Directors’ Duties under ACRA’s New Accounting Standards
ACRA recently published its latest set of accounting standards. These standards are to be used by company directors to avoid having legal action taken against their company. They will also help directors understand what duties will now be required of them to fulfill compliance requirements.
The Accounting and Corporate Regulatory Authority (ACRA) has published a new set of accounting standards for the next financial year, as has been announced by the Accounting Standards Council (ASC) of Singapore. The ASC is responsible for prescribing accounting standards. These accounting standards match those of the International Financial Reporting Standards (IFRS Standards) issued by the International Accounting Standards Board (IASB). The IASB is a global standard-setting body.
The reason behind the publishing of these standards was the fact that many directors had failed to fulfill their duties to maintain annual compliance obligations with ACRA. Among these duties are completing annual filing requirements for ACRA to approve, as well as filing all financial statements in the proper format. Directors, including executive directors and chief executive officers, may also need to consult other members of a board of directors, corporate service providers, or chartered accountants licensed by an accountancy body. They will have to do this to discuss generally accepted accounting principles and accounting practices. These principles and practices will be important when the company’s financial statement is filed.
Accounting standards introduced in 2018 and 2019
In 2018 and 2019, there were major changes in accounting standards. This was largely due to the introduction of a standard known as Singapore Financial Reporting Standards (International) [SFRS(I)] 15 / FRS 115 Revenue from Contracts with Customers. This standard’s purpose was threefold. It forced entities to recognize revenue to reflect the transfer of control of goods or services to the customers in an amount commensurate with the consideration to which the entity expects to receive for the relevant goods or services, provided guidance for transactions that had not previously been properly addressed by other revenue-related standards previously introduced, and enhanced disclosure about revenue.
Two other important standards were also recently introduced. One of these was SFRS(I) 9 / FRS 109 Financial Instruments. This standard enacted several important changes with regard to financial assets. Notably, a new model to calculate expected credit loss impairment was introduced. The second, SFRS(I) 16 / FRS 116 Leases, increased most companies’ recorded liabilities.
The introduction of these standards impacted business-related areas such as ability to pay dividends, compliance with loan covenants, and exposure to remuneration schemes and taxes. All these standards also brought changes to directors’ duties, as will be shown in the following paragraphs.
SFRS(I) 15 / FRS 115 Revenue from Contracts with Customers
This standard requires directors to make significant judgments and estimates when they decide on the amount to be recognized as revenue.
Regarding customer contracts where the performance obligations exceed one year, directors ought to know that the criteria to determine whether revenue is to be recognized at a particular point in time (i.e., at delivery) or progressively (i.e., by using percentage of completion) have now changed. Hence, directors in certain industries must now change when and how they recognize revenue. Examples of such industries include construction, shipbuilding, and real estate.
According to the International Accounting Standards Board (IASB), any related borrowing costs are not to be capitalized for either sold or unsold units. However, this statement by the IASB is tentative. A permanent decision will be made in late February 2019. Directors of any company to which the IASB’s statement applies ought to discuss any further issues with their auditors before authorizing and issuing any financial statements or assessing if there is a need for additional adjustments or disclosures.
The new standard also requires directors to consider issues to which they previously might not have thought of before. They must now determine if the effects of first-time application of the new standard are both clearly explained and meaningful. All disclosures made must also be tailored to suit the company’s circumstances. This would then allow readers to better understand what are the main drivers of the company’s revenue.
SFRS(I) 9 / FRS 109 Financial Instruments
The introduction of this standard has allowed more financial instruments to be recognized at fair value. This is because previous standards allowed companies to carry their investments in unquoted equities at cost. These companies had been operating assuming that fair values cannot be reliably measured. However, under this standard, investments are carried at their fair values unless the costs of the investments are close to or the same as the fair values.
This standard also contains a list of conditions which indicate instances in which an investment’s cost is unlikely to be commensurate with its fair value. This standard applies to all companies, but particularly so in the case of financial institutions. Nevertheless, companies which are not financial institutions must take notice of the new loss impairment model, as it also applies to trade receivables, contract assets, and leave receivables.
The new standard also requires directors to take certain steps. For example, directors are now to take a more active role in estimating fair value because the claim that fair value cannot be measured is no longer valid. Directors must also refer to the list of conditions whenever necessary and act accordingly if one or more of the conditions applies to their company.
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SFRS(I) 16 / FRS 116 Leases
This lease standard will come into effect for companies whose financial year ends in December before all financial statements for the 2018 financial year are authorized. It will impact companies that are lessees of offices, retail space, warehouse space, property, and equipment. This standard will also cause more amounts to be recognized on the balance sheet as financial liabilities.
Directors are to give more thought to compliance with loan covenants because of the effects of this standard. Directors must also ensure that there are adequate disclosures of known or reasonably estimable information which can be used to assess the quantitative and qualitative impact that adopting the new standard would have.
Other directorial duties stated by ACRA
Besides publishing the new accounting standards, ACRA also stated what other duties are now required of company directors after the application of these standards.
According to ACRA, directors ought to use their best discernment in challenging assumptions made by management which are related to financial statements. This is especially true in cases when estimates of future cash flows appear to be inconsistent with the company’s circumstances.
Directors are also advised to obtain independent professional valuations when there is no in-house expertise available or when assessing the value of significant assets. In addition to this, they should assess the final valuation results and consider how they correspond with their understanding of current market conditions, relevant business models, and asset attributes.
In most companies, it is part of the director’s duties to approve major transactions. Thus, they are in a better position than most to evaluate if the accounting treatment of a major transaction reflects its economic reality. To do so, directors must follow four steps.
The first step is to consider the underlying intent of entering into major transactions, the relevant contractual terms, and the financial instruments used. The second step is to evaluate any alternative accounting treatments and conclude that the adopted accounting treatment most reflects the underlying intent of the major transaction and complies with the accounting standards. The third step is to make judgments and estimates in good faith and objectively while also keeping in mind any possible incentives to various parties involved in the transaction. The fourth step is, if necessary, to seek accounting advice from independent experts if there is still any uncertainty over any aspect of the transaction.
Directors must also use information about operating cash flows to help their company fully realize its profits in cash. Directors are also to ensure that there are adequate disclosures of significant non-cash investing and financing transactions. Such disclosures would greatly enhance readers’ understanding of the company’s financial situation.
Directors should ensure that all judgments and estimates that may be too subjective or complex are disclosed in a meaningful manner. They must also avoid approving disclosures that do not give any regard to transactional, industrial, or circumstantial differences.
Directors are also to assess whether the company is able to continue as a going concern if the company is burdened with substantial operating losses, negative operating cash flows, or breaches of loan covenants. This assessment is to cover a period of at least 12 months from the financial year-end. Any significant judgments and key estimates made should be accompanied with relevant and adequate disclosures.
The introduction of the new accounting standards has brought about an increase in directors’ obligations. Directors who do not fulfill these obligations will cause their companies to suffer by causing penalties and legal repercussions to be imposed. Such incidents will also damage a company’s reputation. This is especially true under the new standards, as they were introduced because many directors had not maintained their annual compliance obligations with ACRA.
We at Paul Hype Page & Co do not want you or your company to suffer needlessly. Our team of corporate specialists can help your company fulfill all necessary regulatory compliance requirements. We will do everything in our power to make sure your company remains in ACRA’s good graces and avoid any possible punishments.