Category / FRS

by Edgar

Are SFRSs very different from IFRS?

How does Singapore Financial Reporting Standards (SFRS) fare in terms of our assessment as being IFRS-equivalent?

One opinion said that SFRS are almost in complete sync with IFRS and are applicable to all entities. How come? Singapore generally adopts new or amended IFRS within a three-month period but there are some exceptions.

  • FRS 40 Investment Property

IAS 40 was issued in year 2000 and effective for financial periods commencing Jan 1, 2001 while FRS 40 was issued in 2005 and effective for financial periods commencing Jan 1, 2007. By now, there are no timing differences between IFRS and SFRS.

Any difference between FRSs? Yes, the difference is in these areas:-

  • Differing finance lease requirements
  • One-off revaluation exemption from periodic revaluation for property, plant and equipment.

Anyway Accounting Standards Board (who will replace the Council on Corporate Disclosure and Governance with effect from Sept 1, 2007) is to present to Committee of European Securities Regulators (CESR) that the SFRS is equivalent to IFRS. Probably to get some sort of compliant certification from the Euro body.

Source – “Bridging the gap between accounting standards”, Aug 23, 2007, BT, Choo Eng Beng and Chew Tong Gunn

by Edgar

FRS40 and FRS12 equals more problem for companies

FRS40 on Investment Property

From 2007, annual changes in the fair value of investment properties are carried to P&L account.

So increased valuation of such properties would increase profit and consequent tax burden, vice versa. Recently, Overseas Union Enterprises (OUE) recorded fair value gains of $105.9 million in Q207 (nil in Q206) on its investment properties, due to the escalation in property values in line with the present exciting real estate market.

Such property firms would have already a cashflow issue in complying with FRS40 ie. cash to pay income tax on unrealised revaluation gains.

In addition to the above, property firms has another angle to consider ie. the impact of FRS12 on Income Tax on FRS40.

Companies have to account for the FUTURE tax consequence of a CURRENT event. This element of deferred income tax for any upward revaluation would have to be accounted for as an expense in the P&L.

What is “future tax consequence of a current event”?
An upward revaluation of an investment property

==> an increase in future stream of rental income OR increase in proceeds from disposal

==> make provision for the future tax liability today ie. deferred tax

While there is no actual cashflow for the provision, it is accounted for as an expense to create that provision.

Consequently, higher tax expense and higher effective tax rate.

Reference – “Property companies could be hit by deferred tax provision issues”, Aug 2, 2007 Busines Times, Michelle Quah
by Edgar

IFRS 3 – Business Combinations

Crux of the issue
When company Alpha buys company Beta, there are leeways and incentives for Alpha to plan its allocation between goodwill and intangible assets arising.

If Alpha’s objective were to maximise reporting of profit, it would be under-reporting the value of intangible assets and over-reporting the value of goodwill.

How come?
Goodwill is not amortised nowaday but subject to impairment test. The clever CFOs have discovered that it would easier to avoid an impairment charge.

Auditors, without a significant authoritative alternative source of info to verify the value of goodwill, would generally concur with the recommendation of the management.

Whereas for acquired intangible assets, they are separately valued on the balance sheet and subject to impairment test too. But as they are separately valued, each asset is individually tested for impairment. Thus it presents a higher risk of being devalued.

by Edgar

Stock Grant vs Stock Option

What is stock grant?
Company buys shares from open market and gives them to its staff according to an incentive programme.

What is stock option?
A company issues papers to its employees giving them the right to subscribe to shares of the company at a pre-determined price (usually below current market price) after a certain vesting period.

Similarities
Both forms of incentive plan enable the company to motivate employees to achieve superior performance as well as to align the interests of employees and shareholders’.
Both costs of incentive plan have to be expensed off against profit.

Differences
Expenses incurred to do stock grant is tax deductible as per cash compensation to employees. Stock option expenses are NOT tax deductible.
Determination of cost for stock grant is more definitive. There has been constant debate over the valuation of stock options.

Conclusion
SIA, SembCorp Industries, SMRT and StarHub, are recent adopters that have awarded employees with stock grants for the first time this year.

More expected to follow forth.

by Edgar

AirAsia may have to restate earnings?

Issue
In early Nov 2006, AirAsia, the Malaysian budget airline, have indicated that it may have to restate its earnings for its fiscal year ended June 2006. This is a result of difference in interpretation of a certain accounting policy. The dispute would translate to RM40mio swing in profit.

What is the accounting policy under dispute?

The focus is on FRS 112 under the Malaysian standard.

AirAsia has maintained their position that the International Financial Reporting Standard (IFRS) allows it to recognise unused investment tax allowances as deductible temporary differences.

It argued that its accounts for year ended 30 Jun 2006 will not present a true and fair view of the company’s financial performance if it were to comply strictly with FRS 112 under the Malaysian standard.

Malaysia’s Securities Commission (SC) had asked AirAsia to restate its accounts.

The Malaysian Accounting Standards Board (MASB) confirmed recently that FRS 112 was not a new standard, and that it is also consistent with the international standard.

Bottomline
AirAsia’s accounts could be qualified. The profit definition difference would have no impact on its financial position as the accounting treatment is non-cash in nature.

Anybody got any update on this case?

by Edgar

Hour Glass, Gems TV and FRS39

Hour Glass paid $15.5 million for a 5% stake in Gems TV Holdings towards the end June 2006.

Who is Hour Glass and who is Gems TV?
Hour Glass is in business of retailing luxury watches and accessories and listed in the SGX.

Gems TV buys cut gemstones, makes them into handcrafted jewellery in Thailand and sells the goods through a ‘reverse auction’ over television shopping networks to home buyers in the UK.

Gems TV is currently offering nearly 285.8mio shares at $1.08 apiece in its IPO now.

At the offer price of $1.08, that stake will be worth $44.5mio ie. a potential unrealised investment gain of $29 million after just 4 months!!! This is definitely a situation of “got money can make more money”.

What is Hour Glass’s investment horizon?
Hour Glass has indicated that it will hold the investment for the long term. It has also agreed that it will not, without the PRIOR CONSENT (as compared to “moratorium”) of the IPO’s global coordinator, dispose of any of the shares for 12 months after the listing. Thus technically speaking, Hour Glass may be able to sell its stake within 12 months.

How will Hour Glass account for this investment in their books?
Hour Glass has stated that the investment will be classified as being available-for-sale (AFS) under FRS39 – Financial Instruments: Recognition and Measurement and will thus be restated at fair market value as at the end of the financial year.

What are the impacts of this decision?
For investments under AFS, any unrealised holding gains and losses are deferred in reserves until they are realised or when impairment occurs.

Thus the unrealised gain of $29mio expected on 10 Nov 2006 will go to the reserves and not go to P&L.

Shareholders will thus see the impact on net tangible assets per share and no effect on the earnings per share.

by Edgar

FRS103 for 2 companies who got married

What is the Rule?
According to FRS 103 for Business Combinations, all intangible assets acquired in a business transaction must be separately identified and valued by the buyer. Applicable from Jan 2005.

This new requirement has affected the way companies think and work in the following areas:-

  • states how business acquisitions should be accounted for
  • the valuation of intangible assets
  • defining the various types of intangibles acquired into registered trade marks, patented technology, trade secrect and/or the plain old goodwill

What is the big deal between the old and new rulings?
Under the old regime, the buyer can basically disregard its existence by letting it “rot away” ie. being amortised away somewhere in the balance sheet.

Under the current FRS103, the buyer’s management has to make an effort in protecting and enhancing these intangible assets’ value after acquiring them. Annual review for impairment is necessary.

Shareholders of the buying company or the investing community would be reminded to query its management over any significant impact on profit due to changes to valuation of intangibles. This happened to DBS Bank last year.

For the selling company, it would accelerate a sale if its management is able to crystalise the intangible assets to the buying company by compiling a comprehensive customer database, registering trade marks, patenting innovative technologies and protecting trade secrets.