Financial statements are prepared on the accrual basis of accounting. Under this basis, the effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Financial statements prepared on the accrual basis inform users not only of past transactions involving the payment and receipt of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future. The overall set of accounting standards in Singapore contain about 39 different standards with each standard named as FRS X e.g. FRS 1. Each standard covers a specific topic such as presentation of financial statements, recognition of revenue, accounting for inventories, and so on.
Singapore Accounting Standards for Small Entities
In an ever changing and demanding world, the accounting standards are increasingly becoming more complex. This make it more and more difficult for small businesses to feel confident that they are in compliance. Adhering to the full SFRS was difficult for small and medium size entities (SME), as they found the requirements to be a burden on their precious little resources. As in many other countries, SMEs constitute the bulk of the companies operating in Singapore. As a measure to address the specific need of the international SMEs IASB issued an IFRS specifically for SMEs in 2009. Following this, Accounting Standards Council (ASC) of Singapore also announced the issuance of Singapore Financial Reporting Standard (SFRS) for Small Entities in November 2010.
The SFRS for Small Entities is an alternative framework to the full SFRS for eligible entities in Singapore. SFRS for SE is closely aligned to IFRS for Small Entities, and it was issued after elaborate consultation with the stakeholders. It provides an optional financial reporting standard for small entities for reporting periods beginning on or after 1 January 2011.
The objective of the SFRS for SE is to provide some relief to small entities from compliance with full SFRS while ensuring quality, transparency and comparability, which can benefit the investment community and other users of financial statements. A Singapore incorporated company or a Singapore branch of a foreign company is eligible to apply the SFRS for SE provided –
It is not publicly accountable
It publishes general-purpose financial statements for external users
It is a small entity. An entity qualifies as a small entity if it meets at least two of the three following criteria:
Total annual revenue of not more than S$10 million
Total gross assets of not more than S$10 million
Total number of employees is not more than 50
It must be noted that the SFRS for SE is effective from 1 January 2011 and in order to be eligible for the simplified SFRS, an entity must have met the criteria for each of the previous two consecutive years. An entity that qualifies under the criteria may adhere to the standards until it falls out of the size threshold for two consecutive reporting period and in such cases the company must follow the full SFRS. A subsidiary of a holding company that follows the full SFRS can still adopt the SFRS for SMEs, provided, it meets the prescribed criteria.
Choosing Between “SFRS” or “SFRS for SE”
Until recently all Singapore registered entities regardless of size were following the full SFRS. Now that there is a SFRS especially for the small entities, companies that qualify for the new standards have to consider few points of significance before adopting the SFRS for SE. Companies should also review their growth plans and the nature of their business before adopting these standards. Some of the issues that needs to be scrutinized are
Transition cost – training cost, accounting system and software
Future plans – Plans for IPO, probability of the business exceeding the size threshold
Group consideration – the impact on holding companies
Financing – Financial institutions and lenders seeking full SFRS statements
Marginal companies that are on the verge of breaching the size threshold will be better off adhering to the full SFRS rather than vacillating between the standards. Likewise, companies that are accustomed to the full SFRS, those belonging to a group or held by parent companies that follow the full SFRS and companies, which will be negatively affected by treatment of some accounting elements under the simplified version, must refrain from adopting the SFRS for SE. In a nutshell the simplified SFRS for small entities will be ideal for startup companies and companies that find problems with full SFRS and those companies whose statements are not used by external parties.