by Edgar

FRS 18 Revenue

a marriage contract in progress

Hi AWE readers,

In the Exposure Draft of Proposed Improvements to FRSs expiring Oct 3, 2008, I wish to share an interesting portion where ASC proposes guidance on determining whether an entity is acting as a principal or as an agent.

What is the big deal?
The clarification of the status of either principal/agent will determine how much of an invoice/contract you would record as your company’s turnover.

Allow me to illustrate
Let assume an IT system integrator has got a contract to deliver the following:-
1. Ten servers and 100 laptops – $3 millions
2. Consultancy service (including set up and integration) – $0.5 million

Upon completion of the contract, how much should the IT company record as its Sales Turnover? It could be just $0.5 million or seven times more ie. $3.5 millions. So which is it?

Key point
FRS 18 requires you to determine whether you are acting as a PRINCIPAL or as an AGENT.

ASC is proposing the following for adoption to help you.

When is an entity acting as a PRINCIPAL?

  1. the entity has the primary responsibility for providing the goods or services to the customer or for fulfilling the order, for example by being responsible for the acceptability of the products or services ordered or purchased by the customer;
  2. the entity has inventory risk before or after the customer order, during shipping or on return;
  3. the entity has discretion in establishing prices, either directly or indirectly, for example by providing additional goods or services;
  4. the entity bears the customer’s credit risk.

When is an entity acting as an AGENT?

  1. An entity is acting as an agent when it does not have exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. One feature indicating that an entity is acting as an agent is that the amount the entity earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer.

Source – ED – Proposed Financial Reporting Standard (Oct 3, 2008), ASC

by Edgar

UOLD case and S33A of Stamp Duties Act

Ion in the making

Who are the parties involved?
UOL Development (Novena) Pte Ltd vs Commissioner of Stamp Duties

What are the facts of the case?
In 2005, 53 owners at Minbu Road sold their respective properties on an enbloc basis to UOL Development after a tender. UOL Development’s lawyers subsequently sent separate letters of acceptance to each owner. UOL Development was effectively trying to treat this as 53 separate purchases instead of as an en bloc purchase.

The intended outcome was to reduce the stamp duties payable by UOL Development as the rate of stamp duties is progressively structured.

To illustrate
I assume each property is $1 million and the en bloc price is $53 millions.
The stamp duties payable for $53 mio en bloc price would be $1,584,600.
The stamp duties payable for $1 mio x 53 transactions would be $1,303,800.
A saving of about $280,000!!!

Decision of the Court
The Court ruled against UOL Development for reason that the original intention and contract was for a Sale & Purchase on an en bloc basis.

The Court also said that there was NO “sound commercial basis” for 53 separate contracts and the arrangement was “so contrived that it was clearly intended to reduce or avoid tax liabilities”.

Reference – Lim Gek Khim, “Tax Planning – When does it become tax avoidance?”, Singapore Accountant, Sep/Oct 2008.

Click http://www.AccountingWithEdgar.com for another view of Edgar.
by Edgar

Tax Planning or Tax Avoidance?

F1 in Singapore soon but Look at the mess!

As we consult with our clients on structuring a business and its activities, we often have to check ourselves as to whether we are helping the client to manage its tax exposure efficiently as compared to facilitating the client in avoiding tax.

What is it that so difficult, you may ask. Just go and find out the definition of tax planning and tax avoidance and; just follow the letters of the law.

Dr Richard Hu, the then Minister of Finance back in 1999, attempted to give some meat to the meaning of tax avoidance in the second reading of the bill to adopt Section 33A of the Stamp Duties Act. He said,

  • tax avoidance schemes are purely tax driven, with little or no commercial value or rationale.
  • tax planning are activities/ schemes structured to be tax efficient in accordance with the relevant tax laws.

But am I any wiser after the reading that? I don’t think so.

As we push the boundary of tax planning, are we edging closer to tax avoidance?

In my next posting, I will cite a real case for discussion.

Source – Lim Gek Khim, “Tax Planning – When does it become tax avoidance”, Singapore Accountant, Sep/Oct 2008.

Click http://www.AccountingWithEdgar.com for another view of Edgar.
by Edgar

If you don’t tell,…

Singapore under seige for F1

The managing director of Chuan Soon Huat Industries Group and four other directors were charged in Court for failing to tell the world that there has been a change in effective control of a public listed company.

Mr Lee Tian Teck, the executive chairman, was not in control of the company for two and half years. But nobody bothered to report the matter to the Authority for that long a time.

The gang of five has thus committed an offence under Section 157(1) and if found guilty, each could face a maximum fine of $5,000 or get the jail hospitality for up to a year.

Obviously, we cannot have a situation where there has been a coup in the government of a country. Amazingly, the gang can keep that a secret for so long in this small island of Singapore.

by Edgar

FRS 38 Intangible Assets – Summary

An intangible asset is recognised at cost if and only if:-

  1. the asset meets the definition of an intangible asset;

  2. it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and

  3. the cost of the asset can be reliably measured.

Internally generated goodwill, brands, mastheads, publishing titles, customer lists and similar items are not recognized as assets. Intangible items that do not meet the criteria for recognition as an asset is recognized as an expense when incurred. Expenditure that was initially recognised as an expense is not included in the cost of an intangible asset at a later date.

Research Phase
Expenditure on research is recognized as an expense.

Development Phase
Intangible asset arising from development is recognized only if an entity can demonstrate all of the following criteria in getting the intangible asset ready either for use or sale:-
(a) the technical feasibility of completing the intangible asset;
(b) its intention to complete the intangible asset;
(c) its ability to use or sell the intangible asset;
(d) how the intangible asset can generate probable future economic benefits;
(e) the availability of adequate technical, financial and other resources to complete the development; and
(f) its ability to reliably measure the expenditure due to the intangible asset during its development.

Subsequent to its initial recognition, an intangible asset is carried at:
(a) cost, less accumulated amortisation or impairment losses; or
(b) revalued amount (fair value at the date of revaluation), less any subsequent accumulated amortisation or impairment losses.

An entity shall assess whether the useful life of an intangible asset is finite or infinite. The useful life is infinite if there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. An intangible asset with infinite useful life is not amortised but is tested for impairment at least annually. The depreciable amount of an intangible asset with finite life is amortised on a systematic basis over its useful life.

Gain/loss on derecognition of an intangible asset is the difference between the net disposal proceeds and the carrying amount of the item. The gain/loss is recognized in the profit or loss.

Source – ICPAS ePublication Issue 25/2006 20 Jun 2006

by Edgar

FRS 37 Provisions, Contingent Liabilities and Contingent Assets – Summary

The objective of FRS 37 is to prescribe the accounting standards and disclosure for provisions, contingent liabilities and contingent assets.

A provision is a liability of uncertain timing or amount.

We recognise a provision when:-
(a) an entity has a present legal or constructive obligation as a result of a past event;
(b) it is probable that an outflow of economic benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation

A constructive obligation is an obligation where the entity, through its actions, has indicated to other parties that it will accept certain responsibilities and as a result has created an expectation that it will discharge those responsibilities.

Provision is the best estimate of the expenditure required to settle the obligation at the balance sheet date. Provision should be reviewed and adjusted to current best estimate at each balance sheet date.

A constructive obligation to restructure arises only when an entity has:

  • a detailed formal plan for restructuring; and

  • raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

A contingent liability is not recognised, but is disclosed unless the possibility of an outflow of resources is remote.

A contingent asset is not recognised, but is disclosed when an inflow of economic benefits is probable.

FRS 37 specifies disclosures about provisions, contingent liabilities and assets.

Source – ICPAS ePublication Issue 23/2006 13 Jun 2006

by Edgar

IFRS Conference – Non Controlling Interest


Non controlling interest is a stake ie. percentage of shareholdings, that is not high enough to control the company’s financial and operating policies.

Situation
So assuming if you were buying a 20% stake in a company as a passive investor, how much should you pay for that stake or how much should the seller be selling it for?

20% of net book value? 20% of [fair value of net assets + goodwill]?

Well the answer is:-

20% of value of business LESS the value of non controlling features

Now that we got the formula, we need to work on valuing the business’:-
– assets and liabilities, both tangible and intangible
– goodwill
– non controlling features

Can tell me how?

The moral of the story – We still go a job until the confusion stops.

by Edgar

FRS 16 Property, Plant and Equipment – Summary

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:-

  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

  1. Cost less any accumulated depreciation and any accumulated impairment losses; or
  2. 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, (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 ePublication Issue 3/2006 17 Jan 2006

by Edgar

IFRS Conference – What say you?

veg juice in test tubes @$4

This is a situation described by an accoutant from a local bank. Let me know how would you, as the accountant, would advise the bank officer.

Situation
Within the same bank, there are two departments, A and B, investing and trading for 2 different investment funds with different objectives.

Dept. A is looking to sell a certain financial instrument that is no longer fit its investment objective. Coincidentally, Dept. B is looking to buy the same financial instrument for its portfolio.

Issue
Should Dept A just sell to Dept B directly? And at what price so as to be fair to both sets of investors of the respective funds?

What say you?

by Edgar

Mr Goh Lian Tse, what are you talking about?


Mr Goh Lian Tse, Chairman and CEO of Innovalues, has written in to BT Forum yesterday in an attempt to salvage some “face” for the embarassing debacle of appointing a bankrupt to the position of Group CFO.

  • He said his company’s whistle blowing policies are working fine despite conceding on the lapses in their hiring procedures. I wonder who blew the whistle?
  • Mr Goh said the employee was the country financial controller for a Malaysian plant and he was brought to Singapore with a view to be appointed as the Group CFO. Basically his simple defence here is that the appointment to Group CFO position was not confirmed yet. But is he also implying that it is all right for a bankrupt to be a country financial controller in Malaysia but not good enough to be a Group CFO in Singapore? Please enlighten me.

Mr Goh, please confirm whether the said employee is being considered for the position of Group CFO or not given the 2 contradictory statements I am quoting from your letter to the Forum.

  1. “He was redeployed to Singapore with a view to being confirmed as group financial controller.”
  2. “At no time was the said emplyee being considered for the CFO position.”

“Why can’t a bankrupt be a CFO?”
I agree that a person, bankrupt or otherwise, would need to have some income to keep oneself alive and to pay his/her creditors. But the key question is whether a bankrupt can be a CFO? In my opinion, NO. As a bankrupt, the person has demonstrated that he/she is unable to manage his own financial affairs. And thus I am unable to justify a bankrupt to manage the financial affairs of a company where the likelihood of many are at stake.