The document provides background information on Caring Pharmacy, Hovid Berhad, and MFRS 139 Recognition and Measurement of Financial Instruments. It then summarizes how Caring Pharmacy and Hovid Berhad comply with the disclosure requirements of MFRS 139 in their 2016 annual reports. Both companies disclose information on credit risk, fair value of financial instruments, collateral, and impairment. However, Hovid Berhad provides more extensive disclosures for items like risk management, compound financial instruments, and sensitivity analysis. The document concludes by noting issues with MFRS 139 and the need for its replacement.

1. 1.0 Introduction
Background of Caring Pharmacy
Caring Pharmacy (Berger, 1993) was established in 1994, which was founded by five
pharmacists, who were coursemates in Universiti Sains Malaysia (USM). The
company was headquartered in Petaling Jaya and engaged in the operation of
community pharmacy, included retailing of pharmaceutical, health care and personal
care products. The first Caring Outlet was opened in Cheras. However, the awareness
of community pharmacy service was still low during that time. Therefore, the
founders instilled the value of pharmacist in the health care profession by providing
full time pharmacist service, accessible pharmacist counseling service and health
checks at a minimum fee. With this successful concept, Caring Pharmacy is growing
rapidly in Klang Valley, Melaka and Johor Bahru. In 2003, the company entered into
a new era by establishing the first mall outlet in 1 Utama Shopping Complex after
successfully opening 13 high street outlets. Caring Pharmacy’s vision is to be the
most appreciated and admired pharmacy brand. Besides, the company’s mission is to
provide the most professional and innovative pharmacy services and the
highest quality products for theit customers. The company also aims to
provide superior returns to their partners in terms of dividend and share value perfect
clones.
Background of Hovid Berhad
Hovid Berhad (The Malaysian Organisation of Pharmaceutical Industries, 2017),
which also known as Ho Yan Hor Sdn Bhd is a Malaysian health care provider
and pharmaceutical company. The company was founded by Dr. Ho Kai Cheong in
1940. The company's headquarters are located in Ipoh. The company has more than
400 products distributed and marketed in over 50 countries globally. Its first product
was Ho Yan Hor Herbal Tea, a Chinese herbal tea recipe which made of 24 herbs. In
1980, the company transformed from a traditional Chinese herbal manufacturer to
generic drugs, health supplements and consumer health care products. The company
began focusing on tocotrienol research and development in 2000. Nowadays, the
company engages and manufactures primarily generic drugs and dietary supplements
for their customers, such as antibiotics, analgesics, antacids and others. Furthermore,
Hovid Berhad was publicly listed on Kuala Lumpur Stock Exchange (KLSE) on 20

2. June 2006. Hovid Berhad’s mission is to improve lives through a culture of
continuous innovation by providing high quality pharmaceutical and health care
products and services while achieving customer satisfaction, enhancing employees
and stakeholders’ returns.
Background of MFRS139 Recognition and Measurement of Financial
Instruments
MFRS 139 Recognition and Measurement of Financial Instruments (Lazar & Huang,
2014) is equivalent to IAS 39 Financial Instruments: Recognition and Measurement,
which was issued in November 2011 by Malaysian Accounting Standards Board
(MASB) and amended by International Accounting Standards Board. This standard is
applicable for annual periods beginning on or after 1 January 2012. MFRS
139 outlines the requirements for the recognition and measurement of financial assets,
financial liabilities, and some contracts to buy or sell non-financial items. Besides,
financial instruments are initially recognized when an entity becomes a party to the
contractual provisions of the instrument and are classified into various categories
based on the type of instrument, which then determines the subsequent measurement
of the instrument, typically amortised cost or fair value. However, special rules are
applied to embedded derivatives and hedging instruments. Furthermore, the tentative
project plan for the replacement of IAS 39 consists of three main phases, which are
classification and measurement, impairment methodology, and hedge accounting.
MFRS 139 defines a derivative as a financial instrument or other contract with three
characteristics. First and foremost, the main characteristic is the value changes in
response to the change in a specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index prices or rates, credit rating or credit
index, or other variables, which provided in the case of a non-financial variable that
the variable is not specific to a party to the contract, such as underlying. The
following characteristic is it requires no initial net investment or an initial net
investment that is smaller than would be required for other types of contracts that
would be expected to have a similar response to changes in market factors. The last
characteristic is it is settled at a future date. Furthermore, hedge accounting in MFRS
139 defined a firm commitment as a binding agreement for the exchange of a
specified quantity of resources at a specified price on a specified future date or dates.
A forecast transaction is an uncommitted but anticipated future transaction. Besides, a

3. hedging instrument is a designated derivative or a designated non-derivative financial
asset or non-derivative financial liability whose fair value or cash flows are expected
to offset changes in the fair value or cash flows of a designated hedged item, which is
an asset, liability, firm commitment, highly probable forecast transaction or net
investment in a foreign operation that exposes the entity to risk of changes in fair
value or future cash flows.

4. 3.0 Compilation of MFRS 139 by Caring Pharmacy Group Berhad and Hovid
Berhad
Risk Management and Hedges
The first disclosure that required in MFRS 139 Financial Instruments: Recognition
and Measurement is risk management and hedges. Based on the annual report of
Caring Pharmacy Group Berhad and Hovid Berhad, only Hovid Berhad does disclose
it in its annual report. The availability of both inflow and outflow of foreign currency
arising from the normal business transactions of the Group and of the Company
provide a natural hedge to foreign currency exchange risk. To further illustrate, The
Group and the Company are mainly exposed to the currency of USD, SGD, EUR and
JPY.
Terms and Conditions of Financial Instruments
Terms and conditions of financial instruments is also one of the disclosures involved
by the standard. Nonetheless, both of the companies do not show the particular
disclosure.
Credit Risk
It can be found that Caring Pharmacy and Hovid Berhad do reveal credit risk, when
one party fails to discharge an obligation and causes the other party to incur a
financial loss, the entity should disclose information about its exposure to credit risk.
Caring Pharmacy minimises credit risk by dealing exclusively with high credit rating
counterparties for financial assets including cash and bank balances and deposits with
financial institutions. At the end of the reporting period, the maximum exposure to
credit risk is represented by the carrying amount of each class of financial assets
recognised in the statement of financial position of the Group after deducting any
allowance for impairment losses.

5. Diagram 1
Based on the diagram 1, as the management of Hovid Berhad, it has a credit policy in
place and the exposure to credit risk is monitored on an on-going basis. Credit
evaluations are performed on all new trade receivables. Any receivables having
significant balances past due more than 30 days, except for customers on Letter of
Credit with credit terms ranging from 30 to 45 days, which are seemed to have higher
credit risk, are monitored individually.
Fair Value of Financial Instruments
As stated in annual report of Caring Pharmacy, fair value of financial instruments
carried at fair value indicates that the fair values of term loans are determined by
discounting the relevant cash flows using discount rate that reflects the respective
entities’ borrowing rate at the end of the reporting period. Anyhow for the fair value
of financial instruments not carried at fair value shows the fair value of hire purchase
payables are determined by discounting the relevant cash flows using current market
interest rates for similar instruments at the end of the reporting period.
On the other hand for Hovid Berhad, the financial statements of the Group and of the
Company are prepared under historical cost convention, unless otherwise indicated in
the summary of significant accounting policies. Upon adoption of MFRS 9, financial
assets will be measure at either fair value or amortised cost. It is also expected that the

6. Group’s and the Company’s investments in unquoted shares will be measure at fair
value through other comprehensive income.
Derecognition
As for transfers or sales of financial instruments which are not derecognized in their
entirety, specific disclosures required are nature of the assets, risks and rewards the
entity are still exposed to and carrying amount of the asset of the transferred assets
continue to be recognized by the entity. However, both of the companies do not
expose the disclosure in their annual report.
Collateral
When the financial assets of an entity have been pledged as collateral for liabilities or
contingent liabilities, the entity should disclose carrying amount of financial assets
pledged and terms and conditions of the pledge.
Diagram 2
Caring Pharmacy Group Berhad has shown the net book value of properties pledged
as securities for bank borrowings as stated in Diagram 2.
Diagram 3
Diagram 3 shows the property, plant and equipment and deposit with a licensed bank
of Hovid Berhad were pledged for bank facilities granted to the subsidiary.
Compound Financial Instruments

7. MFRS 7 defines compound financial instrument as a non-derivative financial
instrument that, from the issuer’s perspective, contains both liability and an equity
component. It means that the issuer of such an instrument cannot simply show it
purely as a liability or purely as an equity, because this instrument contains both of it.
From the annual report of Caring Pharmacy Group Berhad for year 2016, the
company does not disclose the compound financial instrument in the year. However,
Hovid Berhad does disclose it in their annual report year 2016.
Diagram 4
From Diagram 4, we can see that 33,465,600 number of shares with the total of RM
3,347,000 were converted from warrants to the issued and fully paid ordinary shares.
This means that the equity instruments issued satisfy the term ‘consideration paid’ in
accordance with paragraph 39 of MFRS. In my opinion, the warrants are being
exercised because the company share price has exceeded the warrant exercise price.
By exercising the warrant, more profit and benefit can be gain by the holder of
warrants.
Financial Assets and Liabilities at Fair Value through Profit or Loss
Other than that, we can see that Hovid Berhad does disclose the financial assets and
liabilities at fair value through profit or loss while Caring Pharmacy Group Berhad
does not by read through their annual report 2016. It was stated in Hovid Berhad’s
annual report that the financial instrument is recognised initially at its fair value plus,
in the case of a financial instrument not at fair value through profit or loss, transaction
costs that are directly attributable to the acquisition or issue of the financial
instrument. However, the company didn’t explain much of it and the loss and profit in
financial instrument didn’t show in their annual report. It may because the financial
instrument of the company didn’t generate any revenue or incurred losses in the
financial year.

8. Reclassifications
Where the financial assets have been reclassified, an entity must disclose the date of
reclassification, detailed explanation of the change in business model and qualitative
description of its effect on the financial statement and the amount reclassified into or
out of each category. From the annual report 2016, both company does disclosed it
but not stated and explained about the detail of it. For Caring Pharmacy Group Berhad,
an impairment loss in respect of available-for-sale financial assets is recognised in
profit or loss and is measured as the difference between its cost and its current fair
value, less any impairment loss previously recognised in the fair value reserve. In
addition, the cumulative loss recognised in other comprehensive income and
accumulated in equity under fair value reserve, is reclassified from equity to profit or
loss. At the Hovid Berhad side, the company disclose the reclassification of financial
instrument more in detailed.
Diagram 5
In diagram 5, we can see that the losses in foreign exchange translation differences for
foreign operation had been stated clearly that it will be reclassified subsequently to
profit or loss. It explain that the losses of it will reduce the total other comprehensive
income for the financial year.
Statement of Profit or Loss and Equity Information
Furthermore, item of interest income, expense, dividend paid to holders and gains and
losses relating from financial assets and liabilities are to be disclosed. Disclosure such
as the fee income and expenses arising from financial instrument and total interest
income and expenses for financial instrument also had disclosed by both company.

9. Diagram 6
Diagram 6 is part of the Statement of Cash Flow extract from annual report 2016 of
Caring Pharmacy Group Berhad. It show that the dividends paid to shareholders of the
Company which relating to the financial liability or to a component of a
compound instrument that is a financial liability, are recognised as income or expense
in profit or loss had recorded properly with its exact value. While for Hovid Berhad,
the company had clearly stated the finance cost and finance income which was related
to the financial assets and liability in their Statement of Profit or Loss and Other
Comprehensive Income as in Diagram 7.
Diagram 7
Diagram 8

10. Other than that, the value of financial liabilities such as loan and borrowing also
recorded specifically in the Statement of Financial Position of Hovid Berhad as in
Diagram 8.
Impairment
Impairment loss is required to disclose for each class of financial asset in the
Statement of Profit and Loss. Besides, impairment loss is recorded in a separate
account and a reconciliation of changes in the separate account is to be disclosed.
According to the annual reports of both entities, Caring Pharmacy does not disclose
any impairment in 2016, whereas Hovid Berhad does. Based on the annual report of
Hovid Berhad, the impairment loss on receivables in 2016 is lower than 2015,
whereas the reversal of impairment loss on receivables has decreased in 2016. Trade
receivables would be considered impaired if its carrying amount exceeds its
recoverable amount. In my opinion, the company might apply a cash discount method
for prompt payment for the debtor or the length of credit being advanced to customers
has decreased. A reduction in the impairment loss on receivables is a desirable
situation for the company. This is because it will decrease the operating expenses, the
essential maintenance and replacement of fixed assets can be conducted, the new
investments projects can be carried on and the growth rate of the company will
increase.
Defaults and Breaches
Defaults and breaches defined as for loans payable which recognized at the end of the
reporting period, the entity shall disclose the details of any defaults during the period
of principal, interest, sinking fund, or redemption terms of those loans payable; the
carrying amount of the loans payable in default at the end of the reporting period; and
whether the default was remedied, or the terms of the loans payable were renegotiated
before the financial statements were authorized for issue. According to the annual
reports of both entities, there are no defaults and breaches recorded in 2016.
Sensitivity Analysis
Sensitivity analysis is defined as the technique used to determine how different values
of an independent variable will impact a particular dependent variable under a given
set of assumptions. It is used within specific boundaries that will depend on one or

11. more input variables. Based on the annual reports of both entities, Caring Pharmacy
did not disclose any sensitivity analysis in 2016. However, Hovid Berhad does.
Currency Risk Sensitivity Analysis
Sensitivity Analysis for Floating Rate Instruments
Diagram 9
Hovid Berhad assumed that the sensitivity analysis for rate of salary and discount rate
will increased by 1%. Furthermore, the sensitivity analysis can be classified into
various types, such as currency risk, interest rate risk, fair value for fixed rate
instruments, and floating rate instruments. However, Hovid Berhad only disclosed
currency risk and floating rate instruments in 2016. We can see that the sensitivity
analysis can be illustrated by USD, SGD, EUR, and JPY.
Other Market Risk
Other market risk consists of credit risk, liquidity risk, and market risk. Market risk is
required to disclose when the possibility for an investor to experience losses due to
factors that affect the overall performance of the financial markets in which he is
involved and cannot be eliminated through diversification; Liquidity risk is required

12. to disclose when an entity encounters difficulty in raising funds to meet commitments
related with financial instruments; Credit risk is required to disclose when one party
fails to discharge an obligation and causes the other party to incur a financial loss.
Diagram 10
Caring Pharmacy has disclosed liquidity risk in 2016. Based on diagram 10, liquidity
risk in 2016 has decreased compared to 2015. This occurs might due to the capability
of entity to convert a security or hard asset to cash without a loss
of capital or income in the process. For example, the entity might has sufficient cash
to pay the trade payables by receiving prompt payment from trade receivables or
credit sales of the entity has increased.
Diagram 11
Hovid Berhad has disclosed liquidity risk in 2016 as well. Based on diagram 11,
liquidity risk in 2016 has increased dramatically. This is because the entity is unable
to meet its financial obligations when they fall due. In my opinion, this happen might

13. due to the company is unable to collect the outstanding payment from trade
receivables or the company took too long time to turnover its inventory.

14. 5.0 Opinions on Issue and Recommendation
Issue on MFRS 139 – Recognition and Measurement on Financial Instruments
The issue of financial instruments is an extremely topical one in financial reporting.
Some commentators have blamed fair value accounting rules for exacerbating the
crisis. Prior to the implementation of GST in 1st April 2015, MFRS 139 has been
implementing and applies to all public listed company in Malaysia on 2006. Hence,
there are few issues may arise and amendment the current practise in the flow on
public company in Malaysia.
i. Tax arising from MFRS 139 implementation
Prior to MFRS 139, the accounting recognition for financial assets and liabilities is
mainly based on the lower of cost or market value is reflected in the profit and loss
account. When the market value of the investments goes above cost, the unrealised
gains are not recognised in the profit and loss. The new amendment under MFRS 139,
gains or losses arising from the change in fair value of the financial assets and
liabilities would be recognised in the profit and loss account.
ii. Impairment Loss for loans and held-to-maturity(HTM)
HTM are to be measured at amortised cost which includes transaction cost. Gains or
losses are recognised in the profit or loss upon derecognition or impairment, and
through the amortisation process.
Next, the standard further requires an entity to assess at each balance sheet date
whether there is objective evidence that a financial asset or group of assets may be
impaired. Impairment loss is the difference between the asset’s carrying amount and
the present value of estimated future cash flow discounted at original effective interest
rate.
Furthermore, Allowance for doubtful debts is to be replaced by impairment loss
which is recognised only on an incurred basis.
iii. Transaction costs
The standard requires the transaction costs are included in the fair value of the
financial assets or liabilities and amortised through profit or loss over the life of the
asset or liability. This means the transaction costs would be capitalised over the life of

15. the asset or liability instead of being recognised in advance. For this reason, this
would result in an increase in interest expense and interest income.
In addition, transaction costs would generally include fees and commission paid to
agents, advisors, exchangers, duties, transfer taxes, etc but do not include debt
premiums or discounts, financing costs or internal administrative or holding costs.
iv. Hedging Accounting
Hedge accounting is optional under MFRS 139. Hedge accounting serves to correct
accounting mismatches. Hedging of a financial instrument involves recognising gains
or losses on a hedging instrument in the same periods as gains or losses on the hedged
item. To apply hedge accounting, there are conditions that need to be met and these
conditions are re-measured at each reporting dates. The conditions are formal
designation and documentation the nature of the risk being hedged, and how the entity
will assess the hedging instrument's effectiveness. Next, expected highly effective in
achieving offsetting changes in fair value or cash flows attributable to the hedged risk
as designated and documented, and effectiveness can be reliably measured.
v. Fair Value through Profit and Loss
A reclassification of derivative out of FVTPL is prohibited. The standard only permits
a reclassification of non-derivative financial assets out of FVTPL. A financial asset
had it not been required to be classified as held for trading that meet the requirement
may be reclassified out of FVTPL and if the entity has the intention and ability to hold
the financial asset for the foreseeable future or until maturity.
vi. Embedded Derivatives
The standard requires the separation of the derivative embedded in a combined
instrument from the host contract for recognition if the economic characteristics and
risk associated with the embedded derivative are not closely related with the host
contract; a separate instrument similar in terms with the embedded derivative would
meet the definition of a derivative; and the hybrid instrument is not categorized as
FVTPL. Hence, If the entity is unable to measure the embedded derivative separately,
the entire combined contract must be designated as FVTPL.

16. References
1. Berger, B. A. (1993). Building an effective therapeutic alliance: competence,
trustworthiness, and caring. American Journal of Health-System
Pharmacy, 50(11), 2399-2403.
2. The Malaysian Organisation of Pharmaceutical Industries (2017). Netxtreme
Onesolution Sdn Bhd.
3. Lazar, J,. & Huang, C. C. (2014). Malaysia Financial Reporting Standards, 4th
edition. Shah Alam Selangor: mcgraw hill.
4. Nelson, S. P. (2014). Financial instruments disclosure practices: evidence from
Malaysian listed firms. Procedia-Social and Behavioral Sciences, 164,
62-67.
5. Dowd, K. (2007). Measuring market risk. John Wiley & Sons.
6. Alexander, C. (2009). Market Risk Analysis, Value at Risk Models (Vol. 4). John
Wiley & Sons.
7. Caouette, J. B., Altman, E. I., & Narayanan, P. (1998). Managing credit risk: the
next great financial challenge (Vol. 2). John Wiley & Sons.
8. Saltelli, A., Chan, K., & Scott, E. M. (Eds.). (2000). Sensitivity analysis (Vol. 1).
New York: Wiley.

17. 9. Adznan, S., & Nelson, S. P. (2015). Financial Instruments Disclosure Practices:
Evidence from Malaysian Listed Firms. Asian Journal of Accounting &
Governance, 6.
10. Arya, A., 2010. Recent developments in fair value accounting.
11. MASB, 2008. Frequently asked questions on Malaysia’s convergence with IFRS
in 2012. Malaysian Accounting Standards Board.
12. Salazar. D., 2006. First adoption of MFRS 139.

18. Appendix
Disclosures Caring Pharmacy Group
Berhad
Hovid Berhad
Risk management and
hedges
√
Terms and conditions of
financial instruments
Credit risk √ √
Fair value of financial
instruments
√
Derecognition
Collateral √ √
Compound financial
instruments
√
Financial assets and
liabilities at fair value
through profit or loss
√
Reclassifications √ √
Statement of profit or loss
and equity information
√ √
Impairment √
Defaults and breaches
Sensitivity analysis √
Other market risk √ √