Post on 16-Apr-2018
transcript
Fin
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Quarter 2 2016
Welcome to Financial Reporting Updates. This is your quarterly update on all things relating to International Financial Reporting / Auditing Standards or Financial Reporting / Auditing Standards. We’ll bring you up to speed on topical issues, provide comment and points of view and give you a summary of any significant developments. Our second edition of 2016 starts with some issues of volatile picture for various asset and liabilities classes, development of International Financial Reporting Standards, International Auditing Standards and regulatory matters. Read this issue to find out:
Issue of volatile picture for various asset and liabilities classes
Breaches of borrowing covenants: Material for Directors
Development of International Financial Reporting Standards
IASB issued New Leases Standard, IFRS 16
IASB & ASC issued Narrow -Scope Amendments to IAS & FRS 12 Income Taxes
Updates on the Disclosure Initiative - IASB & ASC issued the Amendments to IAS & FRS 7 Statement of Cash Flow
IASB & ASC postponed accounting changes for associates and joint ventures until completion of broader review
IASB proposed final amendments Clarifications to IFRS 15 Revenue from Contracts with Customers
International Auditing Standards
IAASB reporting on Special Purpose Financial Statements
In addition, we end with regulatory matters such as:
Practice Direction No. 6 of 2015 - Effect of Companies (Amendment) Act 2014 on Sections relating to Financial Reporting in the Companies Act.
ACRA-SGX-SID Audit Committee Seminar 2016
SGX Watch-list Listed Companies
Breaches of borrowing covenant: Materials for Directors With the slowing down of the global economy, some companies may face a risk of breaching these borrowings covenants or defaulting on loan repayments, which could lead to their long-term borrowings becoming immediately payable. Our first edition of 2016 has highlighted that ACRA has highlighted this area as one areas of review focus for FY 2015 Financial Statements under ACRA’s Financial Reporting Surveillance Programme.
What should Directors query?
Directors of companies with high gearing should query on whether all borrowing covenants have been met and whether loan repayments have been paid timely. If not, directors should consider their implications, including whether the borrowing should be reclassified from a non-current liability to a current liability.
What are the common scenarios to determine if the borrowing should be reclassified from a non-current liability to a current liability?
Scenarios Description of each scenario
Scenario 1
An entity has a long-term loan arrangement containing a debt covenant. The specific
requirements in the debt covenants have to be met as at 31 December every year. The
loans are due in more than 12 months.
Scenario 2 Same as scenario 1, but the loan arrangement stipulates that the entity has a grace
period of 3 months to rectify the breach and during which the lender cannot demand
immediate payment.
Page 2 of 14 | Financial Reporting Updates 2Q2016
Scenario 3 Same as scenario 1, but the lender agreed not to demand repayment as a
consequence of the breach. The entity obtains this waiver:
(a) at or before the period end and the waiver is for a period of more than 12 months
after the period end
(b) at or before the period and the waiver for a period of less than 12 months after the
period end
(c) after the period end but before the financial statements are authorised for issue.
Scenario 4
An entity has a long-term arrangement containing to a debt covenant. The loan is due
in more than 12 months. At the period end, the debt covenants are met. However,
circumstances change unexpectedly and the entity breaches the covenant after the
period end but before the financial statements are authorised for issue.
What are the disclosures required by accounting standards?
IFRS 7 & FRS 107 Financial Instruments: Disclosures
IFRS 7 & FRS 107 requires the following disclosures for any loans payable recognised at the reporting date:
details of any defaults during the period of principal, interest, sinking fund, or redemption terms of those loans payable
the carrying amount of the loans payable in default at the reporting date
whether the default was remedied, or the terms of the loans payable were renegotiated, before the financial statements was authorised for issue.
if, during the period, there were breaches of loan agreement terms other than those described above, the same information should be disclosed if those breaches permitted the lender to demand accelerated repayment (unless the breaches were remedied, or the terms of the loan were renegotiated, on or before the end of the reporting period).
IAS & FRS 1 Presentation of Financial Statements IAS & FRS 1 requires certain disclosures of refinancing and rectification of loan agreement breaches which happen after the end of the reporting period and before the accounts are authorised for issue.
Whether the borrowing should be presented as current or non-current and whether the disclosures are required?
Scenarios
1 2 3 (a) 3 (b) 3 (c) 4
At the period end, does the entity have an
unconditional right to defer the settlement
of the liability for at least 12 months
No No Yes No No Yes
Classification of the liability Current Current Non -
current
Current Current Non -
current
Are the above IFRS 7 disclosures required? Yes Yes No Yes Yes No
Are the disclosures in IAS 1 required? No No No No Yes No
Page 3 of 14 | Financial Reporting Updates 2Q2016
IASB issued New Leases Standard, IFRS 16 In the first quarter of 2016, the International
Accounting Standards Board (“IASB”) issued
a new Leases Standard, IFRS 16.
It replaces accounting requirements
introduced more than 30 years ago in
accordance with IAS 17 Leases that are no
longer considered fit for purpose, and is a
major revision of the way in which companies
where it required lessees to recognise
most leases on their balance sheets.
Lessor accounting is substantially
unchanged from current accounting in
accordance with IAS 17.
What has changed?
Below are the summarised changes of IFRS 16 as compared to IAS 17:
Topic The changes
Lessee
accounting
model
Single lease accounting model
No lease classification test
On initial recognition and measurement, all leases on-balance sheet:
lessee would have to recognise a right-of-use (ROU) asset and lease
liability.
treated as the purchase of an asset on a financed basis. The lease liability is
measured at the present value of the lease payments to be made over the
lease term.
On subsequent measurement,
the related right-of-use asset is depreciated in accordance with the
depreciation requirements of IAS 16 Property, Plant and Equipment on a
straight-line basis. Alternatively, the lessees should apply subsequent
measurement bases for the right-of-use under certain circumstances in
accordance with IAS 16 and IAS 40 Investment Property.
right-of-use assets are subject to impairment testing under IAS 36
Impairment of Assets.
lessees accrete the lease liability to reflect interest and reduce the liability to
reflect lease payments made.
lessees re-measure the lease liability upon the occurrence of certain events
(e.g. change in the lease term, change in variable rents based on an index
or rate), which is generally recognised as an adjustment to the right-of-use
asset.
Dual lease accounting model for lessors.
Lease classification test based on IAS 17 finance lease.
On initial measurement, the lessor can account the lease as:
Type A (finance lease) accounting model for accounting with recognition of
net investment in lease comprising lease receivable and residual asset,
lessors derecognise the underlying assets and recognise a net investment in
the lease similar to today’s requirements. Any selling profit or loss is
recognised at lease commencement.
Type B (operating lease) accounting model based on IAS 17 operating lease
accounting, lessors continue to recognise the underlying assets.
On subsequent measurement,
for finance leases, lessors recognise interest income for the accretion of the
net investment in the lease and reduce that investment for payments
received. The net investment in the lease is subject to the derecognition and
impairment requirements in IFRS 9 Financial Instruments.
for operating leases, lessors recognise lease income on either a straight-
Page 4 of 14 | Financial Reporting Updates 2Q2016
line basis or another systematic basis that is more representative of the
pattern in which benefit from the use of the underlying asset is diminished.
Sales and
leaseback
transactions
A seller-lessee and a buyer-lessor use the definition of a sale from IFRS 15
Revenue from Contracts with Customers to determine whether a sale has occurred
in a sale and leaseback transaction.
If the transfer of the underlying assets satisfies the requirement of IFRS 15 to be
accounted for as a sale, the transaction will be accounted for as a sale and a
lease by both the lessee and the lessor.
If not, the transaction will be accounted for as a financing by both the seller-
lessee and the buy-lessor.
Lease term
and purchase
options
Payments for optional - e.g. renewal - periods and purchase options included in
lease accounting if it is reasonably certain that the lessee will exercise these
options, consistent with the high threshold in current GAAP.
Lessees to reassess renewal and purchase options if there is a significant event
or change in circumstances that is within the control of the lessee - e.g.
construction of significant leasehold improvements.
No reassessment of renewal and purchase options by lessors.
Discount rate Lessee should calculate the present value of the lease payments by the interest
rate implicit in the lease. This is the rate that causes the present value of the
lease payments and the unguaranteed residual value to equal the sum of the fair
value of the underlying asset and any initial direct costs of the lessors.
If the lessee cannot readily determine the interest rate implicit in the lease, then
the lessees uses its incremental borrowing rate. This is the rate that a lessee
would have to pay on the commencement date of the lease for a loan of a similar
term, and with similar security, to obtain an asset of similar value to the right-of-
use asset in a similar economic environment.
Presentation
of lessee
accounting
Right-of-use assets are either presented from separately from other assets on the
balance sheet or disclosed separately in the notes to the financial statements
from other liabilities on the balance sheet or disclosed in the notes to the financial
statements.
Depreciation expense and interest expense cannot be combined in the income
statement.
In the cash flow statement,
lease payments relating to contracts previously classified as operating
leases will no longer be shown in full within operating cash flow
the principal payments on the lease liability are presented within financing
activities, interest payments are presented based on accounting policy
election in accordance with IAS 7 Statement of Cash Flows
the presentation of the interest portions depends on the entity’s general
accounting policy regarding interest paid (that is, either within operating or
within financing activities).
payments for short-term leases, for leases of low-value assets and variable
lease payments not included in the measurement of the lease liability are
part of operating activities.
Presentation
of lessor
accounting
IFRS 16 adds significant new disclosure requirements - further information about
how the lessor manages its risk related to the residual interest in the underlying
asset.
A lessor now has to disaggregate the disclosures required in IAS 16 for each
class of property, plant and equipment into assets subject to an operating lease
and not subject to an operating lease.
Practical
expedients
and targeted
reliefs
Optional lessee exemption for short-term leases - i.e. leases for which the lease
term as determined under the revised proposals is 12 months or less, i.e. lessees
are permitted to make an accounting policy election, by class of underlying asset,
to apply a method like IAS 17’s operating lease accounting and not recognise
lease assets and lease liabilities for leases with a lease term of 12 months or
less.s
Lessees also are permitted to make an election, on a lease-by-lease basis, to
apply a method similar to make an election, on a lease-by-lease basis, to apply a
Page 5 of 14 | Financial Reporting Updates 2Q2016
method similar to current operating lease accounting to leases for which the
underlying asset is of low value (i.e. low-value assets with a value of US$5,000 or
less when new - even if material in aggregate).
Portfolio-level accounting permitted if it does not differ materially from the
requirements to individual leases.
Effects on
Key
Performance
Indicators
For leases that have entered into lease contracts classified as operating leases
under IAS 17 require the recognition of a lease liability for almost all lease
contract results in an increase of debt to equity ratios.
As the interest element of lease payment will now be presented as finance costs,
earnings before interest and tax (EBIT) are expected to be higher under the new
standard.
Earnings before interest, tax, depreciation and amortisation (EBITDA) are even
higher still because of the depreciation of the right-of-use asset.
Example of lessee accounting
Entity H (lessee) enters into a three-year lease
of equipment. Entity H agrees to make the
following annual payments at the end of each
year: $10,000 in year one, $12,000 in year two
and $14,000 in year three. For simplicity, there
are no other elements to the lease payments
(e.g. purchase options), payments to the lessor
before the lease commencement date, lease
incentives from the lessor or initial direct costs.
The initial measurement of the right-of-use
asset and lease liability $33,000 (present value
of lease payments using a discount rate of
approximately 4.235%). Entity H uses its
incremental borrowing rate because the rate
implicit in the lease cannot be readily
determined. Entity H determines the right-of-
use asset should be amortised on a straight-line
basis over the lease term.
Analysis At lease commencement, Entity H would
recognise the lease-related asset and liability:
Dr Right-of-use asset $ 33,000
Cr Lease liability $ 33,000
(To initially recognise the lease-related asset
and liability)
The following journal entries would be recorded
in the first year:
Dr Interest expense $ 1,398
Cr Lease liability $ 1,398
(To record interest expense and accrete the
lease liability using the interest method
(CU33,000 x 4.235%)
Dr Amortisation expense $ 11,000
Cr Right-of-use asset $ 11,000
(To record amortisation expense on the right-of-
use asset (CU33,000 ÷ 3 years)
Dr Lease liability $10,000
Cr Cash $ 10,000
(To record lease payment)
Summary of the lease contract’s accounting (assuming no changes due to reassessment) is as below:
Year 1 - $
Year 2 - $
Year 3 - $
Cash lease payments
10,000 12,000 14,000
Lease expense recognised
Interest expense
1,398 1,033 569
Amortisation expense
11,000 11,000 11,000
Total periodic expense
12,398 12,033 11,569
Year 1 - $
Year 2 - $
Year 3 - $
Balance sheet
Right of use 33,000 22,000 11,000
Lease liability (33,000) (24,398) (13,431)
Page 6 of 14 | Financial Reporting Updates 2Q2016
When is IFRS 16 effective?
The IASB has decided that the new leases
standard - IFRS 16 Leases - will be effective for
accounting periods beginning on or after 1
January 2019. Early adoption will be permitted,
provided the company has adopted IFRS 15.
Transition
As a practical expedient, an entity is not
required to reassess whether a contract is, or
contains, a lease at the date of initial
application.
A lessee shall either apply IFRS 16 with:
full retrospective effect in accordance with
IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors.
alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application.
Next steps
As the final standard is effective from 1 January 2019. This new guidance might require changes to systems, processes and controls. Management will need to assess implications as early as this year to ensure ample time to embrace the change and capture information needed for transition.
IASB & ASC issued Narrow – Scope Amendments to IAS & FRS 12 Income Taxes In the first quarter of 2016, the International
Accounting Standards Board (“the Board”)
issued amendments to IAS 12 Income Taxes.
The amendments, Recognition of Deferred Tax
Assets for Unrealised Losses (Amendments to
IAS 12), clarify how to account for deferred tax
assets related to debt instruments measured at
fair value.
On 14 March 2016, the Accounting Standards
Council (“ASC”) issued amendments to FRS 12
Income Taxes – Recognition of Deferred Tax
Assets for Unrealised Losses
What does this amendment clarify?
The amendments clarify that the following
aspects:
Unrealised losses on debt instruments
measured at fair value and measured at
cost for tax purposes give rise to a
deductible temporary difference regardless
of whether the debt instrument's holder
expects to recover the carrying amount of
the debt instrument by sale or by use.
Example illustrating the above:
Identification of a deductible temporary
difference at the end of Year 2:
Entity A purchases for CU1,000, at the
beginning of Year 1, a debt instrument with
a nominal value of CU1,000 payable on
maturity in 5 years with an interest rate of
2% payable at the end of each year. The
effective interest rate is 2%. The debt
instrument is measured at fair value.
At the end of Year 2, the fair value of the
debt instrument has decreased to CU918 as
a result of an increase in market interest
rates to 5%. It is probable that Entity A will
collect all the contractual cash flows if it
continues to hold the debt instrument.
Any gains (losses) on the debt instrument
are taxable (deductible) only when realised.
The gains (losses) arising on the sale or
maturity of the debt instrument are
calculated for tax purposes as the difference
between the amount collected and the
original cost of the debt instrument
Accordingly, the tax base of the debt
instrument is its original cost. The difference
between the carrying amount of the debt
instrument in Entity A’s statement of
financial position of CU918 and its tax base
of CU1, 000 gives rise to a deductible
temporary difference of CU82 at the end of
Year 2 irrespective of whether Entity A
expects to recover the carrying amount of
the debt instrument by sale or by use, i.e. by
holding it and collecting contractual cash
flows, or a combination of both.
Page 7 of 14 | Financial Reporting Updates 2Q2016
This is because deductible temporary
differences are differences between the
carrying amount of an asset or liability in the
statement of financial position and its tax
base that will result in amounts that are
deductible in determining taxable profit (tax
loss) of future periods, when the carrying
amount of the asset or liability is recovered
or settled. Entity A obtains a deduction
equivalent to the tax base of the asset of
CU1, 000 in determining taxable profit (tax
loss) either on sale or on maturity.
The carrying amount of an asset does not
limit the estimation of probable future
taxable profits. Estimates for future taxable
profits exclude tax deductions resulting from
the reversal of deductible temporary
differences. The estimate of probable future
taxable profit may include the recovery of
some of an entity’s assets for more than
their carrying amount if there is sufficient
evidence that it is probable that the entity
will achieve this.
For example, when an asset is measured at
fair value, the entity shall consider whether
there is sufficient evidence to conclude that
it is probable that the entity will recover the
asset for more than its carrying amount.
This may be the case, for example, when an
entity expects to hold a fixed-rate debt
instrument and collect the contractual cash
flows.
An entity assesses a deferred tax asset in
combination with other deferred tax assets.
If tax law imposes no such restrictions, an
entity assesses a deductible temporary
difference in combination with all of its other
deductible temporary differences. Where tax
law restricts the utilisation of tax losses, an
entity would assess a deferred tax asset in
combination with other deferred tax assets
of the same type.
When is this amendment effective?
Entities are required to apply the amendments
for annual periods beginning on or after 1
January 2017. Earlier application is permitted.
Transition
If an entity applies those amendments for an
earlier period, it shall disclose that fact. An
entity shall apply those amendments
retrospectively in accordance with IAS 8
Accounting Policies, Changes in Accounting
Estimates and Errors. However, on initial
application of the amendment, the change in
the opening equity of the earliest comparative
period may be recognised in opening retained
earnings (or in another component of equity, as
appropriate), without allocating the change
between opening retained earnings and other
components of equity. If an entity applies this
relief, it shall disclose that fact.
How will this impact on your financial
statements?
The impact on your financial statements would
depend on your tax environment, how you
currently account for deferred taxes and
whether that accounting would need to change.
You would need to review:
How you treat transactions that are not
recorded on a tax return?
E.g. the repayment of a principal amount
related to a debt instrument - and whether
any temporary differences would be
identified on those transactions based on
the applicable tax law
Whether you recognise deferred tax assets
if you are loss-making - i.e. even if the
bottom line of tax return is expected to show
a loss, you may still recognise deferred tax
assets if certain conditions are met and
How you assess deductible temporary
differences for recognition - i.e. on a
separate or combined basis?
If any of these considerations would lead to
a change in the assessment about the
recoverability of deferred tax assets - e.g if
you would be able to recognise additional
deferred tax asset.
If any of these considerations would lead to a change in the assessment about the recoverability of deferred tax assets.
Page 8 of 14 | Financial Reporting Updates 2Q2016
Updates on the Disclosure Initiative - IASB & ASC issued the Narrow Amendments to IAS & FRS 7 Statement of Cash Flow Preparers of financial statement have been voicing concerns about “disclosure overload” - e.g. presenting “at-a-minimum” disclosure, regardless of their materiality. The IASB has factored these concerns into its “disclosure initiative”, which aims to improve presentation and disclosure in financial reporting. Other short – term projects
As part of the initiative, the amendments to IAS 1 Presentation of Financial Statements - In
December 2014, the IASB issued amendments to IAS 1, will be joined with the following:
IAS 7 Statement of Cash Flows and
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors - the issue of distinguishing between a change in an accounting policy and a change in an accounting estimate, and any applicable thresholds and disclosures, and
general review of disclosure requirements in existing standards.
Amendments to IAS & FRS 7 Statement of Cash Flows In the first quarter of 2016, IASB issued the amendments to IAS 7 which require:
a reconciliation of the amounts in the opening and closing statements of financial position for each item classified as financing in the statement of cash flows
extended disclosures about the restrictions on cash and cash equivalent balances to provide the users with additional information about the entity’s liquidity.
On 14 March 2016, ASC issued the amendments to FRS 7 Statement of Cash Flows. Reconciliation of components of financing activities
The reconciliation shall include: (a) Opening balances in the statement of
financial position (b) Movements in the period, including:
(i) changes from financing cash flows (ii) changes arising from obtaining or
losing control of subsidiaries or other businesses
(iii) other non-cash changes (for example, the effect of changes in foreign exchange rates, and changes in fair values)
(c) Closing balances in the statement of financial position.
Illustrative disclosures of proposed amendments to IAS & FRS 7
The following is the illustrative disclosures of the reconciliation of items for which cash flows have been, or would be, classified as financing activities, excluding equity items:
Notes to the statement of cash flows (direct method and indirect method)
20X1 Cash Flow Non – cash changes 20X2
Acquisition New leases
Long-term borrowings 1,050 250 300 - 1,600
Lease liabilities - (100) - 1,100 1,000
Long-term debt 1,050 150 300 1,100 2,600
Notes reconciliation would be tagged using the following line items, axis and members
Items for which cash flows are classified as financing activities, excluding equity items
Line items for disclosure of reconciliation of items for which cash flows are classified as financing activities, excluding equity items
Long-term borrowings
Lease liabilities Items for which cash flows are classified as financing activities, excluding equity items
Items for which cash flows are classified as financing activities, excluding equity items at beginning of period
1,050 - 1,050
Page 9 of 14 | Financial Reporting Updates 2Q2016
Increase (decrease) through financing cash flows, items for which cash flows are classified as financing activities, excluding equity items
250 (100) 150
Increase (decrease) through obtaining or losing control of subsidiaries or other businesses, items for which cash flows are classified as financing activities, excluding equity items
300 - 300
Increase (decrease) through non-cash changes in lease liabilities, items for which cash flows are classified as financing activities, excluding equity items
- 1,100 1,100
Items for which cash flows are classified as financing activities, excluding equity items at end of period
1,600 1,000 2,600
Other disclosures
An entity to consider matters such as
restrictions that affect the decisions of an entity
to use cash and cash equivalent balances,
including tax liabilities that would arise on the
repatriation of foreign cash and cash equivalent
balances. If these, or similar, matters are
relevant to an understanding of the liquidity of
the entity, those matters shall be disclosed:
Illustrative disclosure of the description of
restrictions that affect decisions of entity to
use cash and cash equivalent balances
“The company sets aside an equal amount of
cash each month for liquidation (payment) of a
long-term debt. The debt is to be paid off in two
years. The amount of cash set aside is
restricted for future use only, and thus, it
represents restricted cash. When the time of
debt settlement comes, the company will use
the accumulated funds to pay off the debt.”
“Tax liabilities that would arise on repatriation of
S$300,000 foreign cash and cash equivalent
balances”
When are the amendments effective?
An entity shall apply those amendments for
annual periods beginning on or after 1 January
2017. Earlier application is permitted.
Transition
When the entity first applies those
amendments, it is not required to provide
comparative information for preceding periods.
How will this impact on your financial
statements?
The current amendments will add to the
cost/effort to prepare the enhanced disclosures
about changes in a company’s financing
liabilities but they will help investors to evaluate
changes in liabilities arising from financing
activities, including changes from cash flows
and non-cash changes (such as foreign
exchange gains or losses).
IASB & ASC postponed accounting changes for associates and joint ventures until completion of broader review The IASB & ASC have postponed the date
when entities must change some aspects of
how they account for transactions between
investors and associates or joint ventures.
The postponement applies to changes
introduced by the IASB & ASC in 2014 through
narrow-scope amendments to IFRS 10 / FRS
110 Consolidated Financial Statements and IAS
/ FRS 28 Investments in Associates and Joint
Ventures.
Those changes affect how an entity should
determine any gain or loss it recognises when
assets are sold or contributed between the
entity and an associate or joint venture in which
it invests. The changes do not affect other
aspects of how entities account for their
investments in associates and joint ventures.
This will remove the current requirement to
make these particular changes by 2016.
Instead, entities could wait until after the IASB
Page 10 of 14 | Financial Reporting Updates 2Q2016
has carried out a planned broader review that
may result in the simplification of accounting for
such transactions and of other aspects of
accounting for associates and joint ventures.
IASB proposed final amendments Clarification to IFRS 15 Revenue from Contracts with Customers The IASB proposed the final amendments
Clarification to IFRS 15 Revenue From
Contracts with Customers. Below are the
amendments that are intended to address
implementation questions that were discussed
by the Joint Transition Resource Group for
Revenue Recognition on licences of intellectual
property (IP), identifying performance
obligations, principal versus agent application
guidance and transition. The amendments are
also intended to reduce diversity in practice
when entities adopt the new revenue standard
and decrease the cost and complexity of
applying it.
Identifying performance obligations –
Distinct within the context of a contract
The IASB has amended some of the existing
illustrative examples that accompany IFRS 15,
to clarify how an entity would determine when a
promised good or service is ’separately
identifiable’ from other promises in the contract
(i.e., distinct within the context of the contract).
The IASB has decided to amend IFRS 15
Revenue from Contracts with Customers to
clarify the factors that indicate when two or
more promises to transfer goods or services are
not separately identifiable.
In evaluating whether a promise to transfer a
good or service is separately identifiable from
other promises in the contract, an entity
considers the level of integration, interrelation
or interdependence among promises to transfer
goods or services. In the Basis for Conclusions,
the IASB noted that an entity would not merely
evaluate whether one item, by its nature,
depends on the other (i.e., whether two items
have a functional relationship) but would assess
whether there is a transformative relationship
(i.e., one that transforms the items into
something that is different from the individual
items) between the two items in the process of
fulfilling the contract.
Principal versus agent considerations
Under IFRS 15, when another party is involved
in providing a good or service to a customer,
the entity must determine whether its
performance obligation is to provide the good or
service itself (i.e., the entity is a principal) or to
arrange for another party to provide the good or
service (i.e., the entity is an agent). An entity
makes this determination by evaluating the
nature of its promise to the customer. An entity
is a principal (and, therefore, records revenue
on a gross basis) if it controls the promised
good or service before transferring it to the
customer. An entity is an agent (and records as
revenue the net amount that it retains as a
commission) if its only role is to arrange for
another entity to provide the good or service.
IFRS 15 currently provides a non-exhaustive list
of indicators of when an entity is an agent.
The IASB has amended that:
Reframe the indicators to when an entity is
a principal, rather than when an entity is an
agent. The reframed indicators support the
control assessment and are intended to help
an entity assess whether it controls a good
or service before transfer to a customer in
situations in which the assessment of
control may be difficult. They do not override
the assessment of control and are not
intended to be considered in isolation or
viewed as a checklist.
Clarify that the unit of account for the
principal versus agent evaluation would be
at the level of a specified good or service,
which is a distinct good or service (or a
distinct bundle of goods or services).
Depending on the circumstances, a
specified good or service may be a right to
an underlying good or service to be
provided by another party.
Clarify that the determining factor in the
analysis would be whether the entity
controls the specified good or service before
transfer to the customer. If the entity obtains
control before transfer, it is the principal, not
an agent.
Clarify and explain the application of the
control principle in relation to services (i.e.,
what would be controlled if an entity is the
principal providing a service).
Page 11 of 14 | Financial Reporting Updates 2Q2016
Add two examples and amend some of the
existing illustrative examples that
accompany IFRS 15 to align them with the
amendments discussed above.
Transition – practical expedients for
contract modifications and completed
contracts
The IASB has proposed adding two practical
expedients to IFRS 15 to alleviate the transition
burden of accounting for completed contracts
and contracts that were modified prior to
adoption under both transition approaches (i.e.,
full and modified retrospective).
Without the practical expedients, the
assessment of contracts could be onerous for
entities that have completed contracts for which
revenue has not been fully recognised or multi-
year contracts that have been modified many
times prior to adoption of IFRS 15.
Completed contracts.
The practical expedient would allow an entity
that uses the full retrospective approach to only
apply the new standard to contracts that are not
completed as at the beginning of the earliest
period presented. A contract would be
considered completed if the entity has
transferred all of the goods and services
identified under existing revenue standards and
interpretations before the date of initial
application. The new revenue standard already
allows a similar accounting treatment for
entities that choose to use the modified
retrospective approach.
Contract modifications
The IASB has also proposed a practical
expedient that would allow an entity, under
either transition approach, to determine the
aggregate effect of all of the modifications that
occurred between contract inception and the
earliest date presented, rather than accounting
for the effects of each modification separately.
An entity would be permitted to use hindsight to
identify the satisfied and unsatisfied
performance obligations and to determine the
transaction price to allocate to those
performance obligations.
The beginning of the earliest period presented
may vary for IFRS preparers depending on the
number of years they present in their financial
statements (e.g., 1 January 2017 for an entity
that has a calendar year-end and includes only
one comparative period in its financial
statements as compared to 1 January 2016 for
an entity that has a calendar year-end and
presents two comparative periods). If an entity
applies this practical expedient, it would be
required to apply it to all contracts with similar
characteristics.
Transition and effective date
The IASB has proposed these amendments to
IFRS 15, which is expected to issue the
amendments in March or April 2016. It will be
effective for annual reporting periods beginning
on or after 1 January 2018, with early adoption
permitted.
Next steps
We encourage entities to consider the
amendments in light of their specific facts and
circumstances.
IAASB Finalises Changes for Auditor Reporting on Special Purpose Financial Statements In the first quarter of 2016, the International
Auditing and Assurance Standards Board
(“’IAASB”) issued ISA 800 (Revised), Special
Considerations - Audits of Financial Statements
Prepared in Accordance with Special Purpose
Frameworks, and ISA 805 (Revised), Special
Considerations - Audits of Single Financial
Statements and Specific Elements, Accounts,
or Items of a Financial Statement.
Reporting on special purpose financial
statements is linked to the IAASB’s new and
revised Auditor Reporting standards issued in
January 2015, in particular ISA 700 (Revised)
Forming an Opinion and Reporting on Financial
Statements, and new ISA 701, Communicating
Key Audit Matters in the Independent Auditor’s
Report. The amendments to ISA 800 and ISA
805 are limited to auditor reporting and are not
intended to substantively change the underlying
premise of these engagements in accordance
with the extant ISAs.
Page 12 of 14 | Financial Reporting Updates 2Q2016
What has changed?
Key Audit Matters
ISA 700 (Revised) requires the auditor to
communicate key audit matters in
accordance with ISA 701 for complete sets
of general purpose financial statements of
listed entities. For audits of special purpose
financial statements, ISA 701 only applies
when communication of key audit matters in
the auditors’ report on the special purpose
of financial statements is required by law or
regulation or the auditor otherwise decides
to communicate key audit matters. When
key audit matters are communicated in the
auditors’ report on the special purpose
financial statements, ISA 701 applies in its
entirety.
Other information
ISA 720 (Revised) deals with the auditors’
responsibilities relating to other information.
In the context of ISA, reports containing or
accompanying financial statements - the
purpose of which is provide owners (or
similar stakeholders) with information on
matters presented in the special purpose
financial statements - are considered to be
annual reports for the Purpose of ISA 720
(Revised).
Name of engagement partner
The requirement in ISA 700 (Revised) for
the auditor to name of the engagement
partner in the auditor’s report also applies to
the audit of special purpose financial
statements of listed entities.
Inclusive of a reference to the Auditors’
Report on the Complete Set of General
Purpose Financial Statements
The auditor may consider it appropriate to
refer, in an Other Matter paragraph in the
auditors’ report on the special purpose
financial statements to the auditors’ report
on the complete set of financial statements.
For example, the auditor may consider it to
appropriate to refer in the auditors’ report on
the special purpose financial statements to
a Material Uncertainty Related to Going
Concern section included in the auditors’
report on the complete set of general
purpose of financial statements.
Alerting Readers that the Financial
Statements are prepared in accordance
with a Special Purpose Framework
The special purpose financial statements
may be used for purposes of other for which
they intended. To avoid misunderstanding,
the auditor alerts users of the auditors’
report by including an Emphasis of Matter
paragraph that the financial statements are
prepared in accordance with a special
purpose framework, and therefore, may not
be suitable for another purpose. ISA 706
(Revised) requires this paragraph to be
included within a separate section of the
auditors’ report with an appropriate heading
that includes “Emphasis of Matter”.
When is the effective date?
ISA 800 (Revised) and ISA 805 (Revised) will
become effective at the same time as the
auditor reporting standards addressing general
purpose financial statements - for audits of
financial statements for periods ending on or
after December 15, 2016.
Practice Direction No. 6 of 2015 Effect of Companies (Amendment) Act 2014 on Sections relating to Financial Reporting in the Companies Act ACRA has issued the Practice Direction No. 6
of 2015 serves to inform companies of the
legislative amendments to sections 23(2),
29(1), 29(2), 29(4), 200(3), 201(12), 202,
373(12) and 373(13) of the Companies Act (the
“Act”), as well as the introduction of a
new section 29A, pursuant to the
implementation of the Companies (Amendment)
Act 2014. Companies should assess the
Practice Direction No. 6 of 2015 from here. It
may constitute a breach if companies apply the
changes before the revision.
Page 13 of 14 | Financial Reporting Updates 2Q2016
ACRA-SGX-SID Audit Committee Seminar 2016 A joint seminar was organised by ACRA,
Singapore Exchange (SGX) and the Singapore
Institute of Directors (SID) on first quarter of
2016. This annual seminar brings regulators
and industry experts together to share the latest
in audit and financial reporting regulatory
developments and is targeted at directors of
listed companies who serve on the audit
committees.
The presentation slides can be found here.
SGX Watch-list Listed Companies SGX has introduced a Watch-list for companies
listed on Mainboards. For companies that were
placed onto the Watch-list before 1 March
2016, they will have a 24-month cure period.
For companies that were placed onto the
Watch-list after 1 March 2016, they will have a
36-month cure period.
What should management of the SGX Watch-list listed entities do?
For those SGX Watch-list listed companies
were placed onto the Watch-list after 1 March
2016 for the financial criteria, management are
required to assess, at the time of preparing the
financial statements, the entity’s ability to
continue as a going concern and this
assessment must cover the prospects for at
least 12 months from the balance sheet date. In
accordance to FRS 10.14 Events After
Reporting Period:
"An entity shall not prepare its financial
statements on a going concern basis if
management determines after the reporting
period either that it intends to liquidate the entity
or to cease trading, or that it has no realistic
alternative but to do so."
Hence, an entity should not prepare its financial
statements on the going concern basis if
management determines after the reporting
period either that it:
(a) Intends to liquidate the entity or to cease
trading; or
(b) That it has no realistic alternative to doing
so (even if the liquidation or cessation will
occur more than 12 months after the
balance sheet date.
When the economic condition of an entity
deteriorates after the balance sheet date,
management should consider whether or not
the going concern basis of accounting remains
appropriate.
What is the Auditors’ responsibility?
The auditor’s responsibility is to obtain sufficient
appropriate audit evidence about the
appropriateness of management’s use of the
going concern assumption in the preparation
and presentation of the financial statements
and to conclude whether there is a material
uncertainty about the entity’s ability to continue
as a going concern.
Auditors’ evaluation of management’s
assessment
The auditor shall evaluate management’s
assessment of the entity’s ability to continue as
a going concern. In evaluating management’s
assessment of the entity’s ability to continue as
a going concern, the auditor shall cover the
same period as that used by management to
make its assessment as required by the
applicable financial reporting framework, or by
law or regulation if it specifies a longer period. If
management’s assessment of the entity’s ability
to continue as a going concern covers less than
twelve months from the date of the financial
statements as defined in SSA 560,4
Subsequent Events the auditor shall request
management to extend its assessment period
to at least twelve months from that date.
In evaluating management’s assessment, the
auditor shall consider whether management’s
assessment includes all relevant information of
which the auditor is aware as a result of the
audit.
Page 14 of 14 | Financial Reporting Updates 2Q2016
How we can assist
If you need assistance or advice on the above, we are here to assist you. Contact:
Irene Lau
Director, Professional Standards & Assurance Foo Kon Tan LLP 47 Hill Street #05-01 SCCCI Bldg Singapore 179365 D +65 6304 2341 F +65337 2197 E irene.lau@fookontan.com W www.fookontan.com © 2016 Foo Kon Tan LLP. All rights reserved. ‘Foo Kon Tan’ (FKT) refers to the brand name under which Foo Kon Tan and its associated companies provide assurance, tax and advisory services to their clients, or refer to one or more service providers, as the context requires. Services are delivered by the respective entities. Foo Kon Tan LLP is a principal member of HLB International, a world-wide network of independent accounting firms and business advisers, each of which is a separate and independent legal entity and as such has no liability for the acts and omissions of any other member. HLB International Limited is an English company limited by guarantee which co-ordinates the international activities of the HLB International network but does not provide, supervise or manage professional services to clients. Accordingly, HLB International Limited has no liability for the acts and omissions of any member of the HLB International network, and vice versa.