the Malaysian Accounting Standards Board's (MASB) declaration in 2008 indicating

Malaysia would fully integrate IFRS. On November 19, 2011, the Malaysian Financial Reporting

Standards (MFRS) framework was launched by the Malaysian Accounting Standards Board

(MASB), which really is full compliance with IFRS.

As from above explanation we can identified that, MFRS 136 is category under the

principles-based accounting. This is because Malaysia is compliance with the IFRS during the

announcement made by MASB. Somehow according to the MFRS 136 it is clearly see that it is a

set of policy that guide the auditors or accountants when performing the impairment of assets.

The accountants had the privilege to make their decision based on their accounting knowledge

and not restrict to the strict rules based on scenario. In addition, by applied the principles-based

accounting the decision or transaction made is relevant to the current situation.

6.0 Limitation of MFRS 136

According to (Grant Thornton, 2021), although many of the standards of MFRS 136

'Impairment of Assets' are recognized, an impairment analysis of assets (both tangible and

intangible) can be difficult to apply. This is since the guidance in MFRS 136 is thorough, strict,

and difficult in some areas. Below were stated down some of the limitation of MFRS 136.

Too wordy was the first limitation of MFRS 136. This is due to the overuse of terms in

MFRS 136, which makes it difficult for consumers to comprehend the knowledge. This is because

by referring to the MFRS 136 from (Malaysian Accounting Standards Board (MASB), 2011),

inside the standard had listed down a lot of guideline and term that need the consumers to follow

while calculating for the impairment of an asset (tangible or intangible). To fully comprehend this

knowledge, consumers must expend more effort in acquiring and processing it. Consumers must

repeat their readings two or three times in order to assimilate the knowledge. They must also

scribble down crucial information or take notes in order to comprehend it better.

Second was the MFRS 136 too complicated to the consumers. This is because the

explanations in MFRS 136 are overly detailed because the computation of an asset's value in use

must take into account too many factors. In the other hands, paragraph 9 of MFRS 136 also stated

that, each of the closing period of the financial reporting, the company need to determine is it any

sign of impairment of the asset (intangible or tangible). There are numerous requirements for

detecting a potentially impaired asset. Consumers must figure out when the recoverable amount is

to be calculated in some way. The word 'an asset' is used here, however it can refer to either an

individual asset or a cash-generating unit. Consumers must grasp how to calculate the asset's

recoverable value. Furthermore, they must recognised and quantify an impairment loss, which

requires multiple processes to complete.

 Besides that, the disclosure required by the MFRS136 were too extensive. According to

MFRS 136 by (Malaysian Accounting Standards Board (MASB), 2011) , inside the guidelines of

paragraph 126 of disclosure under standard stated that the following information must be

disclosed for each asset class by the consumers:

 First were the amount of impairment loss recognized in profit or loss.

 Second were the amount of impairment loss reversed recognized in profit or loss.

 Third were the revalued asset’s impairment loss recognized in other comprehensive

income.

 Last were value of reversed revalued asset’s impairment loss in other comprehensive

income.
7.0 Suggestions or recommendations to overcome the limitations

Based on the limitations of MFRS 136 we have found, we have also made some solutions.

First of all, we believe that the excessive use of terms in MFRS 136 makes it difficult for

consumers to understand knowledge. This is because through reference (Malaysian Accounting

Standards Board (MASB), 2011) MFRS 136, the standard lists many consumers in calculating

asset deductions. The rules and terminology (tangible or intangible) that need to be followed

when the value is valued. In order to fully understand this knowledge, consumers must read it two

or three times to absorb the knowledge. Therefore, our suggestion is that MFRS 136 should be

concise and clear, and it is best to produce a concise version of terms that can be understood by

consumers at a glance. Or write down in steps how to look at the first step, how to find keywords

or data in the second step, and how to understand and answer the third step. This allows

consumers to learn quickly without feeling too tedious and boring. Of course, consumers should

also learn how to quickly find the important information they need.

Secondly, MFRS 136 is too complicated for consumers. Because the explanation in MFRS

136 is too detailed, because the calculation of asset use value must consider too many factors,

they must confirm and quantify the impairment loss, which requires multiple processes to

complete. So we think we can cite 2.3 different types of examples to teach you how to simplify

the analysis process so that consumers can understand them well and deepen their memories. And

MFRS136 should include more information as the company provides useful accounting policy
disclosures to users of financial statements, which will make it easier for users of financial

statements to read and understand the content provided.

Finally, because the disclosure required by MFRS136 is too extensive, it is also troublesome

for accountants to prepare statements. Therefore, we believe that MFRS136 can simplify the

disclosure of information, or eliminate the need to disclose where it has already been disclosed.

Moreover, the choice of measurement model provides flexibility, rather than being strictly fixed

to one. It can provide multiple disclosure methods and multiple disclosure models, so that the

accountant can choose a variety of methods that he thinks is more convenient and better for each

asset class. Disclosure of information that the entity must disclose.

8.0 Reference

Barclay, P. (2021, May 26). The Difference Between Principles-Based and Rules-Based
Accounting. Retrieved from Investopedia: https://bit.ly/3s1Ymm4

Grant Thornton. (2021). Insights into MFRS 136. Retrieved from https://bit.ly/33rYKAb

Jason, G. (2021, September 16). Principles Based Accounting Standards - Explained. Retrieved
from The Business Professor, LLC: https://bit.ly/33rrnxq

Joint Tax Working Group on FRS. (28 June 2013) TAX IMPLICATIONS RELATED TO THE
IMPLEMENTATION OF MFRS 136/ FRS 136: IMPAIRMENT OF ASSETS. Retrieved from
https://bit.ly/3s2vWZo

Katy Jackson (Editor). (2018, February 20). Positive and Normative Accounting - What’s the
Difference? Aspiring Accountants. Retrieved December 9, 2021, from https://bit.ly/3pPAP57

Malaysia Institute of Accountants. (2012, January). First Step Towards IFRS convergence.
Retrieved from https://bit.ly/3s0g4GE

Malaysian Accounting Standards Board (MASB). (2011, November ). MFRS 136 Impairment of
Assets. Retrieved from https://bit.ly/320vgJ3
MFRS Application and Implementation Committee (MAIC). (n.d.). MASB. Retrieved December 9,
2021, from https://bit.ly/3pP0X09

Ros Shinie Balan. Limitations of MFRS 136. Retrieved from https://bit.ly/3dOEUkG

Staff, T. C. (2020, February 3). Difference between principle based accounting and rules based
accounting. Retrieved from Termscompared: https://bit.ly/3IHs6dY

Teeboom, L. (2019, May 8). The Difference Between Principles & Rules Based Accounting
Standards. Retrieved from Small Business - Chron.com: https://bit.ly/3oQ2J1R