The new rule imposes minimum standards for the treatment of interest on non-performing accounts and provision for bad and doubtful debts in the financial statements of stockbroking companies (SBCs). With this new rule, the treatment of bad and doubtful debts will be standardised across all SBCs.

The SC Chairman, Encik Ali Abdul Kadir said that this is another step by the KLSE to encourage good corporate governance among its member companies.

"With greater transparency in the treatment of SBCs' accounts and enforcement of the Rule by KLSE, the accountability of stockbroking companies towards prudent management of their business will be enhanced," said Encik Ali.

The new rule requires SBCs to review their assessment of the quality of their income and assets that should result in improved asset management and debt recovery.

As an incentive to successful implementation of this new rule, the KLSE with the support of the SC obtained tax relief for SBCs for a two-year period. With the implementation of the new rule, 50 per cent of the interest suspended by SBCs will not be regarded as income for tax until it is collected. Under the existing tax regime, the amount of interest income that must be suspended as required by Rule 16A will not be deemed tax deductible, and hence, will be treated as taxable income.

To afford some flexibility and further facilitate the smooth implementation of the new Rule, the KLSE in consultation with the SC, has agreed to allow SBCs a transition period for full compliance with Rule 16A. In this respect, the default periods for classifying contra loss accounts as "doubtful" and "bad" have been extended to "30 to 60 calendar days" and "more than 60 calendar days" respectively. The transition will be for a period of one year commencing 1 July 1999. In addition, the general provision of 1 per cent of total trade receivables required under Rule 16A may be accumulated at 0.25 per cent for the 1999 calendar year, and thereafter at an annual increment rate of 0.25 per cent.

The new rule is part of an overall plan by the SC and KLSE to strengthen the stockbroking industry.

"The SC and KLSE's plans to boost the stockbroking industry through introduction of new or revised rules are being effected after extensive consultation with industry," said the SC Chairman.

In preparing Rule 16A, the SC and KLSE have worked closely with relevant industry groups to formulate guidelines on the suspension of interest on non-performing accounts and provision for bad and doubtful debts.

Industry groups consulted in this exercise are the Malaysian Accounting Standards Board (MASB), the Association of Stockbroking Companies in Malaysia (ASCM), stockbroking companies, The Malaysian Institute of Accountants (MIA) and the Malaysian Association of Certified Public Accountants (MACPA).

The new rule complements earlier announcements made by the SC and the KLSE on the introduction of the capital adequacy requirements and the intention to introduce a client asset protection framework.

The KLSE Rule 16A will come into effect on 1 July 1999. The tax relief to be given will be for income declared in the years 1999 and 2000.

A separate press announcement by the KLSE will provide details of the rule.