The Impact of an Enforceable Standard in Malaysia: Assessing the Compliance of Disclosures for Large First-Time Adopters Under FRS 136

Abstract

After many years of debating the appropriate treatment for goodwill, Malaysia finally has an enforceable accounting standard on this topic. Applicable for business combinations with reporting dates commencing on or after 1 January 2006, FRS 136 - Impairment of Assets requires that goodwill acquired in a business combination is allocated to cash generating units and tested for impairment at least annually. This new requirements is a radical departure to the existing practice of goodwill reporting in Malaysia, with financial statement prepares now having to deal with complex and rigorous techniques for assessing impairment, and the added disclosure requirements in relation to goodwill allocation and the estimate of recoverable amounts. Given the change in the reporting requirements, there exists the possibility of inconsistent compliance and varying levels of disclosure quality by companies as they transition into the new reporting regime. Thus, the purpose of this paper is to examine the level of compliance with the provisions of FRS 136 - Impairment of Assets and assess the quality of disclosures made in accordance with this new standard. Using a sample of 36 of the largest Malaysian listed corporations as at 2006, we find significant levels of non-compliance and substantial variation in the quality of note-form disclosures pertaining to impairment testing.