ACRA issues Financial Reporting Practice Guidance No. 1 of 2021 on areas of review for FY 2021 financial statements

11 January 2022

On 14 December 2021, the Accounting and Corporate Regulatory Authority (“ACRA”) issued Financial Reporting Practice Guidance No. 1 of 2021 on Areas of Review Focus for FY 2021 Financial Statements under ACRA’s Financial Reporting Surveillance Programme (“Practice Guidance”).

Under the Financial Reporting Surveillance Programme (“FRSP”), ACRA reviews financial statements (“FS”) of Singapore-incorporated companies for compliance with the prescribed accounting standards in Singapore.

To guide directors in reviewing and approving the FS, the Practice Guidance sets out the areas of FRSP review focus for the FY 2021 FS. ACRA’s review on FY 2021 FS will focus on:

• Assessment of going concern and classification in cash flows statement
• Impairment assessment of non-financial assets
• Expected credit loss assessment
• Supply chain financing (an emerging risk)
• Interbank offered rate reform (a new development)

Assessment of going concern and classification in cash flows statement

ACRA sees gaps in going concern assessments where some companies had:

• inappropriately assumed that the future events would follow the trend of prior years, despite changes in business environment and business models;
• viewed forecast assumptions or scenarios in silos when they might in fact be interlinked; and
• incorrectly classified their cash flow items, leading to overstatement of operating cash flows.

Impairment assessment of non-financial assets

ACRA continues to observe instances where companies:

• failed to perform value-in-use (“VIU”) calculation; and
• incorrectly recognised impairment loss based on recoverable amount determined using solely fair value less cost of disposal (“FVLCD”), when there was indication that VIU might be higher than FVLCD.

Expected credit loss assessment

ACRA observes that directors and preparers continue to contend with the concept of expected credit loss (“ECL”). Economic uncertainty also makes the ECL estimation process more challenging.

ECL provisions are typically made based on historical credit loss experience by each aging bucket (for the case of trade receivables), then adjusted with forward-looking estimates. In determining the ECL provision for trade receivables, a company would need to first segment its customer base by their shared credit risk characteristics (e.g. by customer size, location, industry, product line). Thereafter, the expected loss rate is determined based on a combination of historical credit loss experience and forward-looking estimates (using factors that correlate with expected customer repayment behaviour).

Supply chain financing

Supply chain financing (“SCFs”) refers to arrangements where a buyer receives funding on goods and services it purchased. SCFs can lead to cash flow issues if facilities are withdrawn abruptly. In addition, under an SCF arrangement, payment terms with finance providers could be extended (beyond the industry standards). Thus, if it continues to be presented as part of trade and other payables, this will obscure the buyer’s actual amount of “borrowings” and other risks/implications that come with it. ACRA advises that directors should ensure that such balances are appropriately classified and disclosed in the FS.

Interbank offered rate reform

The Singapore Interbank Offer Rate (SIBOR) and Swap Offer Rate (SOR) are expected to be phased out in June 2023 and December 2024 respectively. These will be replaced by the Singapore Overnight Rate Average (SORA). Many outstanding borrowing and hedging contracts in the market contain SIBOR and SOR components, which will need to be amended.

Companies that apply hedge accounting with instruments that refer to IBORs may also need to take steps to preserve hedge accounting. The Institute of Singapore Chartered Accountants has published Financial Reporting Bulletin 9 to provide guidance. ACRA encourages directors to engage professionals early to assess the accounting implications.

Reference materials

ACRA provides case studies and tips for directors’ guidance. The Practice Guidance is available on the ACRA website www.acra.gov.sg.