Is a Foreign Company in Malaysia Allowed to Prepare Its Accounts in a Foreign Currency?

Foreign companies operating in Malaysia can use a foreign currency, such as the US dollar (USD) or Singapore dollar (SGD), as their functional currency if it reflects their main business activities. However, Malaysian-incorporated companies must present their statutory financial statements lodged with the Companies Commission of Malaysia (SSM) in Malaysian ringgit (MYR).

What determines a company’s accounting currency in Malaysia?

A company’s functional currency is the currency that best reflects its main business activities. Under Malaysian Financial Reporting Standard (MFRS) 121, the main considerations are the currencies that influence the prices of its goods or services and its operating costs, including salaries and materials.

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Companies must also consider the currency used to obtain financing and the currency in which they retain money received from their operations. However, revenue and operating costs carry greater weight in determining the appropriate functional currency.

For instance, a Malaysian subsidiary that sells mainly to overseas customers, pays most of its expenses in USD, and receives funding from its foreign parent may have grounds to use USD as its functional currency. However, receiving payments in USD or having foreign shareholders alone does not justify this choice.

Once determined, a company’s functional currency can only change if its underlying business activities change. It may also differ from its presentation currency, which is the currency used to display its financial statements.

Companies generally do not need separate approval from the Companies Commission of Malaysia (SSM) to adopt a foreign functional currency, provided the choice is supported by their business activities.

How must foreign currency accounts be prepared and reported in Malaysia?

Companies using a foreign functional currency must record transactions made in other currencies using the exchange rate on the transaction date.

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At the end of the reporting period, outstanding amounts such as unpaid invoices, loans, and bank balances denominated in other currencies are converted using the closing exchange rate. Any resulting foreign exchange gains or losses are generally recorded in profit or loss, subject to certain accounting exceptions.

Financial statements submitted in Malaysia must use MYR

Under the Companies Act 2016, Malaysian-incorporated companies using a foreign functional currency must translate their financial statements into MYR before lodging them with SSM.

The conversion generally follows these rules:

• Assets and liabilities are converted using the exchange rate at the reporting date.
• Revenue and expenses are converted using the exchange rates on the transaction dates. Average rates may be used where appropriate.
• Differences arising from translating financial statements are generally recorded in other comprehensive income under MFRS 121.

Companies presenting financial statements in a currency different from their functional currency must also disclose the functional currency and explain the difference.

What about branches of foreign companies?

Registered foreign companies generally must submit their overseas financial statements and audited financial information covering their Malaysian operations, including assets and liabilities.

SSM may waive certain requirements where the company qualifies for relief.

How does foreign currency accounting affect corporate tax filing?

Companies using a foreign functional currency must calculate and report their Malaysian corporate income tax in MYR. This requires converting the relevant accounting figures into MYR and applying Malaysian tax rules to any foreign exchange gains or losses.

The tax treatment depends on the nature of the transaction and whether the gain or loss has been realized. Foreign exchange gains from completed business transactions are generally taxable, while corresponding losses may be deductible if they relate to ordinary business operations.

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In contrast, unrealized gains or losses recorded before a transaction is settled are generally not taxable or deductible. Foreign exchange gains and losses relating to capital transactions are also generally excluded from income tax calculations, even after settlement.

To support these calculations, companies must maintain records of their transactions, exchange rates, and any adjustments made between their financial statements and tax returns.

Manage your company’s accounting requirements in Malaysia with Dezan Shira & Associates

Dezan Shira & Associates assists foreign investors with accounting, financial statement preparation, and corporate tax compliance in Malaysia, including businesses using foreign currencies for their operations. Contact us for assistance with your company’s accounting and financial reporting requirements.

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