Board Matters Quarterly - Issue 14: December 2012

Year-end issues the audit committee should consider

2. Accounting changes

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The past few years have been marked by rapid and widespread developments in accounting changes. The volume of Singapore Financial Reporting Standards (FRS) changes is significant, and is likely to continue in the foreseeable future. As part of their oversight responsibilities, the AC must be satisfied that management has sufficient resources devoting appropriate attention to understanding recent and future developments in accounting changes.


Recent developments in accounting changes

The AC should obtain an understanding from management and/or the internal and external auditors on how the recent developments in accounting changes affect the company’s financial statements. What is required is more than a general update. For instance, the amendments to FRS 12 Income Taxes address the determination of deferred tax on investment property measured at fair value, and introduced a rebuttable presumption that deferred tax on investment property measured at fair value should be determined on the basis that the carrying amount will be recovered through sale.

Entities that previously found it difficult to determine the manner of recovery of investment property measured at fair value should welcome this amendment. Entities that have already been able to determine how to measure deferred tax on investment property should be unaffected. However, entities that have previously determined deferred tax on the basis that some, but not “substantially all” the carrying amount of an investment property measured at fair value is expected to be recovered through use could be affected by these amendments. The amendments are effective for annual periods beginning on or after 1 January 2012.

Future accounting changes

FRS 113 Fair Value Measurements which is effective for annual periods beginning on or after 1 January 2013 provides a single source of guidance for all fair value measurements. The effects of applying FRS 113 are likely to vary by entity, and for some entities, the effects could be significant. For instance, for non-financial assets, FRS 113 requires that management must consider the highest and best use of the asset by market participants. If an entity previously did not consider the highest and best use of an asset when determining the fair value when revaluing its property, plant and equipment, adopting FRS 113 could result in a higher fair value than it would have previously determined.

In August 2012, the Accounting Standards Council announced that it will allow stakeholders more time to implement FRS 110 Consolidated Financial Statements together with FRS 111 Joint Arrangements, and FRS 112 Disclosure of Interests in Other Entities. The effective date of these FRS is deferred for a year from annual periods beginning on or after 1 January 2013 to annual periods beginning on or after 1 January 2014. FRS 110 represents a significant change to the process for determining which entities are included in consolidated financial statements. In addition to considering the data that will need to be accumulated, companies should also consider the effects on financial metrics, regulatory compliance, tax, and the structuring of transactions and arrangements. Although the effective date of these standards is deferred, they require retrospective application. An early analysis of the impact of adopting these new standards will help avoid surprises, and ease the transition process.

There are also several projects that are in progress which will result in fundamental changes to the existing accounting requirements to revenue recognition, leases, and financial instruments. These changes may require additional investments in systems and personnel to analyze and implement the proposed changes, and establish new processes and related internal controls. The proposed changes may also affect the company’s business. For instance, the company may need to revisit their revenue recognition methodology since the amount and timing of revenue recognition may be significantly altered by the proposed single revenue recognition model. With the proposed leasing changes, companies may reconsider their decisions to buy or to lease assets.

The AC should discuss with management to determine if they have considered the potential impact of these proposed changes, and whether sufficient and knowledgeable resources are available to address them.


Questions the AC should consider:

  • How is management addressing accounting issues considering the current economy and changing accounting standards?
  • How might the proposed changes in accounting standards affect the company’s financial statements? How might the proposed changes affect the company’s business?
  • What does the company need to do to prepare for the anticipated accounting changes?
  • Have the potential impact of these proposed changes been communicated to the shareholders?

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