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Quarter 2 2016

Welcome to Financial Reporting Updates. This is your quarterly update on all things relating to International Financial Reporting / Auditing Standards or Financial Reporting / Auditing Standards. We’ll bring you up to speed on topical issues, provide comment and points of view and give you a summary of any significant developments. Our second edition of 2016 starts with some issues of volatile picture for various asset and liabilities classes, development of International Financial Reporting Standards, International Auditing Standards and regulatory matters. Read this issue to find out:

Issue of volatile picture for various asset and liabilities classes

Breaches of borrowing covenants: Material for Directors

Development of International Financial Reporting Standards

IASB issued New Leases Standard, IFRS 16

IASB & ASC issued Narrow -Scope Amendments to IAS & FRS 12 Income Taxes

Updates on the Disclosure Initiative - IASB & ASC issued the Amendments to IAS & FRS 7 Statement of Cash Flow

IASB & ASC postponed accounting changes for associates and joint ventures until completion of broader review

IASB proposed final amendments Clarifications to IFRS 15 Revenue from Contracts with Customers

International Auditing Standards

IAASB reporting on Special Purpose Financial Statements

In addition, we end with regulatory matters such as:

Practice Direction No. 6 of 2015 - Effect of Companies (Amendment) Act 2014 on Sections relating to Financial Reporting in the Companies Act.

ACRA-SGX-SID Audit Committee Seminar 2016

SGX Watch-list Listed Companies

Breaches of borrowing covenant: Materials for Directors With the slowing down of the global economy, some companies may face a risk of breaching these borrowings covenants or defaulting on loan repayments, which could lead to their long-term borrowings becoming immediately payable. Our first edition of 2016 has highlighted that ACRA has highlighted this area as one areas of review focus for FY 2015 Financial Statements under ACRA’s Financial Reporting Surveillance Programme.

What should Directors query?

Directors of companies with high gearing should query on whether all borrowing covenants have been met and whether loan repayments have been paid timely. If not, directors should consider their implications, including whether the borrowing should be reclassified from a non-current liability to a current liability.

What are the common scenarios to determine if the borrowing should be reclassified from a non-current liability to a current liability?

Scenarios Description of each scenario

Scenario 1

An entity has a long-term loan arrangement containing a debt covenant. The specific

requirements in the debt covenants have to be met as at 31 December every year. The

loans are due in more than 12 months.

Scenario 2 Same as scenario 1, but the loan arrangement stipulates that the entity has a grace

period of 3 months to rectify the breach and during which the lender cannot demand

immediate payment.

Page 2 of 14 | Financial Reporting Updates 2Q2016

Scenario 3 Same as scenario 1, but the lender agreed not to demand repayment as a

consequence of the breach. The entity obtains this waiver:

(a) at or before the period end and the waiver is for a period of more than 12 months

after the period end

(b) at or before the period and the waiver for a period of less than 12 months after the

period end

(c) after the period end but before the financial statements are authorised for issue.

Scenario 4

An entity has a long-term arrangement containing to a debt covenant. The loan is due

in more than 12 months. At the period end, the debt covenants are met. However,

circumstances change unexpectedly and the entity breaches the covenant after the

period end but before the financial statements are authorised for issue.

What are the disclosures required by accounting standards?

IFRS 7 & FRS 107 Financial Instruments: Disclosures

IFRS 7 & FRS 107 requires the following disclosures for any loans payable recognised at the reporting date:

details of any defaults during the period of principal, interest, sinking fund, or redemption terms of those loans payable

the carrying amount of the loans payable in default at the reporting date

whether the default was remedied, or the terms of the loans payable were renegotiated, before the financial statements was authorised for issue.

if, during the period, there were breaches of loan agreement terms other than those described above, the same information should be disclosed if those breaches permitted the lender to demand accelerated repayment (unless the breaches were remedied, or the terms of the loan were renegotiated, on or before the end of the reporting period).

IAS & FRS 1 Presentation of Financial Statements IAS & FRS 1 requires certain disclosures of refinancing and rectification of loan agreement breaches which happen after the end of the reporting period and before the accounts are authorised for issue.

Whether the borrowing should be presented as current or non-current and whether the disclosures are required?

Scenarios

1 2 3 (a) 3 (b) 3 (c) 4

At the period end, does the entity have an

unconditional right to defer the settlement

of the liability for at least 12 months

No No Yes No No Yes

Classification of the liability Current Current Non -

current

Current Current Non -

current

Are the above IFRS 7 disclosures required? Yes Yes No Yes Yes No

Are the disclosures in IAS 1 required? No No No No Yes No

Page 3 of 14 | Financial Reporting Updates 2Q2016

IASB issued New Leases Standard, IFRS 16 In the first quarter of 2016, the International

Accounting Standards Board (“IASB”) issued

a new Leases Standard, IFRS 16.

It replaces accounting requirements

introduced more than 30 years ago in

accordance with IAS 17 Leases that are no

longer considered fit for purpose, and is a

major revision of the way in which companies

where it required lessees to recognise

most leases on their balance sheets.

Lessor accounting is substantially

unchanged from current accounting in

accordance with IAS 17.

What has changed?

Below are the summarised changes of IFRS 16 as compared to IAS 17:

Topic The changes

Lessee

accounting

model

Single lease accounting model

No lease classification test

On initial recognition and measurement, all leases on-balance sheet:

lessee would have to recognise a right-of-use (ROU) asset and lease

liability.

treated as the purchase of an asset on a financed basis. The lease liability is

measured at the present value of the lease payments to be made over the

lease term.

On subsequent measurement,

the related right-of-use asset is depreciated in accordance with the

depreciation requirements of IAS 16 Property, Plant and Equipment on a

straight-line basis. Alternatively, the lessees should apply subsequent

measurement bases for the right-of-use under certain circumstances in

accordance with IAS 16 and IAS 40 Investment Property.

right-of-use assets are subject to impairment testing under IAS 36

Impairment of Assets.

lessees accrete the lease liability to reflect interest and reduce the liability to

reflect lease payments made.

lessees re-measure the lease liability upon the occurrence of certain events

(e.g. change in the lease term, change in variable rents based on an index

or rate), which is generally recognised as an adjustment to the right-of-use

asset.

Dual lease accounting model for lessors.

Lease classification test based on IAS 17 finance lease.

On initial measurement, the lessor can account the lease as:

Type A (finance lease) accounting model for accounting with recognition of

net investment in lease comprising lease receivable and residual asset,

lessors derecognise the underlying assets and recognise a net investment in

the lease similar to today’s requirements. Any selling profit or loss is

recognised at lease commencement.

Type B (operating lease) accounting model based on IAS 17 operating lease

accounting, lessors continue to recognise the underlying assets.

On subsequent measurement,

for finance leases, lessors recognise interest income for the accretion of the

net investment in the lease and reduce that investment for payments

received. The net investment in the lease is subject to the derecognition and

impairment requirements in IFRS 9 Financial Instruments.

for operating leases, lessors recognise lease income on either a straight-

Page 4 of 14 | Financial Reporting Updates 2Q2016

line basis or another systematic basis that is more representative of the

pattern in which benefit from the use of the underlying asset is diminished.

Sales and

leaseback

transactions

A seller-lessee and a buyer-lessor use the definition of a sale from IFRS 15

Revenue from Contracts with Customers to determine whether a sale has occurred

in a sale and leaseback transaction.

If the transfer of the underlying assets satisfies the requirement of IFRS 15 to be

accounted for as a sale, the transaction will be accounted for as a sale and a

lease by both the lessee and the lessor.

If not, the transaction will be accounted for as a financing by both the seller-

lessee and the buy-lessor.

Lease term

and purchase

options

Payments for optional - e.g. renewal - periods and purchase options included in

lease accounting if it is reasonably certain that the lessee will exercise these

options, consistent with the high threshold in current GAAP.

Lessees to reassess renewal and purchase options if there is a significant event

or change in circumstances that is within the control of the lessee - e.g.

construction of significant leasehold improvements.

No reassessment of renewal and purchase options by lessors.

Discount rate Lessee should calculate the present value of the lease payments by the interest

rate implicit in the lease. This is the rate that causes the present value of the

lease payments and the unguaranteed residual value to equal the sum of the fair

value of the underlying asset and any initial direct costs of the lessors.

If the lessee cannot readily determine the interest rate implicit in the lease, then

the lessees uses its incremental borrowing rate. This is the rate that a lessee

would have to pay on the commencement date of the lease for a loan of a similar

term, and with similar security, to obtain an asset of similar value to the right-of-

use asset in a similar economic environment.

Presentation

of lessee

accounting

Right-of-use assets are either presented from separately from other assets on the

balance sheet or disclosed separately in the notes to the financial statements

from other liabilities on the balance sheet or disclosed in the notes to the financial

statements.

Depreciation expense and interest expense cannot be combined in the income

statement.

In the cash flow statement,

lease payments relating to contracts previously classified as operating

leases will no longer be shown in full within operating cash flow

the principal payments on the lease liability are presented within financing

activities, interest payments are presented based on accounting policy

election in accordance with IAS 7 Statement of Cash Flows

the presentation of the interest portions depends on the entity’s general

accounting policy regarding interest paid (that is, either within operating or

within financing activities).

payments for short-term leases, for leases of low-value assets and variable

lease payments not included in the measurement of the lease liability are

part of operating activities.

Presentation

of lessor

accounting

IFRS 16 adds significant new disclosure requirements - further information about

how the lessor manages its risk related to the residual interest in the underlying

asset.

A lessor now has to disaggregate the disclosures required in IAS 16 for each

class of property, plant and equipment into assets subject to an operating lease

and not subject to an operating lease.

Practical

expedients

and targeted

reliefs

Optional lessee exemption for short-term leases - i.e. leases for which the lease

term as determined under the revised proposals is 12 months or less, i.e. lessees

are permitted to make an accounting policy election, by class of underlying asset,

to apply a method like IAS 17’s operating lease accounting and not recognise

lease assets and lease liabilities for leases with a lease term of 12 months or

less.s

Lessees also are permitted to make an election, on a lease-by-lease basis, to

apply a method similar to make an election, on a lease-by-lease basis, to apply a

Page 5 of 14 | Financial Reporting Updates 2Q2016

method similar to current operating lease accounting to leases for which the

underlying asset is of low value (i.e. low-value assets with a value of US$5,000 or

less when new - even if material in aggregate).

Portfolio-level accounting permitted if it does not differ materially from the

requirements to individual leases.

Effects on

Key

Performance

Indicators

For leases that have entered into lease contracts classified as operating leases

under IAS 17 require the recognition of a lease liability for almost all lease

contract results in an increase of debt to equity ratios.

As the interest element of lease payment will now be presented as finance costs,

earnings before interest and tax (EBIT) are expected to be higher under the new

standard.

Earnings before interest, tax, depreciation and amortisation (EBITDA) are even

higher still because of the depreciation of the right-of-use asset.

Example of lessee accounting

Entity H (lessee) enters into a three-year lease

of equipment. Entity H agrees to make the

following annual payments at the end of each

year: $10,000 in year one, $12,000 in year two

and $14,000 in year three. For simplicity, there

are no other elements to the lease payments

(e.g. purchase options), payments to the lessor

before the lease commencement date, lease

incentives from the lessor or initial direct costs.

The initial measurement of the right-of-use

asset and lease liability $33,000 (present value

of lease payments using a discount rate of

approximately 4.235%). Entity H uses its

incremental borrowing rate because the rate

implicit in the lease cannot be readily

determined. Entity H determines the right-of-

use asset should be amortised on a straight-line

basis over the lease term.

Analysis At lease commencement, Entity H would

recognise the lease-related asset and liability:

Dr Right-of-use asset $ 33,000

Cr Lease liability $ 33,000

(To initially recognise the lease-related asset

and liability)

The following journal entries would be recorded

in the first year:

Dr Interest expense $ 1,398

Cr Lease liability $ 1,398

(To record interest expense and accrete the

lease liability using the interest method

(CU33,000 x 4.235%)

Dr Amortisation expense $ 11,000

Cr Right-of-use asset $ 11,000

(To record amortisation expense on the right-of-

use asset (CU33,000 ÷ 3 years)

Dr Lease liability $10,000

Cr Cash $ 10,000

(To record lease payment)

Summary of the lease contract’s accounting (assuming no changes due to reassessment) is as below:

Year 1 - $

Year 2 - $

Year 3 - $

Cash lease payments

10,000 12,000 14,000

Lease expense recognised

Interest expense

1,398 1,033 569

Amortisation expense

11,000 11,000 11,000

Total periodic expense

12,398 12,033 11,569

Year 1 - $

Year 2 - $

Year 3 - $

Balance sheet

Right of use 33,000 22,000 11,000

Lease liability (33,000) (24,398) (13,431)

Page 6 of 14 | Financial Reporting Updates 2Q2016

When is IFRS 16 effective?

The IASB has decided that the new leases

standard - IFRS 16 Leases - will be effective for

accounting periods beginning on or after 1

January 2019. Early adoption will be permitted,

provided the company has adopted IFRS 15.

Transition

As a practical expedient, an entity is not

required to reassess whether a contract is, or

contains, a lease at the date of initial

application.

A lessee shall either apply IFRS 16 with:

full retrospective effect in accordance with

IAS 8 Accounting Policies, Changes in

Accounting Estimates and Errors.

alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application.

Next steps

As the final standard is effective from 1 January 2019. This new guidance might require changes to systems, processes and controls. Management will need to assess implications as early as this year to ensure ample time to embrace the change and capture information needed for transition.

IASB & ASC issued Narrow – Scope Amendments to IAS & FRS 12 Income Taxes In the first quarter of 2016, the International

Accounting Standards Board (“the Board”)

issued amendments to IAS 12 Income Taxes.

The amendments, Recognition of Deferred Tax

Assets for Unrealised Losses (Amendments to

IAS 12), clarify how to account for deferred tax

assets related to debt instruments measured at

fair value.

On 14 March 2016, the Accounting Standards

Council (“ASC”) issued amendments to FRS 12

Income Taxes – Recognition of Deferred Tax

Assets for Unrealised Losses

What does this amendment clarify?

The amendments clarify that the following

aspects:

Unrealised losses on debt instruments

measured at fair value and measured at

cost for tax purposes give rise to a

deductible temporary difference regardless

of whether the debt instrument's holder

expects to recover the carrying amount of

the debt instrument by sale or by use.

Example illustrating the above:

Identification of a deductible temporary

difference at the end of Year 2:

Entity A purchases for CU1,000, at the

beginning of Year 1, a debt instrument with

a nominal value of CU1,000 payable on

maturity in 5 years with an interest rate of

2% payable at the end of each year. The

effective interest rate is 2%. The debt

instrument is measured at fair value.

At the end of Year 2, the fair value of the

debt instrument has decreased to CU918 as

a result of an increase in market interest

rates to 5%. It is probable that Entity A will

collect all the contractual cash flows if it

continues to hold the debt instrument.

Any gains (losses) on the debt instrument

are taxable (deductible) only when realised.

The gains (losses) arising on the sale or

maturity of the debt instrument are

calculated for tax purposes as the difference

between the amount collected and the

original cost of the debt instrument

Accordingly, the tax base of the debt

instrument is its original cost. The difference

between the carrying amount of the debt

instrument in Entity A’s statement of

financial position of CU918 and its tax base

of CU1, 000 gives rise to a deductible

temporary difference of CU82 at the end of

Year 2 irrespective of whether Entity A

expects to recover the carrying amount of

the debt instrument by sale or by use, i.e. by

holding it and collecting contractual cash

flows, or a combination of both.

Page 7 of 14 | Financial Reporting Updates 2Q2016

This is because deductible temporary

differences are differences between the

carrying amount of an asset or liability in the

statement of financial position and its tax

base that will result in amounts that are

deductible in determining taxable profit (tax

loss) of future periods, when the carrying

amount of the asset or liability is recovered

or settled. Entity A obtains a deduction

equivalent to the tax base of the asset of

CU1, 000 in determining taxable profit (tax

loss) either on sale or on maturity.

The carrying amount of an asset does not

limit the estimation of probable future

taxable profits. Estimates for future taxable

profits exclude tax deductions resulting from

the reversal of deductible temporary

differences. The estimate of probable future

taxable profit may include the recovery of

some of an entity’s assets for more than

their carrying amount if there is sufficient

evidence that it is probable that the entity

will achieve this.

For example, when an asset is measured at

fair value, the entity shall consider whether

there is sufficient evidence to conclude that

it is probable that the entity will recover the

asset for more than its carrying amount.

This may be the case, for example, when an

entity expects to hold a fixed-rate debt

instrument and collect the contractual cash

flows.

An entity assesses a deferred tax asset in

combination with other deferred tax assets.

If tax law imposes no such restrictions, an

entity assesses a deductible temporary

difference in combination with all of its other

deductible temporary differences. Where tax

law restricts the utilisation of tax losses, an

entity would assess a deferred tax asset in

combination with other deferred tax assets

of the same type.

When is this amendment effective?

Entities are required to apply the amendments

for annual periods beginning on or after 1

January 2017. Earlier application is permitted.

Transition

If an entity applies those amendments for an

earlier period, it shall disclose that fact. An

entity shall apply those amendments

retrospectively in accordance with IAS 8

Accounting Policies, Changes in Accounting

Estimates and Errors. However, on initial

application of the amendment, the change in

the opening equity of the earliest comparative

period may be recognised in opening retained

earnings (or in another component of equity, as

appropriate), without allocating the change

between opening retained earnings and other

components of equity. If an entity applies this

relief, it shall disclose that fact.

How will this impact on your financial

statements?

The impact on your financial statements would

depend on your tax environment, how you

currently account for deferred taxes and

whether that accounting would need to change.

You would need to review:

How you treat transactions that are not

recorded on a tax return?

E.g. the repayment of a principal amount

related to a debt instrument - and whether

any temporary differences would be

identified on those transactions based on

the applicable tax law

Whether you recognise deferred tax assets

if you are loss-making - i.e. even if the

bottom line of tax return is expected to show

a loss, you may still recognise deferred tax

assets if certain conditions are met and

How you assess deductible temporary

differences for recognition - i.e. on a

separate or combined basis?

If any of these considerations would lead to

a change in the assessment about the

recoverability of deferred tax assets - e.g if

you would be able to recognise additional

deferred tax asset.

If any of these considerations would lead to a change in the assessment about the recoverability of deferred tax assets.

Page 8 of 14 | Financial Reporting Updates 2Q2016

Updates on the Disclosure Initiative - IASB & ASC issued the Narrow Amendments to IAS & FRS 7 Statement of Cash Flow Preparers of financial statement have been voicing concerns about “disclosure overload” - e.g. presenting “at-a-minimum” disclosure, regardless of their materiality. The IASB has factored these concerns into its “disclosure initiative”, which aims to improve presentation and disclosure in financial reporting. Other short – term projects

As part of the initiative, the amendments to IAS 1 Presentation of Financial Statements - In

December 2014, the IASB issued amendments to IAS 1, will be joined with the following:

IAS 7 Statement of Cash Flows and

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors - the issue of distinguishing between a change in an accounting policy and a change in an accounting estimate, and any applicable thresholds and disclosures, and

general review of disclosure requirements in existing standards.

Amendments to IAS & FRS 7 Statement of Cash Flows In the first quarter of 2016, IASB issued the amendments to IAS 7 which require:

a reconciliation of the amounts in the opening and closing statements of financial position for each item classified as financing in the statement of cash flows

extended disclosures about the restrictions on cash and cash equivalent balances to provide the users with additional information about the entity’s liquidity.

On 14 March 2016, ASC issued the amendments to FRS 7 Statement of Cash Flows. Reconciliation of components of financing activities

The reconciliation shall include: (a) Opening balances in the statement of

financial position (b) Movements in the period, including:

(i) changes from financing cash flows (ii) changes arising from obtaining or

losing control of subsidiaries or other businesses

(iii) other non-cash changes (for example, the effect of changes in foreign exchange rates, and changes in fair values)

(c) Closing balances in the statement of financial position.

Illustrative disclosures of proposed amendments to IAS & FRS 7

The following is the illustrative disclosures of the reconciliation of items for which cash flows have been, or would be, classified as financing activities, excluding equity items:

Notes to the statement of cash flows (direct method and indirect method)

20X1 Cash Flow Non – cash changes 20X2

Acquisition New leases

Long-term borrowings 1,050 250 300 - 1,600

Lease liabilities - (100) - 1,100 1,000

Long-term debt 1,050 150 300 1,100 2,600

Notes reconciliation would be tagged using the following line items, axis and members

Items for which cash flows are classified as financing activities, excluding equity items

Line items for disclosure of reconciliation of items for which cash flows are classified as financing activities, excluding equity items

Long-term borrowings

Lease liabilities Items for which cash flows are classified as financing activities, excluding equity items

Items for which cash flows are classified as financing activities, excluding equity items at beginning of period

1,050 - 1,050

Page 9 of 14 | Financial Reporting Updates 2Q2016

Increase (decrease) through financing cash flows, items for which cash flows are classified as financing activities, excluding equity items

250 (100) 150

Increase (decrease) through obtaining or losing control of subsidiaries or other businesses, items for which cash flows are classified as financing activities, excluding equity items

300 - 300

Increase (decrease) through non-cash changes in lease liabilities, items for which cash flows are classified as financing activities, excluding equity items

- 1,100 1,100

Items for which cash flows are classified as financing activities, excluding equity items at end of period

1,600 1,000 2,600

Other disclosures

An entity to consider matters such as

restrictions that affect the decisions of an entity

to use cash and cash equivalent balances,

including tax liabilities that would arise on the

repatriation of foreign cash and cash equivalent

balances. If these, or similar, matters are

relevant to an understanding of the liquidity of

the entity, those matters shall be disclosed:

Illustrative disclosure of the description of

restrictions that affect decisions of entity to

use cash and cash equivalent balances

“The company sets aside an equal amount of

cash each month for liquidation (payment) of a

long-term debt. The debt is to be paid off in two

years. The amount of cash set aside is

restricted for future use only, and thus, it

represents restricted cash. When the time of

debt settlement comes, the company will use

the accumulated funds to pay off the debt.”

“Tax liabilities that would arise on repatriation of

S$300,000 foreign cash and cash equivalent

balances”

When are the amendments effective?

An entity shall apply those amendments for

annual periods beginning on or after 1 January

2017. Earlier application is permitted.

Transition

When the entity first applies those

amendments, it is not required to provide

comparative information for preceding periods.

How will this impact on your financial

statements?

The current amendments will add to the

cost/effort to prepare the enhanced disclosures

about changes in a company’s financing

liabilities but they will help investors to evaluate

changes in liabilities arising from financing

activities, including changes from cash flows

and non-cash changes (such as foreign

exchange gains or losses).

IASB & ASC postponed accounting changes for associates and joint ventures until completion of broader review The IASB & ASC have postponed the date

when entities must change some aspects of

how they account for transactions between

investors and associates or joint ventures.

The postponement applies to changes

introduced by the IASB & ASC in 2014 through

narrow-scope amendments to IFRS 10 / FRS

110 Consolidated Financial Statements and IAS

/ FRS 28 Investments in Associates and Joint

Ventures.

Those changes affect how an entity should

determine any gain or loss it recognises when

assets are sold or contributed between the

entity and an associate or joint venture in which

it invests. The changes do not affect other

aspects of how entities account for their

investments in associates and joint ventures.

This will remove the current requirement to

make these particular changes by 2016.

Instead, entities could wait until after the IASB

Page 10 of 14 | Financial Reporting Updates 2Q2016

has carried out a planned broader review that

may result in the simplification of accounting for

such transactions and of other aspects of

accounting for associates and joint ventures.

IASB proposed final amendments Clarification to IFRS 15 Revenue from Contracts with Customers The IASB proposed the final amendments

Clarification to IFRS 15 Revenue From

Contracts with Customers. Below are the

amendments that are intended to address

implementation questions that were discussed

by the Joint Transition Resource Group for

Revenue Recognition on licences of intellectual

property (IP), identifying performance

obligations, principal versus agent application

guidance and transition. The amendments are

also intended to reduce diversity in practice

when entities adopt the new revenue standard

and decrease the cost and complexity of

applying it.

Identifying performance obligations –

Distinct within the context of a contract

The IASB has amended some of the existing

illustrative examples that accompany IFRS 15,

to clarify how an entity would determine when a

promised good or service is ’separately

identifiable’ from other promises in the contract

(i.e., distinct within the context of the contract).

The IASB has decided to amend IFRS 15

Revenue from Contracts with Customers to

clarify the factors that indicate when two or

more promises to transfer goods or services are

not separately identifiable.

In evaluating whether a promise to transfer a

good or service is separately identifiable from

other promises in the contract, an entity

considers the level of integration, interrelation

or interdependence among promises to transfer

goods or services. In the Basis for Conclusions,

the IASB noted that an entity would not merely

evaluate whether one item, by its nature,

depends on the other (i.e., whether two items

have a functional relationship) but would assess

whether there is a transformative relationship

(i.e., one that transforms the items into

something that is different from the individual

items) between the two items in the process of

fulfilling the contract.

Principal versus agent considerations

Under IFRS 15, when another party is involved

in providing a good or service to a customer,

the entity must determine whether its

performance obligation is to provide the good or

service itself (i.e., the entity is a principal) or to

arrange for another party to provide the good or

service (i.e., the entity is an agent). An entity

makes this determination by evaluating the

nature of its promise to the customer. An entity

is a principal (and, therefore, records revenue

on a gross basis) if it controls the promised

good or service before transferring it to the

customer. An entity is an agent (and records as

revenue the net amount that it retains as a

commission) if its only role is to arrange for

another entity to provide the good or service.

IFRS 15 currently provides a non-exhaustive list

of indicators of when an entity is an agent.

The IASB has amended that:

Reframe the indicators to when an entity is

a principal, rather than when an entity is an

agent. The reframed indicators support the

control assessment and are intended to help

an entity assess whether it controls a good

or service before transfer to a customer in

situations in which the assessment of

control may be difficult. They do not override

the assessment of control and are not

intended to be considered in isolation or

viewed as a checklist.

Clarify that the unit of account for the

principal versus agent evaluation would be

at the level of a specified good or service,

which is a distinct good or service (or a

distinct bundle of goods or services).

Depending on the circumstances, a

specified good or service may be a right to

an underlying good or service to be

provided by another party.

Clarify that the determining factor in the

analysis would be whether the entity

controls the specified good or service before

transfer to the customer. If the entity obtains

control before transfer, it is the principal, not

an agent.

Clarify and explain the application of the

control principle in relation to services (i.e.,

what would be controlled if an entity is the

principal providing a service).

Page 11 of 14 | Financial Reporting Updates 2Q2016

Add two examples and amend some of the

existing illustrative examples that

accompany IFRS 15 to align them with the

amendments discussed above.

Transition – practical expedients for

contract modifications and completed

contracts

The IASB has proposed adding two practical

expedients to IFRS 15 to alleviate the transition

burden of accounting for completed contracts

and contracts that were modified prior to

adoption under both transition approaches (i.e.,

full and modified retrospective).

Without the practical expedients, the

assessment of contracts could be onerous for

entities that have completed contracts for which

revenue has not been fully recognised or multi-

year contracts that have been modified many

times prior to adoption of IFRS 15.

Completed contracts.

The practical expedient would allow an entity

that uses the full retrospective approach to only

apply the new standard to contracts that are not

completed as at the beginning of the earliest

period presented. A contract would be

considered completed if the entity has

transferred all of the goods and services

identified under existing revenue standards and

interpretations before the date of initial

application. The new revenue standard already

allows a similar accounting treatment for

entities that choose to use the modified

retrospective approach.

Contract modifications

The IASB has also proposed a practical

expedient that would allow an entity, under

either transition approach, to determine the

aggregate effect of all of the modifications that

occurred between contract inception and the

earliest date presented, rather than accounting

for the effects of each modification separately.

An entity would be permitted to use hindsight to

identify the satisfied and unsatisfied

performance obligations and to determine the

transaction price to allocate to those

performance obligations.

The beginning of the earliest period presented

may vary for IFRS preparers depending on the

number of years they present in their financial

statements (e.g., 1 January 2017 for an entity

that has a calendar year-end and includes only

one comparative period in its financial

statements as compared to 1 January 2016 for

an entity that has a calendar year-end and

presents two comparative periods). If an entity

applies this practical expedient, it would be

required to apply it to all contracts with similar

characteristics.

Transition and effective date

The IASB has proposed these amendments to

IFRS 15, which is expected to issue the

amendments in March or April 2016. It will be

effective for annual reporting periods beginning

on or after 1 January 2018, with early adoption

permitted.

Next steps

We encourage entities to consider the

amendments in light of their specific facts and

circumstances.

IAASB Finalises Changes for Auditor Reporting on Special Purpose Financial Statements In the first quarter of 2016, the International

Auditing and Assurance Standards Board

(“’IAASB”) issued ISA 800 (Revised), Special

Considerations - Audits of Financial Statements

Prepared in Accordance with Special Purpose

Frameworks, and ISA 805 (Revised), Special

Considerations - Audits of Single Financial

Statements and Specific Elements, Accounts,

or Items of a Financial Statement.

Reporting on special purpose financial

statements is linked to the IAASB’s new and

revised Auditor Reporting standards issued in

January 2015, in particular ISA 700 (Revised)

Forming an Opinion and Reporting on Financial

Statements, and new ISA 701, Communicating

Key Audit Matters in the Independent Auditor’s

Report. The amendments to ISA 800 and ISA

805 are limited to auditor reporting and are not

intended to substantively change the underlying

premise of these engagements in accordance

with the extant ISAs.

Page 12 of 14 | Financial Reporting Updates 2Q2016

What has changed?

Key Audit Matters

ISA 700 (Revised) requires the auditor to

communicate key audit matters in

accordance with ISA 701 for complete sets

of general purpose financial statements of

listed entities. For audits of special purpose

financial statements, ISA 701 only applies

when communication of key audit matters in

the auditors’ report on the special purpose

of financial statements is required by law or

regulation or the auditor otherwise decides

to communicate key audit matters. When

key audit matters are communicated in the

auditors’ report on the special purpose

financial statements, ISA 701 applies in its

entirety.

Other information

ISA 720 (Revised) deals with the auditors’

responsibilities relating to other information.

In the context of ISA, reports containing or

accompanying financial statements - the

purpose of which is provide owners (or

similar stakeholders) with information on

matters presented in the special purpose

financial statements - are considered to be

annual reports for the Purpose of ISA 720

(Revised).

Name of engagement partner

The requirement in ISA 700 (Revised) for

the auditor to name of the engagement

partner in the auditor’s report also applies to

the audit of special purpose financial

statements of listed entities.

Inclusive of a reference to the Auditors’

Report on the Complete Set of General

Purpose Financial Statements

The auditor may consider it appropriate to

refer, in an Other Matter paragraph in the

auditors’ report on the special purpose

financial statements to the auditors’ report

on the complete set of financial statements.

For example, the auditor may consider it to

appropriate to refer in the auditors’ report on

the special purpose financial statements to

a Material Uncertainty Related to Going

Concern section included in the auditors’

report on the complete set of general

purpose of financial statements.

Alerting Readers that the Financial

Statements are prepared in accordance

with a Special Purpose Framework

The special purpose financial statements

may be used for purposes of other for which

they intended. To avoid misunderstanding,

the auditor alerts users of the auditors’

report by including an Emphasis of Matter

paragraph that the financial statements are

prepared in accordance with a special

purpose framework, and therefore, may not

be suitable for another purpose. ISA 706

(Revised) requires this paragraph to be

included within a separate section of the

auditors’ report with an appropriate heading

that includes “Emphasis of Matter”.

When is the effective date?

ISA 800 (Revised) and ISA 805 (Revised) will

become effective at the same time as the

auditor reporting standards addressing general

purpose financial statements - for audits of

financial statements for periods ending on or

after December 15, 2016.

Practice Direction No. 6 of 2015 Effect of Companies (Amendment) Act 2014 on Sections relating to Financial Reporting in the Companies Act ACRA has issued the Practice Direction No. 6

of 2015 serves to inform companies of the

legislative amendments to sections 23(2),

29(1), 29(2), 29(4), 200(3), 201(12), 202,

373(12) and 373(13) of the Companies Act (the

“Act”), as well as the introduction of a

new section 29A, pursuant to the

implementation of the Companies (Amendment)

Act 2014. Companies should assess the

Practice Direction No. 6 of 2015 from here. It

may constitute a breach if companies apply the

changes before the revision.

Page 13 of 14 | Financial Reporting Updates 2Q2016

ACRA-SGX-SID Audit Committee Seminar 2016 A joint seminar was organised by ACRA,

Singapore Exchange (SGX) and the Singapore

Institute of Directors (SID) on first quarter of

2016. This annual seminar brings regulators

and industry experts together to share the latest

in audit and financial reporting regulatory

developments and is targeted at directors of

listed companies who serve on the audit

committees.

The presentation slides can be found here.

SGX Watch-list Listed Companies SGX has introduced a Watch-list for companies

listed on Mainboards. For companies that were

placed onto the Watch-list before 1 March

2016, they will have a 24-month cure period.

For companies that were placed onto the

Watch-list after 1 March 2016, they will have a

36-month cure period.

What should management of the SGX Watch-list listed entities do?

For those SGX Watch-list listed companies

were placed onto the Watch-list after 1 March

2016 for the financial criteria, management are

required to assess, at the time of preparing the

financial statements, the entity’s ability to

continue as a going concern and this

assessment must cover the prospects for at

least 12 months from the balance sheet date. In

accordance to FRS 10.14 Events After

Reporting Period:

"An entity shall not prepare its financial

statements on a going concern basis if

management determines after the reporting

period either that it intends to liquidate the entity

or to cease trading, or that it has no realistic

alternative but to do so."

Hence, an entity should not prepare its financial

statements on the going concern basis if

management determines after the reporting

period either that it:

(a) Intends to liquidate the entity or to cease

trading; or

(b) That it has no realistic alternative to doing

so (even if the liquidation or cessation will

occur more than 12 months after the

balance sheet date.

When the economic condition of an entity

deteriorates after the balance sheet date,

management should consider whether or not

the going concern basis of accounting remains

appropriate.

What is the Auditors’ responsibility?

The auditor’s responsibility is to obtain sufficient

appropriate audit evidence about the

appropriateness of management’s use of the

going concern assumption in the preparation

and presentation of the financial statements

and to conclude whether there is a material

uncertainty about the entity’s ability to continue

as a going concern.

Auditors’ evaluation of management’s

assessment

The auditor shall evaluate management’s

assessment of the entity’s ability to continue as

a going concern. In evaluating management’s

assessment of the entity’s ability to continue as

a going concern, the auditor shall cover the

same period as that used by management to

make its assessment as required by the

applicable financial reporting framework, or by

law or regulation if it specifies a longer period. If

management’s assessment of the entity’s ability

to continue as a going concern covers less than

twelve months from the date of the financial

statements as defined in SSA 560,4

Subsequent Events the auditor shall request

management to extend its assessment period

to at least twelve months from that date.

In evaluating management’s assessment, the

auditor shall consider whether management’s

assessment includes all relevant information of

which the auditor is aware as a result of the

audit.

Page 14 of 14 | Financial Reporting Updates 2Q2016

How we can assist

If you need assistance or advice on the above, we are here to assist you. Contact:

Irene Lau

Director, Professional Standards & Assurance Foo Kon Tan LLP 47 Hill Street #05-01 SCCCI Bldg Singapore 179365 D +65 6304 2341 F +65337 2197 E irene.lau@fookontan.com W www.fookontan.com © 2016 Foo Kon Tan LLP. All rights reserved. ‘Foo Kon Tan’ (FKT) refers to the brand name under which Foo Kon Tan and its associated companies provide assurance, tax and advisory services to their clients, or refer to one or more service providers, as the context requires. Services are delivered by the respective entities. Foo Kon Tan LLP is a principal member of HLB International, a world-wide network of independent accounting firms and business advisers, each of which is a separate and independent legal entity and as such has no liability for the acts and omissions of any other member. HLB International Limited is an English company limited by guarantee which co-ordinates the international activities of the HLB International network but does not provide, supervise or manage professional services to clients. Accordingly, HLB International Limited has no liability for the acts and omissions of any member of the HLB International network, and vice versa.