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Singapore Financial Reporting Standard for Small Entities

Preamble

Auditor

SFRS for Small Entities

Although the Singapore Financial Reporting Standard for Small Entities has been available as a framework for the preparation and presentation of general purpose financial statements since 2011, its adoption by small entities has been negligible. Some public accountants have even described this standard as redundant and the standard itself has no practical value. Nevertheless, this standard on many instances is more suited to the circumstances and the actual reporting environment of small entities and can result in more meaningful financial information being presented on the financial statements. More importantly, it could avoid boilerplate information, which is assembled only for financial statements disclosure and has little meaning for the users of the financial statements. More information does not necessarily enhance the overall quality of the financial statements.

Illustrative financial statements are available from the Accounting Standards Council and PWC.

Introduction

Through the enactment of the Accountant Standard Act in 2007, the Accounting Standards Council (ASC) has undertaken the role as the prescriber of accounting standard in Singapore. The broad policy intention of the ASC is to adopt the International Financial Reporting Standards issued by the International Accounting Standard Board. In-line with this policy the ASC has adopted the International Financial Reporting Standard for Small and Medium-sized Entities (“IFRS for SMEs”) as the Singapore Financial Reporting Standard for Small Entities (“SFRS for Small Entities”) as at 30 November 2010.

For financial reporting periods beginning on or after 1 January 2011, the SFRS for Small Entities is an alternative framework to the Singapore Financial Reporting Standard (“SFRS”) for the preparation and presentation of general purpose financial statements of entities.

For the purpose of this statement, “entities” refer to

(a) companies incorporated under the Companies Act (Cap. 50) or pursuant to any corresponding previous written law in Singapore; and

(b) foreign companies defined in the Companies Act (Cap. 50) in respect of their operations in Singapore.

Criteria

The SFRS for Small Entities is intended for use by small entities. Small entities are entities that:

(a) do not have public accountability;
An entity has public accountability if:
(i) Its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (such as a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or
(ii) It is a deposit-taking entity and/or holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, insurance companies, securities brokers/dealers, mutual funds and investment banks; or
(iii) It is a public company defined under the Singapore Companies Act (Cap. 50); or
(iv) It is a charity defined under the Charities Act (Cap. 37).

(b) publish general purpose financial statements for external users;
Examples of external users include owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies.

(c) satisfy at lease two of the three following criteria:
(i) total annual revenue of not more than S$10 million;
(ii) total gross assets of not more than S$10 million; and
(iii) total number of employees of not more than 50

In case of company that is required to prepare its accounts on a consolidated basis, the above is calculated on a group basis and not on the basis of the company as a single economic entity.

Where the reporting period is more or less than 12 months, revenue must be pro-rated accordingly.

The total number of employee refers to the number of full-time employees employed by the reporting entity at the end of the financial reporting period.

Subject to (a) and (b), an entity must be the criteria for the previous two consecutive financial years for it to be eligible to use SFRS for Small Entities.

Conversely, subject to (a) and (b), if an entity qualifies for SFRS for Small Entities, it ceases to meet the criteria if it fails to meet the criteria for the previous two consecutive financial years.

For newly incorporated entities, the SFRS for Small Entities is available as an option for the first and second financial reporting periods after incorporation if the entity meets the qualifying criteria set out in (a) and (b) for the full financial reporting period in respect of which the SFRS for Small Entities is sought to be used.

Main differences between SFRS for Small Entities and Singapore Financial Reporting Standards (SFRS)

SFRS for Small Entities SFRS
Disclosure on financial risk management Not required. There is also no requirement to disclose the foreign currency balances of financial assets and liabilities. Required under FRS 107.
Associates Cost model available as an option. Equity method required under FRS 28.
Investment properties Cost model available as an option under property, plant and equipment if fair value measurement cannot be obtained without undue cost and or effort*. No disclosure of fair value necessary if cost model is adopted. Cost model is available as an option but disclosure of fair value and fair value measurement required under FRS 40 and FRS 113, respectively.
Property, plant and equipment No prior year reconciliation of opening balance and closing balance required. Required under FRS 1 and FRS 16.

* Undue cost and effort is not defined as this depends on the specific circumstances and on management’s professional judgement in assessing the costs and benefits. Assessing whether a requirement will result in “undue cost or effort‟ should be based on information available at the time of the transaction or event about the costs and benefits of the requirement

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Audit Exemption – Small Company Concept

Audit

Audit Exemption – Small Company Concept

Under the current rule, which will be replaced by the Companies Act (amendments) 2014 from 1 July 2015 onwards, a company can be exempted from audit provided it meets the following conditions:

  1. The company is a exempt private company. An exempt private company is a company that does not have corporate shareholder and has less than 20 shareholders.
  1. Its revenue is less than S$5.0 million.

Definition exempt private company as extracted from the Companies Act

“exempt private company” means — 

(a) a private company in the shares of which no beneficial interest is held directly or indirectly by any corporation and which has not more than 20 members; or  

(b) any private company, being a private company that is wholly owned by the Government, which the Minister, in the national interest, declares by notification in the Gazette to be an exempt private company;                                                                                                                                                       
From 1 July 2015 onwards, the Companies Act (amendments) 2014 has eliminated the concept of exempt private company. The concept of small company is introduced for audit exemption. A company is defined as a small company if:

(a) it is a private company in the financial year in question; and
(b) it meets at least 2 of 3 following criteria for immediate past two consecutive financial years:

  1. total annual revenue ≤ $10m;
  2. total assets ≤ $10m;
  3. no. of employees ≤ 50.

For a company which is part of a group:
(a) the company must qualify as a small company; and
(b) entire group must be a “small group”

to qualify to the audit exemption.

For a group to be a small group, it must meet at least 2 of the 3 quantitative criteria on a consolidated basis for the immediate past two consecutive financial years.

Where a company has qualified as a small company, it continues to be a small company for subsequent financial years until it is disqualified. A small company is disqualified if:
(a) it ceases to be a private company at any time during a financial year; or
(b) it does not meet at least 2 of the 3 the quantitative criteria for the immediate past two consecutive financial years.

Where a group has qualified as a small group, it continues to be a small group for subsequent financial years until it does not meet at least 2 of the 3 the quantitative criteria for the immediate past two consecutive financial years.

However, it must be emphasised that the Companies Act (amendments) 2014 only applies for financial year starting from 1 July 2015. This is clearly stated by ACRA and in the Companies Act (amendments) 2014. There appears to be a misunderstanding that after 1 July 2015, no audit needs to be performed as long as the small company criteria is met without any references to the start date of the financial year. This is not the case.

For instance if a company meets the exemption criteria and financial year ends on 31 December, audit will still need to be performed for the years ended 31 December 2014 and 31 December 2015 as both financial years start before 1 July 2015. It will only be exempted from audit for the year ended 31 December 2016.

The followings are FAQ(s) as stated from ACRA website:-

Q: When will the small company audit exemption take effect?
A: The audit exemption will be applicable for financial years beginning on or after the change in the law (1 Jul 2015). Transitional provisions have been provided for the first two years after the change in law.

Q: How does the small company criteria apply in the first 2 years (transitional period) after the exemption takes effect (1 Jul 2015)?
A: To determine if a company qualifies as a small company in the first 2 financial years commencing after the exemption takes effect, the company must assess if it fulfils the requirements in each of the years. E.g. in order to determine whether a company would qualify in FY2016, the company should look at whether it is a private company in FY2016 and whether it meets the 2 out of 3 quantitative criteria in FY2016. If it does not qualify for that year, it will still get a chance to qualify for FY2017, if it is a private company and meets the 2 out of 3 quantitative criteria in FY2017.

Q: How does a new company incorporated after 1 Jul 2015 qualify as a small company? For a new company, because the company is newly incorporated, there would not be any financial information to assess for the previous 2 years.
A: To determine if a company qualifies as a small company in its first 2 financial years after its incorporation, the company must assess if it fulfils the requirements in each of the years. E.g. if a company is incorporated after Jul 2015, in order to determine whether a company would qualify in its first financial year, the company should look at whether it is a private company and whether it meets the 2 out of 3 quantitative criteria in than year. If it does not qualify in that year, it will still get a chance to qualify in its second financial year, if it is a private company and meets the 2 out of 3 quantitative criteria in its second financial year.

Q: How do companies determine their total assets and total revenue?
A: The total revenue and total assets of a company would be determined by the accounting standards and what appears as the total revenue or total assets in the financial statements of the company.

Q: How do companies determine their number of employees?
A: The number of employees is based on the number of full-time employees employed by the company at the end of the financial year.

Q: If a company has corporate shareholders and meet the criteria, can they enjoy the small company audit exemption?
A: There is no longer a requirement that the company has to be an exempt private company (one of the requirements for which is that there is no corporate shareholder) to qualify for the audit exemption. A private company which has corporate shareholders but fulfils the critera can be entitled to the small company audit exemption.

Q: If a holding company has audited the consolidated financial statements for the group, would the subsidiary be required to audit its financial statements, even if the subsidiary satisfies as a small company?
A: In order for a subsidiary to be able to qualify for the small company exemption, the group to which it belongs would have to qualify as a small group and fulfil the thresholds on a consolidated basis. Therefore, even if the subsidiary is able to qualify as a small company, but the group to which it belongs is not a small group, and the holding company has to audit the consolidated financial statements, the subsidiary would not be able to enjoy the benefits of audit exemption.

Q: Does the small company audit exemption apply to foreign companies?
A: The small company audit exemption only applies to Singapore incorporated companies. However, for the purposes of determining whether the group to which a company belongs is a small group, all entities within that group are taken into account, including foreign entities, in determining whether the consolidated total revenue and consolidated total assets of the group meet the thresholds.

Q: If the holding company is a foreign company, how do you determine the consolidated total revenue and consolidated total assets for the purpose of determining whether the group is a small group?
A: Even where the holding company is a foreign company, a Singapore subsidiary will need to determine whether the group to which it belongs qualifies as a small group, to determine if it can qualify for the small company audit exemption. Where the holding company has prepared consolidated financial statements, the “consolidated total assets” and “consolidated revenue” of the group shall be determined in accordance with the accounting standards applicable to the group. Where the holding company does not prepare consolidated financial statements, the consolidated total assets should be determined by the aggregation of the total assets of all the members of the group, and the consolidated revenue should be determined by the aggregated revenue of all the members of the group.

Q: Does the small company criteria affect the obligations for filing financial statements with ACRA?
A: No. The obligations for filing financial statements are determined by whether the company is a solvent exempt private company. There are no changes to the current criteria for determining the obligation for filing financial statements.

Further Readings
Recent Legislative Changes to the Companies Act – Highlight of Key Amendments
New “Small Company” Concept for Audit Exemption – Practical Application (Part 1)
New “Small Company” Concept for Audit Exemption – Practical Application for Groups (Part 2)
More Details on Small Company Concept for Audit Exemption

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