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TOWARDS QUALITY FINANCIAL REPORTING

PREPARING INTERIM FINANCIAL STATEMENTS UNDER SFRS(I) 1-34

LIM JU MAY, FELICIA TAY AND MARCUS CHAN

NAVIGATING TOWARDS QUALITY FINANCIAL REPORTING

High-quality and reliable financial statements are vital to maintaining confidence in Singapore’s capital markets and upholding the country’s reputation as a trusted global business hub. However, SGX RegCo noted in its response paper that “several issuers, in particular, Singapore-incorporated issuers, have not been preparing their periodic financial statements in accordance with the prescribed accounting standards. We understand from feedback that in this regard, the application of these requirements to Singapore-incorporated issuers should be clarified”.

On 12 January 2021, SGX RegCo added Listing Rule 705(3A) to require issuers reporting under Singapore Financial Reporting Standards (International) (SFRS(I)s) to apply SFRS(I) 1-34 Interim Financial Reporting in their interim financial statements. This provides a good framework for comprehensive disclosures and enhances comparability of issuers’ interim financial statements on an international level. SGX RegCo also highlighted in its communique to issuers that ISCA would issue technical guidance to aid issuers on the compliance with the new Listing Rule 705(3A).

On 3 May 2021, ISCA issued Financial Reporting Guidance 3 (FRG 3) Preparation of Interim Financial Statements under SFRS(I) 1-34 Interim Financial Reporting (in compliance with the SGX Listing Rule 705(3A) and two sets of accompanying illustrative condensed interim financial statements. These illustrate how certain key requirements of SFRS(I) 1-34 and SGX Listing Rule Appendix 7.2 could be met concurrently in the interim financial statements.

FRG 3 aims to aid issuers in understanding the implications of the Listing Rule 705(3A) to their interim financial statements and to highlight the key areas to take note of when preparing a set of interim financial statements under SFRS(I) 1-34. Issuers are encouraged to refer to FRG 3 and the accompanying illustrative condensed interim financial statements as highlighted in the SGX RegCo’s Guidance Note on Accounting Standards for Financial Statements issued on 4 May 2021.

On 19 August 2021, a panel discussion was convened at the ISCA PAIB Conference 2021 to discuss and share challenges faced by issuers in applying the new Listing Rule 705(3A), and how it has impacted issuers’ reporting to SGX while concurrently meeting the expectations of relevant stakeholders. The panel discussion, moderated by Chen Voon Hoe, Deputy Chairman of ISCA Financial Reporting Committee, featured panellists Lim Kai Ching, Group Chief Financial Officer, Uni-Asia Group Limited; Ng Kian Hui, Audit Partner, Head of Audit and Assurance, BDO LLP; Eliza Tan, Vice President, SGX RegCo, and Tan Yong Choo, Vice President (Group Finance), Singtel Limited.

In this article, we will be sharing highlights from FRG 3 as well as key insights from the panel discussion.

FRG 3 PREPARATION OF INTERIM FINANCIAL STATEMENTS UNDER SFRS(I) 1-34 INTERIM FINANCIAL REPORTING (IN COMPLIANCE WITH THE SGX LISTING RULE 705(3A)

FRG 3 covers the following areas:

1) Overview of the regulatory changes

This section provides an overview of the regulatory changes and discusses:

  • Listing Rule requirements prior to the addition of Listing Rule 705(3A) on 12 January 2021;
  • Issuance of Listing Rule 705(3A) and SGX response paper.

2) Key requirements in SFRS(I) 1-34

Section 2(A) states that the basis of preparation for a set of interim financial statements under SFRS(I)s is SFRS(I) 1-34, and this fact shall be disclosed in that set of interim financial statements. It should be noted that a set of interim financial statements shall not be described as complying with SFRS(I)s unless it complies with all the requirements of SFRS(I)s.

Section 2(B) sets out key requirements in SFRS(I) 1-34 and the associated implications for issuers. Some of the implications include differences from the current disclosure requirements under Listing Rule Appendix 7.2 that issuers should take note of.

Section 2(C) highlights that issuers are required to assess whether the going concern assumption is still appropriate in light of events and circumstances which may have taken place since the end of the last annual reporting period.

3) Complying with the requirements of SFRS(I) 1-34 and Listing Rule Appendix 7.2

SFRS(I) 1-34 requires more holistic disclosures than those prescribed in Listing Rule Appendix 7.2. Such additional requirements include disclosures of key judgements/estimates and explanations for significant changes from the last audited annual financial report. This enables users to have a better understanding of what has happened to the issuer since the last audited annual financial report and to understand the key judgements/estimates applied. The overriding goal of SFRS(I) 1-34 is to ensure that an interim financial report includes all information that is relevant to understanding an issuer’s financial position and performance during the interim period.

Therefore, a set of interim financial statements that is prepared in compliance with SFRS(I) 1-34 should concurrently meet the requirements of Listing Rule Appendix 7.2 if it provides certain additional disclosures prescribed by Listing Rule Appendix 7.2. These additional disclosures are summarised in this section of FRG 3.

This section also highlights (i) those additional disclosures which relate to accounting information and hence, could be included in the disclosure notes in the interim financial statements, and (ii) those additional disclosures which relate to non-accounting information; a good practice is to show them separately from the interim financial statements (for example, in Management Discussion & Analysis) in the same announcement.

4) Key areas of focus

This section sets out key areas which an issuer should consider focusing on when preparing the interim financial statements. They include:

(A) Appropriateness of significant judgements and estimates made

The potential areas where changes in judgements and estimates could have taken place include:

(i) Are the fair values of the issuer’s investment properties overstated?

(ii) Are the issuer’s non-financial assets (carried at cost) overstated and impairment losses required to be recognised?

(iii) Are the issuer’s estimates of expected credit losses appropriate in light of the current uncertain situation?

(iv) Have any of the issuer’s contracts become onerous?

(B) Non-reversal of impairment loss on goodwill recognised in an interim period

(C) Estimation of weighted average annual income tax rate expected for the full year.

PANEL SESSION: INTERIM FINANCIAL REPORTING: NAVIGATING THE JOURNEY TO QUALITY FINANCIAL REPORTING

The adage rings true: any change, even a change for the better, is always accompanied by drawbacks and discomfort. Issuers have certainly faced challenges in applying the regulatory changes to interim financial reporting.

Chen Voon Hoe, Deputy Chairman of ISCA Financial Reporting Committee, shared insights from FRG 3 at the recent PAIB Conference

Before moderating the panel discussion at the recent PAIB Conference, Mr Chen presented an overview of the regulatory changes to interim financial reporting in Singapore and shared insights from FRG 3.

Although the regulatory changes made it clear that issuers reporting under SFRS(I)s are to prepare interim financial statements using SFRS(I) 1-34, Mr Chen shared that some issuers may not fully appreciate how this differs from the current practice of preparing interim financial reporting using Listing Rule Appendix 7.2.

FRG 3 was issued to aid issuers in understanding the implications of the regulatory changes. Mr Chen explained that FRG 3 sets out key requirements in SFRS(I) 1-34 and explains how each key requirement impacts the issuers (including how a particular requirement differs from that in Listing Rule Appendix 7.2). One example is segment information – SFRS(I) 1-34 requires segment information to be included in the interim financial statements whereas Listing Rule Appendix 7.2 only requires segment information to be included in the year-end announcement.

Mr Chen also emphasised that SFRS(I) 1-34 requires judgement to be exercised by issuers in certain areas, such as identification of significant events and transactions, identification of unusual items (because of nature, size or incidence), and assessment of the appropriateness of significant judgements and estimates made (for example, fair values of non-financial assets and estimates of expected credit losses).

Mr Chen also spotlighted the accompanying illustrative condensed interim financial statements which illustrate how a set of SFRS(I) 1-34-compliant interim financial statements would look like. “FRG 3 covers the ‘what’ – what you need to cover in the interim financial statements. The accompanying illustrative condensed interim financial statements cover the ‘how’ – how a set of condensed interim financial statements looks like. Do take note that while it is as comprehensive as we can make it, it is not a checklist, so you do need to look at SFRS(I) 1-34 and Listing Rule Appendix 7.2 for completeness,” he reminded the delegates.

(From left) Moderator Mr Chen with panellists Lim Kai Ching, Group Chief Financial Officer, Uni-Asia Group Limited; Ng Kian Hui, Audit Partner, Head of Audit and Assurance, BDO LLP; Eliza Tan, Vice President, SGX RegCo, and Tan Yong Choo, Vice President (Group Finance), Singtel Limited

In the ensuring panel discussion, the panellists engaged in a lively discussion of the benefits as well as the challenges faced by issuers in applying the new Listing Rule 705(3A), and how it has impacted the issuers’ reporting to SGX. They also shared tips on how the challenges can be mitigated.

Salient points from the panel discussion include:

  • Financial reports prepared in accordance with the relevant accounting standards bring about benefits such as increased transparency and better-quality interim financial statements to issuers and users of the financial statements.
  • Listing Rule 705(3A) has affected issuers differently. Larger issuers are likely more prepared for the changes as they have more resources to handle the changes, and some may have been applying SFRS(I) 1-34 in their preparation of interim financial statements all along. Smaller issuers may need to change their interim reporting processes to be able to capture the data required in the preparation of a set of SFRS(I) 1-34-compliant interim financial statements.
  • Issuers should exercise judgement to include only material and relevant information in the interim financial statements.
  • Issuers should engage auditors early to obtain a common understanding of material events and transactions that warrant disclosure, and areas where significant judgements and estimates made may need to be revisited.

WHAT PANELLISTS SAID…

“A good starting point is to look at the issuer’s business and identify any new businesses or changes to existing business during the interim period. From there, the issuer would consider the additional disclosures to be included in the interim financial statements to explain the changes to the users.”
Lim Kai Ching, Group Chief Financial Officer, Uni-Asia Group Limited

“Issuers need to consider impacts of changes during the interim period on significant judgements and estimates made in the interim financial statements. For instance, in the area of fair valuation of investment properties, if the issuer is aware of recent conditions which may cause the fair values to differ significantly, the issuer should consider if an updated valuation exercise should be performed to ensure that the reported fair values are appropriate.”
Ng Kian Hui, Audit Partner, Head of Audit and Assurance, BDO LLP

“High-quality and reliable financial statements are integral to the functioning of capital markets. The requirement for issuers to prepare the interim financial statements in accordance with SFRS(I) 1-34 would bring about increased transparency and better assure users of the quality and rigour in the preparation of the financial statements.”
Eliza Tan, Vice President, SGX RegCo

“Accounting standards require you to disclose a lot of things, but some are not material or relevant to investors. You will need to look at your financial statements and see what is material and relevant. It is important to go through this with your auditors as well.”
Tan Yong Choo, Vice President (Group Finance), Singtel Limited


ADDRESSING THE QUERIES FROM PREPARERS

Among the queries that ISCA has received from preparers, the following frequently appear. We would like to share our responses here.

1) For the year-end announcement, am I required to issue a set of SFRS(I) 1-34-compliant interim financial statements if I can issue my full-year financial statements under SFRS(I)s within 60 days after my financial year end?

The answer is No.

SGX RegCo has clarified in its Guidance Note that “Issuers that currently prepare their full-year financial statements based on the broader set of accounting requirements that apply to annual financial statements under the SFRS(I)s, IFRS or US GAAP do not have to change their approach and should continue their existing practice.” This means that if an issuer has issued its full-year financial statements prepared under SFRS(I)s within 60 days after its financial year end, that issuer is not required to issue a separate set of interim financial statements (containing the second-half or the fourth-quarter financial information) prepared in accordance with SFRS(I) 1-34.

Although an issuer in the above scenario is not required to issue a separate set of SFRS(I) 1-34-compliant interim financial statements, the following requirement of paragraph 26 of SFRS(I) 1-34 should be noted:

“If an estimate of an amount reported in an interim period is changed significantly during the final interim period of the financial year but a separate financial report is not published for that final interim period, the nature and amount of that change in estimate shall be disclosed in a note to the annual financial statements for that financial year.”

2) Listing Rule 705(3A) refers to the preparation and not issuance of SFRS(I) 1-34-compliant interim financial statements. Am I required to publish the set of SFRS(I) 1-34-compliant interim financial statements which I have prepared?

The answer is Yes.

We understand that SGX RegCo is of the view that Listing Rule 705 should be read in its entirety and specifically, “such financial statements” as referred to in Listing Rule 705(3A) are those financial statements required to be announced under Listing Rule 705(1) – (2C).

In addition, issuers need to refer to SGX RegCo’s Guidance Note and the Financial Statements Checklist that is required to be submitted by all issuers, as part of their interim and full-year announcements. The Financial Statements Checklist includes specific references to FRG 3, and requires a statement of compliance with relevant accounting standards on pages 3 and 4. Any “non-compliance” would need to be explained by issuers and be subjected to scrutiny by SGX RegCo.

3) The Financial Statements Checklist referred to in (2) above requires the presentation of percentage variances in a separate column in the income statement. This requirement is not included in FRG 3 and the illustrative condensed interim financial statements. Is this a requirement under SFRS(I) 1-34?

The answer is No.

Notwithstanding this, paragraph 15 of SFRS(I) 1-34 requires the interim financial statements to include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the end of the last annual reporting period. The information disclosed in relation to those events and transactions should also update the relevant information presented in the most recent annual financial statements.

The above requirement is more encompassing than that of paragraph 8 of Listing Rule Appendix 7.2 (see paragraph 8, below). It requires the issuer to disclose and update significant events and transactions that impact the issuer’s financial position and performance since the end of the last annual reporting period and is not limited to events and transactions that affect the performance for the current financial period reported on.

Paragraph 8 reads:

A review of the performance of the group, to the extent necessary for a reasonable understanding of the group’s business. It must include a discussion of the following:

(a) any significant factors that affected the turnover, costs, and earnings of the group for the current financial period reported on, including (where applicable) seasonal or cyclical factors, and

(b) any material factors that affected the cash flow, working capital, assets or liabilities of the group during the current financial period reported on.


Lim Ju May is Deputy Director, Technical, ISCA; Felicia Tay and Marcus Chan are from Financial Reporting, Technical, ISCA.