Guidance on Special Matter No.

1
Determination of Realised and Unrealised Profits or Losses in the Context of
Disclosures Pursuant to Bursa Malaysia Securities Berhad Listing Requirements

Preamble

Bursa Malaysia Securities Berhad (“Bursa Malaysia”) has, on 25 March 2010 and 20 December
2010, issued directives requiring all listed corporations to disclose the breakdown of
unappropriated profits or accumulated losses into realised and unrealised on group and
company basis, as the case may be, in quarterly reports and annual audited financial
statements.

As the meaning of “realised” and “unrealised” profits or losses are not defined in the
Malaysian Accounting Standards Board (“MASB”) approved accounting standards, Bursa
Malaysia has requested the assistance of the Institute to develop a guide on the
determination of realised and unrealised profits and losses – with the objective to assist the
listed corporations in performing the necessary analysis to distinguish between realised and
unrealised profits or losses at individual legal entity level.

Guidance on Special Matter No. 1 “Determination of Realised and Unrealised Profits or

Losses in the Context of Disclosures Pursuant to Bursa Malaysia Securities Berhad Listing
Requirements” has been developed in response to the requirements of, and in consultation with,
Bursa Malaysia for the purpose of complying with the additional disclosures pursuant to the
aforementioned directives, and is issued as part of the Institute’s initiatives to assist Bursa Malaysia
in ensuring consistency and comparability in respect of the aforementioned disclosures amongst
listed corporations in Malaysia.

Issuance Date

Guidance on Special Matter No. 1 is issued on 20 December 2010.

© Malaysian Institute of Accountants

Malaysian Institute of Accountants

Dewan Akauntan, 2 Jalan Tun Sambanthan 3 Brickfields, 50470 Kuala Lumpur, Malaysia
[Web] http://www.mia.org.my [Phone] + 60 3 2279 9200 [Fax] + 60 3 2274 1783
GUIDANCE ON SPECIAL MATTER NO. 1
Determination of Realised and Unrealised Profits or Losses in the Context of Disclosures Pursuant
to Bursa Malaysia Securities Berhad Listing Requirements

1. INTRODUCTION

1.1 Bursa Malaysia Securities Berhad (“Bursa Malaysia” or “the Exchange”) has, on 25 March
2010, issued directives Ref. SR/RPA/TAC(RO)/LD09/10 and Ref.
SR/RPA/TAC(RO)/LD10/10 to all Main Market and ACE Market listed corporations
respectively to introduce certain enhancements to the existing disclosure requirements.

1.2 With the purpose of improving transparency, the directives require, inter-alia, listed
corporations to:
(a) disclose in the notes to its quarterly report, a breakdown of the unappropriated profits
or accumulated losses as at the end of the reporting period and the previous financial
year, on a group basis, into realised and unrealised profits or losses, as the case may
be; and
(b) include in the notes to its annual audited financial statements, a breakdown of the
unappropriated profits or accumulated losses as at the financial year end and the
previous financial year, on a company and group basis, into realised and unrealised
profits or losses, as the case may be.

1.3 The aforementioned disclosure requirements are applicable to quarterly reports and annual
audited financial statements for the financial period or financial year ending on or after 30
September 2010. Comparative figures are not required in the first financial year of
applying this requirement.

1.4 Following the earlier directives, Bursa Malaysia has released subsequent directives Ref.
SR/RPA/TAC(RO)/LD22/10 and Ref. SR/RPA/TAC(RO)/LD23/10 to all Main Market and
ACE Market listed corporations respectively on 20 December 2010 to provide clarity and
guidance on the extent and format of the aforementioned disclosures by listed corporations
in the quarterly report and annual audited financial statements.

1.5 It should be noted that the meaning of “realised” and “unrealised” profits or losses are not
defined in the Malaysian Accounting Standards Board (“MASB”) approved accounting
standards or any pronouncements of other standard-setting bodies that develop accounting
standards using a conceptual framework similar to those of MASB, as the underlying
concepts in the preparation and presentation of general purpose financial statements do
not include the distinction between realised and unrealised profits or losses.

1.6 In this regard, Bursa Malaysia has requested the Malaysian Institute of Accountants (“MIA”
or “the Institute”) to develop and publish this Guidance, which provides the guiding
principles in distinguishing between realised and unrealised profits or losses at individual
legal entity level, to facilitate listed corporations in complying with the aforementioned
disclosure requirements.

1.7 The principles contained in this Guidance have been developed in response to the
requirements of, and in consultation with, Bursa Malaysia. These principles and the
resultant breakdown between realised and unrealised profits or losses of an entity are for
the purpose of complying with the additional disclosure pursuant to the aforementioned
directives issued by Bursa Malaysia. These principles may not be consistent with other
similar guidance developed by other bodies in other jurisdictions where the disclosure of
realised and unrealised profits or losses of an entity are required.

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GUIDANCE ON SPECIAL MATTER NO. 1
Determination of Realised and Unrealised Profits or Losses in the Context of Disclosures Pursuant
to Bursa Malaysia Securities Berhad Listing Requirements

2. OBJECTIVE

2.1 The objective of this Guidance is to assist listed corporations to analyse charges and credits
to the profit or loss of a legal entity into “realised” and “unrealised” categories, solely for
the purposes of complying with the disclosure requirements stipulated in the directives of
Bursa Malaysia as described in Section 1 of this Guidance, and not to be applied for any
other purposes.

2.2 This Guidance is developed with the objective to ensure consistency and comparability of
information disclosed in the quarterly report and annual audited financial statements of
listed corporations in relation to the above disclosure requirements and shall be read in
conjunction with the relevant Bursa Malaysia directives, as appropriate.

3. SCOPE AND DEFINITIONS

3.1 This Guidance is intended for use by listed corporations in the preparation and
presentation of quarterly reports and annual audited financial statements.

3.2 The Guidance does not override any provisions contained in the MASB approved
accounting standards or any acceptable internationally recognised accounting standards,
as defined in the Financial Reporting Act, 1997.

3.3 The Guidance is not intended, and does not affect or alter the existing divisible profit rule
in Malaysia. Likewise this Guidance shall not be applied to address or interpret any legal
matters regarding the availability of profits for distribution to shareholders. Listed
corporations shall observe the existing requirements in the Malaysian legal framework in
dealing with matters related to distribution of profits to shareholders.

3.4 The following terms are used in this Guidance with the meanings specified:
A “listed
listed corporation”
corporation or a “company
company”
company is a corporation, other person or undertaking
(including a trust), whose securities have been admitted for listing on Bursa Malaysia;
A “group
group”
group is a listed corporation and all the entities which are controlled, jointly controlled
or significantly influenced by the listed corporation; and
A “legal
legal entity”
entity is a body corporate such as a corporation, partnership or other entity with
legal personality, formed or incorporated under any prevailing legal framework.

3.5 For the purpose of this Guidance, the term “legal entity” as discussed above should not be
confused with the term “economic entity” used in the context of MASB approved
accounting standards. The term “legal entity” refers to individual entity with legal
personality and as such, a listed corporation and each of its subsidiaries are viewed as
separate legal entities. Instead, the term “economic entity” may refer to a combination of
more than one legal entity.

3.6 This Guidance does not purport to deal with all possible questions and issues that may
arise in any given situation although the guiding principles in the Guidance should be
applied. Companies should consider seeking further consultation with the Institute,
particularly in relation to any matters not covered by this Guidance.

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GUIDANCE ON SPECIAL MATTER NO. 1
Determination of Realised and Unrealised Profits or Losses in the Context of Disclosures Pursuant
to Bursa Malaysia Securities Berhad Listing Requirements

4. PRINCIPLES OF REALISATION

INCOME AND EXPENSE

4.1 It is generally accepted that a charge or a credit to the profit or loss of a legal entity is
deemed as realised when it is resulted from the consumption of resource of all types and
form, regardless of whether it is consumed in the ordinary course of business or otherwise.
A resource may be consumed through sale or use.

4.2 The economic activities engaged by a legal entity require the consumption of various
resources which result in the outflow or depletion of assets. Therefore, expenses incurred by
a legal entity in respect to the consumption or depletion of resource (including the write-
down/impairment of carrying amounts of assets in excess of the amounts expected to be
realised from consumption) would result in charges to the profit or loss which are deemed
as realised. Examples of expenses incurred in respect of consumption or depletion of
resources in economic activities include:

(a) cost of sales in regards to the sale of inventories and expense associated to any write-
down of inventories to net realisable value;
(b) wages and salaries (including share-based payments) for services provided by
employees;
(c) contract expense and expected loss associated with a construction contract;
(d) depreciation and impairment of property, plant and equipment and investment
properties;
(e) amortisation and impairment of intangible assets;
(f) impairment of financial assets;
(g) borrowing/finance cost incurred; and
(h) lease expense.

4.3 From economics perspective, a public good is defined as a good that are non-rivalrous
and non-excludable “which all enjoy in common in the sense that each individual’s
consumption of such a good leads to no subtractions from any other individual’s
consumption of that good”1. Examples of public goods include defence, law enforcement
and public infrastructures such as public roads and lighting. Similarly, a legal entity
consumes public goods provided by the Government in its ordinary course of business. The
consumption of public goods in exchange for payment of dues and taxes in the current
year of assessment should therefore be regarded as realised.

1
Samuelson, P. (1954), “The Pure Theory of Public Expenditure”, Review of Economics and Statistics Vol. 36 No. 4 (MIT
Press), p387-389.

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GUIDANCE ON SPECIAL MATTER NO. 1
Determination of Realised and Unrealised Profits or Losses in the Context of Disclosures Pursuant
to Bursa Malaysia Securities Berhad Listing Requirements

4. PRINCIPLES OF REALISATION (continued)

INCOME AND EXPENSE

EXPENSE (continued)

4.4 Any increase in economic benefits that flow to the entity, directly attributable to the
consumption of resources in a legal entity’s economic activities that result in credits to the
profit or loss should similarly be regarded as realised. In general, such increase in
economic benefits is credited to the profit or loss as income. Examples of income include:

(a) revenue from the sale of goods;

(b) revenue from the rendering of services;
(c) contract revenue associated with a construction contract;
(d) lease/rental income;
(e) interest/finance income;
(f) dividend income; and
(g) royalty income.

INITIAL RECOGNITION / SUBSEQUENT MEASUREMENT

4.5 The initial recognition or subsequent measurement of an asset or a liability may give rise to
a credit or a charge to the profit or loss respectively. This includes those credit or charge to
the profit or loss as discussed above, which is attributable to the consumption of resource.

4.6 Where a credit or a charge to the profit or loss upon initial recognition or subsequent
measurement of an asset or a liability is not attributed to consumption of resource, such
credit or charge should not be deemed as realised until the consumption of resource could
be demonstrated. For example, a legal entity may recognise a provision for product
warranty in respect of the probability of an outflow of resources to settle the present
obligation arising from its commitment to the customers. The initial recognition and
subsequent measurement of such provision would give rise to a charge or a credit to the
profit or loss, but resource is only consumed upon settlement of the obligation, i.e. when a
defective good is repaired or replaced in accordance with the commitments. Therefore, any
charge or credit to the profit or loss in relation to such provision should not be regarded as
realised until the settlement of the obligation takes place.

DERECOGNITION

4.7 A charge or a credit to the profit or loss arising from the derecognition of an asset or a
liability is regarded as realised, as the derecognition signifies the termination of any ability
to derive future economic benefit from an asset or the present obligation which is expected
to result in an outflow of economic benefits, which in turn terminates any consumption of
resource in the economic activities.

4.8 Consistent to the above, any unrealised charge or credit to the profit or loss associated to
a derecognised asset or liability made prior to the derecognition is deemed realised upon
derecognition of the asset or liability.

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GUIDANCE ON SPECIAL MATTER NO. 1
Determination of Realised and Unrealised Profits or Losses in the Context of Disclosures Pursuant
to Bursa Malaysia Securities Berhad Listing Requirements

5. EFFECTS OF THE GUIDING PRINCIPLES

5.1 The application of the guiding principles described in Section 4 would result in many
charges and credits to the profit or loss made in the ordinary course of business of a legal
entity be regarded as realised.

5.2 Having considered the principles on what constitutes unrealised profits and losses,
common examples of such credits or charges to the profit or loss include:

(a) credits or charges relating to the recognition of deferred tax;

(b) cumulative net gains (but not net losses) from the remeasurement of assets or liabilities
at fair value through profit or loss;
(c) provision of liabilities in respect of present obligations where resources are only
consumed upon settlement of the obligations; and
(d) translation gains or losses of monetary items denominated in a currency other than the
functional currency.

6. REVISION / AMENDMENT

6.1 The guiding principles contained in this Guidance may be affected by the ongoing efforts
of Suruhanjaya Syarikat Malaysia (“SSM”) to revise the divisible profit rule in Malaysia as
part of its corporate law reform initiatives. The Exchange and the Institute shall endeavour
to revisit this Guidance at regular intervals in light of this development to address any
matters with regards to the relevancy of this Guidance.

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GUIDANCE ON SPECIAL MATTER NO. 1
Determination of Realised and Unrealised Profits or Losses in the Context of Disclosures Pursuant
to Bursa Malaysia Securities Berhad Listing Requirements

FREQUENTLY ASKED QUESTIONS

This document accompanies, but is not part of, the Guidance

1. My company adopted the fair value model for remeasurement of investment properties.
Should the fair value gain on the remeasurement of investment properties be considered as
a realised gain or an unrealised
unrealised gain?

The fair value gain on the remeasurement of investment properties is regarded as an

unrealised gain. This is because the recognition of the said fair value gain is not resulted
from any form of consumption of resource.

2. Paragraphs 4.2(g) and

and 4.4(e) of the Guidance indicated that finance cost and finance
income should be deemed as a realised charge or credit to the profit or loss respectively.
Should the effects of time value of money in the remeasurement of a financial liability or a
financial
financial asset at amortised cost be similarly regarded as a realised charge or credit?

Yes. Any charge or credit resulting from the recognition of time value of money represents
losses incurred or gains earned from the consumption (by the borrower) of resource
(contributed by the lender).

3. If an impairment loss on a financial asset is deemed as realised, should the reversal of such
impairment be similarly considered as realised?

Yes, but the amount of credit to the profit or loss deemed realised should not exceed the
amount of impairment loss previously charged to the profit or loss (consistent with the
treatment of reversal of impairment as prescribed in the accounting standards).

4. Are all corresponding charges to the profit or loss in regards to the recognition
recognition of provisions
deemed as unrealised?

Not quite. Where provisions are created in respect of the consumption of resources, the
corresponding charges to the profit or loss are deemed realised. For example, provision for
bonus payout is deemed realised because it is a form of remuneration in respect of services
provided by the employees to the company.

5. Should the creation of a provision in relation to the expected settlement of an ongoing

litigation be regarded as unrealised?

Yes. Such provision should be regarded as unrealised upon initial recognition as the
consumption of resource is generally not expected at this point of time. However, such
provision should not be confused with any accruals made in respect of legal fees payable in
connection with the litigation, which should be regarded as realised. The provision would
generally be regarded as realised upon settlement of the obligations, i.e. upon the
derecognition of the said provision.

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GUIDANCE ON SPECIAL MATTER NO. 1
Determination of Realised and Unrealised Profits or Losses in the Context of Disclosures Pursuant
to Bursa Malaysia Securities Berhad Listing Requirements

FREQUENTLY ASKED QUESTIONS

This document accompanies, but is not part of, the Guidance

6. If my company sells goods to another company for

for consideration other than cash, would the
sale of goods be regarded as realised only upon the conversion of the non-
non-cash
consideration into cash?

The notion of “consumption of resource” explained in the Guidance does not suggest so.
The sale of goods and the conversion of the non-cash consideration into cash should be
regarded as separate transactions.

7. Upon first-
first-time adoption of this Guidance to comply with the new disclosure requirements of
Bursa Malaysia, kindly advise how unrealised unappropriated
unappropriated profits or accumulated losses
could be distinguished from those deemed realised?

To identify those unappropriated profits or accumulated losses deemed unrealised as at the

end of the first reporting period where this new disclosure requirements of Bursa Malaysia is
applicable, listed corporations should review all of the assets and liabilities of the respective
legal entities as at the even date to identify if the carrying amounts of the assets and liabilities
were previously adjusted by charges and credits to the profit or loss which are deemed
unrealised. The aggregate amount of the identified charges and credits represent the
unrealised unappropriated profits or accumulated losses as at the reporting date. Therefore,
the remaining sum/balance may be assumed as realised.

8. Would a charge or a credit to the profit or loss identified as unrealised be regarded as such
permanently?

No. An unrealised charge or credit to the profit or loss is deemed realised upon
derecognition of a corresponding asset or liability.

9. I understand that the Guidance suggests that credits or charges relating to the recognition of
deferred tax are regarded as unrealised. Why is this different as compared to those relating
to current tax?

Payment of dues and taxes in the current year of assessment is viewed as a consideration for
the consumption of public goods during the said year. In contrast, deferred tax represents
the future deductible or taxable amount and hence, it is seen to be related to the future
consumption of public goods. As the resources have not been consumed, credits or charges
relating to deferred tax are therefore regarded as unrealised.

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GUIDANCE ON SPECIAL MATTER NO. 1
Determination of Realised and Unrealised Profits or Losses in the Context of Disclosures Pursuant
to Bursa Malaysia Securities Berhad Listing Requirements

FREQUENTLY ASKED QUESTIONS

This document accompanies, but is not part of, the Guidance

10. Can I assume that Paragraph 5.2 of the Guidance is a complete list of charges or credits to
the profit or loss that
that should be classified as unrealised?

Paragraph 5.2 of the Guidance provides a list of common examples of unrealised credits or
charges. The application of the guiding principles contained in the Guidance requires the
use of judgement and therefore, it should not be assumed that the examples provided in
Paragraph 5.2 constitute a complete list. Users are welcomed to seek further consultation
with the Institute, particularly in relation to any matters not covered by the Guidance.

11. Will the release or

or settlement or assumption by another party, of all or part of a liability of
the company give rise to a realised profit?

Yes. Any charge or credit to the profit or loss arising from the derecognition of an asset or a
liability is regarded as realised.

12. Under FRS 2 “Share-

“Share-based Payment”, it is required that an expense be recognised in profit
or loss in respect of equity-
equity-settled share based payment transaction, with a corresponding
realised?
credit in equity. Is such charge to the profit or loss regarded as realised?

Yes, as the goods or services received as consideration for equity instruments in question
constitutes a consumption of resource.

13. Should the provision for retirement benefits be regarded as a realised charge or unrealised
charge to the profit or loss?

Provision for retirement benefits should be regarded as realised, as it is related to the

employee services which have been consumed by an entity. This is consistent with the
determination for all other types of employee benefits.

14. Should the

the allowance for doubtful debts be regarded as a realised charge or unrealised
charge to the profit or loss?

Allowance for doubtful debts is a realised charge, as it represents an impairment of a

financial asset and hence, a depletion of resource.

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GUIDANCE ON SPECIAL MATTER NO. 1
Determination of Realised and Unrealised Profits or Losses in the Context of Disclosures Pursuant
to Bursa Malaysia Securities Berhad Listing Requirements

FREQUENTLY ASKED QUESTIONS

This document accompanies, but is not part of, the Guidance

15. Although
Although the recognition of a provision requires a reliable estimate on the amount of the
obligations, there is usually an element of uncertainty. Would the uncertainty affect the
realised/unrealised determination?

No. A provision is regarded as a realised charge if the present obligation is associated with
the consumption of resource. Further charge to the profit or loss in the subsequent period
due to under-provision should similarly be regarded as realised. Likewise, a credit to the
profit or loss in the subsequent period due to over-provision should be regarded as a
realised credit.

16. Why does a fair value loss be regarded as realised when a fair value gain is regarded as
unrealised?

A charge or credit to the profit or loss is deemed realised when it is related to the
consumption or depletion of resource. Impairment of an asset is basically a depletion of
resource. For an asset that is remeasured at fair value through profit or loss, the recognition
of impairment is implicit within the recognition of fair value loss.

17. Why a provision for warranty is regarded as unrealised when the warranty itself is created as
a result of a sale transaction that is regarded as realised?

Charges or credits to the profit or loss could result in simultaneous recognition and
derecognition of assets or liabilities, and such recognition and derecognition should be
viewed separately.

When a provision for warranty is recognised upon the sale of goods, there are essentially
two events which have happened, i.e. the transfer of inventories that results in the inflow of
revenue, as well as the recognition of a present obligation with a probable outflow of
resources. In the sale of goods, the entity has already consumed the resource through the
transfer of inventories. As far as the warranty is concerned, consumption of resource takes
place only when the entity fulfils its obligations under the warranty.

© Malaysian Institute of Accountants iv