Whilst a business owner does not deal with Singapore accounting standards too often, it makes sense to still be in the loop. They set the principles for the financial statements you will be reading yourself and presenting to your potential partners.
We explain what the international framework for financial reporting is all about and help you understand which of the standards apply to your particular company.
What Financial Reporting is About
The state of a company's finances is something that interests many stakeholders: investors and employees, lenders, suppliers, and other partners, both present and prospective. If the company is publicly accountable (listed on a public stock exchange), it is legally required to publish financial reports. In this case, the general public and the company's private investors will be interested in the financial statements too.
To keep all these parties in the know, the company presents its financial statements of the general purpose. They contain information about the company's performance, position and cash flow — in other words, all the key facts pertaining to financial decisions that affect the business in question.
What is the scope of the company's activities? Are there debts that are likely to impede the fulfilling of the company’s obligations? Should Forbes include the company in its Top 100 list this year? Depending on what the stakeholders find in the statements, they will either make favourable decisions or steer clear of the company and business relations with it. Thus, the financial statements must be as clear as possible: no one wants to hinder the potential partners' research, especially if there are positive things indicated there.
The International Reporting Standards
Today's interconnected economies need standard financial reporting. Listed business entities have shareholders from all over the world, and they need to know how their investments are doing. International companies need to assess and compare their branches' performance. A venture capital fund from Singapore must be able to inspect an American startup's papers, instantly understand the format, and concentrate on the figures. To make all that possible, the unified standards of financial reporting exist.
International accounting standards are a set of principles determining how to classify and present the information on the companies' transactions and events that appear in financial statements of the general purpose.
Where do these standards come from? There is a non-profit organisation called the International Accounting Standards Board (IASB) that is the accounting standards-setting body of the International Financial Reporting Standards Foundation (those are both really creative names). The IASB and the Foundation develop the standards, control their implementation and make amendments if something is not working the way it is supposed to.
The IFRS Foundation's accounting framework is now mandatory in 140 jurisdictions and is permitted in many more. There are two sets of international standards: one is for corporations, the other one is for SMEs. The SME version is relatively simple and is focusing on presenting information about cash flow, solvency, and liquidity. We will look at in a bit.
Singapore Accounting Standards
Singapore Financial Reporting Standards (Singapore SFRS) are based on the IFRS. This set of accounting standards contains more than 40 sections. The standards are named "FRS X" (FRS 1, FRS 2, etc.). Each of them covers a separate topic — for example, presenting financial statements, or accounting for inventories, or recognition of revenue.
One of the SFRS principles that you might need to know about is the accrual basis of accounting. This helps to make your books more indicative of the company's profitability and gives you a better understanding of the business's assets and liabilities at the end of an accounting period. How is that?
The accrual method tracks the revenues earned and the expenses incurred when they really happen, not only when the transactions are completed. In contrast, within the so-called cash basis framework, revenues would not make it to the income statement until the revenue is received in the bank or expenses appear in the bank.
The accrual method dictates the revenues to be indicated in the income statement when they are earned. Expenses will appear in the income statement when they match up with the revenues. Hence, you will know what costs result in what revenue. If some spendings of yours do not directly bring any earnings, you will see that.
Imagine you sell flowers. One section of your income statement (cost of sales) shows that you spent S$1,500 on exotic plants, S$500 on flowerpots, and paid S$1,000 to a one-time contractor who did the design. These costs are associated with S$3,700 of revenue that you got having sold all these Venus flytrap floral arrangements. If the figures were scattered around the statement, it would be harder to assess the project's profitability.
Your flower shop rent is S$2,000 a month. This expense does not directly result in any revenue, so it makes a separate section (other operating expenses).
Financial statements of such kind show paying and receiving cash as well as the obligations to pay in the future and the resources representing the cash you will get or spend.
Singapore Accounting Standards: Small Businesses’ Edition
To ease the reporting burden on small companies, the IFRS Foundation developed the simplified version of international standards for SMEs. In 2010, Singapore introduced its own Financial Reporting Standard for Small Entities (SFRS for SE).
A Singapore-incorporated company and a Singapore branch of a foreign company can both apply SFRS for SE. A subsidiary of a holding company can adopt it, too. To be eligible for using the framework, the entity must have the following features:
- not to be publicly accountable;
- publish financial statements of general purpose;
- be small.
To be deemed "small", the company must meet at least 2 out of 3 criteria:
- The total annual revenue is less than S$10 million.
- The total gross assets are less than S$10 million.
- The company employs 50 employees or less.
The Singapore Accounting Standards for small entities are the best option for startups and those business entities that do not present their financial statements to external parties.
Switching to "Singapore FRS" from "Singapore FRS for SE"
As any new company qualifies for SFRS for SE, it uses this simplified framework until it outgrows the size threshold and remains like that for two consecutive reporting periods. Then, the business will need to switch to the full-fledged version, SFRS.
The business on the verge of becoming too huge for SFRS for SE should start preparing for the transition in advance. They will need to educate the employees and purchase extended software if the accounting team is in-house. If the accounting is outsourced, they need to make sure that the service provider has the qualified staff to meet the new needs. Either way, the transition must be well prepared. Mind that the reporting costs will go up almost inevitably.
There are cases when it may be reasonable for small companies to adopt the SFRS framework while they are still eligible for SFRS for SE. The first situation is when the company becomes part of a holding where SFRS is already being used. The second case is when a company deals with financial institutions and lenders seeking full SFRS statements.
While the exact standards tend to make sense to professional accountants only, the results of their being in place affect your life as an entrepreneur. The nature of the accounting standards applied to your company determines your reporting costs and what you see in the statements your accountants prepare for you.
The Singapore’s framework is convenient. First and foremost, is in line with international practice, which makes it easy to share your financial documents with investors from all over the world. Secondly, Singapore Accounting Standards are aimed at serving the business’s needs, not just collecting the information to pay tax at the end of the financial year.