This article is the first article in a series of articles prepared by Janus Corporate Solutions to provide general guidance on accounting standards in Singapore. Please note that this is neither a comprehensive compilation of standards nor a professional advice but only a broad overview of the subject matter.
Business entities across the world report their financial performance through financial reporting. Historically, the format of ﬁnancial reporting has varied from one country to another and each country’s ﬁnancial reporting practices followed a set of principles, rules, or conventions that evolved in the political, legal, economic, and cultural environments of that country. Consequently ﬁnancial reports often lacked international comprehensibility and acceptance.
In today’s globalized world, comparable, transparent, and reliable financial information is fundamental for the smooth functioning of global capital markets. Therefore, the need for comparable standards of financial reporting has become paramount because of the dramatic growth in the number, reach, and size of multinational corporations, foreign direct investments, cross-border purchases and sales of securities, as well as the number of foreign securities listings on the stock exchanges.
Accounting standards consist of a set of principles and governing practices for treatment of various financial transactions. The key objective of the accounting standards is to set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in general purpose financial statements. These statements give information about performance, position and cash flow that is useful to a range of users in making financial decisions. The users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the general public. They use financial statements in order to satisfy some of their different needs for information.
The most important driving force in the development of international accounting standards is the International Accounting Standards Board (IASB) – an independent, accounting standard-setting body of the IFRS Foundation. The broad objective of the IASB is to further harmonization of accounting practices through the formulation of accounting standards and to promote their worldwide acceptance. International Financial Reporting Standards (IFRS) issued by IASB are widely being used as the yardstick to measure the financial health of businesses. Reliability and quality of the framework is high but it is lengthy and complex.
Accounting Standards in Singapore
In Singapore, accounting standards are known as Singapore Financial Reporting Standards (SFRS) and are based on the IFRS. All companies with financial period starting on or after 1 January 2003 have to comply with SFRS.
Accrual-based accounting is one of the main principals of Singapore accounting standards. Financial statements are prepared on the accrual basis of accounting. Under this basis, the effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Financial statements prepared on the accrual basis inform users not only of past transactions involving the payment and receipt of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future.
The overall set of accounting standards in Singapore contain about 39 different standards with each standard named as FRS X e.g. FRS 1. Each standard covers a specific topic such as presentation of financial statements, recognition of revenue, accounting for inventories, and so on.
Singapore Accounting Standards for Small Entities
In an ever changing and demanding world, the accounting standards are increasingly becoming more complex. This make it more and more difficult for small businesses to feel confident that they are in compliance. Adhering to the full SFRS was difficult for small and medium size entities (SME), as they found the requirements to be a burden on their precious little resources. As in many other countries, SMEs constitute the bulk of the companies operating in Singapore.
As a measure to address the specific need of the international SMEs IASB issued an IFRS specifically for SMEs in 2009. Following this, Accounting Standards Council (ASC) of Singapore also announced the issuance of Singapore Financial Reporting Standard (SFRS) for Small Entities in November 2010.
The SFRS for Small Entities is an alternative framework to the full SFRS for eligible entities in Singapore. SFRS for SE is closely aligned to IFRS for Small Entities, and it was issued after elaborate consultation with the stakeholders. It provides an optional financial reporting standard for small entities for reporting periods beginning on or after 1 January 2011.
The objective of the SFRS for SE is to provide some relief to small entities from compliance with full SFRS while ensuring quality, transparency and comparability, which can benefit the investment community and other users of financial statements.
A Singapore incorporated company or a Singapore branch of a foreign company is eligible to apply the SFRS for SE provided -
- It is not publicly accountable
- It publishes general-purpose financial statements for external users
- It is a small entity. An entity qualifies as a small entity if it meets at least two of the three following criteria:\
- Total annual revenue of not more than S$10 million
- Total gross assets of not more than S$10 million
- Total number of employees is not more than 50
It must be noted that the SFRS for SE is effective from 1 January 2011 and in order to be eligible for the simplified SFRS, an entity must have met the criteria for each of the previous two consecutive years. An entity that qualifies under the criteria may adhere to the standards until it falls out of the size threshold for two consecutive reporting period and in such cases the company must follow the full SFRS.
A subsidiary of a holding company that follows the full SFRS can still adopt the SFRS for SMEs, provided, it meets the prescribed criteria.
Choosing Between “SFRS” or “SFRS for SE”
Until recently all Singapore registered entities regardless of size were following the full SFRS. Now that there is a SFRS especially for the small entities, companies that qualify for the new standards have to consider few points of significance before adopting the SFRS for SE. Companies should also review their growth plans and the nature of their business before adopting these standards. Some of the issues that needs to be scrutinized are
- Transition cost – training cost, accounting system and software
- Future plans – Plans for IPO, probability of the business exceeding the size threshold
- Group consideration – the impact on holding companies
- Financing – Financial institutions and lenders seeking full SFRS statements
Marginal companies that are on the verge of breaching the size threshold will be better off adhering to the full SFRS rather than vacillating between the standards. Likewise, companies that are accustomed to the full SFRS, those belonging to a group or held by parent companies that follow the full SFRS and companies, which will be negatively affected by treatment of some accounting elements under the simplified version, must refrain from adopting the SFRS for SE.
In a nutshell the simplified SFRS for small entities will be ideal for startup companies and companies that find problems with full SFRS and those companies whose statements are not used by external parties.
The complete set of Singapore Accounting Standards is available at Accounting Standards Council of Singapore.