Special treatment for banks or development FIs adopting MFRS 9

Special treatment for banks or development financial institutions adopting MFRS 9: Financial Instrument

The “Malaysian Financial Reporting Standard 9 Financial Instruments” was issued to replace the “Malaysian Financial Reporting Standard 139 Financial Instruments: Recognition and Measurement” effective 1 January 2018. The MFRS 9 provides updated guidance for the recognition and measurement of financial instruments.

Following the above, the Income Tax (Special Treatment for Bank or Development Financial Institution which Adopt Malaysian Financial Reporting Standard 9: Financial Instruments) Regulations 2021 [P.U.(A) 400] were gazetted on 14 October 2021. The Regulations apply to a bank or development FI, as listed below, which adopts the MFRS 9:

(a)   A licensed bank under the Financial Services Act 2013 (FSA),

(b)  A licensed Islamic bank under the Islamic FSA, or

(c)   A development FI prescribed under the Development Financial Institutions Act 2002

The Regulations stipulate the methodology of ascertaining the “gross income” and “adjusted income” of a bank or development FI from its business in a basis period for a YA in respect of a financial instrument. The Regulations also outline the tax treatment for the following:

• Financial assets on capital account
• Impairment loss of financial assets
• Reversal of impairment loss of financial assets
• Transaction costs
• Gain or loss in respect of hedging instrument
• Gain or loss in respect of financial instrument arising from foreign exchange transactions

The Regulations provides transitional provisions for certain situations. In addition, the Regulations also stipulate that for the purpose of ascertaining the income of a bank or development FI, the bank or development FI shall for each YA, maintain separate records in respect of the:

(a)   Particulars of financial assets measured at amortised cost,

(b)  Movement of financial assets measured at fair value through other comprehensive income,

(c)   The impairment losses which were allowed as a deduction and the reversal amount treated as gross income relating to such impairment losses from the date of initial application, and

(d)  Any other records as may be specified by the DG

The Regulations are deemed to be effective from:

• YA 2018: Bank or development FI with accounting period ending on 31 December
• YA 2019: Bank or development FI with accounting period ending on a day other than 31 December