Accounting standards are a crucial aspect of a global financial landscape that helps to ensure transparency, consistency, and comparability in financial reporting. As one of the major global financial centers, Singapore also implemented an accounting standard that was recognized by the international body.
The Accounting Standards Council (ASC) in Singapore (now ACRA) has chosen to use International Financial Reporting Standards (IFRS) as the foundation for its accounting standards. This was done to improve the quality of the financial information and to align with the worldwide trend of making accounting standards more consistent.
In the past, different countries had accounting standards that mirrored their economy and politics, which shaped the country's business practices. Unfortunately, this discrepancy often results in a lack of international comprehensibility and acceptance.
But today, globalization has changed the business world; i.e. many foreign companies operate in foreign countries, and cross-border investment, thus creating financial information that can be easily understood globally is important.
There are mainly two types of accounting standards; the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). The main difference between the two is that IFRS is globally recognized as a set of accounting standards used by many countries, while GAAP is a set of accounting standards primarily used in the United States.
The Key Principles in Singapore Accounting Standards
As mentioned earlier, Singapore has adopted IFRS for every company incorporated in the country. However, these rules were also customized to fit specific needs and regulations in Singapore. These adjustments are known as the Singapore Financial Reporting Standards (SFRS). Thus, though SFRS sticks mainly to the principles and guidelines of IFRS, it also includes some changes to match local laws.
SFRS consists of 41 standards that cover a variety of accounting topics. Some standards focus on particular financial activities, like how to deal with leases, employee benefits, income tax, and many others.
Starting in 2003 all companies incorporated in Singapore, including foreign companies branches must follow SFRS when making their financial statements. These statements include things like balance sheets, income statements, cash flow statements, notes that explain the financial statements, and others.
Below are some of the key principles that shape the SFRS accounting standards to match the Singaporean company's needs.
- Alignment with IFRS
While SFRS has made some changes to remain relevant for Singapore’s unique business environment, the SFRS will still closely follow the IFRS. This alignment will ensure that financial reporting in Singapore is in line with international practices.
- Accrual Accounting System
In Singapore all financial reports should implement the accrual accounting system, where transactions are recorded when they happen and not when the money is exchanged. This system will help to give an accurate picture of company cash flows and how efficiently it operates.
- Comparability
The SFRS also standardizes how financial information is presented, this aims to make comparing different financial statements much easier. Whether looking for the statements from the same company or not, this consistency will help the readers to easily understand and spot differences or similarities. In turn, this standard will help aid better decision-making in business.
- Relevance
The financial statement produced by a company must provide essential information that can help readers predict future outcomes or confirm past expectations in the company. This is crucial to help provide evidence regarding the company’s financial health.
- Verification
SFRS also requires companies to make their financial statements transparent, thus the data presented can be easily checked to make sure that the information and assumptions gathered can be trusted.
Singapore Accounting Standards for Small Entities
With the opportunity to easily build a business and the favorable tax system, it is only natural that Singapore has become the leading startup hub in Asia. Thus the small businesses (SMEs) in Singapore are also one of the great factors that shaped the country's economic prosperity.
Unfortunately for these SMEs, the accounting standards they have to follow might become increasingly too complex. This complexity can be a challenge for them, as the SFRS can be tough and puts a strain on their limited resources.
To accommodate the SME's needs, Singapore also introduced the other options that will perfectly suit the small and medium-sized business in January 2011 - following the IFRS for SMEs which had been published the year before by the Accounting Standards Council. The goal of the Singapore Financial Reporting Standards for Small Entities widely known as SFRS for SE is to make financial reporting for SMEs much easier, but still maintain high quality, transparency, and comparability in financial reporting.
The main change for SFRS for SE is that it will require less detailed information to disclose, which makes it more cost-effective and less of a burden for small businesses. The rules about how to measure and record things are also much simpler than the regular SFRS.
What Are The Eligibility Criteria for SFRS for SE?
As small businesses are a significant part of Singapore’s economy, after the introduction of the SFRS - many of these small companies had a hard time meeting all the detailed requirements for SFRS due to their limited resources.
Now with the availability of SFRS for SE, a company incorporated in Singapore or a branch of a foreign company in Singapore can use SFRS for SE as long as they are under eligible criteria. Here are some of the eligibility conditions:
Not a publicly accountable company
An entity is considered to be “publicly accountable” if:
- Its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market
- It is a deposit-taking entity and/or holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses
- It is a public company defined under the Singapore Companies Act (Cap.50)
- It is a charity defined under the Charities Act
A small entity
A company is categorized as a small entity if it satisfies 2 out of 3 of the criteria below:
- Total annual revenue of not more than S$ 10 million
- Total gross assets of not more than S$ 10 million
- Total number of employees of not more than 50
A business is only eligible to be SFRS for SE if it satisfies the above requirements for the previous 2 consecutive years. While a newly incorporated company is eligible to use the SFRS for SE in the first 2 years of its incorporation.
How to Choose Between SFRS or SFRS for SE?
With the introduction of the SFRS for SE, smaller companies now have more flexibility to choose the accounting standards that are suitable for them. However, if you have a small company and are planning to switch to SFRS for SE, below are the important things that need to be considered first.
- Expansion and IPO Plans
If your company is thinking about getting bigger or going public, it might not qualify for the SFRS for SE. Thus, it is better to stick with the full SFRS instead of changing lanes.
- Transition Cost
If you’re planning to change from the full SFRS to the SFRS for SE, please note that it can be expensive as you may need to cover the cost of staff training, purchasing new software, and upgrading the accounting system. If you are already using SFRS and doing it well, then it might be full of hassle and costly to change to SFRS for SE.
- Lender Requirements
If your company needs a loan or funding from a bank, then it might be important for you to check on the requirements they have. Some of the lenders usually need financial statements that follow the full SFRS. Changing to SFRS for SE might limit your options for getting funds.
To conclude, small businesses that might reach the requirement size limit for SFRS soon might be better to stick to the full SFRS instead of following SFRS for SE as changing to the SFRS in the future can be costly. SFRS for SE is a good fit for startups or companies whose financial statements aren’t needed by outside parties.
Hire WealthBridge for a Hassle Free Financial Reporting in Singapore
Planning to incorporate a company in Singapore and need expert guidance on Singapore Accounting Standards? Look no further, because WealthBridge will have you covered.
Whether you have questions about the SFRS or SFRS for SE, need assistance in choosing the best accounting standards for your business, or wonder how to transition from one set of standards to another; WealthBridge's accounting services Singapore can provide guidance and support based on your specific needs.
Wait no more and reach out to us for a consultation. Let's ensure your financial compliance and success in Singapore!