Answer :

As per the given information about the issues inherent in the Accounting treatment of heritage assets, military equipment and infrastructure assets.

In elevating the achievement of a developed nation status, Malaysia introduced the Economic Transformation Programme in 2010. Under the programme, six Strategic Reform Initiatives were introduced. One of the Strategic Reform Initiatives is called “Public Finance Reform”. The main objective of this initiative is to strengthen the government’s finance in ensuring the stability and sustainability of public funds. In executing the Public Finance Reform initiative, several measures have been introduced, one of which is the adoption of the accrual accounting system by the Malaysian Federal Government (Economics Transformation Programme, 2017).

Accrual accounting, as opposed to cash accounting, is an accounting basis that measures the performance and position of an entity by recognizing economic events regardless of when the cash transactions occur. Accrual accounting is common in the private sector, and the public sector’s adoption of the accrual accounting system is also not new. Governments of several countries have implemented accrual accounting, including the UK, Canada, New Zealand, Australia, The Netherlands, Sri Lanka and Indonesia (Baker and Rennie, 2006). The fundamental justification for the transition from cash to accrual accounting system by the government is the drawbacks of cash accounting. Cash accounting fails to recognize future commitments, guarantees and other contingent liabilities (Ball et al., 1999). It also fails to provide details of how the resources are controlled by an entity, the cost of providing goods and services and other financial information for assessing the financial position of an entity (Peter Van Der Hoek, 2005; Arnaboldi and Lapsley, 2009; Lapsley et al.2009). Accrual accounting is advantageous for the Governments as it provides full information about costs and available resources which ultimately enhances efficiency, effectiveness, transparency, good governance and accountability of the public sector to the society (Guthrie, 1998; Chan, 2003; Hodges and Mellett, 2003; Barton, 2005; Deaconu et al., 2009; Hyndman and Connolly, 2011; Monteiro and Gomes, 2013).

In Malaysia, in line with the Public Finance Reform initiative, the Prime Minister, Dato’ Seri Najib Tun Razak in 2011 announced that the Federal Government of Malaysia was to adopt a full accrual-based accounting system in 2015 (Gomes and Sargiacomo, 2013; Economics Transformation Programme, 2017). The government was highly committed to accrual transition because of its benefits and embarked on intensive preparations for accrual accounting adoption, including the establishment of several committees to review the procedures, acts and regulations, to monitor the implementation of accrual accounting, to develop relevant accounting standards, policies and information system, as well as to ensure sufficient training on accrual accounting among public sector accountants and relevant personnel. However, the implementation of accrual accounting system in the Federal Government of Malaysia has been postponed twice. Initially, the implementation was postponed from 2015 to 2017. Recently, it was further postponed until 2018. The postponements of the transition, to some extent, indicate that the government is yet to be ready to implement accrual accounting. The Ministry of Finance claimed that the preparations are still ongoing that cause a delay in the implementation (Lee, 2015). This postponement, therefore, inspires the researcher to scrutinize the Malaysian Federal Government’s readiness to fully implement accrual accounting.

In addition, although several official documents on accrual accounting implementation have emphasized on the need for an organization that makes the decision to move to the accrual accounting system to carefully consider its readiness in terms the pre-implementation challenges to minimize the implementation and post-implementation risks (IFAC, 1994; IFAC, 2006), there is scant theoretically informed empirical evidence on the factors influencing the readiness to implement accrual accounting (i.e. pre-implementation stage). Moreover, although several prior studies including Ryan (1998), Harun et al. (2012) and Adhikari and Mellemvik (2011) have investigated the factors influencing accrual accounting adoption, the studies were carried out when the accrual accounting has been implemented in their countries. In other words, the studies are not investigating the “readiness” to implement.

In light of the above motivations, using the organizational readiness to change theory, the current study aims to examine factors influencing the readiness of the Malaysian Federal Government to move towards accrual accounting, as perceived by public sector accountants. In particular, the study investigates the influencing factors on readiness in terms of change commitment and change valance. The unique contribution of this study is that it offers empirical evidence on factors that are important in ensuring the readiness of the Federal Government for the transition to accrual accounting, which is currently very limited.

More importantly, there is yet a theory-based empirical study which investigates the organizational readiness for change on the issue of the readiness of a government to adopt accrual accounting system.

Challenges in the accounting of heritage assets, military equipment, and infrastructure assets -
a. Recognition and measurement:
At present, no assets were recognized as the modified cash basis accounting treats all expenditures relating to heritage items (including purchase costs) as expenses in the year they were incurred. Under accrual-based accounting, all assets should be capitalised if their cost or fair value could be measured reliably. This requirement would be challenging for both departments. For the Department of Museums of Malaysia, the Ethnological Collections have been valued but previously the data were used solely for record-keeping and not for accounting purposes. The challenge would be to value the Archaeological Collection and Natural History Collection. For this purpose, the department needs to set up an expert team specifically to value the two collections.

‘Currently, we have database only for the Ethnological Collection which contains information on acquisition cost, date of acquisition, description of items, and annual increment rate of 3- 5%. The financial value of items and annual increment rate for items were determined by our expert committee’ (Senior Curator, Department of Museums of Malaysia)

At the Department of National Heritage, no effort at all has been made to value the items of their collection. According to the management of the department,
‘Accrual accounting is new to us. We have no idea on how to place financial value to those heritage items. In fact, we never identified any experts who can value the items. These are going to be great challenges if the items are recognized as assets’ (Director, Department of National Heritage Malaysia).

Moreover, accrual accounting also requires major subsequent expenses that prolong the useful life of an asset be capitalised. The officers in charge of both departments stated that currently all the costs incurred from the maintenance or conservation works are accounted for as operating expenses. Identifying subsequent expenses that should be capitalised would be problematic as the staffs in charge of financial management of the departments do not have accrual accounting experience.

All this while we carry out maintenance and conservation works using fund obtained from the government based on our annual budgets and from UNESCO for heritage items recognized as World Heritage. There are routine maintenance and major conservation. We record all these as expenses’ (Director, Department of National Heritage Malaysia).

b. Assets registry:

The database developed by the Department of Museum of Malaysia indicates that they are most unlikely to face many problems in setting up an asset registry as the current database can be used as a basis and extended to incorporate two other classifications of collections (the Archaeological and Natural History collections) which are currently not in the database. Unlike the Department of Museums of Malaysia, currently, the Department of National Heritage does not have a complete registry for heritage items under management. Thus, setting up an asset registry for accounting purposes would be challenging to the department.

‘We do not have a database for heritage items that we manage. At present, we list all items according to classification either as National Heritage or Heritage. Under these, we have three different categories Site, Objects or “Orang Hidup”. Information on the location and ownership of heritage buildings are also included in the list. Ownership may be by the Federal Government, State Government or individual’ (Director, the Department of National Heritage Malaysia)

c. Staff competency:
In general, the officers involved in heritage asset management believe that the implementation of accrual accounting does not affect them. To them, the heritage items are not assets.

‘Our collections are not assets. Assets should be depreciated while the value of our collection increases every year. Our collections are very unique with high aesthetic value. Also, these items require high maintenance and conservation costs but we charge very minimal entrance fee which doesn’t even cover the maintenance cost. To me, it is more liability than an asset’ (Senior Curator, the Department of Museums of Malaysia)

The interviews also revealed that the transition to accrual accounting is challenging to not only the staff without an accounting background but also to those with an accounting background. As admitted by one of the accountants,

‘We are so used to modified-cash basis. Actually, we don’t quite understand the requirements of accrual accounting. So far, we just follow the manuals and Treasury Instructions’ (Accountant, the Ministry of Information, Communication and Culture)