seminar on observations by the financial statements review...

Seminar on Observations by the Financial Statements Review Committee

Friday, 19th October 2012

9.00am

Technical Excellence Building an Empowered Membership

Chairperson, FSRC Partner, Deloitte & Touch LLP

Seminar on Observations by the Financial Statements Review Committee of ICPAS

(FSRC)

Ms Cheng Ai Phing

by

Objectives

Findings

FSRC

• Enhance the standards of the accountancy profession in

Singapore.

• Respond in principle to questions submitted by members in

respect of compliances with statutes and standards and

recommendations promulgated by the Institute in respect of

financial statements.

• Refer a member to the relevant FSRC sub-committee for

counselling as deem appropriate.

Objectives of FSRC

Composition of FSRC

FSRC Chairperson and 28 members

Six Sub-committees chaired by FSRC core members

Total of seven core members including the FSRC Chairperson

CPA firm Big 4 Medium Size Local Firms

No. of FSRC members 12 11 5


FSRC reviews done for 2011/2012

Industry Listed Co Pte Ltd Total

Trading/services/ IT/ Engineering/logistics 19 20 39

Manufacturing 10 4 14

Property Dev & Investment Property/Construction 11 4 15

Energy/Commodities include oil/gas marine,

offshore 11 2 13

Shipbuilding/transport ( by sea & road) 5 12 17

Printing 1 0 1

Banks/ finance co/stock-broking house/insurance 8 0 8

Agriculture 2 0 2

Investment holdings(IP/FA) * 0 2 2

Total 67 44 111

FSRC reviews done for 2010/2011

Trading/services/IT/Engineering/Logistics 15 6 21

Manufacturing 17 3 20

Property Dev & Investment Property/Construction 8 5 13

Energy/Commodities 12 0 12

Shipbuilding/transport (by sea & road) 2 1 3

Printing 1 0 1

Banks/ finance co/stock-broking house/insurance 6 0 6

Money changers /remittance agents 0 2 2

Agriculture 2 0 2

Investment holdings (IP/FA) 0 28 28

Total 63 45 108

* IP - Investment Properties. FA - Financial Assets

6

Number of accounts reviewed from 2010 - 2012

Top 10 Findings - 2012

•Management of entity's capital - objectives, policies and processes for managing capital. Qualitative & quantitative terms of what the entity manage as capital.

(1) FRS 1.134 & 1.135

•Notes to financial statements should provide information that is not presented elsewhere in these statements.

(2) FRS 1.112(c)

•Significant estimates and critical judgement in applying accounting policies. Nature and carrying amounts of assets and liabilities subject to critical judgement.

(3) FRS 1.122 & 1.125

•An entity shall disclose significant accounting policies which are relevant to an understanding of the financial statements.

(4) FRS 1.117

•For material items of income or expenses, an entity shall disclose their nature and amounts separately.

(5) FRS 1.97

15

14

10 10

9 9 9 9

7

6

0

2

4

6

8

10

12

14

16

1 2 3 4 5 6 7 8 9 10

FSRC Findings 2012

Findings

Findings

Occ

urr

en

ce

Top 10 Findings 2012(continued)

• Sensitivity analysis for each type of market risk such as changes in foreign exchange rates and interest rates to which the entity is exposed.

(6) FRS 107.40

• Contractual undiscounted cash flows in respect of maturity analysis for financial liabilities.

(7) FRS 107.39

(a) & (b) AG B11D

• Independent Auditor’s Report –Certain statements no longer required – (a)Selecting & applying appropriate accounting policies (b)making accounting estimates. Responsibility for preparation of “true & fair” financial statements & not “fair presentation”.

(8) SSA 700

• Events & circumstances that led to recognition or reversal of impairment losses. Calculations on recoverable amounts of assets.

(9) FRS 36.130

(a), (e)-(g)

• Statement of cash flows – investing and financing activities have been classified as operating activities which are not in accordance with FRS 7.16 & 7.17.

(10) FRS 7.16 & 7.17

15

14

10 10

9 9 9 9

7

6

0

2

4

6

8

10

12

14

16

1 2 3 4 5 6 7 8 9 10

FSRC Findings 2012

Findings

Findings

Occ

urr

en

ce

Top 10 Findings - 2011

• Significant estimates and critical judgments in applying accounting policies. Nature and carrying amounts of assets and liabilities subject to significant estimates uncertainty.

(1) FRS 1.122 & 1.125

•

• Material classes of similar items should be presented separately.

• When items of income or expense are material, an entity shall disclose their nature and amount separately.

• The NTA shall provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them.

(2) FRS 1.29 & 1.97 & 1.112(c)

(3) FRS 1.134 & 1.135

Management of entity’s capital - objectives, policies & processes. Qualitative & quantitative terms of what the entity manage as capital.

• Contractual undiscounted cash flows in respect of maturity analysis for financial liabilities

(4) FRS 107.39(a) & (b) AG B11D

• Sensitivity analysis for each type of market risk such as changes in foreign exchange rates and interest rates to which the entity is exposed.

(5) FRS 107.40 0

2

4

6

8

10

12

14

16

18

1 2 3 4 5 6 7 8 9 10

17

16

15

14

12

10 10

9

7

6

Findings

Findings

Occ

urr

ence

Top 10 Findings – 2011 (continued)

• Related party disclosures: (a) amounts of transactions (b) outstanding balances - terms & conditions etc

(6) FRS 24.18

• In summary of significant policies, to disclose: Relevant accounting policies used.

(7) FRS 1.117

• Events and circumstances that led to recognition or reversal of impairment losses

• Disclosures on calculation of recoverable amount of asset

(8) FRS 36.130(a) & FRS 36.130(e)-

(g)

• aging analysis of financial assets; analysis of financial assets which are individually impaired.

(9) FRS 107.37(a)-(b)

• Disclose material uncertainties related to events or conditions that may cast doubt upon the entity's ability to continue as going concern. May be unable to realize assets and discharge liabilities in normal course of business.

(10) FRS 1.25 & SSA 570.18(b) 0

2

4

6

8

10

12

14

16

18

1 2 3 4 5 6 7 8 9 10

17

16

15

14

12

10 10

9

7

6

Findings

Findings

Occ

urr

ence


Total number of PAs counselled and referred to ACRA for early practice

monitoring

11 Technical Excellence Building an Empowered Membership

7 7

12

0

8

1 1 1

2

0

2

4

6

8

10

12

14

2010 2011 2012

Counselling

Intensified follow-up

Referred to ACRA

FSRC 1. New Accounting Standards /Interpretations coming into effect during 2012

• Amendments to FRS 1-Presentation of Items of Other Comprehensive Income (wef 1.7.2012)

• Amendments to FRS 12 –Deferred Tax: Recovery of Underlying Assets (wef 1.1.2012)

2. New Accounting Standards /Interpretations coming into effect on 1.1 2013

• FRS 19- Employee Benefits

• Amendments to FRS 101- Government Loans

• FRS 107-Offsetting of Financial Assets and Financial Liabilities

• FRS 113-Fair Value Measurements

• Improvements to FRSs 2012

FSRC

3. New Accounting Standards / Amendments to FRS adopted in Singapore and effective during 2014

• FRS 28: Investments in Associates and Joint Ventures

• FRS 32: Offsetting of Financial Assets and Financial Liabilities

• FRS 110: Consolidated Financial Statements

• FRS 111: Joint Arrangements

• FRS 112: Disclosure Of Interests In Other Entities

Conclusion

• Generally members have shown improvement in the standard of disclosure over the years. The number of critical areas lacking in adequate disclosure has dropped.

• However, there are still a large number of instances of boiler plate disclosures, some of which are not relevant to the companies.

• In view of the substantial changes to the FRSs ahead, members are encouraged to continuously keep abreast of such changes and take necessary actions early to manage the new changes.

Thank you

by

Partner

PricewaterhouseCoopers LLP

Lease incentives

Revenue - principal vs agent

Functional currency

Kok Moi Lre

Lease incentive - example

Background:

A retailer enters into a lease agreement for a period of 5 years. The lease agreement specifies that the retailer does not have to make payments for the first year of the lease. The lessee has to pay a yearly rental of $100,000 from the 2nd year onwards.

Management has appropriately classified the lease as an operating lease.

Question:

What is the annual rental of the retailer?

A: Retailer recognises the rental in accordance with the cash payment of the rental, ie zero for 1st year and $100,000 per year for 2nd to the fifth.

B. Retailer recognises annual rental of $80,000 per year on each of the 5-year period.

17

Lease incentive - example

Background:

A retailer enters into a lease agreement for a period of 5 years. The lease agreement specifies that the retailer does not have to make payments for the first year of the lease. The lessee has to pay a yearly rental of $100,000 from the 2nd year onwards.

Management has appropriately classified the lease as an operating lease.

Question:

What is the annual rental of the retailer?

A: Retailer recognises the rental in accordance with the cash payment of the rental, ie zero for 1st year and $100,000 per year for 2nd to the fifth.

B: Retailer recognises annual rental of $80,000 per year on each of the 5-year period.

18

Lease incentive

Examples of incentives :

• contributions to relocation or start-up costs;

• the assumption of liabilities, eg. lessor bears directly all the costs of fitting out the property to the lessee's specifications

• giving rent-free or reduced rental periods for an initial period of lease.

INT FRS 15 requirements:

• same treatment for all incentives for agreement of a new or renewed operating lease, regardless of their form or cash flow effect. [INT FRS 15 para 3].

• should be recognised by lessee as a reduction of rental expense over the lease term on a straight-line basis, unless another systematic basis is representative of the time pattern of the lessee's benefit from the use of the leased asset. [INT FRS 15 para 5].

19

Revenue - Principal vs agent

• FRS 18, para 8 states that:

"…in an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission".

20

Revenue - Principal vs agent

• Additional guidance is provided in the illustrative examples attached to FRS 18, in paragraph 21.

– Principal has exposure to the significant risks and rewards associated. Indicators include:

• Primary responsibility for providing the goods or services to the customer or for fulfilling the order

• Has inventory risk before or after the customer order, during shipping or on return.

• Has latitude in establishing prices

• Bears customer’s credit risk

– entity earns is predetermined, being either a fixed fee transaction or a stated percentage of the amount billed to the customer.

– not appropriate to recognise the transactions as agent transactions simply because the cash flows are received net

21

Example 1

An entity sell goods under CIF (cost, insurance, freight) terms. It has the right to choose the parties providing shipping and insurance services. Should the CIF charges be included as part of revenue under the following circumstances?

A. There is no profit element in the insurance and freight charged to the customer, ie, these charges are merely as reimbursement of expenses.

B. The entity is able to determine the additional margin on the CIF charges.

22

Example 2 (1)

23

Entity A distributes entity B's products under a distribution agreement. The terms and conditions of the contract are such that A: • Obtains title to the goods and sells them to third party retailers.

• Stores, repackages, transports and invoices the goods sold to third party retailers.

• Earns a fixed margin on the products sold to the retailers, but has no flexibility in establishing the sales price.

• Has the right to return the goods to B without penalty.

• Is responsible for the goods while the goods are stored in A's warehouse, but B bears the risk of obsolete goods.

B retains product liability and is responsible for manufacturing defects. Credit risk also rests with B.

B should recognise revenue on the transfer of the goods to A.

True or False?

Example 2 (2)

24

FALSE, A is acting as agent for the principal, B. B does not transfer the risks and rewards of ownership of the goods to A when it transfers the goods to B.

• Entity A has the option to return the goods.

• Entity B bears the product and inventory risks.

• Entity B retains continuing managerial involvement over the goods by being able to set the sales price.

Accounting by B

• continue to recognise the inventory on its balance sheet.

• only recognise revenue when entity A sells the goods to a third party.

Accounting by A

• recognise an agency fee or commission revenue for the sales made on entity B's behalf.

Other examples

• Department store concessionaires

• Travel agents

• Media agencies

• Government taxes and levies - Sales taxes

• Distributors – online stores

25

Functional currency - recap

26

Important to determine the right functional currency as

• transactions and balances in another currency will be considered as foreign currency

• Result in FX gains/losses either in P&L or OCI

What is a functional currency

• An entity’s functional currency is the currency of the primary economic environment in which it operates. [FRS 21 para 8].

• Not a free choice (unlike presentation currency)

Functional currency - recap

27

How determined

• Judgement is required in determining an entity's functional currency based on individual facts and circumstances.

• It is determined at individual entity level, including group entities.

Group with multiple entities

• functional currency of each entity in the group should be determined for the purpose of defining that entity’s foreign currency exposure.

• different entities within a multinational group, therefore, often have different functional currencies.

• the group as a whole does not have a functional currency.

Indicators of functional currency

Currency of the

primary

economic

environment

Currency that

influences sales

prices/income

Currency that

influences labour,

material and costs

Financing currency:

• debt and equity

funding

• retention of funds Foreign operations

• extension of parent or autonomous?

• level of transactions with parent

• impact / availability of funds to

parent

• ability to independently fund debt

Currency of the

country that

determines sales

prices and operating

costs (competition

and regulations)

10

20

20

10

10

Investment holding companies (1)

List Co

(Singapore)

S$ Share capital and borrowings

No other substantive business

No executive management in Singapore

Operating

subsidiaries

(China)

Executive management in China

RMB functional currency

What is the appropriate functional currency of ListCo? S$ or RMB?


ListCo

(Singapore)

S$ Share capital and borrowings

No other substantive business

Corporate HO management in Singapore

Operating

subsidiaries

(Singapore)

What is the appropriate functional currency of ListCo?

Operating

subsidiaries

(China)

Operating

subsidiaries

(Indonesia)


ListCo

(Singapore)

S$

Intermediate

Parent 1

(Singapore)

What is the appropriate functional currency of Intermediate

Parent 1, 2 and 3?

Intermediate

Parent 2

(Singapore)

Intermediate

Parent 3

(Singapore)

Operating

subsidiaries

(Singapore) – S$

Operating

subsidiaries

(China) - RMB

Operating

subsidiaries

(Indonesia) - IDR

Intermediate Parent

1, 2 and 3 are pure

investment holding

vehicles

Subsidiary importing products from foreign parent (1)

Background • A subsidiary located in Spain imports a product manufactured by its

US parent at a price denominated in US dollars. • The product is sold throughout Spain at prices denominated in euros,

which are determined primarily by competition with similar locally produced products.

• All selling and operating expenses are incurred locally and paid in euros.

• The operation's long-term financing is primarily in the form of US dollar loans from the parent.

• The distribution of profits is under the parent's control.

Primary indicators • 'sales and cash inflows' indicators euro. • 'expenses and cash outflows' indicators mixed.

• The primary indicators produce a mixed response, although overall they favour euro.

35

Subsidiary importing products from foreign parent (2)

Secondary indicators

• foreign subsidiary's long-term financing is primarily in US dollar from loans from the parent.

• foreign subsidiary does not retain any euros generated from its operations for its own use.

• If the 'autonomy' indicator suggests that the foreign subsidiary is simply acting as an agent for its US parent US dollar.

• If the foreign subsidiary's operations were carried out with a significant degree of autonomy Euro, as the primary indicators

are overall in favour of the euro.

36

Thank you

by

Audit Partner

KPMG LLP

Selected Financial Instruments Topics

David Waller

Agenda

Topics covered

• Embedded foreign currency derivatives in sale and purchase contracts of non-financial items

• Interest-free and low-interest loans

• Impairment of available-for-sale financial instruments

• Classification of term loans with callable clauses

• Other FSRC observations on financial instruments

39

Embedded foreign currency derivatives in sale and purchase contracts of

non-financial items

40

Embedded foreign currency derivatives in non-financial contracts

Agenda

• Embedded derivatives - requirements of FRS 39

• Foreign currency contracts

• ‘Closely related’ criteria for foreign currency contracts

• Substantial party to the contract

• Routinely denominated currency

• Commonly used currency

• Illustrative example

• Accounting for embedded fx derivatives in non-financial contracts

41

Embedded derivatives – requirements of FRS 39

• ..... a component of a hybrid instrument that also includes a non-derivative host contract – with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative.

FRS 39.10

• Separated from host contract and accounted as a derivative when:

(a) The economic characteristics and risks of the embedded derivative are not closely related to those of the host contract; and

(b) A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

(c) The hybrid contract is not carried at fair value with changes in fair value recognised in profit or loss.

42

Foreign currency contracts

• An example of a contract with an embedded derivative is a contract for the sale or purchase of a non-financial item, the price of which is denominated in a foreign currency

• Exemption from the bifurcation requirements for embedded fx derivatives if the ‘closely related’ criteria under FRS 39.AG33(d) are met.

43

Example

An entity with a functional currency of SGD purchases coal under a purchase contract denominated in AUD

Non-derivative host contract => purchase of coal

Embedded derivative => fx forward for the sale of AUD

Economic characteristics and risks of embedded derivative and host contract are not closely related => separation required?

‘Closely related’ criteria for foreign currency contracts

• An embedded fx derivative is closely related to an insurance or a non-financial instrument (e.g. sale or purchase of a non-financial item denominated in a foreign currency) host contract if:

it is not leveraged; and

does not contain an option feature; and

payments are denominated in one of the following currencies:

(a) functional currency of any substantial party to the contract; or

(b) currency in which the price of the related goods or services is routinely denominated in commercial transactions around the world; or

(c) currency that is commonly used in the economic environment in which the transaction takes place.

FRS 39.AG33(d)

44

Routinely denominated currency (1/2)

• Refers to the currency that is used to transact a particular good or service:

- in international trades all around the world, not just those in one or a few local markets

45

Example

Natural gas transactions is routinely denominated in USD in North America, and in Euro in Europe.

=> Neither the USD or the Euro would be considered as the routinely denominated currency used in commercial transactions around the world for natural gas

(Extract FRS 39.IG.C.9)

Routinely denominated currency (2/2)

• Refers to the currency that is used to transact a particular good or service: (continued)

- in a large majority of its transactions conducted internationally

includes trades in local currency but that are priced off the international price at the spot exchange rate

a relatively small number of transactions in local currency in one or two markets would not taint the criterion

• Expected only one routinely denominated currency for each good or service - however such cases are expected to be limited

e.g. oil transactions denominated in USD

46

Commonly used currency

• Refers to the currency that is being widely used in a particular jurisdiction for their local and international commercial transactions

- Look at business practices in that country

- Assess based on facts and circumstances in the national jurisdiction, not in the context of a specific industry or with reference to specific goods or services

• May not be the local currency of that jurisdiction

47

Fact pattern:

• Norwegian entity enters into a contract to sell oil to a French entity. The oil contract is denominated in CHF.

• The functional currency of the Norwegian entity and the commonly used currency in Norway is the Norwegian krone.

• The functional currency of the French entity and the commonly used currency in France is the Euro.


Illustrative example (1/2)

48

Analysis

CHF is not the functional currency nor the commonly used currency in the country of both parties to the contract.

In addition, oil contracts are routinely denominated in USD in commercial transactions around the world. Question

Should the embedded fx derivative in the oil contract be separated? Answer

Yes. As the exemption criteria of FRS 39.AG33(d) are not met, the embedded fx derivative in the oil contract should be separated.


Illustrative example (2/2)

49

Accounting for embedded fx derivatives in non-financial contracts (1/2)

50

Embedded fx derivatives in non-financial contracts

Closely related? (FRS 39.AG33(d))

Relevant FRS governing the host contract

Host contract accounted as a derivative? *

FVTPL

No (bifurcation

required)

Yes (no bifurcation)

Bifurcate

Yes No

Embedded fx derivative

Host contract

Consider: - settled net? - own use exemption?

* Host contract accounted for as derivative if it can be settled net in cash or another financial instrument, or by exchanging financial instruments, and it does not meet the own use exemption.

entire contract

Accounting for embedded fx derivatives in non-financial contracts (2/2)

• Initial measurement (on contract date) of embedded fx derivative separately accounted from the host contract:

embedded fx derivative => measure at fair value

host contract => measure as difference between consideration paid (if any) for the sale/purchase contract and the fair value of the embedded fx derivative

(The value of the embedded fx derivative and the host contract on contract date, in most instances, is expected to be nil?)

• Subsequent measurement:

embedded fx derivative => at fair value through profit or loss

host contract => relevant FRSs governing underlying non-financial item

51

Fact pattern:

• Singapore entity enters into a contract on 1 December 2012 to buy a machine from a German entity, for delivery on 31 March 2013. The machine purchase is for own-use and hence is accounted for as an executory contract.

• The machine is purchased for a price of USD1,000. The machine is not commonly priced in USD.

• The functional currency of the Singapore entity and the commonly used currency in Singapore is the Singapore dollar.

• The functional currency of the German entity and the commonly used currency in Germany is the Euro.

• Singapore entity’s year end date is 31 December.

Illustrative example on accounting for embedded fx derivative (1/2)

52

Accounting entries:

Illustrative example on accounting for embedded fx derivative (2/2)

53

Date of contract

Year end date

Delivery date

1 Dec 2012 4-mth forward: $1.25

31 Dec 2012 3-mth forward: $1.30

31 Mar 2013 Spot: $1.32

FV of derivative: Nil (contract is at forward rate)

No accounting entries

FV of derivative: $50 (USD1,000 x ($1.30 – $1.25))

DR P&L Expense 50 CR Derv liability 50

FV of derivative: $70 (USD1,000 x ($1.32 – $1.25))

DR P&L Expense 20 CR Derv liability 20

DR Asset 1,250 DR Derv liability 70 CR Cash 1,320

Interest-free and low interest loans

(hereinafter collectively referred to as “Interest-free loans”)

54

Interest-free and low-interest loans

Agenda

• Financial instruments recognition - requirements of FRS 39

• Interest-free and low-interest loans

• Below-market rate loans

• Discount rate

• Expected future cash flows

• Illustrative examples

• Accounting for interest-free loans

55

Financial instruments recognition - requirements of FRS 39

• When a financial asset or financial liability is recognised initially, an entity shall measure it at its fair value .....

FRS 39.43

• The fair value of a financial instrument on initial recognition is normally the transaction price ..... However, if part of the consideration given or received is for something other than the financial instrument, the fair value of the financial instrument is estimated, using a valuation technique.

For example, the fair value of a long-term loan or receivable that carries no interest can be estimated as the present value of all future cash receipts discounted using the prevailing market rate(s) of interest for a similar instrument with a similar credit rating.

FRS 39.AG64

56

Interest-free and low-interest loans

• Interest-free loans could arise in some cases of loans received from or given to shareholders (parent), related companies, directors*, employees or the government. * Under the Companies Act, certain restrictions apply to loans given to directors of

the company or its related companies

• Such loans arise when:

- no interest is being charged on the loan, or

- the interest coupon on the loan is at a below-market rate.

• On initial recognition, such loans are required to be measured and recognised at the present value of all future cash receipts discounted using the prevailing market rate of interest for a similar instrument with a similar credit rating.

57

Below-market rate loans

• Consider:

- terms and conditions of loan

- local industry practice and local market circumstances

- interest rates on other loans with similar terms e.g. remaining maturities, cash flow patterns, currency, credit risk, collateral, interest basis

58

Example

Very low interest rates on current accounts could be viewed as market rates if they are given in arm’s length transactions and is a common feature or expectation of that particular market

Discount rate

• Should be the market rate of interest for a similar loan with a similar credit rating.

• In practice, rate being used is usually either:

- the borrower’s cost of funds, or

- the rate that an external bank would charge the borrower

59

Similar loans – characteristics to consider:

- payment terms, contractual / expected cash flows

- remaining maturities

- currency

- credit risk profile of borrower e.g. industry, markets, size

- collateral pledged

Expected future cash flows (1/2)

• Interest-free loans could carry the following repayment terms:

Fixed repayment terms

- generally will reflect the contractual repayment terms e.g. periodic or bullet repayment

Repayable on demand

- determined as follows:

for borrower => immediate repayment (no discounting necessary if impact is immaterial)

The fair value of a financial liability with a demand feature (e.g. a demand deposit) is not less than the amount payable on demand ..... FRS 39.49

for lender => best estimate of expected repayment (in practice, generally would expect this to also be immediate repayment?)

60

Expected future cash flows (2/2)

• Interest-free loans could carry the following repayment terms:

No fixed terms of repayment and not repayable on demand

- future cash flows will be based on best estimate of expected repayment.

consideration given to:

- how and where the repayment will be funded from

- timing of receipt/generation of these funding sources

- where repayment plans are not clear or cannot be reliably estimated, then may consider the loan as being payable on demand i.e. immediate repayment?

• Short-term receivables and payables with no stated interest rate may be measured at the original invoice amount if effect of discounting is immaterial. FRS 39.AG79

61

Illustrative example 1 (1/2)

62

Fact pattern:

• Principal amount - $100,000

• Fixed interest rate - 2% (i.e. $2,000) p.a.

• Principal repayment - $20,000 annually over 5 years

• Market rate for a similar loan - 7% p.a.


63

Analysis:

Year

Cash

flows

Discount

@ 7%

Present

value

Opening

balance

Interest

@ 7%Payments

Closing

balance

1 22,000 0.9346 20,561 90,204 6,314 (22,000) 74,519

2 22,000 0.8734 19,216 74,519 5,216 (22,000) 57,735

3 22,000 0.8163 17,959 57,735 4,041 (22,000) 39,776

4 22,000 0.7629 16,784 39,776 2,784 (22,000) 20,561

5 22,000 0.7130 15,686 20,561 1,439 (22,000) -

90,204

Fair value at initial recognition

Annual interest to be recognised


64

Fact pattern:


• Fixed interest rate - 2% (i.e. $2,000) p.a.

• Principal repayment - Bullet repayment in 5 years’ time



65

Analysis:

Year

Cash

flows

Discount

@ 7%

Present

value

Opening

balance

Interest

@ 7%Payments

Closing

balance

1 2,000 0.9346 1,869 79,499 5,565 (2,000) 83,064

2 2,000 0.8734 1,747 83,064 5,814 (2,000) 86,878

3 2,000 0.8163 1,633 86,878 6,081 (2,000) 90,960

4 2,000 0.7629 1,526 90,960 6,367 (2,000) 95,327

5 102,000 0.7130 72,725 95,327 6,673 (102,000) -

79,499




66

Fact pattern:


• Fixed interest rate - nil

• Principal repayment - Bullet repayment in 5 years’ time



67

Analysis:

Year

Cash

flows

Discount

@ 7%

Present

value

Opening

balance

Interest

@ 7%Payments

Closing

balance

1 - 0.9346 - 71,299 4,991 - 76,290

2 - 0.8734 - 76,290 5,340 - 81,630

3 - 0.8163 - 81,630 5,714 - 87,344

4 - 0.7629 - 87,344 6,114 - 93,458

5 100,000 0.7130 71,299 93,458 6,542 (100,000) -

71,299



Accounting for interest-free loans (1/2)

• Any difference between the consideration received/paid and the fair value of the loan on initial recognition is recognised as a gain or loss unless it qualifies as an asset or liability [FRS 39.AG64].

• No guidance or examples provided in FRS 39 on the accounting for these differences.

• Generally expected that the differences accounted for should reflect the nature of the item received or given by the entity in contemplation of the interest-free loan.

68

Accounting for interest-free loans (2/2)

• In practice, the entries are generally as follows, for a loan .....

.. from shareholder - equity contribution received (equity)

.. to subsidiary - investment in subsidiary (asset)

.. from government - government grants received (income)

.. to employee - employee benefits given (expense)

.. to supplier - right to receive goods/services at favourable prices (intangible asset or prepayment, if relevant recognition criteria are met)

• Subsequent to initial recognition,

- loan is measured on the amortised cost basis,

- interest on the loan is recognised using the effective interest method (unwinding of discount).

69

Accounting – loan from parent

70

Parent (in capacity

as shareholder)

Lender

Borrower Subsidiary

On initial recognition DR Cash 100,000 CR Amount due to parent 71,299 CR Equity contribution 28,701

Interest recognition – year 1 DR Interest expense 4,991 CR Amount due to parent 4,991

On initial recognition DR Amount due from subsidiary 71,299 DR Investment in subsidiary 28,701 CR Cash 100,000

Interest recognition – year 1 DR Amount due from subsidiary 4,991 CR Interest income 4,991

Note: The entries above are in respect of the respective entities’ separate financial statements only

Accounting – loan to parent

71

Subsidiary Lender

Borrower Parent

(in capacity as shareholder)

On initial recognition DR Cash 100,000 CR Amount due to subsidiary 71,299 CR Dividend income 28,701

Interest recognition – year 1 DR Interest expense 4,991 CR Amount due to subsidiary 4,991

On initial recognition DR Amount due from parent 71,299 DR Distribution - equity 28,701 CR Cash 100,000

Interest recognition – year 1 DR Amount due from parent 4,991 CR Interest income 4,991


Accounting – loan to fellow subsidiary

72

Subsidiary A (on parent’s instruction)

Lender

Borrower Subsidiary B

On initial recognition DR Cash 100,000 CR Amount due to subsi A 71,299 CR Equity contribution 28,701

Interest recognition – year 1 DR Interest expense 4,991 CR Amount due to subsi A 4,991

On initial recognition DR Amount due from subsi B 71,299 DR Distribution - equity 28,701 CR Cash 100,000

Interest recognition – year 1 DR Amount due from subsi B 4,991 CR Interest income 4,991


Accounting – loan from government

73

Government Lender

Borrower Entity

On initial recognition DR Cash 100,000 CR Amount due to government 71,299 CR Government grant 28,701

Interest recognition – year 1 DR Interest expense 4,991 CR Amount due to government 4,991

Accounting – loan to employee

74

Entity Lender

Borrower Employee

On initial recognition DR Amount due from employee 71,299 DR Employee benefits 28,701 CR Cash 100,000

Interest recognition – year 1 DR Amount due from employee 4,991 CR Interest income 4,991

Impairment of Available-for-sale financial instruments

75

Impairment of Available-for-sale financial instruments

Agenda

• Requirements of FRS 39

• Indicators of impairment (“triggering events”)

• Computation and accounting for initial impairment loss

• Accounting for subsequent impairment loss

• Reversals of impairment loss

• Illustrative examples

76

Requirements of FRS 39

• Two-step process:

Step 1: Determine if there is objective evidence of impairment:

- assessed for all financial assets not at fair value through profit or loss

- carried out at least at the end of each reporting period

- based on the conditions, facts and circumstances existing as at the reporting date and does not take into consideration (both further loss or recovery) events transpiring after the reporting date

Step 2: If objective evidence of impairment exists, compute amount of impairment loss required.

(generally referred to as the “incurred loss model”)

77

Indicators of impairments (“triggering events”) (1/2)

• Objective evidence of impairment:

- when one or more ‘loss event’ has occurred after initial recognition that have an effect on the estimated future cash flows of the asset

• General indicators:

- significant financial difficulties of issuer/borrower

- payment defaults by issuer/borrower

- renegotiation of terms and granting of concessions to borrower

- potential bankruptcy or reorganisation of the issuer/borrower

- disappearance of an active market for the financial asset

- observable data indicating a measurable decrease in estimated future cash flows from a group of financial assets since their initial recognition

78

Indicators of impairments (“triggering events”) (2/2)

• Other indicators for equity securities:

- significant adverse changes in technological, market, economic or legal environment in which the issuer operates, that indicate that the cost of investment may not be recovered

- significant or prolonged decline in fair value of equity securities below cost

- no bright lines provided by the standard

- assessment based on judgement, facts and circumstances

- assessment made in functional currency of the holder

• A decline in fair value below cost (for debt securities or equity securities) does not automatically indicate that a loss event has (or has not) occurred. Other relevant facts and circumstances should also be considered e.g. reason and nature of the decline.

79

Computation and accounting for initial impairment loss

• Where there is objective evidence of impairment for an available-for-sale (“AFS”) financial asset, the cumulative loss previously recognised in other comprehensive income (as fair value changes) is reclassified to profit or loss.

• The cumulative loss to be reclassified is computed as follows:

AFS equity securities => difference between fair value and acquisition cost, less any impairment loss previously recognised in profit or loss

AFS debt securities => difference between fair value and amortised cost, less any impairment loss previously recognised in profit or loss

80

Accounting for subsequent impairment loss

• Subsequent declines in fair values of AFS securities, after the initial impairment loss has been identified and recognised, are accounted for as follows:

AFS equity securities => recognise in profit or loss until the asset is derecognised

AFS debt securities => no clear guidance in the standards

81

Reversals of impairment loss

• The rules for reversals of impairment losses are as follows:

AFS equity securities => impairment loss may not be reversed through profit or loss

=> any subsequent increases in fair value is recognised in other comprehensive income

AFS debt securities => any subsequent increases in fair value that can be objectively related to an event occurring after the loss was recognised, is reversed in profit or loss

=> no further guidance on qualifying event that triggers reversals and on amount of reversal to be recognised

=> entity to establish their accounting policies in these respects

82

Illustrative example 1

83

900,000

950,000

1,000,000

1,050,000

1,100,000

0 3 6 9 12 15 18

Equity securities

Fair value Acquisition cost

Loss event identified

<----- Fair value changes to OCI ------>

significant?

prolonged?

Cumulative loss reclassified to P&L

Subsequent decline in FV in P&L

Subsequent increase in FV in OCI

Further decline will first offset OCI, remaining to P&L

$

months

Illustrative example 2

84

600,000

700,000

800,000

900,000

1,000,000

1,100,000

0 3 6 9 12 15 18

Debt securities

Fair value Amortised cost

Loss event identified

<----- Fair value changes to OCI ------>

Cumulative loss reclassified to P&L

Subsequent decline - P&L or OCI?

Subsequent increase – P&L or OCI?

$

months

Classification of term loans

with callable clauses

85

Classification of term loans with callable clauses

Agenda

• Features of term loans with callable clauses

• Example of callable clauses

• Requirements of FRS 1

• Classification of term loans with callable clauses

• Other considerations

86

Features of term loans with callable clauses

• General key features:

- agreed scheduled repayment dates and amounts, either in instalments over term loan period or bullet repayment at maturity

- tenor of usually more than one year

- specified interest rates, early repayment options

- identified default events that would give lender the right to accelerate repayment terms or to demand for immediate repayment

• Overriding “repayment on demand” clause also included that would give the lender the right to demand repayment at any time, at their sole discretion and irrespective of the occurrence of any default event(s).

87

Example of callable clauses (1/2)

88

“The Bank reserves the right to review the banking facility(ies) from time to time. Upon such review, we will have the right at our sole discretion, notwithstanding any inconsistent provision in this letter or any other document, to immediately cancel, reduce or vary the banking facility(ies) and all further utilisation of the banking facility(ies) and/or to demand immediate repayment of all monies and liabilities owing to us under the banking facility(ies) (whether actual or contingent).”

Example of callable clauses (2/2)

89

“Notwithstanding the aforesaid, the banking facilities are subject to review from time to time and at any time by the Bank at the Bank’s absolute discretion. Upon the review of the banking facilities, the Bank shall have the right at the Bank’s absolute discretion to vary, modify, terminate, reduce, suspend or cancel the banking facilities or any of them and/or to demand immediate repayment of all moneys and liabilities owing to the Bank under the banking facilities (whether actual, contingent or otherwise). Without limiting the generality of the foregoing, the Bank reserves the right to vary the terms and conditions, including the interest rate, from time to time at the Bank’s sole discretion.”

Requirements of FRS 1

• [For a debt liability,] an entity shall classify a liability as current when:

(a) .....

(b) .....

(c) the liability is due to be settled within twelve months after the reporting period; or

(d) it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period .....

An entity shall classify all other liabilities as non-current.

FRS 1.69

90

Classification of term loans with callable clauses (1/2)

• Generally expected that repayments on the term loans would occur based on scheduled repayment terms and the likelihood of early recall or recall on demand by the lender would be low.

• Notwithstanding, classification of the debt liabilities are strictly based on the contractual obligations of the borrower as at the reporting date.

• As such callable clauses provide the lender with the right to demand repayment at any time at their sole discretion, and hence the borrower would not be considered as having an unconditional right to defer settlement of the liabilities for at least twelve months after the reporting period, term loans with callable clauses should be classified as current liabilities in its entirety in the statement of financial position.

91

Classification of term loans with callable clauses (2/2)

• Any waivers of, or changes to the recall rights obtained from the lender after the end of the reporting period are non-adjusting post balance sheet events i.e. no change to the classification of the term loans as determined as at the reporting date.

92

Other considerations

• Restatement of comparative figures where such term loans were previously classified as non-current liabilities

- third statement of financial position required?

• Impact on debt covenants and financial ratios?

93

Other FSRC observations on financial instruments

94

Other FSRC observations on financial instruments

Agenda

• Items of financial assets and financial liabilities

• Fair value hierarchy disclosures

• Liquidity risk - maturity analyses

• Credit risk – ageing analysis on past due but not impaired financial assets

• Market risk - sensitivity analysis on foreign currency risk

95

Items of financial assets and financial liabilities (1/4)

• FRS 32.11 defines:

a financial instrument as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity

a financial asset as any asset that is:

(a) cash;

(b) an equity instrument of another entity;

(c) a contractual right:

(i) to receive cash or another financial asset from another entity; or

(ii) to exchange financial assets and financial liabilities with another entity under conditions that are potentially favourable to the entity; or

(d) .....

96


• FRS 32.11 defines:

a financial liability as any liability that is:

(a) a contractual obligation:

(i) to deliver cash or another financial asset to another entity; or

(ii) to exchange financial assets and financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or

(b) .....

97


98

Observation 1

Cash used in business of money changing is accounted for as inventories.

Is this appropriate?

In a money changing business, notwithstanding the fact that the cash held by the entity is the primary asset ‘sold’ and ‘purchased’ in its ordinary course of business, such cash held should be accounted for as financial assets in accordance with (the definition in) FRS 32.

Such cash are not inventories under FRS 2 as FRS 2 has specifically scoped out financial instruments from its standard.


99

Observation 2

Inclusion of the following items as financial assets and financial liabilities:

• Inventories

• Prepayments

• Deferred tax asset/liabilities

• Income tax payable

• Provisions

• Deferred/unearned income


Such items do not meet the definition of, and hence should not be categorised as, financial instruments under FRS 32.

Fair value hierarchy disclosures (1/4)

• For fair value measurements recognised in the statement of financial position, an entity shall disclose for each class of financial instruments:

(a) the level in the fair value hierarchy into which the fair value measurements are categorised in their entirety ..... in accordance with the levels defined in paragraph 27A .....

FRS 107.27B

100


• ... an entity shall classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements ..... :

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs)

FRS 107.27A

101


102

Observation

Fair value hierarchy disclosures were not presented.


Fair value hierarchy disclosures should be presented in respect of all financial instruments measured at fair value.

Such fair value disclosures should be provided by each class of financial instruments, showing the level within the fair value hierarchy to which it belongs in its entirety. This categorisation is based on the lowest level of significant input that is used in the fair value measurement.


103

Illustrative example

(Extract KPMG Singapore Illustrative Financial Statements 2012)

Liquidity risk – maturity analyses (1/4)

• An entity shall disclose a maturity analysis:

(a) for non-derivative financial liabilities that shows the remaining contractual maturities.

(b) for derivative financial liabilities. The analysis shall include remaining contractual maturities ... [for those which] are essential for an understanding of the timing of the cash flows.

FRS 107.39(a)-(b)

• [For the maturity analysis above,] the contractual maturities are the contractual undiscounted cash flows ..... [which] differ from the amount included in the statement of financial position because the amount in that statement is based on discounted cash flows .....

FRS 107.B11D

104


105

Observation

No disclosure of the contractual cash flows maturity analysis or the cash flows were not presented on the undiscounted basis.


The remaining contractual maturities of non-derivative and derivative financial liabilities should be disclosed in accordance with FRS 107.39(a) and (b).

Such disclosures should be based on the undiscounted contractual cash flows of the financial liabilities. The sum of these numbers would differ from the carrying amounts of the financial liabilities in the statement of financial position which are computed based on discounted cash flows.


106



Convertible notes

Redeemable preference

shares

Principal $5,000,000 $2,000,000

Interest rate 3.0% p.a. (i.e. $150,000)

4.4% p.a. (i.e. $88,000)

Issue date 1 July 2012 1 June 2012

Tenor 3 years 6 years

Maturity date 30 June 2015 31 May 2018


107

Illustrative example (cont’)


Credit risk – ageing analysis (1/2)

• An entity shall disclose by class of financial asset, an analysis of the age of financial assets that are past due as at the end of the reporting period but not impaired.

FRS 107.37(a)

108

Observation

No disclosure of the ageing analysis of past due but not impaired trade receivables as at the end of the reporting period.


The ageing analysis of past due but not impaired financial assets, including trade receivables, as at the reporting date should be presented.

Credit risk – ageing analysis (2/2)

109



Market risk – sensitivity analysis on foreign currency risk (1/2)

• An entity shall disclose ... a sensitivity analysis for each type of market risk to which the entity is exposed at the end of the reporting period, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date .....

FRS 107.40(a)

• In determining what a reasonably possible change in the relevant risk variable is, an entity should consider:

(a) the economic environments in which it operates .....

(b) the time frame over which it is making the assessment .....

FRS 107.B19

110

Market risk – sensitivity analysis on foreign currency risk (2/2)

111

Observation

Rates used for sensitivity analysis on foreign currency risk (i.e. fluctuations of foreign currencies against the entity’s functional currency) does not appear to be appropriate or reflective of current environment and expectations in the market.


Rates used for the sensitivity analysis should reflect management’s estimation of changes in exchange rates that are reasonably possible as at the reporting date, for each foreign currency.

Such rates should take into consideration: - the conditions of the current economic environment, and - the expectations for the foreseeable future.

Thank you

by

Partner

Deloitte & Touche LLP

Going Concern

and

Construction Contracts

James Xu

GOING CONCERN

Accounting Standards Say…

• FRS Framework and FRS 1(2008).25:

Financial statements (FS) are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future.

Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operation.

FS prepared on a going concern basis unless:

Management intends to liquidate the entity; or

To cease trading; or

Has no realistic alternative but to do so (i.e. to liquidate or cease trading).

115

115

Accounting Standards Say…

• FRS 1(2008).25:

When preparing FS, management shall make an assessment of an entity's ability to continue as a going concern.

When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern, the entity shall disclose those uncertainties.

When a financial statements is prepared on a non going concern basis, to disclose:

that fact,

the basis on which it prepared the financial statements, and

the reason why the entity is not regarded as a going concern.

116

116

117

Events or conditions that

may cast significant doubt

on the entity’s ability to

continue as a going concern?

Material uncertainty?

Yes

Adequate disclosures

in FS?

No

Yes

EOM Yes

Qualified or

Adverse No

FS prepared by mgt

based on going

concern?

Yes Going

concern assumption

appropriate? Adverse Yes

EOM (may) No

Disclaimer (rare) Multiple material

uncertainties that are significant to the FS

If no other audit evidence obtained during the audit that

suggests otherwise, going concern assumption can be concluded to be appropriate

No

No

Auditing Standard (570) Says…

118


Adequate disclosures in

FS?

Yes

Yes Going

concern assumption

appropriate?

What is considered adequate? Does the information explicitly draws the reader’s attention to possibility that entity may be unable to continue realising its assets and discharging its liabilities in the normal course of business?

Audit Reporting: Scenario 1

EOM Yes

Material uncertainty exists, but going concern assumption is appropriate

119


Question 1: Is it mandatory to include the EOM?

Yes.

If the auditor concludes that the use of the going concern assumption is appropriate in the circumstances but a material uncertainty exists, and if adequate disclosure is made in the financial statements, the auditor shall express an unmodified opinion and include an Emphasis of Matter paragraph in the auditor’s report.


120


Question 2: What should the EOM contain?

• Highlight the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entity’s ability to continue as a going concern; and

• Draw attention to the note in the financial statements that discloses:

Description of the principal events or conditions and management’s plans; and

That there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business


121


Question 3: The directors of a company are considering whether to cease trading. At the date of the report, the directors have not yet reached a decision. There is a reasonable possibility that the company will continue to trade and, therefore, the financial statements have been prepared on a going concern basis. Should the fact that the directors are considering ceasing to trade be regarded as an indicator of impairment?

Yes.

It will usually be appropriate to regard the fact that the directors are considering ceasing to trade as an indicator of impairment. The management will not usually consider ceasing to trade if the company is expected to be profitable. The fact that the directors are considering ceasing to trade may call into question the ability of the company to continue to trade profitably and, therefore, whether the carrying amounts of assets are recoverable.


122



FS?

Yes

Yes Going

concern assumption

appropriate?


Qualified or Adverse No

If adequate disclosure is not made in the financial statements, the auditor

shall express a qualified or adverse opinion, as

appropriate, in accordance with SSA 705


123


Yes Going

concern assumption

appropriate?

Audit Reporting: Scenario 2 Use of going concern assumption inappropriate

FS prepared by mgt based

on going concern?

Adverse Yes

No

If the financial statements have been prepared on a going concern

basis but, in the auditor’s judgment is inappropriate, the auditor shall

express an adverse opinion

124


Question 1: What if management has adequately disclosed in the financial statements that management’s use of the going concern assumption is inappropriate? Is it still necessary to issue an adverse opinion since users will be aware?

Yes.

The requirement for the auditor to express an adverse opinion applies regardless of whether or not the financial statements include disclosure of the inappropriateness of management’s use of the going concern assumption.

Use of going concern assumption inappropriate

125


Yes Going

concern assumption

appropriate?

Audit Reporting: Scenario 2 Use of going concern assumption inappropriate

FS prepared by mgt based

on going concern?

EOM (may)

No

No

If management prepares the FS on an alternative basis (for example,

liquidation basis) and the alternative basis is an acceptable financial reporting framework in the circumstances, and there is

adequate disclosure therein, may consider it appropriate or necessary to include EOM

126


Question 2: What should the EOM contain?

Draw the user’s attention to:

The alternative basis; and

The reasons for its use


127


Question 3: What are the accounting considerations when FS have been prepared on a non going concern basis?

Recognition and measurement should still follow FRS requirements.

• Consider whether fixed assets should be reclassified as current

To classify as “non-current” until and unless the ‘held for sale’ criteria in FRS 105 are met.

• Consider whether long-term liabilities should be reclassified as current liabilities

May have to be reclassified as current liabilities because of breaches of borrowing covenants and similar factors which existed at the end of the reporting period.

• Consider whether provision for contractual commitments that have become onerous and make provision as appropriate.

• But no future costs or liabilities should be recognised for which there was no present legal or constructive obligation at end of the reporting period


128

Audit Reporting: Scenario 3 Multiple Uncertainties

Disclaimer (rare)


Yes Going

concern assumption

appropriate?


FS?

Yes

EOM Yes

In situations involving

multiple material

uncertainties that are

significant to the financial

statements as a whole, may

consider it appropriate in

extremely rare cases to

express a disclaimer of

opinion instead of EOM

129

Events or conditions that

may cast significant doubt

on the entity’s ability to

continue as a going concern?


Yes

Adequate disclosures

in FS?

No

Yes

EOM Yes

Qualified or

Adverse No

FS prepared by mgt

based on going

concern?

Yes Going

concern assumption

appropriate? Adverse Yes

EOM (may) No

Disclaimer (rare) Multiple material

uncertainties that are significant to the FS

If no other audit evidence obtained during the audit that

suggests otherwise, going concern assumption can be concluded to be appropriate

No

No

Big Picture

NOTE: To refer to SSA 570, SSA 705 and SSA 706 for specific wordings to the

auditor’s report

CHANGES TO AUDIT GUIDANCE STATEMENT (AGS) 1

• Contains sample independent auditor’s reports

• Reports revisited for appropriateness of frameworks applied and continued relevance since last update in Jan 2010

o Frameworks changed

o Withdrawal of reports no longer relevant

o Inclusion of new commonly used reports

• ICPAS engaged various agencies, sought inputs and agreed final reports with them

• Issued in February and effective immediately

Appendix 1: Sample Independent Auditor’s Reports on SSA 700 Forming an Opinion and Reporting on Financial Statements

(A) Non-incorporated entity (B) Incorporated entity (C) Holding company (D) Branch of a foreign company (E) Bank (F) Branch of a foreign bank (G) Foreign company (H) Society (I) Charity (Company Limited By Guarantee)

Appendix 2: Sample Independent Auditor’s Reports- Examples of Reports on Special Purpose Audits

(A) Approved International Shipping Enterprise Scheme (B) Fund Raising Appeal by Societies (C) Major Exporter Scheme for New and Renewal Application (D) Claims Summary (IDA) (E) Licensee’s Annual Gross Turnover (F) Summary Financial Statements

Appendix 3: Sample Independent Assurance Reports on SSAE 3000 Assurance Engagements other than Audits or Reviews of Historical Information – Illustrations of Assurance Reports on Compliance (A) Project accounts - Housing Developers (Project Account) Rules (B) Money-Changing and Remittance Businesses Act (Chapter.187) (C) “Terminated”/“Matured” Investment-Linked Insurance Policy Sub-Fund (“ILP

Sub-Fund”) Pursuant to MAS Notice 307

Appendix 4: Sample Independent Auditor’s Supplementary Reports to Relevant Authorities

(A) Supplementary Report for Banks (B) Supplementary Report for Finance Companies (C) Supplementary Report for Merchant Banks (D) Supplementary Report for Members of CDP, SGX-DC, SGX-ST (E) Private Lotteries Permits (Fruit Machine/Tombola/Lucky Draw) (F) Report on Depository Agent for the Central Depository (Pte) Ltd

Appendix 5: Sample Reports of Factual Findings on SSRS 4400 Engagements to Perform Agreed-upon Procedures Regarding Financial Information

(A) EDAS Schemes (EDB) (B) Submission of the Value-added Productivity Figure to the BCA

Approved International Shipping (AIS) Enterprise Scheme to MPA

(SSA 805)

Auditor's Report on Monthly Gross Revenue to CAAS

Licensee’s Annual Gross Turnover (AGTO) to IDA

(SSA 805)

Report on Monthly Statement of Fruit Machines’ Operations

Submission of the Value-added Productivity Figure to BCA

(SSRS 4400)

Operations of Fruit Machines

Report Old framework New framework

Project accounts - Housing Developers (Project Account) Rules

SSA 800 SSAE 3000*

Money-Changing and Remittance Businesses Act (Chapter 187)

SSA 800

SSAE 3000*

“Terminated”/“Matured” Investment-Linked Insurance Policy Sub-Fund (“ILP Sub-Fund”) Pursuant to MAS Notice 307

SSA 800

SSAE 3000*

Private Lotteries Permits (Fruit Machine/ Tombola/ Lucky Draw)

SSA 800

Supplementary report

Report on Depository Agent for the Central Depository (Pte) Ltd

SSA 800

Supplementary report

* Assurance Engagements other than Audits or Reviews of Historical Financial Information covered by SSAs or SSREs

CONSTRUCTION

CONTRACTS

FRS 11 Construction Contracts

Judgments and

Estimates

What is a construction

contract?

How many contracts?

What is contract revenue?

What is contract

cost?

How to recognise contract revenue

and cost?

137

e.g. INT FRS 112 Service concession arrangement, construction of bridge, building, dam, pipeline, road, tunnel, manufacture of specialised equipment, certain types of shipbuilding etc.

Segmentation and combination e.g. construction of a road and bridge performed concurrently

e.g. initial amount of revenue agreed in the construction contract, variations, claims , Incentive Payments

e.g. Costs relating directly to the specific contract, Costs attributable to contract activity in general and can be allocated to the contract, Other costs specifically chargeable to the customer under the terms of the contract, Pre-contract costs

Stage of Completion Method

At end of the reporting period , the following steps are taken: 1. Estimate the outcome, or total profit or loss, expected to be achieved on a contract

2. Estimates the % of completion of the contract

3. Apply the estimated % of completion to the total expected revenue and expenses

related to the contract to determine the amount of revenue and cost to be recognised in the period

4. If expect that a loss will be made on the contract, the total loss is recognised immediately

How to recognise contract revenue and contract cost?

Estimate outcome of

contract

Estimate stage of

completion

Recognition of contract

revenue


cost

Recognition of losses

1 2 3 3 4

138

Cost plus contracts

1. Probability of inflow of economic benefits

2. Contract costs attributable to contract can be clearly identified and measured reliably

Fixed price contracts

1. Total contract revenue reliably measurable

2. Probability of inflow of economic benefits

3. Contract costs to complete can be estimated

4. Stage of contract completion can be estimated

5. Contract costs attributable to contract can be clearly identified and measured reliably

(to enable comparison with prior estimates)

Estimate outcome of contract

Estimate outcome of

contract

Estimate stage of

completion


revenue


costs


139

Several ways allowed by FRS 11.30:

• the proportion that contract costs incurred for work performed to date bear to the

estimated total contract cost (also known as the “cost-to-cost method”).

• surveys of work performed; and

• completion of a physical proportion of the contract work.

Estimate outcome of

contract

Estimate stage of

completion


revenue


costs


Estimate stage of completion

140

For revenue to be recognised:

• probable that future economic benefits will flow to the entity

• amount can be estimated reliably (i.e. Step 1 above met)

Computation of revenue

= Stage of Completion X Total Contract Revenue

Estimate outcome of

contract

Estimate stage of

completion


revenue


costs


141

Recognition of contract revenue

Assume $10,000 fixed price contract value in the following scenarios:

1. Cost-to-cost method

Entity has incurred and applied costs of $4,000. $3,000 is the best estimate of cost-to-complete.

Entity should therefore recognise revenue of:

• $4,000/($4,000+$3,000) X $10,000 = $5,714.

2. Survey of work performed

An independent surveyor has certified at period-end that 55% of a project is complete. Entity

should therefore recognise revenue of:

• 55% X $10,000 = $5,500.

3. Completion of a physical proportion of the contract work

The company estimates that physical proportion of work it has completed is 60%. The value of

work done is thus = 60% X $10,000 = $6,000.

Estimate outcome of

contract

Estimate stage of

completion


revenue


costs


142

Recognition of contract revenue

Estimate outcome of

contract

Estimate stage of

completion


revenue


costs


“Cost-to-cost” method

• Generally, contract costs recognised in P/L in the period incurred

• An exception = costs that relate to future activity e.g. inventories for future use, advance

payments to sub-contractors

“Survey of work performed” method and “Completion of a physical proportion of the contract

work” method

• Generally, contract costs may be recognised in P/L or capitalised in B/S in period incurred,

depending on % of completion

• For capitalisation on B/S, it must be probable that such costs are recoverable

143

Recognition of contract costs

Estimate outcome of

contract

Estimate stage of

completion


revenue


costs


When an entity estimates that the outcome of a contract will be a loss, the expected loss is recognised as an expense immediately. The amount of the loss is the expected loss on the entire contract, and thus is determined without reference to [FRS 11.37]: • whether or not work has commenced on the contract;

• the stage of completion of contract activity; or

• the amount of profits expected to arise on other contracts which are not treated as the

same contract under the rules of FRS 11. Similar concept: Onerous contacts under FRS 37

144


Estimate outcome of

contract

Estimate stage of

completion


revenue


costs


What kind of contracts do we normally look out for? • Contracts that are larger-than-normal in dollar amount and/or duration • Contracts involving projects outside the client’s usual operations • Contracts involving projects in geographical locations that the entity has limited prior

experience in • Contracts involving very unique or highly technical project subject matter • Contracts involving difficult contract provisions, such as substantial late-completion

penalties or no-damage-for-delay clauses • Contracts with significant current year revenues, costs or gross profits • Contracts with low gross profits or loss jobs • Contracts with significant under or overbillings and/or past due amounts

Audit considerations


145

The POC method is applied on a cumulative basis in each accounting period to the current estimates of contract revenue and contract costs. Therefore, the effect of the following is accounted for as a change in accounting estimate (see FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors): • estimate of contract revenue; • estimate of contract costs; • estimate of the outcome of a contract.

Apply change prospectively. To perform retrospective review to test how reliable management estimates are.

Estimate outcome of

contract

Estimate stage of

completion


revenue


costs


Changes in estimates

146

• The amount of contract revenue recognised as revenue in the period;

• The methods used to determine the contract revenue recognised in the period; and

• The methods used to determine the stage of completion of contracts in progress

• An entity should disclose each of the following for contracts in progress at the balance

sheet date :

o Aggregate amount of costs incurred and recognised profits to date;

o Amount of advances received; and

o Amount of retentions

• An entity should present:

o the gross amount due from customers for contract work as an asset; and

o the gross amount due to customers for contract work as a liability.

Disclosures

147

Thank you

by

Partner

RSM Chio Lim LLP

Statement of Cash Flows (FRS 7) – operating, financing and investing activities; Inventories (FRS 2) –

Recognised as an expense, reversal of write-down of inventories, spare parts

recognised as inventory/PPE

Goh Swee Hong

150

CASH FLOW STATEMENTS

INVENTORIES

NEW AND REVISED ACCOUNTING STANDARDS

DEFERRED TAX

Presentation

• A statement of cash receipts and payments, reconciling opening and closing cash and cash equivalents balances, under headings:

152

Investing Activities

Financing Activities

Cash Flow Statement

Operating Activities

Overview of Structure

Cash from operating activities X/(X)

Cash from investing activities X/(X)

Cash from financing activities X/(X)

Net cash inflow (or outflow) in the period X/(X)

Cash and cash equivalents at start X/(X)

Cash and cash equivalents at end X/(X)

153

Key indicator of the extent to which an entity

has generated cash to meet its needs

Useful in predicting claims on future cash flows by providers of

finance

The extent to which expenditures have been made

on resources intended to generate future cash flows

Classification of Cash Flow Statement

154

Movement of trust receipts Financing activities

155

Interest expense on loan paid by a

financial institution

Operating activities

Interest expense on loan paid by a manufacturing

company

Financing activities


156

Dividend received by a

manufacturing company

Investing activities

Dividend received by an investment holding company



157

Movement of non- trading accounts

due to parent company



158

Proceeds from disposal of

investment by a manufacturing

company

Investing activities


Proceeds from disposal of

investment by an investment holding

company


159

FRS 7: Cash Flow Statements

Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.

Non-cash transactions

Examples



Cash Flow Used in Investing Activities

2012

$

Acquisition of property, plant and equipment (Note) 210,000

Property, Plant and Equipment

Additions during the year 300,000

Note During the year, there were acquisition of plant and equipment with total cost of $90,000 by means of finance leases.

Examples



Statement of Changes in Equity

2012

$

Issue of shares during the year (Note) 500,000

Cash Flow from Financing Activities

Issue of shares during the year 300,000

Note A total of 200,000 ordinary shares were issued to offset against the amounts of $200,000 due to the parent company during the year.

162

• Cash at bank, which are pledged to banks to secure credit facilities, should not be included as cash and cash equivalents in the cash flow statement.

• The movement of such cash or cash equivalent should be included in cash flow from/(used in) financing activities.

Cash and cash equivalents


163

Cash and cash equivalents Example


Cash flow from financing activities

2011

$

Cash pledged for bank facilities (80)

Cash and cash equivalents in the statement of cash flow

2011

$

Amount as shown in cash and bank balance 2,000

Cash pledged for bank facilities (112)

Cash and cash equivalents for statement of cash flows purposes at end of year 1,888

164

The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the enterprise. Examples of cash flows arising from financing activities are inter alia:

cash proceeds from long term borrowings.

cash repayments of amounts borrowed.

An enterprise should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities as per FRS7.21.

Cash inflows from new loans should not be netted off with cash out flows from pre-existing loans.



Example 2011

$

Cash Flows from Financing Activities

Proceeds from new term loans 1,110

Repayment of term loans (222)

Increase in trust receipts 400

Net cash inflow from financing activities 1,288



Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the statement of cash flows in order to reconcile cash and cash equivalents at the beginning and the end of the period. This amount should be presented separately from cash flows from operating, investing and financing activities and includes the differences, if any, had those cash flows been reported at end of period exchange rates. FRS7.28


Foreign currency cash flows

Foreign currency cash flows Example

2011

$

Net increase in cash & cash equivalents 888

Foreign currency translation adjustment (222)

Cash & cash equivalents at beginning balance 555

Cash & cash equivalents at ending balance 1,221


For foreign currency denominated cash balances only

Inventories are assets:

a) Held for sale in the ordinary course of business;

b) In the process of production for such sale; or

c) In the form of materials or supplies to be consumed in the production process or in the rendering of services.

169

FRS 2: Inventories

Definition of Inventories (FRS2.6)

170

FRS 2: Inventories

Accounting for Spare Parts and Tooling Equipment

• Spare parts and consumables used for operation and maintenance of equipment should be accounted for as inventory.

• Tools which can be used for operations over a period of time should be classified as plant and equipment.

INVENTORIES - Inventories consist mainly of parts, accessories and consumable stores required for the operation and maintenance of vehicles and certain equipment. Inventories are stated at the lower of cost and net realisable value. Cost comprises cost of purchase and those costs that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method.

171

FRS 2: Inventories

Example (Inventory accounting policy of a transport operator)


VEHICLES, PREMISES AND EQUIPMENT - Vehicles, premises and equipment are stated at cost, less accumulated depreciation and any provision for impairment.

172

FRS 2: Inventories

Example (PPE accounting policy of a transport operator)


Number of years

Buses 19 to 20

Bus grooming and other accessories (classified under buses)

2 to 8

Leasehold land and buildings Over terms of leases which are between 4 to 28 years

Computers and automated equipment 1 to 6

Workshop machinery, tools and equipment

3 to 5

Motor vehicles 5 to 10

Furniture, fittings and equipment 7 173

FRS 2: Inventories Example (PPE accounting policy of a transport operator)

• Depreciation is charged so as to write off the cost of the assets, other than capital projects in progress, over the estimated useful lives on straight-line method, on the following bases:

• The financial statements should disclose the amount of inventories recognised as an expense during the period.

• This typically consists of those costs previously included in the measurement of inventory that has now been sold. It includes unallocated production overheads, abnormal amounts of production costs of inventories and other costs (if required).

• Where the financial statements presents an analysis of expenses using a classification based on the nature of expenses, the costs recognised as an expense for raw materials and consumables, labour costs and other costs together with the amount of the net change in inventories for the period should be disclosed.

FRS 2.36(d) read with FRS 2.38 and FRS 2.39

FRS 2: Inventories

Example

2011

$

The amount of inventories included in cost of sales 1,222,888

FRS 2: Inventories

2011

$

Raw material and consumables used 900,111

Changes in inventories of finished goods and work in

progress

322,777

Or

The movements in the inventory allowance and the circumstances

or events that led to the reversal of a write-down of inventories should be disclosed.

FRS 2.36 (e) – (g)

FRS 2: Inventories

Example 2011

$’000

2010

$’000

Inventories are stated after allowance.

Movements in allowance: Balance at beginning of the year 32 30 Charge to profit or loss included in cost of sales - 5

Reversed to profit or loss included in cost of sales (14) -

Amount written off (2) (3) Balance at end of the year 16 32

The reversal of the allowance is for finished goods that were sold during the year at prices above their carrying amounts.

FRS 2: Inventories

• The carrying amount of inventories pledged as security for liabilities should be disclosed.

Example

• Inventories amounting to $200,888 as at 31 December 2011 are pledged as securities to the company’s bank facilities.

178

FRS 2: Inventories

FRS 2.36 (h)

• There should be disclosure of whether there is any new & revised FRS & INT FRS adopted by the entity, which have a material effect on the financial statements as per FRS 8.28.

• There is however no necessity to list out every single new and revised FRS, only those which are relevant need to be highlighted.

180

FRS 8: Accounting Policies, Changes in Accounting Estimates and Errors

FRS 8.28

181


Example

Adoption of New and Revised Standards

In the current year, the Group adopted the new/revised FRS and Interpretations of FRS (“INT FRS”) that are effective for annual periods beginning on or after 1 July 2011. Changes to the Group’s accounting policies have been made as required, in accordance with the transitional provisions in the respective FRS and INT FRS.

The following are the new or amended FRS that are relevant to the Group:

The adoption of the above FRS did not result in any substantial change to the Group’s accounting policies nor any significant impact on the financial statements.

FRS 24 (Revised) Related Party Disclosures

Amendments to FRS 107 Disclosures Transfer of Financial Assets

182


FRS 8.30

When an entity has not applied a new Standard or Interpretation that has been issued but is not yet effective, the entity shall disclose:

(a) this fact; and

(b) known or reasonably estimable information relevant to assessing the possible impact that application of the new Standard or Interpretation will have on the entity’s financial statements in the period of initial application.

183


Example

The Group has not adopted the following standards that have been issued but not yet effective:

Description Effective for annual period beginning on or after

Amendments to FRS 1 Presentation of Items of Other Comprehensive Income

1 July 2012

Improvements to FRSs issued in 2012:

- Amendment to FRS1 Presentation of Financial Statements 1 January 2013

- Amendment to FRS16 Property, Plant and Equipment 1 January 2013

- Amendment to FRS 32 Financial Instruments: Presentation 1 January 2013

Revised FRS 27 Separate Financial Statements 1 January 2014

Revised FRS 28 Investments in Associates and Joint Ventures 1 January 2014

FRS 110 Consolidated Financial Statements 1 January 2014

FRS 111 Joint Arrangements 1 January 2014

FRS 112 Disclosure of Interest in Other Entities 1 January 2014

184


Example

• The directors expect that the adoption of the standards above will have no material impact on the financial statements in the period of initial application.

185


Example

• Certain new standards, amendments and interpretations to existing

standards have been published and are relevant for the Group’s accounting periods beginning on or after 1 July 2012 or later periods and which the Group has not early adopted.

• Management has assessed that the new or revised accounting standards and interpretations do not have any material impact to the Group.

FRS12.81 (g)

For each type of temporary difference, and each type of unused tax losses and unused tax credits, the following should be disclosed separately :

a) the amount of deferred tax assets and liabilities recognised in the balance sheet

b) the amount of the deferred tax assets and liabilities recognised in the income statements.

187

Deferred Tax

188

Example

Group

2012 ’000

2011 ’000

Excess of net book value of plant and equipment over tax values (500) (130)

Allowance for impairment of trade and other receivables (900) (945) Allowance for impairment of inventories (50) – Tax losses carryforward 50 (200)

Deferred tax charge relating to unremitted profits of a subsidiary 750 500

Total deferred income tax income recognised in profit or loss (650) (775)

Deferred tax expense (income) recognised in profit or loss include:

Deferred Tax

189

Example

Group

2012 ’000

2011 ’000

Excess of net book value of plant and equipment over tax values (2,000) (2,500)

Allowance for impairment of trade and other receivables 3,900 3,000

Allowance for impairment of inventories 50 –

Tax losses carryforward 150 200

Deferred tax charge relating to unremitted profits of a subsidiary (1,250) (500)

Net balance 850 200

Deferred tax balance in the statement of financial position:

Deferred Tax

190

Presented in the statement of financial position as follows:

2012 ’000

2011 ’000

Deferred tax liabilities (3,250) (3,000)

Deferred tax assets 4,000 3,200 Net position 850 200

Example

Deferred Tax

191

Group

2012 ’000

2011 ’000

2014 200 400

2015 400 400 600 800

Example

For subsidiary in Country X, the realisation of the future income tax benefits from tax loss carryforwards is available for a period of 5 years subject to the conditions imposed by law. The expiry dates of tax losses carryforwards are as follows:

Deferred Tax

FRS12.39

An enterprise should recognise a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, except to the extent that both of the following conditions are satisfied:

a) the parent, investor or venturer is able to control the timing of the reversal of the temporary difference; and

b) it is probable that the temporary difference will not reverse in the foreseeable future.

192

Deferred Tax

Example

Company Y in Singapore has a subsidiary A in Country X which was incorporated in 2011. Subsidiary A made net profits of $1,000 during 2011. Dividends declared by subsidiary A and remitted out of Country X is subject to a withholding tax of 5%. During 2012, subsidiary A declared dividend of $1,000 out of its 2011 profits. Company Y is unable to control the timing of the reversal of the temporary difference.

193

Deferred Tax

194

Example (Cont’d)

Deferred Tax

Group level

Dr Deferred tax expense $50 Cr Deferred tax liability $50

2011

Company level

No entry required for deferred tax

195

Example (Cont’d)

Deferred Tax

Group level

Dr Dividend income $1,000 Cr Dividend $1,000 Dr Deferred tax liability $50 Cr Withholding tax expense $50

2012

Company level

Dr Cash $950 Dr Withholding tax expense $50 Cr Dividend income $1,000

• If an enterprise did not recognise the deferred tax liabilities for the taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, as it satisfy the two conditions stated in FRS12.39, it should disclose the deferred tax liabilities that have not been recognised.

196

Deferred Tax

197

Example

At the end of the reporting year, the aggregate amount of temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognised are as follows.

Group

2012 ’000

2011 ’000

Subsidiary 10,231 8,000

Deferred Tax

Thank you

by

Partner

Ernst & Young LLP

FRS 1 Presentation of Financial Statements

FRS 16 Property, Plant & Equipment

FRS 23 Borrowing Costs

Mr Tham Chee Soon

FRS 1 Presentation of Financial Statements

200

Capital management

Share capital

Capital management

• An entity shall disclose information that enables users of its financial statements to evaluate the entity’s objectives, policies and processes for managing capital.

201

FRS 1.134

• Qualitative information regarding objectives, policies and processes for managing capital (what it manages as capital, externally imposed requirements, and how it meets its objectives)

• Summary quantitative data and other related disclosures.

FRS 1.135

Capital management

• FSRC Findings:

Capital management note missing.

In several sets of financial statements reviewed, a generic

capital management note was disclosed. However, there were no specific qualitative and quantitative disclosures of what the company manages as capital.

Capital management note inappropriately worded.

202

Capital management

Every entity is different!

Different entities may use different methods to monitor capital or use gearing ratios with different measurement bases. Disclosures would have to be customised in the light of specific facts and circumstances applicable to the entity.

203

Capital management

• Disclosure example 1:

204

FRS 1 Implementation Guidance Part III – Illustrative examples of capital disclosures The Group’s objectives when managing capital are: • to safeguard the entity’s ability to continue as a going concern, so that it can continue to

provide returns for shareholders and benefits for other stakeholders, and • to provide an adequate return to shareholders by pricing products and services

commensurately with the level of risk. The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt. Consistently with others in the industry, the Group monitors capital on the basis of the debt-to-adjusted capital ratio. This ratio is calculated as net debt ÷ adjusted capital. Net debt is calculated as total debt (as shown in the statement of financial position) less cash and cash equivalents. Adjusted capital comprises all components of equity (ie share capital, share premium, minority interest, retained earnings, and revaluation reserve) other than amounts accumulated in equity relating to cash flow hedges, and includes some forms of subordinated debt.

Objective

Policies & procedures

What it manages as capital

Capital management


205

FRS 1 Implementation Guidance Part III – Illustrative examples of capital disclosures (continued) During 20X4, the Group’s strategy, which was unchanged from 20X3, was to maintain the debt-to-adjusted capital ratio at the lower end of the range 6:1 to 7:1, in order to secure access to finance at a reasonable cost by maintaining a BB credit rating. The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows:

31 Dec 20X4 $million

31 Dec 20X3 $million

Total debt 1000 1100

Less: cash and cash equivalents (90) (150)

Net debt 910 950

Total equity 110 105

Add: subordinated debt instruments 38 38

Less: amounts accumulated in equity relating to

cash flow hedges (10) (5)

Adjusted capital 138 138

Debt-to-adjusted capital ratio 6.6 6.9

How it meets its objective

Summary quantitative data

Capital management


206

FRS 1 Implementation Guidance Part III – Illustrative examples of capital disclosures (continued) The decrease in the debt-to-adjusted capital ratio during 20X4 resulted primarily from the reduction in net debt that occurred on the sale of subsidiary Z. As a result of this reduction in net debt, improved profitability and lower levels of managed receivables, the dividend payment was increased to $2.8 million for 20X4 (from $2.5 million for 20X3).

Any changes from previous period

Capital management


207

Example extracted from private company without borrowings: The management’s policy is to maintain a strong capital base so as to sustain future development of the business. The Company manages its capital structure and makes adjustments to it, in light of changes in economic conditions. The Company regards the equity attributable to shareholder as capital. The Company maintains an optimum capital structure by various means such as deciding on the amount of dividends paid to the shareholder, and return of capital to the shareholder as it deems beneficial to the interests of its shareholder. There are no changes in the Company’s approach to capital management during the financial year. The Company is not subject to externally imposed capital requirements.

Share capital

• An entity shall disclose the following, either in the statement of financial position or the statement of changes in equity, or in the notes:

(a) for each class of share capital:

(iii) par value per share, or that the shares have no par value

(v) the rights, preferences and restrictions attaching to that class including restrictions on the distributions of dividends and the repayment of capital.

208

FRS 1.79

Share capital

• FSRC Findings:

In certain sets of financial statements reviewed, there was no disclosure of the par value per share, or that the shares have no par value, rights, preferences and restrictions attaching to that class including restriction on the distribution of dividends and the repayment of capital.

209

Share capital

• Disclosure example:

210

Summary of significant accounting policies:

The holders of ordinary shares are entitled to receive dividends as and when declared by the Company. All ordinary shares carry one vote per share without restrictions. The ordinary shares have no par value. All the above issued ordinary shares are fully paid.

FRS 16 Property, Plant and Equipment

211

Useful life and residual value

Restoration costs


• Useful life is the period over which an asset is expected to be available for use by an entity; or the number of production or similar units expected to be obtained from the asset by an entity.

212

FRS 16.6

• The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.


• FSRC Findings:

In certain financial statements reviewed, the disclosure on the range of useful life is so wide for a category of PPE that the information is not meaningful. For example:

Buildings - 15 to 50 years

Leasehold land – Over the period of the lease of between 5 to 50 years

Plant & machinery - 5 to 25 years

213


• FSRC Findings:

In certain sets of financial statements reviewed, the policy on depreciation of barges was to write off the cost of the asset over its useful life without consideration for residual value –

Reason given that it is difficult to estimate residual value of these barges.

FRS 16.6: The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

214

Restoration costs

• The cost of an item of property, plant and equipment comprises:

a. ………

b. ………

c. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

215

FRS 16.16

Restoration costs

• FSRC Findings:

In certain financial statements reviewed, restoration costs were not recognised.

216

Restoration costs

217

INT FRS 101

• INT FRS 101 Changes in Existing Decommissioning, Restoration and Similar Liabilities applies to changes in remeasurement of any existing decommissioning, restoration or similar liability that is recognised as part of the cost of an item of property, plant and equipment in accordance with FRS 16.

Restoration costs

218

INT FRS 101

• Related assets measured at cost:

Changes in the liability are added to, or deducted from, the cost of the asset. Any deduction may not exceed the carrying amount of the asset and any excess over the carrying value is taken immediately to profit or loss.

• If the change in estimate results in a addition to the carrying value, the entity is required to consider whether this is an indication of impairment of the asset as a whole and test for impairment in accordance with FRS 36 Impairment of Assets.

Restoration costs

• Example: Cost Model

219

Background facts: An entity has a nuclear power plant and a related restoration liability. The nuclear power plant started operating on 1 January 2000. The plant has a useful life of 40 years. Its initial cost was $120,000; this included an amount for restoration costs of $10,000, which represented $70,400 in estimated cash flows payable in 40 years discounted at a risk-adjusted rate of 5%. The entity's financial year ends on 31 December.

Restoration costs


220

On 1/1/2000, the entity makes the following journal entries to record the purchase of the fixed asset and the provision for restoration costs: Dr Fixed asset $110,000 Cr Cash $110,000 Dr Fixed asset $10,000 Cr Provision for restoration costs $10,000

Restoration costs


221

On 31 December 2009, the plant is 10 years old. Accumulated depreciation is $30,000. Because of the unwinding of discount over the 10 years, the restoration liability has grown from $10,000 to $16,300. On 31 December 2009, the discount rate has not changed. However, the entity estimates that, as a result of technological advances, the net present value of the expected cash flows has decreased by $8,000. Accordingly, the entity reduces the restoration liability from $16,300 to $8,300. How do we account for the subsequent change?

Restoration costs


222

On 31/12/2009, the entity makes the following journal entry to reflect the change: Dr Provision for restoration costs $8,000 Cr Fixed asset $8,000 Under the Cost Model, the reduction in the restoration liability decreases the carrying amount of the fixed asset by the same amount.

Restoration costs


223

Following this adjustment, • Carrying amount of the asset is $82,000 ($120,000 – $30,000 –

$8,000)

• Depreciation over the remaining 30 years = $2,733 ($82,000 ÷ 30)

• The next year's finance cost for the unwinding of the discount will be $415 ($8,300 × 5%).

FRS 23 Borrowing costs

224

Capitalisation of borrowing costs


• Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense.

225

FRS 23.1


• The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made. When an entity borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified.

226

FRS 23.10


• To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation by applying a capitalisation rate to the expenditures on that asset. The capitalisation rate shall be the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that an entity capitalises during a period shall not exceed the amount of borrowing costs it incurred during that period.

227

FRS 23.14


• Example: Capitalisation of general borrowing costs

228

On 1 April 2011 a company engages in the development of a property, which is expected to take five years to complete, at a cost of $6,000,000. The balance sheets at 31 December 2010 and 31 December 2011, prior to capitalisation of interest, are as follows:

31 December 2010 $

31 December 2011 $

Development Property - 1,200,000

Other assets 6,000,000 6,000,000

6,000,000 7,200,000

Loans

Bank loan at 6% p.a. - 2,000,000*

Bank loan at 7% p.a. 1,000,000 1,000,000

1,000,000 3,000,000

Shareholders’ equity 5,000,000 4,200,000

* Loan drawdown on 1 July 2011.


• Example: Capitalisation of general borrowing costs (continued)

229

Expenditure was incurred on the development as follows:

$

1 April 2011 600,000

1 July 2011 400,000

1 October 2011 200,000

1,200,000

All borrowings are general borrowings. Total interest expense for the period:

$

$2,000,000 * 6% *6/12 60,000

$1,000,000 * 7 % 70,000

130,000



230

How much borrowing costs to capitalise for the financial year ended 31 December 2011? Capitalisation rate is calculated as:

Total interest expense for the period ----------------------------------------- Weighted average total borrowings 130,000 ---------------------------- = 6.5% 1,000,000+(2,000,000)/2



231

The capitalisation rate is then applied to the expenditure on the qualifying asset, resulting in an amount to be capitalised of $45,500 as follows:

$

$600,000 * 6.5% * 9/12 29,250

$400,000 * 6.5% * 6/12 13,000

$200,000 * 6.5% * 3/12 3,250

45,500


• FSRC Findings:

In certain financial statements reviewed, the policy on borrowing costs as mentioned above was not disclosed and in certain other statements, the policy on borrowing costs was incomplete.

232


• Disclosure example:

233

Summary of significant accounting policies: Borrowing costs incurred to finance advance and progress payments for aircraft are capitalised as part of advance and progress payments until the aircraft are commissioned for operation or the projects are completed. All other borrowing costs are recognised as finance charges in the period in which they are incurred.

Thank you

seminar on observations by the financial statements review...

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