ACRA, Van der Horst Energy and FRS102

a quiet pavillion

What happened?
The Accounting and Corporate Regulatory Authority (ACRA) has requested Catalist-listed Van der Horst Energy (VDHE) to restate its financial statements for fiscal 2008 on grounds that options granted to two executive directors should have been treated as an equity-settled share-based payment under a financial reporting standard (FRS).

ACRA confirmed that this is the first time it has directed a listed company to restate its financial statements under such circumstances.

What is the rule?
FRS102 ruled that every company that granted stock options have to account for them as a business expense in its income statement, instead of merely just having to mention them as a note in the annual report.

What is the implication?
After taking the fair value of the share options of $5.7 million as business expense, VDHE would now report a pre-tax loss of $2.83 million, instead of the pre-tax profit of $2.87 million that were earlier stated.

ACRA was not prepared to sit back and accept the auditor's qualification of the accounts on the basis of non-compliance with FRS102. ACRA has now ruled for restatement of the financial statements.

Audit opinion?

Based on Singapore’s accounting standards, auditors would put an 'emphasis of matter’ if an issue warrants deeper discussion but does not affect the auditors’ opinion.

Matters that affect their opinion would be highlighted by way of a qualified opinion, a disclaimer of opinion or an adverse opinion - in order of severity.

Is there a better way?

Perhaps we could follow the World Health Organisation's numerical approach on the level of seriousness on H1N1.

Alternatively, we could go on the colour-coding way.

Of course, I am not wholly serious about the above suggestions.

But the point here, let us not try to make our profession and our work complicated by using "chim" words/phrases that the ulitmate users of the auditor's report may not understand.

Can we do better?

FRS 14 - Segment Reporting v280509

FRS 14 prescribes the reporting of financial information by segment – information.

FRS 14 applies to enterprises whose equity or debt securities are publicly traded and enterprises in the process of issuing equity or debt securities in public securities market. Enterprises not in the above categories are also encouraged to disclose financial information by segment voluntarily.

A business segment is a component of an enterprise that is engaged in providing an individual or a group of product or service and is subject to risks and returns that are different from other business segments.

A geographical segment is a component of an enterprise that is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those in other economic environments.

The source and nature of an enterprise’s risks and returns determine whether the primary segment reporting will be business segments or geographical segments. Enterprises risks and returns mainly affected by differences in products and services should have its primary segment reporting as business segments and secondary segment reporting as geographical segments.

Likewise, enterprises risks and returns mainly affected by its operations in different countries should have its primary segment reporting as geographical segments and secondary segments as business segments. This is identified by the enterprise’s internal organizational and management structure and its system of internal financial reporting to senior management.

A business or geographical segment is a reportable segment if a majority of its revenue is earned from sales to external customers; and

a) these revenue from sales to external customers is 10% or more of the total revenue of all segments; or

b) its profit or loss results is 10% or more of the combined result of all segments in profit or loss, whichever is the greater in absolute amount; or

c) its assets are 10% or more of the total assets of all segments.

If total external revenue due to reportable segments is less than 75% of the total consolidated revenue, additional segments are identified as reportable segments until at least 75% of total revenue is included in reportable segments.

The disclosure for each primary reportable segment is as follows:-

a) separate revenue disclosure of sales to external customers, inter-segment revenue;

b) separate results from both the continuing and discontinuing operations;

c) carrying amount of segment assets;

d) segment liabilities; and

e) cost incurred in the period to acquire property, plant and equipment and intangibles.

The disclosure for each secondary reportable segment is as follows:-
a) separate revenue disclosure of sales to external customers and inter-segment;
b) carrying amount of segment assets; and
c) cost incurred in the period to acquire property, plant and equipment and intangibles.

Source - ICPAS CPA Singapore Wire 28 May 2009

ACCA Graduation - May 23, 2009

Linda, great to see you..

top guns for the various subjects

Welcome to the World!

Another 195 affiliates have completed the rigorous ACCA curriculum. Congratulations.

Women in Accounting & Finance Survey 2009

On Thursday last, I was invited to attend, in my humble capacity as a Local ACCA Executive Council member, the presentation of the survey results of women in accounting and finance roles. The survey was commissioned jointly by ACCA and Robert Half Singapore.

Based on the responses of 721 women, the following are some key findings:-

1. Are women ambitious? Yes, particularly for the younger women but the more matured ones are more likely to stay with their current employers.

2. 64% of respondents said they did not attend any leadership course at all in 2008.

3. What women see themselves doing better than men? The respondents highlighted 3 areas - attention to details, dealing with people issues, communication skills.

4. Women's top three desired work benefits:- flexi hours, better maternity benefits and thirdly, more annual leaves. 53% said they are willing to take pay cut for more flexi hours.

5. What are the priority areas for women?
Work/life balance came out as top priority for 59%. Surprisingly for me, the younger women are the ones that value this more than the matured counterpart.

FRS 12 - Income Taxes

casino in process

FRS 12 prescribes the accounting treatment for income taxes.

Current tax refers to the amount of income taxes payable/recoverable in respect of taxable profit/tax loss for the period. Income taxes payable for current and prior periods are recognized as a liability. Income tax recoverable or overpaid is recognized as an asset.

Deferred tax is the differences between the carrying value of the assets and liabilities in the balance sheet and the tax base of assets and liabilities. A deferred tax asset or liability arises if recovery/settlement of asset/liabilities affect the amount of future tax payments.

FRS 12 states that entities should recognize a deferred tax liability in full except in the following situations:-
a) where the initial recognition of an asset/liability in a transaction
i) is not a business combination; and
ii) at the time of the transaction, affects neither accounting profit nor taxable profit

b) deferred tax liability arising from the initial recognition of goodwill, or from goodwill for which amortization is not deductible for tax purposes.

c) deferred taxes on temporary differences arising on investments in subsidiaries, branches, associates and joint ventures if the entity is able to control the timing of the reversal of the difference, and it is probable that the temporary difference will not reverse in the future.

FRS 12 also states that a deferred tax asset is recognized to the extent that it is probable that a tax benefit will be realized in the future. This applies to the unused tax losses and unused tax credits.

Deferred tax is measured at tax rates expected to apply when the deferred tax asset/liability is realized/settled. The tax rates used must be enacted or substantially enacted by the balance sheet date. A deferred tax asset or liability is not discounted.

The tax consequences of transactions and events are recognized in the same financial statement as the transaction or event – that is, current and deferred taxes are:-

a) recognized in equity, if the items to which they relate are credited or charged directly to equity;

b) recognized as identifiable assets or liabilities at the acquisition date, if they arise as part of a business combination in accordance with FRS 103;

c) otherwise, recognized as tax income or expense.

Source - CPA Singapore Wire / ICPAS May 21, 2009

How to account for Jobs Credit?

prawns in soup

Surprisingly I received a circular from ICPAS on how to account for the grants received from Jobs Credit.

I thought we don't need guidance on something so simple. But then again, perhaps we should synchronise.

Anyway the specific directions that we should follow are:-

1. For grant received on 31 March 2009, we should recognise it for value 31 March 2009. For grant received on 30 Jun 2009, we should recognise it for value 30 Jun 2009 etc etc.
   
2. An entity should start accounting as per circular No. A7/2009 prospectively from 20 May 2009.
3. If you have chosen to apply this circular early, you are permitted to do so.
4. But if you have not applied as per Circular for the first cheque in March, you have to disclose that.

Questions

• What if we receive the cheque only after 31 March 2009? Should we then accrue for it?
• Which account should we credit the amount to?

What have you been doing for your company? Can share with me?

Summary of FRS 10: Events After the Balance Sheet Date

charlton hotel is changing

The objective of FRS 10 is to prescribe the accounting and disclosure requirements of events after the balance sheet date. Events after the balance sheet date refer to those events that occur between the balance sheet date and the date when the financial statements are authorised for issue.

Adjusting events provide evidence of conditions that existed at the balance sheet date. Examples of adjusting events include:-

• the settlement after the balance sheet date of a court case that confirms that the entity had a present obligation at balance sheet date;
• the awareness of information after the balance sheet date pertaining to the impairment of an asset impaired at the balance sheet date (eg. knowledge of customer’s bankruptcy after balance sheet date warrants an adjustments to be made to the receivable from customer at balance sheet date and sale of inventories below cost after the balance sheet date)
  

Non-adjusting events reflect conditions that arise only after the balance sheet date.

Examples of non-adjusting events include:-

• a decline in market value of investments subsequent to balance sheet date and before date financial statements are authorized for issue;
• dividends declared after the balance sheet date.
  

Refer to FRS 10 for more examples of non-adjusting events.

For non-adjusting events, the entity discloses the nature of the event and an estimate of its financial effect.

Financial statements should not be prepared on a going concern basis if management determines after the balance sheet date that it intends to liquidate the entity or to cease trading.

Financial statements should disclose the date when the financial statements were authorized for issue and who gave that authorisation.

Source - eICPAS newsletter May 2009

FRS 8 - Accounting Policies, Changes in Accounting Estimates and Errors

The objective of FRS 8 is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and correction of prior period errors.

An entity should change its accounting policies only if the change is required by the Standards or the change results in a more relevant and reliable information about the entity’s financial position, financial performance or cash flows. Any changes in accounting policies shall be accounted for in accordance with the specific transitional provisions of the Standards. If there are no specific transitional provisions, the change in accounting policies shall be done retrospectively as though the new accounting policy had always been applied.

Changes in accounting estimates should be recognized prospectively in the profit and loss account either in the period of the change only or the period of change and future periods, if the changes affect both. Any corresponding changes in assets, liabilities or equity are recognized by making adjustments to the carrying amount of the assets, liabilities or equity in the period of change.

Material errors in financial statements that are discovered in subsequent periods must be adjusted retrospectively in the first set of financial statements authorized for issue after their discovery. The comparative amounts for prior period are either restated or if the error occurred before the earliest prior period presented, the opening balances of the assets, liabilities and equity for the earliest prior period are restated.

FRS 8 specifies that in instances where it is impracticable to do a retrospective adjustment for change in accounting policy, the entity should restate the comparative information prospectively from the earliest date practicable.

FRS also specifies the disclosures required of changes in accounting policies, accounting estimates and errors.

Source - eICPAS Apr 20, 2009

Unequal rights of shareholders

Shareholders only have rights but no liabilities.

What rights do shareholders have?

• right to vote
• right to attend AGM and EGM
• right to receive the Annual Accounts
• right to receive dividends when declared

Issue - Do some shareholders have more rights than stated above? Do the above always hold true for every single shareholder?

The simple answer - Some shareholders do have more rights, whether rightfully or otherwise, than the others.

The following are real examples where my simple answer holds true:-

• The issue of consolidating the accounts of 2 companies which are publicly listed. The holding company requires a lot more than statutory info to prepare its consolidated accounts and satisfy its auditors. So we have possible situation of a majority shareholder being given access to non-publicly available info.
  

• How about the situation of a major shareholder getting sensitive info through its nominee directors in the subsidiary company? A nominee director is appointed by a major shareholder. Who do that director owe a duty and responsibility to? The major shareholder or to the company?
  

How to resolve this?

FRS 7 - Cash Flow Statements Apr 2009

Summary of FRS 7: Cash Flow Statements

FRS 7 requires all enterprises to present cash flow statement. The standard requires the provision of information about historical changes in cash and cash equivalents of a company by means of a cash flow statement that classifies cash flows during the period by operating, investing and financing activities.

Operating activities are the principal revenue-producing activities of the enterprise. Cash flows from operating activities are disclosed either using the:-

• direct method (disclosure of major categories of gross cash receipts and payments; or
• indirect method (profit or loss for the period is adjusted for non cash items (such as depreciation, foreign exchange losses etc.) and income or expense related items related to investing and financing activities to determine the operating cash flows.

Investing activities are those expenditures incurred with an intention to generate future income and cash flows.

Financing activities are those expenditures incurred that result in changes in the size and composition of the contributed equity and borrowings of the entity.

Source - ICPAS ePublication April 2009

MOM's position on Company Stamp Part II

lingzhi

To be fair, I am presenting MOM's response received today on Company Stamp for your consideration.

MOM said,
"Our requirement to have company stamp endorsing our documents reduces the likelihood of unauthorised transactions or applications by a third party. Such cases do happen and companies become invariably implicated or inconvenienced due to fraudulent transactions.

While there is no legal requirement for companies to have a company stamp, such a requirement will safeguard the interests of our customers such as yourself. We will also accept alternative means of authorisation such as an official company letter in lieu of a company stamp endorsement." Unquote.

Questions for your consideration.

1. What is a Company Stamp?
2. Can anyone make a Company Stamp?
3. How much to make a Company Stamp?
4. How does a Company Stamp protect your company if it is not legally binding to use a Company Stamp in official documents and contracts?
5. Is it different from Company Seal?

1. What is a Company Letterhead?
2. What are the statutory information that must be found on a letterhead?
3. How to make Company Letterheads? Must I ask the printer to print or can I print them using my printer?
4. When is a letterhead a letterhead and when is it not a letterhead?

If the primary objective is to prevent false or fraudulent applications and transactions, you verify the person that is making the application / transaction by checking the identity card/passport.

I don't think a Company Stamp or Company Letterhead can prevent a fraudulent application/transaction.

Company Stamp? Do we need it?

Recently my company went into a tangle with Ministry of Manpower (MOM) over the requirement to place the company stamp on a work permit form.

I told the MOM officer that my company does not use any company stamp. The officer then requested my company to issue a letter on my company letterhead saying my company does not use company stamp.

I seek an explanation for the need of such a piece of paper with the company letterhead generated by MS Word. What is the legal importance of that piece of paper?

I seek feedback from MOM and EnterpriseOne on whether there is a legal requirement for companies to use company stamp. MOM's email response that I seek is still pending after more 3 business days as per their explicitly stated service standard. EnterpriseOne responded the very same day. Fantastic service! EnterpriseOne simply state that company stamp is not a legal requirement.

If that is the case, why are some banks and government bodies insist on use of company stamp?

Don't ask for things if they are not necessary in the first place. It is time to stop creating unnecessary work.

Anyone with legal knowledge, please correct me if I have mistaken. Cheers.

Proposed changes to Revenue Recognition

my last Sat's lunch - ICPAS AGM

Which FRSs could be affected? FRS 18 Revenue and FRS 11 Construction Contracts are proposed to be merged into a single revenue recognition model in a discussion paper published in Dec 2008.

What is the proposed underlying principle?
The underlying principle in the proposed model is that revenue is recognised when a company satisfies a performance obligation in a contract; in other words, when the company fulfils one of its promises in the contract.

Who will be affected?
The abolition of FRS 11 would affect industries involved in ship building and property development. Particularly those industries delivering products and services with long gestation period.

What would be the difference in treatment?
Currently, revenue is recognised on a percentage of completion basis.
In proposed model, revenue can only be recognised if and only if the work-in-progress is transferred to the Customer as it is created. Since the Customer will not be accepting the handover of partially completed products/services, the business entities involved could experience fluctuations in reported earnings.

For those in the software business - For eg. a software developer is paid $1 million to develop a software with a warranty period of 3 months after delivery date. The developer cannot recognise the full $1 million upon delivery of the software. To satisfy the proposed change, the $1 million must be apportioned as separately identifiable revenue to software development and warranty respectively. Over the delivered portion can be recognised as revenue.

Reference - Accounting and Business 04/2009

FRS 1 - Presentation of Financial Statements Apr 2009

The objective of FRS 1 is to prescribe the basis of presentation of general purpose financial statements, to ensure comparability of entity’s financial statements with previous periods and with other entities’ financial statements.

Below is a summary of the overall considerations for the presentation of financial statements.

a) Fair presentation and compliance with FRS;
b) Going concern;
c) Accrual basis of accounting:
d) Consistency of presentation
e) Materiality and aggregation
f) Offsetting
g) Comparative information

FRS 1 also specifies the minimum line item disclosure required on the face of the balance sheet, income statement, statement of changes in equity and notes to the financial statements.

FRS 7 sets out the requirements for presentation of a cash flow statement.

FRS 1 also specifies that entities discloses information that is presented in the financial statements such as the accounting policies, judgements and key sources of estimation uncertainty at the balance sheet date.

Source - CPA Singapore Wire Apr 2009

We understand better with graphics?

keep roaring!

Just read a paper from University of Chicago entitled "Human Judgement Accuracy, Multidimensional Graphics, and Humans vs Models".

The objective of the paper was to check whether graphics aid humans in the detection of changes in firms' performance and consequently reflect their judgement in bond's rating of bonds from the respective companies.

So the researchers showed financial info in "boring" tabular format and then "pictorial" format to groups of people with different levels of financial accounting training.

Results

• The research confirmed our common understanding that graphics do help with our understanding of any issue, including complex financial results.

• This behaviour is similar to people from different levels of financial accounting training. This means that even the highly trained/"practiced" professionals would also get additional understanding.
  

Applications

• So at work, can we try to present to our bosses in pictorial format ie. at least use bar charts and pie charts, to help them with their understanding?
• If you are reading financial statments from public listed companies, they come with all the bells and whistles in term of presentation. For presentation of results to the press, go check out the powerpoints they use. You download a copy of SMRT's if you wish.
• Edgar should put more pictures in his notes to help his charges.

So we are kindergarten kids, basically?

Putting "Public" back into "Public Accountant"

amk at midnite walk

Who is Public Accountant suppose to serve? Is there a heavy emphasis on "public interest"?

Who are the people in control of financial standards setting process?

Do we all need such complex accounting standards? Are the accounting standards complex because the standards setting people want them to remain complex? For what? To ensure that we still have a job?

Or is it just the demand of some groups? Who then are these groups?

Could large public accounting firms, who have amassed valuable expertise regarding the intricacies of accounting standards and of corporations issuing financial statements be one such group?

I am reading this article entitled "What is the meaning of "the public interest"?" by Richard Baker. The article examined rhetorical claims by American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB), and PriceWaterhouseCoopers (PWC).

I am doing an injustice to the article by paraphrasing them as above. If you are interested to read the full article, buzz me.

Till then, smile.

Is your business a Going Concern?

Are your bankers, suppliers, customers, employees... asking questions or passing remarks about your company's health ie. going concern (GC) status?

Given the current economic situation, may businesses may display certain symptoms that they may have caught the GC disease.

There is one more key person whom you may have to contend with in due course.. the auditor!

Auditors will increasingly question the viability of business. Helen Brand, head of ACCA reinterated this point in yesterday's BT article entitled "Going concern dilemma for auditors".

A CFO of a public listed company that I "accidentally" had lunch with recently, made this remark about their auditor. The company has some investment in China. To check for impairment, auditor requested that his company to do a 5-year cashflow projection and to be followed by computing for its NPV using the higher Weighted Average Cost of Capital (WACC) as the discount rate. He said the end result of that exercise is obvious. There will definitely be a write down on the investment. The write down may wipe off whatever profit and resulting in a loss. A loss ==> any going concern problem?

While a loss may not lead to a going concern problem, nevertheless the loss would activate another series of tests to confirm whether a company has the ability to meet its obligations within 12 months from its balance sheet date.

A quick and simple test would be whether Current Assets > or < Current Liabilities.

A loss in the P&L and CA Qualified Audit Report => investors/bankers withdrawing their support. Unthinkable?

Business owners, you may wish to get ready the following for the GC test.

• a realistic business plan
• a realistic plan to liquidate non-current assets
• a financial support package secured
• capital injection from shareholders
  
• or any other info that will help the auditor to appreciate that your business can go on for another 12 months

Both auditors and business owners do understand the gravity of GC.

Budget Chat 2 - Dr Basant K. Kapur

With reference to today's ST "Making the case for GST roll-back" editorial by Dr Kapur, his principle position is:-

Singapore's fiscal policy is too supply oriented.

I disagree with Dr Kapur in the following areas. Whether the budget measures are too supply-sided or demand-sided could be a matter of perception.

Keynes gave us fiscal policy measures to manage Aggregate Demand.

Aggregate Demand = Consumption (C) + Investment (I) + Government Spending (G)

My position - When I analyse the headline measures of the Budget, they are as much demand-sided as supply-sided.

• For the Job Credits Scheme, it is primarily aimed at maintaining the job/income for many and hopefully translate to Consumption. This is a more indirect but maybe sustainable) approach to Consumption as compare to Government just crediting your accounts with some monies. This simple-putting-money-into-your-pockets idea is also done in the form of GST credits.
• Unfreezing Credit by provding loan guarantees - While this is a way to keep the cash flow going to pay wages, it could be viewed as a means to encourage domestic Investment demand.
• Double GST rebates - Dr Kapur called for GST roll-back ie. reverse the 2% GST increase to stimulate domestic demand. He argued that negative "real-balance effect" of higher prices due to higher GST would curb Consumption. My views - Would the Double GST rebates achieve the same? Or as GST rebates (and Job Credits schemes) are only given to Singaporeans, does it imply that the postive impact on demand (if any) would be more muted as compared to a GST roll-back to all residents? I hesitate to agree with Dr Kapur until I am given some info on the cost to businesses in changing GST/CPF rates up and down.
• $20billion on Construction project - Is this not a direct prescription of Keynes where we would count the intended expenditure as Government Spending (G) and/or Investment (I)? Dr Kapur is asking for 2%/$1.8billion GST roll-back. May I have your view on $20billion thingy too? While the Contractors will be happy first, I am sure when they spend the money they earn, the rest of Singapore will be happy too.
  
• The longer term spending on Education, Healthcare, Marriage, Parenthood and Green theme - I would agree with Dr Kapur that these would be more supply-sided initiatives.
  

Other Dr Kapur's key views to share:-
The biggest thing that is weighing down on Consumption is Housing. Given the high owner occupied properties and "high" property prices, a lot of purchasing power is directed at maintaining our place of residence.

Budget Chat 1 - Just like after 2nd World War

pic from Business Times

Before the release of the Budget, many were wondering what can the government do to help the economy in the absence of external demand?

On Thursday 22 Jan 2009, the Budget presented looks like a modified version of the efforts to revive a war-ravaged economy of a country immediately after the world war.

At that time, there was obviously no external demand and many of the surviving population were unemployed and living in poverty. The government then used borrowed money (from World Bank I think) to pay labour and materials to build roads, bridges and our now famous HDB flats!!

In today's Singapore, we are planning to use part of our reserves to partially pay for all our salaries (Jobs Credit Scheme) and another $20billion for construction projects.

For the Jobs Credit Scheme, the government will give cash grants of 12% for the first $2,500 salary of a Singaporean employee. So if your gross salary is $1,800, your boss will get a refund of $216 per month from the government.

My immediate off-the-cuff response would be that all of us will be partially working for the Government ie. part-time civil servants!!

Based on YA 2007 figures, there were about 825,000 residents who reported income tax. Assuming 300,000 are non-Singaporeans, at $200 cash grant per person per month for about 500,000 Singaporeans, it is certainly no small sum.

Definitely a bold budget indeed.

P/S - Singapore Budget 2009 May I know the person who came up with "Jobs Credit Scheme" idea?