Financial statements – balance sheets, income statements, etc – are critical to sound business decisions as they provide information about the financial position, performance, and cash flow situation of companies. They are invaluable not only to business owners and employees but also to a long list of external stakeholders such as customers, suppliers, investors, and lenders (both existing and potential) as well as auditors, regulators, and even the general public. These external users rely significantly on financial statements to shape their business choices, from making an investment in the company of their choice or negotiating a deal for the supply of raw materials. To make sure that they make informed and well thought out decisions, they require a degree of uniformity, transparency, and reliability in the information they are provided in the financial statements. This uniformity, reliability, and transparency is guaranteed when companies prepare their reports in adherence to strict financial reporting standards (FRS).
Financial reporting standards – also called accounting standards – are principles and practices used in the preparation, analysis, and audit of financial statements. They dictate the type and amount of information to be provided in the financial statements and the method by which this information is to be measured, presented, and disclosed. Importantly, financial reporting standards ensure that the financial statements of different companies – irrespective of their size, industry, and location – can be compared and analysed universally and with ease for the growth of the global market.
Before the days of globalisation, each country or region had their own accounting standards that closely reflected their economy, politics, culture, and unique business practices. But with globalisation and the growth of international trade, there came a need for uniform, comparable, and globally acceptable accounting standards.
The International Accounting Standards Committee was set up in 1973 to address this need. It came out with the International Accounting Standards, the first set of globally comparable accounting principles. In 2001, the International Accounting Standards Committee was replaced by the International Accounting Standards Board, which published the International Financial Reporting Standards (IFRS) that are currently in use. The IFRS is the most universally accepted set of accounting standards – even though they are not used by major markets such as the United States and China, which continue to follow their own national practices. Singapore accounting standards are closely modelled on the IFRS and called the Singapore Financial Reporting Standards (SFRS), which we will discuss in detail in this article.
The primary objective of universally accepted financial reporting standards is to help businesses make educated decisions through correct analysis and interpretation of financial statements. These are the ways in which these accounting standards make this possible:
As previously mentioned, the Singapore Financial Reporting Standards (SFRS) are largely based on the International Financial Reporting Standards. A few differences remain – such as the effective dates for some provisions – and the idea is to fully converge with the international standards in the long run.
The SFRS comprises 41 standards, which are formulated by the Accounting Standards Council. Each standard deals with a separate topic. The topics cover wide accounting areas. Some deal with specific types of records or transactions, such as inventories, leases, employee benefits, and income tax. Others deal with accounting practices, such as the presentation of financial statements, or the preparation of separate and consolidated financial statements. Some topics are industry-specific, such as agriculture.
As of 2003, all Singapore-incorporated companies as well as the Singapore branches of foreign firms must comply with the SFRS while preparing their financial statements. Financial statements include balance sheets, income statements, cash flow statements, notes to financial statements, statements showing changes in equity, and lists of accounting policies.
In line with its intention to fully converge the SFRS with the International Financial Reporting Standards (IFRS), Singapore introduced the Singapore Financial Reporting Standards (International) or SFRS(I) in 2017. The SFRS(I) is mandatory for all Singapore-incorporated companies that are listed on the Singapore Exchange (SGX). For annual accounting periods starting on or after January 1, 2018, eligible companies must prepare SFRS(I)-compliant financial statements. Non-listed Singapore-incorporated companies may also voluntary use the new standards.
The FRS in Singapore works on the following principles:
Financial reports must follow the accrual system of accounting, as prescribed in the accounting standards in Singapore. This means transactions (such as income or expenses) are recorded as and when they occur, not as and when they are paid. Accrual accounting is universally preferred to its alternative, cash accounting, where transactions are recorded based on when cash is received or paid. Experts are in agreement that accrual accounting makes financial statements easier to read as it presents a more accurate picture of a company’s cash flow and operational efficiency.
The standardisation of accounting language and practices that the SFRS brings ensures that the information contained in multiple financial statements – whether of the same organisation or of different companies – can be easily compared. Those reading the statements are thus better able to understand a specific data set better and tell between similarities and differences in that data. In this way, comparability improves decision-making in business.
Financial statements must hold information that is both predictive and confirmative. This means that by using the information or data, the reader should be able to predict a result in the future or confirm a past prediction. This is important given that more and more companies today are making evidence-based decisions backed by data rather than relying on old-fashioned instinct and intuition.
The SFRS requires companies to prepare their financial statements in a way that allows readers to verify the information they hold. This means making disclosures about the methods used to compile the information and the assumptions made, if any, to interpret them.
The information must be accurate, complete, error-free, and neutral. Measures must be taken to minimise human error, which is common while compiling and recording large amounts of data. But beyond that, it also means that the accounting assumptions and estimates used to arrive at various conclusions in the financial statements are reasonable.
Finally, there must be a standard and consistent way of classifying and recording information. This will make reading, understanding, and comparing financial statements easy.
Small businesses make up a large chunk of Singapore’s economy. In the years after the Singapore FRS was introduced, many of these small companies struggled to comply with the comprehensive requirements of the SFRS and found it a strain on their limited resources. To ease their burden, the Accounting Standards Council in 2010 adopted the International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs), which had been published the previous year. The Singaporean version is called the Singapore Financial Reporting Standards for Small Entities (SFRS for SE). It came into effect from January 1, 2011.
The SFRS for SE is tailored to match the needs of small and private businesses. Under it, companies do not have to make as many disclosures as required under the full SFRS. Furthermore, rules on measurement and recognition have been simplified, ensuring that those reading financial statements that are compliant with the SFRS for SE only receive information that is relevant to them.
To be eligible to use the Singapore accounting standards for small entities, a business must fulfil the following conditions:
To qualify as a small entity, a company must fulfil two of three conditions:
Furthermore, an entity is considered publicly accountable if it meets any one of the following criteria:
Compliance with the SFRS for SE is not mandatory. Eligible companies may opt for it or continue to use the full SFRS. Also, once they make the switch, they must adopt the SFRS for SE in its entirety. They cannot use a mix of both the SFRS and its alternative for small entities.
While the SFRS for SE is definitely easier to comply with, companies are advised to consider a few factors before making the switch from SFRS: