By:

Azrul Abdullah

Norshamshina Mat IsaUniversiti Teknologi Mara (PERLIS), Malaysia

Ku Nor Izah Ku IsmailSchool Of Accountancy, Universiti Utara, Malaysia

Risk Management Committee and Disclosure of Hedging

Activities Information among Malaysian Listed Companies

Introduction Previous studies have reported that derivatives are often used by

numerous companies as a tool for corporate risk management.

(Stulz 2004)

Derivatives act as a mechanism to hedge risks - offset risk resulting from

their business activities

Although derivatives can offer assistance to mitigate financial risk

exposure, it also can magnify risks at the company level which

may lead to financial distress and collapse

Enron, Baring and etc

Must be handled with extra care-so the used of derivatives will help

more than hurt.

Introduction (Cont) Since derivatives are held in many business transactions together

with high financial risk exposure and involve huge amounts of a

company’s funds, it is therefore essential for the company to have

well-defined internal policies, practices and controls for the use of

derivatives (Chung & Fung, 1995)

The derivative and hedging activities information is important

because:

For users of financial statements, it is essential for them to understand more

and have enhanced information regarding the companies’ usage of

derivatives.

Undervaluing the risk of reporting entities; mislead to critical investment

decision.

Introduction(Cont)

Disclosure of financial instruments (i.e. derivatives) by business

entities in Malaysia is entrusted under three separate financial reporting

standards.(i.e. MFRS 7,132,139)

To improve disclosure on financial instruments-faithful represent to the

users of financial statements comprehensive and far reaching additional

requirement as compared to previous accounting standard

The requirements for hedging activities are included in two of the

standards-MFRS 139 and MFRS 7.

International studies showed that disclosure of derivatives and hedging

activities in annual report is varied, incomplete and inconsistent:

Cannot be relied by users(especially investors) to make favorable decision( e.g.

Wood and Marginson 2004; Birt et. al 2013)

Accounting standard offer discretion for management to manipulate information. (

e.g. Hassan et al. 2006).

Introduction(Cont) Previous studies also explained several reasons (factors) that associate on

variation of disclosure on financial instruments

Firms characteristics

The strength of corporate governance

The existence of RMC and Audit committee (e.g Birt et al. 2013; Hassan et al.

2012)

However, it is argued that those evidences is weak to be generalized.

Different organizational culture, current economic development, ownership

structure and regulations (Ball and Shivakumar 2005)

Examine the extent of derivatives disclosure based on specific industries(e.g.

financial services industries, banks, extractives industries)

Mixed evidence.

Problem Statement

Quality of hedging activities information in company annual

report still not conclusive in Malaysia.

Norkhairul Hafiz (2003),Hassan et. al (2010),Hassan et al. (2012), Abdullah

and Chen, (2010). Unsatisfactory disclosures; some companies not

forthcoming to report derivatives and hedging activities information.

(Hassan et al 2012)

Company size, company liquidity and the existence of risk management

committee are factors that contribute for high disclosure

Outdated evidence- as new accounting standard has been introduced

Poor disclosures and non-compliance would affect users of

financial statements to make unfavorable investment decision.

Problem Statement (Cont) There was no clear evidence whether the monitoring control (i.e

RMC) is the optimal means of dealing with the disclosure

practice.

Previous studies proposed that RMC could influence the level

of transparency and quality of disclosure on financial instrument

(Hassan et al. 2012; Abdullah and Chen 2010; Birt et al. 2013)-

Mixed evidence

Hence, the existence of the RMC alone can be argued as

insufficient to explain the level and quality of financial

instrument disclosure-lead this study to deal with the

characteristics of RMC.

Research Question

What are the characteristics of the RMC that

influence the extent of information on hedging

activities disclosure in Malaysian listed companies?

ObjectiveTo determine the relationship between RMC’s characteristics and the extent of

information on hedging activities disclosure of the Malaysian listed companies.

Literature review Studies on disclosure of hedging activities information

Lack of studies- only few studies have specifically addressed the disclosure of

information on hedging activities.

The extent of disclosures were reported less satisfactory (e.g. Birt et al 2013,

Chalmer and Godfrey 2004)

Factors associated with disclosure of financial instruments

Firm characteristics and corporate governance mechanisms

Studies on financial instruments disclosure in Malaysia

Hassan et al., (2012)

Abdullah and Chen, (2010)

Norkhairul Hafiz, (2003)

Ismail and Abdul Rahman, (2011)

Adznan and Puat Nelson (2014)

Methodology Measurement(Dependent Variable)

This study measure the dependent variable (EHAD) based on the

disclosure score.

Disclosure checklist is developed based two types of disclosures, i.e.,

mandatory and discretionary. (28 items) The score of 1 for each dimension of hedging activities disclosure will be assigned in the

EHAD index if it is disclosed in the annual report or 0 otherwise

Formula used to measure the disclosure level of hedging activities

information:

Methodology (Cont)

Measurement of Explanatory Variables

Methodology (Cont) Data and Sample Selection

This study use secondary data collected from two separate sources:

DataStream and the Malaysian listed companies’ annual reports.

The population setting for this study is all public listed companies on the

Main Market of Bursa Malaysia except the financial services sector

companies.

300 large companies, listed in 2013 are selected based on their total

assets as a sample for this study.

large companies is found most likely to engage in derivatives usage(Hassan et al.

2012,Ammer et al. 2011)

However, we ended up with 117 companies since not all the sampled companies

use derivatives to mitigate their financial risk exposure and establish an RMC.

Year 2013 is the third year of MFRS 7 has been fully adopted-sufficient time.

Methodology (Cont)

Model Specification

Findings

Descriptive Statistics

Findings (Cont)

Regression Results

Conclusion The objective of this study is to examine the influence of risk

management committee characteristics (i.e. RMC size, RMC

independence, RMC meeting, RMC gender diversity and RMC

training) to the extent of hedging activities information

disclosures in the annual reports of Malaysian listed companies.

The analysis shows that the RMC characteristics (i.e. RINDE,

RMEET) have some significant bearing in influencing the extent of

hedging activities information disclosure in Malaysia

Intrinsically, this finding may provide some meaningful insights to the

regulator, policy makers and researchers, especially in incorporating RMCs

as part of the corporate governance mechanisms.

It is not just the existence of RMC, but their effectiveness is something that

needs to be emphasized.

THANK YOU