Majority in CPA survey favour simplified treatment of SME accounting

A difficult bak kut teh lunch

The following are the results of a survey done by CPA Australia and the Corporate Governance & Financial Reporting Centre (CGFRC) at the National University of Singapore (NUS). It is reported in BT today.

  1. 42% agreed with the definition of an SME in the proposed IFRS as ‘entities that do not have public accountability and publish general purpose financial statements for external users’.
  2. More than 60% felt that we should also include large unlisted companies which do not have public accountability into the new standard.
  3. 72% said the new standard would better meet the needs of users of SMEs’ financial statements.
  4. 69% said they feel it would reduce the financial reporting burden for SMEs that want to use global reporting standards.
  5. 59% said they believe it would reduce the audit burden of SMEs in general.
  6. Banks who lend monies to SMEs are expected to be the main users of the financial statements.

What are some of the suggestions to simplify certain accounting treatments for SMEs?

SMEs are generally not in favour of complex accounting standards – for example:-

  • share-based payments,
  • accounting for impairment,
  • fair value accounting.

What are the respondents’ concerns?

  1. Adopting SME-specific accounting standards today would lead to difficulties in aligning financial statements to full IFRS in future, when needed.
  2. SMEs today may dread the work of converting from current full FRS to the new SME standards.
  3. Many believe the guidance to implement the proposed IFRS for SMEs is inadequate.

P/S – On Wed, I will attend the Mr Kon’s presentation at ASME.

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Incentives for Overseas Investment

Why the need for Singapore companies to invest overseas?
In a very simple manner, to make more monies from a bigger market size.

There was a rallying call from the government under Goh’s administration for Singapore companies to go overseas. I was working for one such company who took up that challenge.

We were overcame by lack of attitude preparation to operate in a foreign market and finally succumbed to the financial crisis in the late 1990s.

Recently, Mr David Sandison in his article in BT’s “Tax alone cannot solve everything” raised the issue on overseas investment again. He said Singaporeans still need a push to get them out and about in the world, to take their businesses across borders and leave a footprint in the global sands.

Currently, incentives to venture abroad are virtually non-existent, and even less used, as they reward only failure through deductions for losses.

The interpretation of our tax schemes may be harsh. They were crafted to anticipate losses from early days of any investment.

Perhaps it is timely now to heed Mr Sandison’s call to change the approach.

Directors are sweating over Interim Results

What is the Rule ?
Directors are required to confirm that “to the best of their knowledge, nothing has come to the attention of the Board of Directors which may render the interim results false or misleading”. Effective 1 Sep 2006.

This is a negative confirmation rule ie. to state that generally there is nothing wrong, as compared to “generally everything is ok”.

So why are the directors sweating over it?
– unable to rely on the comprehensive audit work done by auditors in year-end audit
– they have to worry whether the internal processes and procedures are vigorious
– especially if the company has operations over many countries with thousands of employee
– wondering to buy professional assurance service and incur more compliance costs

What is the proposed solution?
ACCA has proposed that directors should be allowed to explicit:-
– add a “read-and-act-at-your-own-risk statement” and,
– the numbers are mere estimates.

Conclusion
There is a need to find a balance to give some interim information to shareholders on the performance of the company and yet put certain amount to pressure to ensure credibility of information presented by directors.

Reference – “Use estimates to take heat off directors: Accounting bosy”, Lee Su Shyan, ST 25 Sep 2006

SingTel got "mulled" over a possible writedown for Optus

What is the Rule?

Under Singapore FRSs, SingTel has ceased amortisation of goodwill on acquisition since April 2004.

The carrying value of goodwill continues to be reviewed annually or whenever there is an indication of impairment.

What are the possible indications of impairment?

  • introduction of a superior product by competitor
  • significant change in the business environment

How much monies are we talking about ie. size of goodwill in Singtel’s books?

  • Singtel paid $13bi0 for Optus in Oct 2001. $11.4bi0 (about 87%) of which is for goodwill.
  • By FY2005, Singtel had reduced goodwill by $1.78bio. ie. the Group’s profit had been reduced by that value.
  • The auditors had just signed off the accounts for year ended March 31, 2006 with no request to adjust the goodwill figure.

A Mr Patrick Russel, a Merrill Lynch analyst attempted to value that intangible assets from different approaches. The current book asset value of Optus is $18.2 bio.

In his first approach, he used the current Singtel’s share price of $2.50, multiplied by the no. of shares outstanding and then less all liabilities. It churned out a figure of $10.6 bio.

He calculated the present value of Optus’ future cash flows in his second approach to give $9.4 bio.

Both Mr Russel’s approaches highlighted the difference of about $5 – 8 bio from book value. I would love to know how Singtel does its valuation. While it may be true that goodwill amortisation and impairment charges are non-cash accounting adjustments in post-acquisition years, Singtel did pay good monies of about $13 bio back in 2001.

Merrill Lynch has reaffirmed its SELL recommendation on Singtel. So if you were one of those Singaporeans who are holding Singtel shares, should you panic and sell? Mr Heng, Singtel spokesman, correctly highlighted the need for investors to read widely from other analysts for a balanced view.

Till my next post, good night…

Exemption for Foreign Income

Law
Dividends, branch profits and service fee income from overseas will be exempt from tax when remitted into Singapore.

Two conditions to be fulfilled:-

  • The country from which the income is received imposes a corporate tax rate of 15% or more and;
  • that some tax is actually imposed in that country.

Issue #1
Tax has to be paid in the country where the profits were earned.
It must be on a first-tier “subsidiary” level basis.

Issue #2
IRAS will need to examine and grant exemption only a case by case basis upon all conditions duly satisfied.

If total dividends paid do not exceed total cumulative taxed profits, then you should be all right on the assumption that taxed profits are deemed to have been distributed first. For a young company, it would be relatively easier to sort out the taxed income from untaxed income; and why they were untaxed.

However in circulars issued in May 2006 by IRAS, exemption for foreign income would still be applicable even if no tax suffered on those income given the following:-

  • utilisation of tax losses
  • existence of tax free capital gains

Conclusion

The exemption is a move in the right direction as observed by Mr Sandison. Especially when our neighbours in Malaysia and Hong Kong have already done this. Why is Singapore seems to be lagging behind in inplementing changes?

But are we still too careful in loosening the apron strings?

Reference – Singapore Tax Roundup – David Sandison, PricewaterhouseCoopers, The Directors’ Bulletin, Second Quarter 2006