Business entities around the world report on their financial performance through financial reports.

Overview of Singapore Accounting Standards

Business entities around the world report on their financial performance through financial reports. Historically, the format of financial reports varies from country to country. The practice of financial reporting in each country follows a set of principles, rules or practices that evolved from the political, legal, economic and cultural environment of the country. Therefore, financial reports from different countries may be difficult to interpret and understand.

In today's globalized world, comparable, transparent and reliable financial information is the basis for the smooth operation of the global capital market. Therefore, the demand for comparable financial reporting standards has become critical due to the rapid growth of transnational corporations, foreign direct investment, cross-border securities purchases and sales, and the number of foreign securities listed on stock exchanges.

Accounting standards: what are they?

Accounting standards consist of a set of principles and management practices for dealing with various financial transactions. The main objective of the accounting standards is to specify how important transactions and events in general-purpose financial statements are to be recognised, measured, reported on, and displayed. These statements provide information about performance, position and cash flow, which assists various users in making financial decisions. Those who rely on financial statements include existing and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their institutions, and the public. They use financial statements to meet their different information needs.

The most important driving force in the development of international accounting standards is the International Accounting Standards Board (IASB), an independent accounting standard setter of the International Financial Reporting Standards Foundation. The broad objective of the IASB is to further harmonize accounting practices through the development of accounting standards and promote their worldwide acceptance. International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) are widely used as a standard to measure the financial health of enterprises. The reliability and quality of the framework is high, but it is lengthy and complex.

Singapore Accounting Standards (SFRS)

In Singapore, accounting standards are called Singapore Financial Reporting Standards (SFRS), which are based on international financial reporting standards. All Singapore-incorporated companies that begin their financial periods on or after 1 January 2003 are required to comply with IFRS.

Accrual accounting is one of the main principles of Singapore Accounting Standards. The financial statements are prepared on the accrual basis of accounting. On this basis, the impact of transactions and other events is recognized when they occur (and not in the form of cash or its equivalents), recorded in accounting records, and reported in the financial statements of the relevant period. The financial statements prepared on the accrual basis not only inform users of past transactions involving cash receipts and payments, but also inform users of future cash payment obligations and cash payment to be received in the future.

Singapore's set of accounting standards includes about 41 different standards, each following a template of FRS X, such as FRS 1. Each standard encompasses a specific subject, such as the presentation of financial statements, revenue recognition, inventory accounting, etc.

Singapore Financial Reporting Standards for Small Businesses

In a constantly changing and demanding world, accounting standards are becoming more and more complex. This makes it increasingly difficult for small businesses to be confident that they are compliant with the standards. It is difficult for small and medium-sized entities (SMEs) to comply with the full SFRS because they find that such a demand is a burden on their precious few resources. Like many other countries, SMEs account for the majority of companies operating in Singapore.

In order to meet the special requirements of international SMEs, IASB issued the International Financial Reporting Standards for SMEs in 2009. Shortly after, the Singapore Accounting Standards Board (ASC) also issued Singapore Financial Reporting Standards for Small Enterprises (SFRS for SE) in November 2010.

The Singapore Financial Reporting Standards for Small Enterprises (SFRS for SE) is an alternative framework to the full version of Singapore's financial reporting standards. The financial reporting standards for small enterprises closely follow the IFRS for small enterprises and were issued after detailed consultations with stakeholders. It provides an optional financial reporting standard for small businesses for reporting periods on or after January 1, 2011.

The goal of SFRS for SE is to provide some assistance to small Singapore companies to enable them to comply with the complete Singapore Accounting Standards while ensuring quality, transparency and comparability, which can benefit the investment community and other users of financial statements.

Requirements for applying for the adoption of SFRS for SE

Companies incorporated in Singapore or Singapore branches of foreign companies are eligible to apply for the adoption of SFRS for SE. These companies or branches must meet the following conditions:

1.The company is not publicly accountable

2.The company publishes general-purpose financial statements for external users

3. The company must meet at least 2 of the following 3 standards to be considered a small enterprise:

• The total annual revenue of the company does not exceed SGD 10 million

• The total assets of the company do not exceed SGD 10 million

• The total number of company employees does not exceed 50

It must be highlighted that the Singapore Financial Reporting Standards (SFRS) for small businesses came into effect on January 1, 2011. In order to qualify for simplified application, small businesses must meet the above requirements in each of the past two consecutive years. An entity meeting these requirements may comply with this standard until its scale exceeds the limit for two consecutive reporting periods, in which case the company must comply with the full Singapore Financial Reporting Standards (SFRS).

For subsidiaries of holding companies that comply with the full Singapore Financial Reporting Standards, they can also apply to adopt the SFRS for SE as long as they meet the above requirements.

Differences between SFRS and SFRS for SE

Since there is now the SFRS for SE for small business entities, companies meeting this new standard must consider several key points before deciding whether to adopt SFRS or SFRS for SE. Before adopting these standards, companies should also review their growth plans and the nature of their business.

Some questions that need careful consideration are:

1.Conversion costs - training costs, accounting systems and software

2. Future plans - IPO plan, the possibility of the enterprise exceeding the scale threshold

3. Impact on holding companies - for group companies’ consideration

4. Financing - Financial institutions and lenders often need to view financial reports from Singapore that follow the full SFRS specifications

It is suggested that companies about to edge past the scale threshold comply with the complete SFRS rather than vacillate between standards. Similarly, companies accustomed to using full SFRS, companies belonging to groups, parent companies that follow full SFRS, and companies that will be adversely affected by the changes in certain accounting elements under the simplified version must avoid adopting SFRS for SE.

In short, the SFRS for SE is an ideal choice for Singapore startups, companies that encounter problems in the complete SFRS, and companies whose reports are not used by external parties.