Wednesday 9 September 2009
Time to adapt to new accounting standards
Companies listed on Singapore Exchange are required to prepare their financial statements in accordance with the US Generally Accepted Accounting Principles (GAAP), the International Financial Reporting Standards (IFRS) or the local equivalent of IFRS, the Singapore Financial Reporting Standards (SFRS).
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Time to adapt to new accounting standards
IFRS for SMEs attempts to meet users’ needs while balancing costs and benefits to preparers
By KOK MOI LRE
08 September 2009
Companies listed on Singapore Exchange are required to prepare their financial statements in accordance with the US Generally Accepted Accounting Principles (GAAP), the International Financial Reporting Standards (IFRS) or the local equivalent of IFRS, the Singapore Financial Reporting Standards (SFRS).
These standards demand much rigour in their application and contain extensive disclosure requirements so as to instil a high degree of public accountability. More importantly, they allow investors, analysts and other capital-market participants to have high-quality information that is prepared consistently and reflects the economics of the transactions undertaken, in order to allow them to evaluate the reporting company’s financial performance, quality of assets, extent of obligations and the financial risks faced.
This is necessary to develop and maintain Singapore’s position as a key capital market with a proper governance and reporting regime that is comparable with the major global and regional capital markets.
While the accounting measurement and disclosure requirements for listed companies are well appreciated and accepted, the same may not be said for private entities. Under the Singapore Companies Act, all Singapore-incorporated companies and Singapore branches of foreign companies are required to prepare and file their financial statements in accordance with SFRS.
This means that private entities are required by law to provide the same level of financial information as listed companies. Intuitively, one would ask: Is this one-size-fits-all approach in the best interest of these private entities, their shareholders and other stakeholders? Is there room for a different reporting framework for different types of companies? If so, what should be an appropriate differential reporting basis?
To answer these questions, let’s start by understanding the focus of IFRS, which in nearly all respects is almost identical to SFRS. IFRS has always been developed with a primary focus on listed entities, and with the roadmap to achieve convergence with GAAP, and with changes made in response to the 2008 financial crisis, the focus on listed entities has become even more pronounced.
On the other hand, our key financial reporting framework has been based on IFRS since the days of the Singapore Statements of Accounting (SAS), which were based on the International Accounting Standards (IAS), the predecessor of IFRS. We never had different financial reporting frameworks for private and public-listed companies as our private entities could previously cope with IAS, that were less sophisticated in concept and less demanding.
However, IAS has evolved to IFRS and has become too onerous for many private entities. A very common example of challenging accounting concepts for private companies (and even for some listed companies) is the accounting for financial instruments. As IFRS continues to evolve in serving the needs of stakeholders of listed companies, the need to look for a different financial reporting framework for private entities has become more pressing.
Maintaining quality
While one could say that the accounting framework for listed companies is too sophisticated and costly for private entities, the alternative framework which is appropriate for private entities should by no means be of inferior quality as this could diminish the reliability of their financial statements and, ultimately, trust. The financial statements must still meet the varied needs of stakeholders, especially non-owners such as the financiers, creditors, customers, employees and regulators.
This is important for Singapore to continue to uphold its ‘branding’ as a financial centre with high degree of transparency and governance so that the cost of capital for private entities can remain competitive.
The need for a separate financial reporting framework for smaller businesses has long been acknowledged globally. The International Accounting Standards Board (IASB) concluded its six-year project on IFRS for Small and Medium Sized Entities (SMEs) in July 2009 and has issued the 230-page accounting standard.
IFRS for SMEs attempts to meet the users’ needs while balancing the costs and benefits to preparers. It is a standalone standard; it does not require preparers of private entity financial statements to cross-refer to the full IFRS framework.
To ensure that IFRS for SMEs is of high quality, the new standard is built on the foundation concepts of the full IFRS: The overall framework, the principles for recognising and measuring assets, liabilities, income and expenses including the use of fair values, are generally similar. The standard reduces the paragraphs in IFRS by as much as 85 per cent and simplifies certain areas.
For instance, goodwill is amortised over a period of not more than 10 years rather than needing to be reviewed for impairment at least annually; all borrowing costs and research and development (R&D) costs are expensed to the income statement rather than requiring to evaluate for capitalisation on the balance sheet; and the myriad disclosures on financial risks are not required under IFRS for SMEs.
In addition, the standard strives for stability; it will only be updated for significant changes once every three years.
As prescribed by IASB, IFRS for SMEs can be applied to all entities that do not have public accountability rather than what its name suggests, and not by its size such as revenue, net assets or employees.
An entity has public accountability if it files its financial statements with a securities commission or other regulatory organisations for the purpose of issuing any class of instrument in a public market, or if it holds assets in a fiduciary capacity for a broad group of outsiders - for example, a bank, an insurance entity, a pension fund or a security broker/dealer.
However, the ultimate decision on which entities can adopt this standard is deliberately left to the local regulator or standard setter, which in the case of Singapore is the Accounting Standards Council (ASC). The decision by ASC on which entities can apply the local version of IFRS for SMEs (or SFRS for SMEs) is a significant one as it could impact many private companies in Singapore.
Relief to pros
Privately held entities can obviously benefit by choosing to adopt IFRS for SMEs when ASC allows for adoption. In addition to lower compliance costs to businesses, at a macro level, this is also a relief to the many highly skilled financial professionals who need to comply with the full IFRS for every company in Singapore.
However, for subsidiaries of listed groups locally or overseas, the benefit of switching to IFRS for SMEs is less clear as there may be a need to maintain two sets of financial books for group reporting in the full SFRS or IFRS and statutory reporting using IFRS for SMEs. In addition, its resources in financial reporting may also need to be trained and conversant in two financial reporting frameworks, thereby increasing costs.
The move towards a separate reporting standard for SMEs has been a long time coming, and Singapore, in its bid to be a leading financial hub, must adapt swiftly to the rapid changes in international accounting standards. As the economy recovers into a brave new world, organisations of all sizes should strive towards high levels of governance and disclosure without being weighed down by unnecessary forms of regulation and accounting complexity.
The writer is assurance partner (accounting consulting services), PricewaterhouseCoopers LLP. This article is part of a series leading up to the PwC Forum 2009, entitled ‘The dawn of a brave new world - Survive, Sustain, Succeed’, which will be held on Thursday
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