Directors be warned – Areas of focus for 2019 reporting

Ahead of the annual financial reporting season, ACRA has proactively issued its first Financial Reporting Practice Guidance for 2019 on 1 February 2019 to highlight the areas of review focus for 2019. It is expected that the implementation of the new accounting standards FRS115, FRS109 and FRS 116 (effective in 2019 with disclosure for material impact on FY2018) will have a significant impact on most listed companies relating to compliance with loan covenants, dividends payout, exposure to taxes and remuneration schemes.

The move is notably a pre-emptive advisory for all listed companies and its directors to step up their responsibilities to improve the compliance of financial statements in light of the new accounting standards. It is likely that with this advisory and clarification, ACRA is expecting that the financial statements selected for review under the subsequent Financial Reporting Surveillance Programme (FRSP) will hopefully show an acceptable standard of compliance. It in turn also indicates that ACRA expects a minimum (not best!) standard is expected for compliance and likely a tough stance will be taken for non-compliance.

As expected, FRS115 has taken the limelight here. For any revenue recognition over time, both the condition of no alternative use to the Company and enforceable right to payment for performance to date must be satisfied. Specifically, it is highlighted that right to receive progressive payments or compensation for the loss of profit is not equivalent to right to payment for the performance completed to date. For bundled transaction with upfront fee collected directly related to a material right for goods or services to be delivered or performed in the future, eg an option to contract renewal, this has to be deferred and recognised over time. Borrowing costs for construction of properties should not be capitalised even if the sale is ready but construction is not yet completed. A conservative view is adopted despite IASB has not yet issued formal guidance on this issue.

Unquoted investment can now no longer be allowed to be reflected at cost under FRS109 on the basis that its fair value cannot be reliably ascertained. Reasonable efforts must be taken by directors to assess its fair value. Directors now cannot use the short-cut of cost basis unless it is tested under the seven indicators that did not show otherwise.

Impairment assessment has to be done on fair value for more assets eg investment property, derivatives, biological assets, financial assets such as unquoted equity instruments(mentioned above) and convertible debts.  Directors have to challenge the Company management of the competency of the valuer, robustness of the model, reasonableness of the underlying inputs/assumption and frequency of fair valuation. For companies with significant operating lease liabilities under previous accounting standard, material disclosure will need to be make on the impact of these off-balance sheet liabilities as both lease liabilities and right-to-use assets, possibility impacting financial ratios or loan convenants.

In addition, the directors have been advised to exercise due efforts in ensuring relevance of the presentation of the cashflows statement and adequate disclosure and treatment in accounting for reflecting the economic substance of the transaction.

It is expected that this will be a busy year of restatement, adjustments or assessment of the impact of new accounting standards for most listed companies. It will be interesting to see if any out-of-the-world creativity accounting treatment will emerge and how this would withstand the rigours of the new accounting standards.