The world is always divided into two parts. Be it in investment (Bitcoin or a new IPO), a movie (Blade Runner 2049) or a car (the i8), there will always be people who will wax lyrical about the stratospheric heights of these and at the same time, people who express a healthy distaste or mild aversion towards them. In the more mundane sphere of accounting, International Financial Reporting Standards (IFRS) convergence in Singapore is no less such an animal leaving some interests piqued, others nonplussed, and yes, yet others disinterested. But the world is never interested in disinterested people.
Before you can decide which of the first two relevant categories you belong to, there invariably must be some foremost questions that must be answered. When is IFRS Convergence applicable? What are the differences between Singapore Financial Reporting Standards (“SFRS”) and IFRS? What is the difference between mandatory exceptions and optional exemptions?
On May 2014, the Singapore Accounting Standards Council (“ASC”) announced that companies incorporated in Singapore and listed on the Mainboard and Catalist of SGXST are required to implement and apply a new financial reporting framework identical to IFRS for annual periods beginning on or after 1 January 2018. Silence ensued.
On November 2016, the ASC issued a reminder to Singapore companies on the full IFRS convergence in 2018. Silence persisted.
On October 2017, in light of listed companies’ lack of readiness and awareness for IFRS convergence, the Institute of Singapore Chartered Accountants, in collaboration with the Singapore Institute of Directors issued a publication on IFRS convergence roadmap to provide guidance on how to navigate the maze of changes that IFRS convergence entails. The silence broke.
Applying the new financial reporting framework identical to IFRS (hereon referred to “SG-IFRS”) requires Singapore companies to apply all the specific transition requirements in IFRS 1 First-time Adoption of IFRS. The basic principle in IFRS 1 is that the latest version of each and every IFRS must be applied retrospectively, unless a specific exemption or relief
is provided. The silence was buried.
IFRS convergence is not an upcoming concern but rather, a clear and present concern for business entities. As shown in Diagram 1, for an entity with a 31 December year-end, the date of transition is 1 January 2017.
In the first set of IFRS-compliant financial statements, an entity must prepare:
• Reconciliations of equity at 1) the date of transition to IFRS (i.e. 1 January 2017) and 2) the end of the latest period presented in the entity’s most recent annual financial statements under SFRS (i.e. 31 December 2017);
• Reconciliations of total comprehensive income under SFRS to IFRS for the latest period in the entity’s most recent annual financial statements (i.e. 31 December 2017); and
• An explanation of material adjustments to the statement of cash flows
In order to report 31 December 2018 financial statements under SG-IFRS, IFRS 1 requires presentation of comparative information for 2017 and an opening balance sheet as at 1 January 2017 that comply with SG-IFRS.
Diagram 1 illustrates the key dates:
The roadmap is long and winding, the foliage thick and impenetrable, the guidance opaque and inscrutable. The following, sieved and simplified, are three areas of must-knows.
Whilst SFRS have been substantially aligned with IFRS since the introduction of IFRS in 2009, there continue to be a number of differences, notably in different effective dates of certain standards, (e.g. IFRS 2) as well as some localisation amendments. Table 1 shows two commonly known examples of the differences that could affect transition.
The following are exceptions to the blanket rule of the retrospective application under IFRS adoption, i.e. these must be applied prospectively:
Accounting estimates (including impairment of financial assets) –
These shall not be adjusted, unless there is objective evidence that the estimates were in error. This nips in the bud the “hindsight” issue, as it distorts judgments made by management about past conditions after the
outcome is already known
Derecognition of financial assets and financial liabilities –
Entities are to apply derecognition rules prospectively, unless the information needed to apply FRS 39 was obtained at the time of initially accounting for those transactions Hedge accounting – Likewise, entities cannot re-designate a hedging relationship and apply hedge accounting at the date of transition unless the hedging relationship has been fully
designated and documented as effective in accordance with FRS 39 on or before the date of transition
Non-controlling interests –
Measurement requirements for non-controlling interests as introduced by FRS 103 should be applied prospectively from the date of transition. (E.g. cap of NCI to nil, rather than a deficit balance)
These are practical expedients, granted to relief an entity the overwhelmingly daunting process of retrospective application of all the IFRSs. Entirely optional, an entity can pick and choose the exemptions it wishes to apply, and the standard is clear that there is no hierarchy or recommendations to apply these exemptions or not. It is important to note that application of exemptions by analogy with other items is specifically prohibited.
It is almost axiomatic to entities that adopting all these optional exemptions will be worthwhile in all circumstances, but entities are urged to read and understand these before taking the leap.
The list of optional exemptions is as follows:
• Business combinations
• Share-based payment
• Insurance contracts
• Deemed cost
• Cumulative translation differences
• Investments in subsidiaries, joint ventures and associates
• Assets and liabilities of subsidiaries, associates and joint ventures
• Compound financial instruments
• Designation of previously recognised financial instruments
• Fair value measurement of financial assets or financial liabilities at initial recognition
• Decommissioning liabilities included in the cost of property, plant and equipment
• Service concession arrangements
• Borrowing costs
• Transfers of assets from customers
• Extinguishing financial liabilities with equity instruments
• Severe hyperinflation
• Joint arrangements
• Stripping costs in the production phase of a surface mine
We bring to your attention what we believe may be relevant and useful for most entities:
Deemed cost –
For certain categories (namely, property, plant & equipment, investment properties and intangible assets), the concept of using an amount used as a surrogate for cost or depreciated cost may be applied. An entity can choose a previous revaluation, an event-driven fair value, a fair value obtained at date of transition or a relevant-IFRS amount applied retrospectively as the “new” cost, to depreciate in accordance with company policy in future, and without having to perform regular revaluation moving forward.
Cumulative translation differences –
These differences, carried as other comprehensive income (equity) for all foreign subsidiaries, can be zerorised and transferred directly to retained earnings at the date of transition without having to be recycled through profit and loss in future, at the point of disposal of these subsidiaries.
It is imperative to note that IFRS convergence also applies to the first interim financial statements prepared under IAS 34: Interim Financial Reporting for a period covered by those first set of financial statements that are prepared under IFRSs. For SGX-listed companies, this simply means IFRS convergence steps are ominously close, if not at, at their doorsteps.
Companies need to be ready to articulate the impact by the first-quarter announcement or half-year announcement, whichever is applicable, and prepare IFRS-compliant comparatives and disclosures about the transition in their 2018 financial announcements.
Tables 2 and 3 present the relevant reconciliations required for the first-quarter, half-year, third-quarter financial announcements and the annual financial statements for a listed entity with a 31 December year-end:
Next and urgent steps:
• Understand SG-IFRS 1, including the basic rules, mandatory exceptions and optional exemptions relevant to your company
• Allocate appropriate resources internally
• Make quick decisions about optional exemptions and gather information required for transition adjustments
• Identify date of transition to IFRS and prepare an opening IFRS statement of financial position at this date
• Consider potential tax and dividend payment implications of transition adjustments
• Seek the input and approval of the Board of Directors and Audit Committee
• Engage your auditor for a professional evaluation