In Tune & In Sync. That is the theme for ISCA’s annual report 2016/17.
To stay in tune with the changing times and be in sync with our members’ needs, ISCA is committed to supporting our members in their careers as they progress and rise to the challenges they face along the way. Through our Technical Helpdesk, ISCA’s technical team receives and responds to enquiries on financial reporting, audit and assurance and ethics matters. Many of these enquiries require the application of professional judgement and scepticism. At times, there are also enquiries that may warrant further discussions and in-depth deliberation, in particular, those of a complex and controversial nature. Such enquiries are then brought onto the agenda of ISCA FRC Core Sub-Committee1 for deliberation.
ISCA’s Technical Bite-Size is an initiative by ISCA’s technical team to share deliberations by the FRC Core Sub-Committee on accounting issues with diverse market practices, application issues requiring professional judgement, topical accounting issues unique to the Singapore market and many more. Technical Bite-Size serves as a platform for the sharing of technical knowledge and ISCA’s views on accounting issues in an understandable and easy-to-read manner with our members (Tech Bites).
In December 2016, the first series of Tech Bites was published on ISCA’s Knowledge Centre for Financial Reporting website. As a start, the focus of these Tech Bites was on the impending changes to two major standards, namely, revenue and financial instruments, both of which are effective from 1 January 2018. Below are three Tech Bites on FRS 115: Revenue from Contracts with Customers, FRS 109: Financial Instruments, and one other that arose from an enquiry that we received from our members. Other Tech Bites include the accounting for contract costs and variable consideration under FRS 115 and the differences in the impairment of financial instruments under FRS 109 as compared to the existing financial instruments standards. For the entire suite of Tech Bites, please refer to “Technical Bites”.
Question Should land costs be included in the measurement of progress under FRS 115?
FRS 115 paragraph 39 requires the recognition of revenue over time by measuring the progress towards complete satisfaction of that performance obligation. The objective when measuring progress is to depict an entity’s performance in transferring control of goods or services promised to a customer.
FRS 115 paragraph 41 requires the use of appropriate methods of measuring progress, namely input and output methods. FRS 115 paragraph 42 states that when applying a method for measuring progress, an entity shall include or exclude from the measure of progress any goods or services for which the entity does not transfer control to a customer.
When an entity uses an input method to measure the progress or percentage of completion, FRS 115 paragraph B18 states that input methods recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation. FRS 115 paragraph B19 goes on to state that the entity shall exclude from an input method the effects of any inputs that do not depict the entity’s performance in transferring control of goods or services to the customer. One example whereby an adjustment is required is when a cost incurred is not proportionate to the entity’s progress in satisfying performance obligation.
To meet the objective of depicting the entity’s performance, an entity would need to consider the nature of the promised goods or services and the nature of the entity’s performance. In the case of a property development, one would usually view the sale of land and the development of the property as a single performance obligation. Therefore, the overall promise to customer is the development of the property and the progress towards complete satisfaction of the performance obligation is reflected by the work done in relation to the development of the property. When using a cost-based input method, the cost of the acquisition of the land is not proportionate to the entity’s progress in the development of the property. Accordingly, land cost is excluded from the measure of progress towards complete satisfaction of the performance obligation.
Publication Date: 30 December 2016
Written by: Jezz Chew and Lim Ju May, Financial Reporting Standards and Corporate Reporting
Question Investments in equity instruments classified as available-for-sale under FRS 39 – What are the main differences under FRS 109?
Under FRS 109, there is no available-for-sale (AFS) classification. An investment in equity instruments would be classified under fair value through profit or loss (FVTPL) unless the entity makes an irrevocable election at initial recognition to present subsequent changes in fair value in other comprehensive income (OCI).
The fair value through other comprehensive income (FVOCI) classification under FRS 109 paragraph 4.1.2A may appear similar to the AFS classification but they are different because unlike FRS 39, FRS 109 requires an examination of an entity’s business model for managing the financial asset, and the contractual cash flow characteristics of the financial asset before concluding on the classification. An investment in equity instruments would not qualify for FVOCI classification because it would fail the requirement for the instrument’s cash flows to be solely payments of principal and interest.
In the event that the entity makes an irrevocable election at initial recognition to present subsequent changes in fair value in OCI in accordance with FRS 109 paragraph 4.1.4, it is important to be aware that upon de-recognition of the equity instrument, cumulative gains or losses previously recognised in OCI are not permitted to be reclassified to profit or loss.
FRS 109 also does not have the exception in FRS 39 that allows subsequent measurement of investments in equity instruments to be at cost when they do not have a quoted price in an active market and whose fair value cannot be reliably measured. Under FRS 109, all equity instruments are to be subsequently measured at fair value.
Lastly, equity investments are not required to be assessed for impairment under FRS 109. This is a notable change from the requirements under FRS 39 whereby a significant or prolonged decline in fair value of an investment in an equity instrument below its cost is an objective evidence of impairment.
Publication Date: 30 December 2016
Written by: Lim Ju May, Financial Reporting Standards and Corporate Reporting
Question Does a change from the preparation of a set of consolidated financial statements to a set of separate financial statements constitute a change in accounting policy under FRS 8: Accounting Policies, Changes in Accounting Estimates and Errors?
The requirements in FRS 8 shall be applied in selecting and applying accounting policies, and accounting for changes in accounting policies, changes in accounting estimates and corrections of prior period errors. Accounting policies are defined in FRS 8 paragraph 5 as the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
Consider the following scenario:
Entity A has one subsidiary and is wholly owned by another entity, B. In prior years, entity A has been preparing consolidated financial statements, notwithstanding that entity A meets the criteria set out in paragraph 4(a) of FRS 110: Consolidated Financial Statements for the exemption on the preparation of consolidated financial statements. Entity A chooses to apply the exemption and prepares separate financial statements for the current financial year. Should entity A consider this as a change in accounting policy under FRS 8?
Separate financial statements and consolidated financial statements are two distinct sets of financial statements. Therefore, this is not a change in accounting policy under FRS 8. When an entity chooses to apply the exemption from preparing consolidated financial statements in the current financial year (in place of consolidated financial statements), Entity A effectively ceases to prepare consolidated financial statements and commences the preparation of separate financial statements.
Accordingly, FRS 27: Separate Financial Statements applies when an entity produces separate financial statements. FRS 27 paragraph 9 requires the preparation of separate financial statements in accordance with all applicable FRSs, except for accounting for investments in subsidiaries, joint ventures and associates in paragraph 10. This would mean that the opening balances in the separate financial statements are to be presented as though the entity has been preparing separate financial statements all along. In addition, paragraph 16 requires a parent entity that elects not to prepare consolidated financial statements to include the disclosures as listed in (a) to (c) in their separate financial statements.
Publication Date: 30 December 2016
Written by: Lim Ju May and Jezz Chew, Financial Reporting Standards and Corporate Reporting
The two years 2017 and 2018 are critical for the accounting profession in the implementation of major accounting standards and the move to full IFRS convergence. We welcome our members to share your implementation issues of these standards through our Technical Helpdesk. In the meantime, we will continue to publish Tech Bites to share technical views and insights on financial reporting matters.
Jezz Chew is Senior Manager, Financial Reporting Standards & Corporate Reporting, ISCA.
1 ISCA FRC Core Sub-Committee is a sub-committee of ISCA’s Financial Reporting Committee (FRC). Members of ISCA FRC Core Sub-Committee are Prof Chua Kim Chiu (Chairman), Ms Chan Yen San, Mr Chen Voon Hoe, Ms Cheng Ai Phing, Mr Reinhard Klemmer, Ms Kok Moi Lre, Ms Ong Suat Ling, Ms Soh Lin Leng, Mr Tan Seng Choon and Mr James Xu.