Financial Reporting standards prescribe the methods of recognition, measurement, presentation and disclosure requirements for transactions and events that are reported in financial statements. There are industry specific FRS for some industries. Apart from harmonizing the accounting statements the FRS also provides a basis of judgment in case of any disputes.
FRSs apply to all general-purpose financial statements. Financial statements provide information on the financial position, performance and cash flow of a company and shareholders, creditors, and potential investors usually use them to make economic decisions. FRSs are gaining significance with the increase in cross border transactions, foreign direct investments, ecommerce, capital markets evolution and listing of companies in multiple bourses.
In the pre-globalization era, each jurisdiction or market had a set of generally accepted accounting principles that were in tune with the local economy, politics, culture, and business practices. But with the onset of globalization and the resultant streamlining of standards, evolution of capital markets and the advent of ecommerce, the global economies have converged in favor of homogenous accounting standards.
International Accounting Standards Board (IASB) was set up under the governance of International Accounting Standards Committee (IASC) Foundation, in order to create a uniform global system for financial reporting. In 2001 the IASB promulgated the first set of International Financial Reporting Standards (IFRS), since then more than 150 countries have adopted the standards.
FRS in Singapore
The Council on Corporate Disclosure and Governance (“CCDG”) was established on 16 August 2002 to prescribe accounting standards for Singapore-incorporated companies, and to review and recommend corporate governance and disclosure practices on a continuing basis. The accounting standards prescribed by the CCDG are known as Financial Reporting Standards (“FRSs”), which are closely modeled after the IFRS.
Eventually CCDG was dissolved and Accounting Standards Council (ASC) was established in November 2007. ASC has the statutory authority of setting accounting standards. In addition to prescribing accounting standards for companies, the ASC also prescribes accounting standards for charities, co-operative societies, and societies. The ASC is responsible only for the formulation and promulgation of accounting standards. The monitoring and enforcement of compliance with accounting standards remains the prerogative of the respective regulators, the Accounting and Corporate Regulatory Authority (ACRA) for companies, Commissioner of Charities for charities, Registrar of Co-operative societies for co-operative societies, and Registrar of Societies for societies.
Since 2003, all companies incorporated in Singapore and all Singapore branches of foreign companies are required by the Companies Act to prepare and present financial statements that comply with the Singapore Financial Reporting Standards (SFRS). SFRS is substantially similar to the International Financial Reporting Standards (IFRS). In an attempt to reinforce Singapore’s status as international financial center and for the welfare of international investors, the ASC is aiming for full convergence of SFRS with the IFRS in order to ensure global comparability and transparency.
The general purpose financial reports are the key source of information on an entity’s financial position therefore they are largely useful to potential investors, lenders and other creditors. Such statements do not provide the value of an entity but provide ample information for the users to estimate the value of the entity. Financial reports are based on estimates, judgments and models rather than exact depictions. The ASC has provided some key concepts in arriving at the estimates and judgments essential for financial reporting.
The financial statements are normally prepared on the assumption that an entity is a going concern and will continue its operation for the foreseeable future therefore it is assumed that the entity has neither the intention nor the need to liquidate or curtail the scale of its operations. If there is any change to the assumption of “going concern” the reporting entity must make appropriate disclosure of such intention or possibility of such event.
Report must comply with accrual basis of accounting, that is, the effects of transactions and other events are recognized as and when incurred instead of as and when paid. This accounting method provides a more vivid picture of an entity’s economic resource and claim, changes in the same and the entity’s performance by enabling a better estimate of its cash flow, insight into its operational efficacy and an understanding of the market’s impact on the entity’s performance.
The information furnished in the financial reports must be of relevance, in the sense, it should be capable of influencing a decision or help in decision-making. For that effect, information must have both predictive and confirmative value. The information contained in the financial report must help users to predict an outcome and confirm past predictions. For example, revenue of an entity is helpful in forecasting its sales as well as confirming past sales forecasts.
The information furnished must be complete, neutral and free from error in order to be a faithful representation however it is a tall order to achieve, but nevertheless the accounting entity must take all measures to maximize these characteristics of the information. The reporting entity must ensure that critical accounting estimates, assumptions and judgments made by management are reasonable.
Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. This is essential so that users of financial reports understand the similarities or differences in reported items and gauge them to make informed decisions.
The users of the reports should be able to verify the information furnished in the reports, therefore the reporting entity, in order to facilitate verification, must disclose the underlying assumptions, the methods of compiling the information and other factors and circumstances that support the information.
Information must be made available to users in time so that they can use them to make timely decisions. Even older information may be useful beyond their reporting period for the users in predicting trends or confirming a prediction.
Information must be classified and reported consistently for easy understanding by the users.
SFRS for Small entities
In order to ease the pressure on Small and Medium Size Enterprises (SMEs) that found adherence to full SFRS a little cumbersome and a burden on their resources the ASC has issued the Singapore Financial Reporting Standard for Small Entities (SFRS for SE) in December 2010 for financial reporting period beginning on or after 1st January 2011. This standard is modeled after the IFRS for SMEs, with modified scope and applicability. It is an alternative to the Singapore FRS for the preparation and presentation of financial statements. The requirements are less complex in comparison to the SFRS.
Key Features of SFRS for SEs
- Reduced Disclosures
- Simplified recognition and measurement rules
- Fewer choices and options allowed in accounting treatment
- Simple drafting requirement for understandability and conciseness
- Amendments only every three years
- “Undue cost or effort principle” eliminates the requirement of certain elements such as assets held for sale, interim reporting, insurance contracts etc.
A company that publishes general purpose financial statements, would qualify as a “Small Entity” if it is not publicly accountable and satisfies two out of the following three criteria, referred to as the size test.
- Total annual revenue is not more than S$10 million;
- Total gross assets is not more than S$10 million; and
- Total number of employees is not more than 50 people.
An SME will be disqualified if it fails to meet the above size test for last 2 years. If the company is considered as a group of companies, the criteria should be applied on a consolidated basis.
Entities that are presently reporting under the SFRS regime must consider the following before they transfer to SFRS for SE.
- Cost of transitions, such as, investments in new software, or updates and staff training.
- Likely breach of requisite size condition
- Loan covenants, where financial institutions and lenders requiring statements in full SFRS
- Plans for public listing
- The impact on group companies
The full set of Singapore FRS (SFRS) is available at Accounting Standards Council website. There are more than 30 FRS.