TUNKU PUTERI INTAN SAFINAZ SCHOOL OF ACCOUNTANCY

FIRST SEMESTER 2023/2024 (A231)

BKAR3053 FINANCIAL ACCOUNTING AND REPORTING V

LECTURE GROUP: L

ASSIGNMENT: COMPREHENSIVE CASE 1

PREPARED FOR:

DR. MOHD. AMIR BIN MAT SAMSUDIN @ MOHD. SHAM

PREPARED BY:

GROUP 6

NO. NAME MATRIC NUMBER

1 NUR AIN BINTI NAZRI 288376
2 NUR FARIHAH NAJLA’ NASUHA BINTI RISLI 288082
3 AUNIE NAZIHAH BINTI MOHD HANIF 287942
4 SITI ZULAIKHA BINTI NOR HADI 287963
5 NUR SYAQIRIEN BINTI AZRUL FAZLI 288733
6 MUHAMMAD FARRIQ EMIER THIBRONI 284661

SUBMISSION DATE: 17 DECEMBER 2023

 TABLE OF CONTENT

1.0 SUMMARY OF MFRS 116 ..................................................................................................................... 3

2.0 THREE THEORIES................................................................................................................................... 4

3.0 MAIN PARTIES INVOLVED IN THE DEVELOPMENT ................................................................................... 6

4.0 NATURE OF SELECTION OF MFRS 116 ..................................................................................................... 7

5.0 LIMITATIONS OF STANDARD .................................................................................................................. 9

6.0 SUGGESTIONS AND RECOMMENDATIONS ............................................................................................ 11

7.0 LETTER TO MASB ................................................................................................................................ 13

8.0 REFERENCES ....................................................................................................................................... 15

APPENDIX ................................................................................................................................................ 16
1.0 SUMMARY OF MFRS 116

MFRS 116, also known as Malaysian Financial Reporting Standard 116 (PPE), is a set of
accounting regulations that focuses on property, plant, and equipment. This standard outlines
the procedures for identifying, measuring, depreciating, and disclosing information related to
these assets. Recognition of an asset is contingent upon its ability to generate future economic
benefits and the accurate calculation of its cost. Upon initial recognition, an asset's value is its
cost, encompassing all expenses directly associated with its utilization. Continuous
measurement offers the choice between the cost model and the revaluation model. According
to the cost model, assets are held at cost less fair value, while the revaluation model allows
assets to be maintained at fair value minus future accumulated depreciation and impairment
losses.

MFRS 116 provides guidance on the systematic allocation of an asset's depreciable amount
over its useful life and assists in selecting the most appropriate depreciation method. Periodic
impairment testing is mandatory to determine the potential irrecoverability of the carrying
value of an asset. The standard outlines the criteria for derecognizing property, plant, and
equipment. Entities are required to present information in a manner that facilitates the
comprehension of property, plant, and equipment details, including types, amounts, and
modifications. It is crucial for users to refer to the most recent version of MFRS 116 for
accurate and up-to-date information, as accounting standards are subject to changes and
revisions.
2.0 THREE THEORIES

NORMATIVE THEORY

Normative theories are such kind of statements that explain what normal, acceptable, or best
practice should be. It is not related directly to the current situation that already exists or in
predicting what will happen in the future even all normative theories are concerned which is
what should be happening now. In simple words, normative theory is presenting the best action
of practice to those who need guidance on their actions.

MFRS 116 Property, Plant and Equipment, which is resulting in accounting standards, is an
illustration of a normative theory, it prescribes what a financial accountants should or must do
to present their financial statements. MFRS 116 is the framework that provide guidance as to
which that their objective is prescribe the accounting treatment for property, plant, and
equipment so that users of the financial statements can make a judgement on information about
entity’s investment in its property, plant. and equipment and the changes in such investments.

Based on the normative theory, the accountants will refer to the MFRS 116 when making the
decision about the treatment of PPE whether the cost of an item of PPE should be recognised
or not. For example, under paragraph 7, the accountants need to identify the requirements in
order to decide whether the cost of PPE should be recognised based on the criteria’s such as it
is probable that the future economic benefits associated with the item of PPE and its cost can
be measured reliably.

POSITIVE THEORY

Positive theory is the area of academic accounting research that tries to explain and predict
how accounting standards will change in the future. This is different from normative theory,
which tries to find and approve the best accounting rules. This means that positive theory is
what actual studies (which explain and predict) are built on.

In other words, positive theory refers to an approach that seeks to explain and predict the actual
accounting practices. Compared to normative theory that describe the best action of practice
on how accounting should be done based on the conceptual framework, positive accounting
theory focuses on understanding and explaining the behaviours of individuals and
organizations involved in the accounting process.
Therefore, based on the positive theory that related to MFRS 116, accountant should follow the
standard and relate it with current situation in the organization’s operation. All the information
that being recorded must be consider by predict how to organization will account their property,
plant and equipment.

REGULATORY THEORY

MFRS 116 is used as a guide or reference for how to account for Property, Plant, and
Equipment. This explains how to properly recognize, measure, depreciate, and report these
assets in financial statements so that information is clear, correct, and easy to compare. MFRS
is an accounting standard that comply with International Accounting Standard Board (IASB)
where the IASB also provided an accounting guideline for PPE which is known as IAS 16.
This means that MFRS 116 is the same as IAS 16 Property, Plant, and Equipment, and
companies that follow MFRS 116 should also follow IAS 16.

Later, in May 2020, the IASB released an amendment to IAS 16. This change took effect for
accounting periods that began on or after January 1, 2022. The Malaysian Accounting
Standards Board (MASB) announced changes to MFRS 116 on June 5, 2020. These changes
will take effect on or after January 1, 2022. In any case, the MASB allows an early adoption.

The amendments made to MFRS 116 meant that an organization could not deduct from the cost
of an item of PPE any proceeds made from selling things while the item of PPE was being used
for its intended use, like while it was being tested or put into service. So, an organization would
record the proceeds from these sales right into their statement of profit or loss. Therefore, that
amendment will most likely have an effect on the oil and gas industries.
3.0 MAIN PARTIES INVOLVED IN THE DEVELOPMENT

The development and issuance of accounting standards, including MFRS 116 (Malaysian
Financial Reporting Standards 116) or its international counterpart IFRS 16 (International
Financial Reporting Standards 16), involve several key parties.
International Accounting Standards Board The IASB is an independent, private-sector
(IASB) body that develops and approves
International Financial Reporting Standards
(IFRS), including IFRS 16. While Malaysia
has its own standard-setting body, MFRS is
largely converged with IFRS, and changes
made by the IASB can influence the
development of Malaysian standards.
Malaysian Accounting Standards Board The MASB is the national accounting
(MASB) standard-setter in Malaysia. It is responsible
for the development and issuance of
Malaysian Financial Reporting Standards
(MFRS), which includes MFRS 116.

Auditing Firms Firms providing auditing services are also

important stakeholders. They can provide
insights into the auditing implications and
challenges associated with the new standard.

Professional Accounting Bodies Organizations such as the Malaysian

Institute of Accountants (MIA) may play a
role in providing input and feedback during
the standard-setting process. These bodies
often represent the interests of accounting
professionals and contribute to the
development of standards that are practical
and can be effectively implemented.
Public and Private Sector Entities Companies and entities that will be affected
by the standard have a stake in its
development. They may provide feedback
on the practicality and feasibility of
implementing the proposed standards.
Regulators and Government Authorities Regulatory bodies and government
authorities may also be involved in the
development process to ensure that the
standards align with national regulatory
requirements and policies.
Stakeholders and Industry Experts The standard-setting process involves
obtaining input from various stakeholders,
including preparers, auditors, regulators,
 investors, and other interested parties. The
MASB typically seeks input through
exposure drafts and consultations to ensure
that the standards are relevant and practical
for the Malaysian business environment.

4.0 NATURE OF SELECTION OF MFRS 116

 The Financial Accounting Standards Board (FASB) requires that almost all
corporations follow its principles-based standards in the preparation of their financial
statements. One notable distinction between rules-based and principles-based accounting
standards is that rules-based standards specify explicit actions for practitioners, while
principles-based accounting standards are built on effective communication, guiding
practitioners toward optimal judgments and decisions (Stuebs & Thomas, 2011). Despite being
less specific, principles-based standards may be more accessible to users as the purpose of the
guidelines is clearer, introducing a level of ambiguity inherent in regulations.

Bradbury and Schroder (2012) identify six characteristics that differentiate principles-
based standards from rules-based standards. These include a reduced number of rules, a greater
reliance on accounting principles in conceptual frameworks, an increased need for judgment,
fewer bright-line thresholds, fewer exceptions, and lower levels of verbosity and complexity.

MFRS 116 is recognized as a principles-based accounting standard due to its broad

guidelines applicable in various circumstances. Unlike strict regulations, principles provide
users with multiple options for accounting transactions, making MFRS 116 principles-based as
it allows flexibility in compliance approaches. MFRS 116 lacks specific numerical standards
or restrictions, presenting broad accounting rules, thus earning the classification of "principles-
based" standards. It provides basic rules for accountants generating financial statements,
requiring them to exercise discretion and make professional judgments within the provided
guidelines.

MFRS 116 falls into the category of principles-based standards, rooted in accounting
theories, ideas, and principles connected to a comprehensive theoretical framework. It
explicitly outlines its purpose, aiming to provide essential components of an interim financial
report and establish guidelines for recognition and measurement in full or condensed financial
statements during an interim period. Categorized as principles-based accounting standards,
MFRS 116 emphasizes a reliance on accounting principles from conceptual frameworks when
deciding on aspects like recognition, measurement, classification, or disclosure for interim
financial reporting. Materiality is considered in evaluating how to handle an item during
interim financial reporting, with an understanding that interim measures often involve more
estimations compared to annual financial data.
 Lastly, MFRS 116 is principles-based as it necessitates a higher level of judgment in
implementing its guidelines. While exercising judgment is crucial for determining materiality,
the standard relies on interim period data to make decisions on recognition and disclosure,
ensuring clarity and preventing misleading conclusions. The primary goal is to ensure that the
interim financial report includes all pertinent information for understanding an entity's financial
position and performance during the interim period.

5.0 LIMITATIONS OF STANDARD

MFRS 116, which stands for Malaysian Financial Reporting Standard 116, is a standard that
prescribes the accounting treatment for property, plant and equipment (PPE). There are some
limitations on the adoption of the standard.
 First and foremost, the standard does not provide a clear and comprehensive
explanation of how the computation of interest that is to be capitalised for self-constructed
assets should be considered. In general, there are two ways to obtain the property, plant, and
equipment either by direct acquisition or through self-construction. In the case of assets that
were constructed by the firm itself, the construction must be financed through loans and
borrowings, and the interest that satisfies the requirements outlined in MFRS 123 Borrowing
Cost must be capitalised as part of the cost of assets. The criteria for the interest that should be
capitalised and the computation of interest that should be capitalised are not specified or
defined in the standard that is MFRS 116 by the Financial Accounting Standards Board. The
users are required to consult MFRS 123 Borrowing Cost in order to obtain the specifics and
conditions of the interest that must be capitalised, as stated in MFRS 116. By requiring users
to refer to two different standards in order to comprehend the accounting treatment for the
interest that has been accrued, this may result in awkward and problematic circumstances for
the users. Furthermore, the formula that is used to compute the interest that needs to be
capitalised is not defined in the standard, which creates the potential for uncertainty among
users regarding the calculation of interest that must be capitalised and expensed.

Besides that, the material contained in MFRS 116 is extremely lengthy and difficult to
comprehend since it is comprised of a total of 83 paragraphs, some subsections, and the
utilisation of certain profound terminology. The customers of this software experience a
significant amount of inconvenience because it takes them a considerable amount of time to
comprehend the accounting treatment that is required in accordance with the standard.
However, even though the lengthy explanation may assist users in better comprehending the
implementation of the standard, it results in inefficiency for users because it requires a
significant amount of time to read all the paragraphs to clarify any questions or concerns, they
may have. There is a possibility that the users will require additional time to comprehend the
meaning and the accounting treatment that is required due to the profound terms that are used
in the construction of the sentences in the paragraphs. This is because they may need to consult
a dictionary or a wordbook to acquire a better knowledge of the material.
6.0 SUGGESTIONS AND RECOMMENDATIONS

In order to address the first issue that are brought about MFRS 116 on the computation
of capitalized interest and interest, standard-setters may consider developing comprehensive
accounting policies that integrate relevant aspects of both MFRS 116 and MFRS 123,
particularly focusing on the treatment of interest for self-constructed assets. In these policies,
cross-referencing the relevant sections of each standard will provide a clear linkage between
the two MFRSs. In order to do this, standard-setters have to specify and clearly outline the
criteria and conditions for capitalizing interest on self-constructed assets within the accounting
framework. This limitation occurs when the users have to refer to another standard which in
this case, MFRS 123 Borrowing Cost to figure out the criteria of the interest that will be
capitalized during construction which have caused confusion to the users. Hence, consolidating
the key information from both MFRS 116 and MFRS 123 will ensure that users have a single
point of reference for comprehending the complete process. For example, the standard-setters
may provide a brief description of the calculation and include the formula used to calculate the
interest to be capitalized, as well as some instances of calculations that are comparable to the
work done by the Inland Revenue Board of Malaysia on the recently announced Public Ruling.

To overcome the issue and limitation posed by the length, complexity, and use of
profound terminology in MFRS 116, those responsible for setting the standards may develop
user-friendly guides and training materials that simplify and break down the complicated
content of MFRS 116 into more digestible and accessible formats. This approach aims to
enhance users' understanding and shorten the time required for comprehension. Since this issue
is related to the use of complex and sophisticated term, the standard should be summarised in
a way that focuses on the most important topics, and any explanations that are not necessary
should be eliminated. In order to do this, the standard-setters may prepare concise summary
documents that emphasise key principles, requirements, and typical uses covered in MFRS
116. These summaries should serve as quick reference guides for users, providing an improved
version of the standard. A newly presented summary is an essence that extracts from the
standard, and the standard that is already in place may be retained because it contains more
thorough explanations of the necessary accounting treatment. In the meanwhile, the profound
terms that are used in MFRS 116 need to be altered, and they may conduct a search for
reasonably simple terms to replace those that have the potential to cause misunderstanding
among the users. The standard-setters produce a dictionary of terms exclusive to MFRS 116,
which would simplify and explain complex terminology in a user-friendly manner. The guides
and training materials may utilise this vocabulary, saving users from having to refer to external
dictionaries. In summary, the standard-setters can greatly increase users' accessibility and
comprehension of MFRS 116 by concentrating on the development of user-friendly training
materials and guides, minimizing the amount of time and effort required for them to
comprehend and apply the standard.
7.0 LETTER TO MASB

_________________________________________________________________________________
Our reference : UUM/HEP/U-ASSIST/K-14/C378212
Date : 1 December

Mr Leo Hans Hoogert

Chairman
Malaysian Accounting Standards Board
Level 5, Tower 7
Avenue 3, Bangsar South
No 8, Jalan Kerinchi
59200 Kuala Lumpur
Malaysia

Dear Mr Leo

EXPOSURE OF SUGGESTIONS AND RECOMMENDATIONS TO OVERCOME

LIMITATIONS FINANCIAL REPORTING (PROPOSED AMENDMENTS TO MFRS
116- PROPERTY PLANT AND EQUIPMENT)

The Malaysian Accounting Standards Boards welcome the opportunity to provide comments
to the IASB on Exposure Draft of Suggestions and Recommendations to Overcome Limitations
– Proposed Amendments to MFRS 116.

We appreciate the Board’s proposal to amend some of the MFRS 116 property plant and
equipment and I trust this letter finds you well. As a stakeholder committed to upholding the
highest standards of financial reporting, we appreciate the ongoing efforts of the MASB in
maintaining and enhancing the Malaysian Financial Reporting Standards (MFRS). We would
like to offer our constructive suggestions and recommendations concerning MFRS 116 -
Property, Plant and Equipment based on limitation on standard does not provide a clear and
comprehensive explanation and material contained is extremely lengthy and difficult to
comprehend.In the hope of contributing to its continued improvement, we attached some
suggestion on this limitation above :

1. Specify Criteria For Capitalizing Interest

Advocate for the specification and clear outlining of criteria and conditions for capitalizing
interest on self-constructed assets within the accounting framework. Based on the development
of comprehensive accounting policies that integrate relevant aspects of both MFRS 116 and
MFRS 123, with a focus on the treatment of interest for self-constructed assets. This cross
check provide a clear linkage between the two MFRSs.

2. User Friendly Guides and Training Materials

Recommend the development of user-friendly guides and training materials to simplify and
break down the complex content of MFRS 116. This approach aims to enhance users'
understanding and shorten the time required for comprehension. We also suggest the
preparation of concise summary documents that emphasize key principles, requirements, and
typical uses covered in MFRS 116. Retain the existing standard for thorough explanations, but
provide a newly presented summary that extracts essential information. Through this, its
propose the alteration of profound terminology used in MFRS 116 to make it more user-
friendly. For example, creating a dictionary of terms exclusive to MFRS 116, using reasonably
simple terms to replace those that may cause misunderstandings. This way can ensure that the
guides and training materials utilize this vocabulary.

We appreciate the MASB's commitment to continuous improvement, and we believe that the
incorporation of these suggestions into future revisions of MFRS 116 will contribute to its
effectiveness and relevance in the evolving business environment.
Thank you for considering our input. We remain at your disposal for any further discussions or
clarifications on these recommendations on ([email protected])

Yours sincerely,

MOHAMED FIRAS UMAR ABDUL RAZAK

Chairman

8.0 REFERENCES

Malaysian Accounting Standards Board. (2023). Financial Reporting Standard 116 Property,
Plant and Equipment. Retrieved November 28, 2023, from
https://www.masb.org.my/article.php?id=47&page=4

Sponsored, A. C. R. |. (2018). Positive vs normative accounting. Retrieved from

https://www.accountancyage.com/2018/02/06/positive-vs-normative-
accounting/?amp=1
Team, T. (2021, April 13). Amendments to MFRS 116 Property, Plant and Equipment:
Proceeds before Intended Use. TheAccSense.
https://www.theaccsense.com/accounting/financial-accounting/amendments-to-mfrs-
116-property-plant-and-equipment-proceeds-before-intended-use/

CCS. (2022, July 8). MFRS 116 Amendments – what does this mean for your accounts? CCS
& CO. https://www.ccs-co.com/post/mfrs116-amendments-what-does-this-mean-for-
your-accounts

IAS 16. (2023). https://www.ifrs.org/content/dam/ifrs/publications/pdf-

standards/english/2021/issued/part-a/ias-16-property-plant-and-equipment.pdf

Property, plant and equipment | ACCA Global. (2023, December 15). Www.accaglobal.com.
https://www.accaglobal.com/my/en/student/exam-support-resources/fundamentals-
exams-study-resources/f7/technical-articles/ppe.html

APPENDIX