UPDATES ON FINANCIAL REPORTING IN SG
ACRA’s 10 Review Focus on 2015 Financial Statements1
1 “2015 Financial Statements” refer to financial statements with financial year ended between 1 January 2015 and 31 December 2015.
On 9 December 2015, the Accounting and Corporate Regulatory Authority (“ACRA”) issued Financial Reporting Practice Guidance No. 2 of 2015 which highlights the ten areas of review focus under the Financial Reporting Surveillance Programme (“FRSP”) for 2015 Financial Statements.
The practice guidance serves to guide directors and other financial statements preparers on some of the areas of potential misstatements in the financial statements, such as impairment assessment of long-life assets, impact from foreign currency movements, and the control assessment over investees.
A summary of the ten areas of review focus is provided in Table 1 at the end of this article for ease of reference.
New Auditor’s Report
On 30 July 2015, new and revised auditor reporting standards were issued by the Institute of Singapore Chartered Accountants (“ISCA”), following approval from ACRA’s Public Accountants Oversight Committee (“PAOC”). The new and revised standards and the related conforming amendments will be effective for audits of financial statements with financial years ending on or after 15 December 2016. Early adoption is permitted.
With this implementation, the auditor’s report is expected to be dramatically different from the current norm. This development is expected to revitalise corporate reporting and be a game-changer in the way an external auditor’s executes his judgment in each engagement. It is highly likely that the auditor’s report could turn into one of the most-read documents in an annual report.
Among the key changes, there is a new section on the auditor’s report highlighting “key audit matters” (“KAM”) where it requires an auditor to justify why each KAM in the audit was considered significant and how the matter was addressed in an audit. The objective of this could be seem as a step forward in enhancing better transparency of the financial statement where stakeholders, especially the shareholders and investors, will be kept abreast of significant matters or issues within the company. This development should ultimately bring about improved financial reporting and enhance the value of an audit.
A summary of the key enhancements to the auditor’s report is presented in Table 2 at the end of this article.
Implications to Stakeholders, Management and Preparers
The above changes and implementations will affect the entire financial reporting ecosystem, posing significant implications and challenges to all parties, including the stakeholders, management, financial statements preparers and the auditors.
Some of the pertinent issues that decision makers in a company ought to consider immediately are:
1. Embrace the change:
There is a need for decision makers to familiarise themselves with the enhanced requirements, its impact and leverage on these enhancements to strengthen their roles in improving the company’s financial reporting quality and corporate governance.
In addition, the incorporation of the KAM in the new auditor’s report could send different signals regarding the quality of the financial statements, regardless as to whether it is real or perceived. Therefore it is necessary that the management recognizes the change and its impact on their interaction with the stakeholders and public.
2. Increase communication with external auditors:
Management should actively engage the auditors in order to understand the requirements of the enhanced corporate reporting requirements and how these will affect the company.
It will be meaningful to have open dialogues with the auditors on significant developments and issues so as to arrive at an agreement on certain treatment of complex matters and also to ensure that expectations are aligned.
3. Pre-emptive measures:
Companies are encouraged to do a field test of the new auditor’s report requirements in financial year 2015 so as to better pre-empt the extent of work involved when the new standards kicks in from the financial year ending on and after 15 December 2016.
4. Identify and address significant risk areas:
In the spirit of enhancing the quality of the financial report and good corporate governance, management should dedicate sufficient competent resources to proactively review and address the company’s significant risk areas in respect of both the ACRA’s review focus and the new audit reporting requirements.
Changes are inevitable and have just begun. The real test is whether the management and auditors could work hand-in-hand to embrace these changes. In order to avoid the likelihood of a substantial increase in auditor’s remuneration, it is prudent for management to take immediate actions to gather sufficient accounting resources in managing those risky areas within the company. If this is appropriately managed, the likelihood of a substantial fee increase will be trivial.
If you wish to understand more on the implications of the enhanced corporate reporting requirements, please feel free to approach:
Ms. Lim Soh Yen Email: email@example.com
Ms. Yan Yun Ha Email: firstname.lastname@example.org
Ms. Heng Kin Yong Email: email@example.com
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© January 2016. This article is contributed by Acutus LLP. All rights reserved.