Ottavia has prepared this article to provide some broad, general guidance for entrepreneurs looking to incorporate in Singapore as to what their financial reporting requirements will be. The information provided here is not a substitute for professional advice and we encourage individuals looking to learn more to contact our firm directly.
Financial reporting is the method by which businesses can have their conduct scrutinised by regulatory and government bodies. Financial performance is reported to authorities and shareholders, allowing both to evaluate the company’s capabilities. In previous centuries, the format and precise requirements of financial reporting have developed out of each country’s unique legal, economic, political and cultural environments. This resulted in financial reporting systems that differed wildly between even neighbouring nations, and the unique sets of principles applied by each country resulted in financial reports that could not be accepted or even comprehended in another nation.
The pressures of today’s extremely globalised world have amplified calls for a truly universal accounting system. Most developed nations consider increasing the transparency, reliability and comparability of financial information to be a key pillar of a smoothly-functioning global capital market. The dramatic increase in the size, reach and number of foreign direct investments, cross-border purchases and sales of securities and multinational corporations, in addition to the number of foreign securities listed on stock exchanges, have made this need keener.
Fundamentally, accounting standards are a set of governing practices and principles that shape how financial entities report the nature and content of financial transactions. The key objective when establishing accounting standards is to provide clear requirements for the recognition, measurement, presentation and disclosure of transactions and events considered to be important in general purpose financial statements. Statements provided by an entity give information on their position and performance in their chosen industry or market and their cash flow. These statements can help shape the decision-making of a number of individuals and organisations, including but not limited to current and potential investors, lenders, suppliers and other trade creditors, employees, customers, governments and affiliated agencies, as well as the general public. These statements are used in a variety of ways for diverse purposes, but remain one of the fundamental ways financial entities communicate with stakeholders and the broader community.
The International Accounting Standards Board (IASB) is arguably the most important driving force behind the ongoing development of international accounting standards. The IASB is an independent body of the International Financial Reporting Standards Foundation with the broad objective to promote harmonisation of global accounting practices through creating and promoting the worldwide adoption of new, versatile accounting standards. The interoperability of the International Financial Reporting Standards (IFRS) issued by the IASB enable organisations to measure the financial health of different businesses across borders. While the reliability and quality of the framework these standards operate in is high, ensuring compliance can be complicated and lengthy.
Here known as Singapore Financial Reporting Standards (SFRS), Singapore’s accounting standards are based on IFRS. Compliance with SFRS is mandatory for all companies with a financial period starting on or after 1 January 2003.
One of the primary pillars of Singapore’s accounting standards is referred to as accrual-based accounting. All financial statements are prepared on the accrual basis, whereby the effects of transactions and other events are recognised as they occur, not as cash or equivalent payment is received or paid. Transactions are recorded in a business’ accounting records and reported in financial statements covering the period to which they relate. The advantage of accrual-based financial reporting is that it informs people using the information not only of past transactions where cash was paid or received, but also makes them aware of any obligations to pay cash in the future and of resources representing cash yet to be received.
Singapore’s overall set of accounting standards contains over 30 different individual standards, each named as FRS followed by an integer (e.g. FRS 1). Each standard covers a different aspect of financial reporting such as the presentation of financial statements, accounting for inventories, recognition of revenue, et cetera.
With the increasing reach and interconnectivity of global business and trade, accounting practices naturally evolve in number, breadth and complexity. This can cause problems for small business when it comes to ensuring compliance; many reporting that they never feel entirely confident in their regulatory position. For these business, adhering the full SFRS can be a costly burden on their limited resources, leading to difficulty in ensuring compliance at all.
Comparable to many other countries, the bulk of business entities operating in Singapore are considered to be SMEs. To address the specific needs of SMEs operating at the international level, the IASB issued an IFRS targeted at SMEs in 2009, a move later followed by Singapore’s Accounting Standards Council (ASC) in November 2010 with the issuance of the Singapore Financial Reporting Standard (SFRS) for Small Entities.
The SFRS for Small Entities (SFRS for SE) provides an alternative framework for eligible entities that lessens the burden of compliance compared to the full SFRS. Closely aligned to IFRS for Small Entities, the ASC issued this SFRS after extensive discussion with stakeholders and affected parties. SMEs with a reporting period beginning on or after 1 January 2011 may make use of this optional alternative financial reporting standard.
SFRS for SE was designed to relieve the financial pressure of compliance with the full SFRS while maintaining a high standard of comparability, quality and transparency, benefitting small business-owners alongside the investment community and other consumers of financial statements.
Singapore branches of foreign companies or Singapore incorporated companies are eligible to apply for the alternative framework provided that:
Entities that qualify are required to adhere to the standards until it falls out of the size threshold for two consecutive reporting periods. Upon falling out of the size threshold, the business must follow the full SFRS.
Subsidiaries of holding companies following the full SFRS may adopt the SFRS for SMEs provided they, as a subsidiary, meet the prescribed criteria.
While the SFRS for SE seems like an attractive option for companies of a certain size, business-owners will have to weigh their options and consider a few points of significance before embarking on the change. Prior to adopting the SFRS for SE, companies would do well to review their growth plans as well as the nature of their business. Potential issues affecting the uptake of SFRS for SE that require scrutiny include:
Marginal companies that are just under the size threshold would be advised not to take up SFRS for SE. Vacillating back and forth between the full SFRS and SFRS for SE standards can quickly accumulate additional costs and complexities for the business. Conversely, companies accustomed to meeting the requirements of the full SFRS or those held by parent companies or belonging to a group following the full SFRS, or business that may suffer negatively from treatment by some accounting elements in the simplified SFRS for SE standards must avoid adopting the simplified standard.
In short, SFRS for SE is ideal for small entities such as startup companies and companies struggling to maintain full SFRS compliance, as well as companies whose financial statements are not used by external parties.
The Accounting Standards Council of Singapore retains a complete set of Singapore Accounting Standards.