Capitaland and Singapore’s new revenue recognition standard

where was i?

Effective on 1 Jan 2011, Singapore’s Accounting Standards Council requires that revenue be recognised when control of a property has passed on to the owner. Thus previous year’s figures have to be restated to allow for fair comparison. (Yes, this is additional work for everyone involved in the preparation of financial reporting.)

The purpose of this article is an attempt to understand the possible impact of the standard change to a company in the business of property development and management such as CapitaLand.

Quantify the change
Here are the figures reported by ST April 27, 2011 on CapitaLand’s performance for quarter ended March,

Sales revenue
2010 – $440m ($687.3m before restating)
2011 – $611.5m

2010 – $29.8m ($115.4m before restating)
2011 – $101.5m

Edgar’s observations and analysis
Both sales revenue and profit for Q1 of 2010 declined significantly by 36% and 74% respectively after the change in standard. Thus when you compare current quarter’s performance with that of previous year’s quarter, the management is able to report significant positive change in both sales revenue and profit.

The question is how much of the sales revenue and profit reported for current quarter could be due to revenue and profit “deferred” from previous quarters which we now captured due to the change in accounting standard.

The share price has hardly moved on the reporting. Edgar would like to speculate on possible reasons.

Efficient market hypothesis that we learned in class stated we assume the market is semi-strong in terms of efficiency in the share price reflecting all past, currently and publicly available information. Has the market been able to quantify the possible impact on CapitaLand’s bottomline since the announcement of its new standard adoption last year?

The lack of reaction to the strong figures could be due to other news, prevailing in the market, that are distracting the investors. Since the completion of the Election, property sector has been deemed to have been earmarked for radical changes deemed not conducive for investors.

Taking the more pessimistic stand, we should question whether investors understand the impact of the change in accounting standard. This was highlighted to me by an industry veteran who was very wary of earnings volatility due to the change in standard. The uncles and aunties type of investors may sell their shares unnecessary when a property firm is reporting losses in the current year due to “deferred” recognition of sales revenue and profit.

We await for more clarity.

Proposed changes to Accounting for Leases

it pours and pours

What is the proposed change?
For lessees, FASB and IASB believe that all lease contracts should be treated in a manner similar to the treatment of finance leases. Thus removing the existing requirement for lessees to differentiate leases as finance or operating leases.

Why the proposed change?

  1. Firstly, current rules which determine lease classification may result in similar transactions reported very differently, leading to lack of comparability and significant amounts of off balance-sheet finance not being recognised.
  2. Secondly, the right obtained by the lessee in a lease contract is the right to use the leased asset during the lease term. This right meets the definition of an asset. The lessee incurs an obligation to pay rentals in a lease contract, and that this obligation meets the definition of a liability. (“Right of Use” model)

Details of proposed change for LESSEE under “Right of Use model”

  • Leases would be measured at cost initially ie.the present value of the lease payments, including initial direct costs incurred by the lessee.
  • Present values would be calculated using the lessee’s incremental borrowing rate as the discount rate.
  • Expense to lessee would be interest expense on instalments paid. (Existing treatment is rental expense.)

Possible consequences

For the lessees, interest expense would thus be higher in the early years of a lease (compared with the current straight-line treatment for rent expense) ==> impact on accounting ratios / loan covenants / profitability / credit ratings and other external measures of financial

For the lessors, a significant chunk of their business could disappear overnight if the lessees decide to buy the assets themselves instead trying to rent.

Source – Accounting and Business Singapore 06/2010

FASB and IASB to delay their marriage?

view from an office in Jakarta

Yes, there will be a delay of 6 months from the original date of June 30, 2011.

This is despite the fact that their family members from the G-20 group of industrial and emerging countries have been pushing them to stick to the original date since FASB and IASB announced their engagement in 2006.

So why the delay?

  1. Firstly, FASB cannot keep up the pace preparing for their marriage.

To meet the deadline, FASB and IASB would have to release about 10 proposals in the next two months and rushing through the due process of public comment, blah blah blah, reconsideration by the respective board and adoption.

2. Both FASB and IASB want their marriage only after aligning major areas of the accounting rules, such as revenue recognition, leases, financial instrument accounting and financial statement presentation.

3. FASB is 38 years old now but it has never worked so hard before in its life to get ready for the marriage. FASB has never released more than three or four proposals at a time for public comment.

4. FASB and IASB’s preparation were distracted by the financial crisis in 2008 and 2009. Both were forced to activate more resources to make changes to accounting rules related to the financial crisis. FASB dedicated one third of its 60 professional staff members during the crisis. IASB has a slightly smaller staff than the FASB.

Misnomer between FRS12 and FRS40?

a new hotel taking shape

The second part of Tan Eng Juan/Tan Kai Guan’s article on Accounting for Deferred Tax in Sep/Oct2009 Singapore Accountant touched on the following areas:-

What if disposal of investment properties “attracts a badge of trade” ==> Consequently, gain/loss from such transactions would be subject to tax. Both professors got no issue with that.

The two professors are however unhappy with when such entities SHOULD have started accounting for deferred tax on these properties. They posit that:-
a) deferred tax should have been provided for when FRS12 was adopted in year 2001 and;
b) accounting for deferred tax should not started only year 2007 ie. the year FRS40 was adopted.


1. SAS12 to FRS12 effected on April 1, 2001
Assuming gain on disposal is taxable, SAS12, in the past, said deferred tax has to be provided for IF the timing differences affect P&Ls.
But now FRS12 said we must provide for deferred tax on ALL temporary differences, regardless or not they affect P&Ls.

2. FRS25 to FRS40 effected on January 1, 2007
Under the extinct FRS25, revaluation surplus is taken to reserve (ie. never to P&L).
Under the currently in force FRS40, fair value gain is taken to P&L.

The simple point is that while FRS12 has been in force about 6 years earlier than FRS40, have most companies been accounting for deferred tax as tax expense in P&L since 2001? The two professors seem to imply that most did not. During those 6-7 years, deferred tax on revaluation of investment property will be debited to “revaluation reserve” (instead of P&L).

Impact? – Profit figures are overstated over those years while the overall value of shareholders’ equity remain neutral.

Accounting for Deferred Tax – A Mispractice

chingay 2010 colours

Tan Eng Juan and Tan Kai Guan, two Associate Professors from NTU wrote a very interesting article on “Accounting for Deferred Tax on Investment Property in Sep/Oct2009 Student Accountant.

Their paper argued that we should NOT provide for deferred tax on investment property if the gain on disposal of those properties is NOT taxable. If gain on disposal is a badge of trade ie. such gains are thus taxable, then deferred tax should be accounted for.

Their supporting arguments in favour of their position:-

a) FRS12 said deferred tax should only be accounted for if and only if “it is probable that recovery or settlement of that carrying amount will make future tax payments larger (smaller) …” ==> In the absence of capital gains tax in Singapore and if the profit/loss on disposal has no tax implication, then why are we wasting time accounting for deferred tax?

b) If fair value adjustment to asset values have no tax implications on disposal, then why are we accounting for deferred tax? We should NOT account for deferred tax for reason that the fair value adjustments are reflected in P&L and thus affect the current profitability and thus tax expense.

c) Even if higher fair value is due expected higher rental for its properties, there is still NO basis to account for deferred tax on the higher fair value. Why?
As the higher rental income for each future period would be subject to income tax and thus higher tax expense for that future period, there is thus no basis to subject changes in fair value to deferred tax.

If both these professors are correct, what are the implications for entities that had been accounting for deferred tax all these years on non-taxable gains even if they were to be realised in the future?

FRS for SMEs – Definition issue

shenton way last week

The International Accounting Standards Board (IASB) published the International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs, or Standard) on July 9, 2009.

The Professional Standards Group of Foo Kon Tan Grant Thornton made an obervation of South Africa’s experience in preparing for the adoption of an SME standard. It observed that 90% of the queries on the ED were on who could apply the ED.

Thus getting the definition of the term SME right is of paramount importance. Let me present some definitions offered by the various authorities thus far.

The Standard is designed to meet the financial reporting needs of entities that:-
(1) do not have public accountability and
(2) publish general purpose financial statements for external users.

Spring Singapore defines SMEs as those entities with:-
(1) less than $15mio of non current assets in manufacturing sector or;
(2) employ less 200 workers in non manufacturing sector.

Last year, Accounting Standards Council (ASC) proposed that an entity would qualify as a SME if it satisfies two of the three size criteria below.
(1) net assets do not exceed $15mio;
(2) annual turnover does not exceed $15mio and;
(3) average number of employees does not exceed 200.

What are the possible practical application issues on the definitions?

(1) Non current assets
– Based on historical purchase price of asset? Can revalued? Impairment?
– Based on net book value? Thus it could depend on depreciation method adopted?
– Classification “mess” between NCA and CA?

(2) Annual turnover
Currently an exempt private company with less than $5mio of annual revenue is already exempted from the need for audited financial statements. Is there not a conflict with the $15mio criteria?

(3) No. of employees
– Who is your employee? Those on CPF contribution list? Part time?
– Can manipulate to meet criteria by moving from “contract for service” to “contract of service”/outsourcing?

Source – ACCA Singapore, FOCUS Quarter 3 – 2009

FRS 16 – Property Plant Equipment v090604

a plant as defined by FRS16

FRS 16 prescribes the accounting treatment for property, plant and equipment.

Property, plant and equipment are tangible assets that are in use for more than one accounting period. Cost of property, plant and equipment comprise of:-

  1. Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
  2. Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
  3. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purpose other than to produce inventories during that period.

Property, plant and equipment are initially recorded at cost. Subsequently, they can be carried either:-

  • Cost less any accumulated depreciation and any accumulated impairment losses; or
  • Revalued amount (Fair value at the date of revaluation), less any accumulated depreciation and any accumulated impairment losses.

If option (b) is chosen, all assets within a class of property, plant and equipment must be revalued and the valuations must be updated regularly.

A revaluation increase shall be credited directly to equity as revaluation surplus, unless it reverses a revaluation decrease of the same asset previously recognized in profit or loss.

A revaluation decrease shall be recognized in the profit or loss. However, the decrease is debited directly to revaluation surplus in equity to the extent of the credit balance in revaluation surplus.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The residual value and the useful life of an asset should be reviewed at least at each financial year-end. If expectations differ from previous estimates, the change in accounting estimate (FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors) is applied.

Impairment is recognised in accordance with FRS 36 Impairment of Assets.

The gain or loss on the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item and is included in the profit or loss.

FRS 16 specifies disclosures about property, plant and equipment.

Source – ICPAS CPA Singapore Wire 9 June 2009

ACRA, Van der Horst Energy and FRS102

a quiet pavillion

What happened?
The Accounting and Corporate Regulatory Authority (ACRA) has requested Catalist-listed Van der Horst Energy (VDHE) to restate its financial statements for fiscal 2008 on grounds that options granted to two executive directors should have been treated as an equity-settled share-based payment under a financial reporting standard (FRS).

ACRA confirmed that this is the first time it has directed a listed company to restate its financial statements under such circumstances.

What is the rule?
FRS102 ruled that every company that granted stock options have to account for them as a business expense in its income statement, instead of merely just having to mention them as a note in the annual report.

What is the implication?
After taking the fair value of the share options of $5.7 million as business expense, VDHE would now report a pre-tax loss of $2.83 million, instead of the pre-tax profit of $2.87 million that were earlier stated.

ACRA was not prepared to sit back and accept the auditor’s qualification of the accounts on the basis of non-compliance with FRS102. ACRA has now ruled for restatement of the financial statements.

FRS 14 – Segment Reporting v280509

FRS 14 prescribes the reporting of financial information by segment – information.

FRS 14 applies to enterprises whose equity or debt securities are publicly traded and enterprises in the process of issuing equity or debt securities in public securities market. Enterprises not in the above categories are also encouraged to disclose financial information by segment voluntarily.

A business segment is a component of an enterprise that is engaged in providing an individual or a group of product or service and is subject to risks and returns that are different from other business segments.

A geographical segment is a component of an enterprise that is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those in other economic environments.

The source and nature of an enterprise’s risks and returns determine whether the primary segment reporting will be business segments or geographical segments. Enterprises risks and returns mainly affected by differences in products and services should have its primary segment reporting as business segments and secondary segment reporting as geographical segments.

Likewise, enterprises risks and returns mainly affected by its operations in different countries should have its primary segment reporting as geographical segments and secondary segments as business segments. This is identified by the enterprise’s internal organizational and management structure and its system of internal financial reporting to senior management.

A business or geographical segment is a reportable segment if a majority of its revenue is earned from sales to external customers; and

a) these revenue from sales to external customers is 10% or more of the total revenue of all segments; or

b) its profit or loss results is 10% or more of the combined result of all segments in profit or loss, whichever is the greater in absolute amount; or

c) its assets are 10% or more of the total assets of all segments.

If total external revenue due to reportable segments is less than 75% of the total consolidated revenue, additional segments are identified as reportable segments until at least 75% of total revenue is included in reportable segments.

The disclosure for each primary reportable segment is as follows:-

a) separate revenue disclosure of sales to external customers, inter-segment revenue;

b) separate results from both the continuing and discontinuing operations;

c) carrying amount of segment assets;

d) segment liabilities; and

e) cost incurred in the period to acquire property, plant and equipment and intangibles.

The disclosure for each secondary reportable segment is as follows:-
a) separate revenue disclosure of sales to external customers and inter-segment;
b) carrying amount of segment assets; and
c) cost incurred in the period to acquire property, plant and equipment and intangibles.

Source – ICPAS CPA Singapore Wire 28 May 2009

FRS 12 – Income Taxes

casino in process

FRS 12 prescribes the accounting treatment for income taxes.

Current tax refers to the amount of income taxes payable/recoverable in respect of taxable profit/tax loss for the period. Income taxes payable for current and prior periods are recognized as a liability. Income tax recoverable or overpaid is recognized as an asset.

Deferred tax is the differences between the carrying value of the assets and liabilities in the balance sheet and the tax base of assets and liabilities. A deferred tax asset or liability arises if recovery/settlement of asset/liabilities affect the amount of future tax payments.

FRS 12 states that entities should recognize a deferred tax liability in full except in the following situations:-
a) where the initial recognition of an asset/liability in a transaction
i) is not a business combination; and
ii) at the time of the transaction, affects neither accounting profit nor taxable profit

b) deferred tax liability arising from the initial recognition of goodwill, or from goodwill for which amortization is not deductible for tax purposes.

c) deferred taxes on temporary differences arising on investments in subsidiaries, branches, associates and joint ventures if the entity is able to control the timing of the reversal of the difference, and it is probable that the temporary difference will not reverse in the future.

FRS 12 also states that a deferred tax asset is recognized to the extent that it is probable that a tax benefit will be realized in the future. This applies to the unused tax losses and unused tax credits.

Deferred tax is measured at tax rates expected to apply when the deferred tax asset/liability is realized/settled. The tax rates used must be enacted or substantially enacted by the balance sheet date. A deferred tax asset or liability is not discounted.

The tax consequences of transactions and events are recognized in the same financial statement as the transaction or event – that is, current and deferred taxes are:-

a) recognized in equity, if the items to which they relate are credited or charged directly to equity;

b) recognized as identifiable assets or liabilities at the acquisition date, if they arise as part of a business combination in accordance with FRS 103;

c) otherwise, recognized as tax income or expense.

Source – CPA Singapore Wire / ICPAS May 21, 2009