29 May 2020
On 22 May 2020, the Accounting and Corporate Regulatory Authority (“ACRA”) issued Financial Reporting Practice Guidance No. 1 of 2020 on “Proposed areas of review focus by directors on the financial statements affected by the Covid-19 pandemic” (“Guidance”) to help directors in their reviews of the upcoming financial statements during the Covid-19 pandemic. The Guidance highlights warning signs of some possible non-compliance(s) with accounting standards, and provides directors with questions to ask management and statutory auditors when assessing the impact from the Covid-19 pandemic on the financial statements.
Financial position and sustainability
When reviewing the financial statements for the financial year ended 31 December 2019 and beyond, directors ought to pay close attention to the following areas involving management’s estimates, and question the assumptions vigorously:
In respect of the carrying amount of assets
- Property, plant and equipment, goodwill and other intangible assets: Directors should expect management to perform impairment tests, and a smaller headroom (or impairment loss to be recognised) to result from these tests.
- Investment properties and other non-current assets held at fair value: Due to the circuit breaker measures, property valuations may have to be performed based on information provided by the owner or from other sources. Directors should ensure that management has provided accurate information to valuers in these areas.
If the fair value of properties is expected to change significantly between the year-end date and the date that the financial statements are authorised for issue, directors should consider performing a revaluation.
- Inventories: Directors should ensure that seasonal inventories and perishable products which might be exposed to the risk of loss due to damage and/or contamination are written down to their net realisable value.
If a company’s production level is abnormally low, directors should still expect the costing of inventories to be based on normal production capacity so as to avoid overstating the cost of inventories. Unallocated fixed overheads should be expensed off in the period in which they are incurred. Directors should also ensure that fixed assets in idle production lines are continually depreciated.
While the Singapore Government has granted a six-month extension for property developers to meet the conditions to qualify for Additional Buyer’s Stamp Duty (ABSD) remission, directors of property developer companies should still consider the impact of shrinking demand on unsold units.
- Trade, other receivables and contract assets: Directors are reminded to apply more rigour when reviewing management’s expected credit loss estimates.
In respect of the carrying amounts of liabilities
- Provisions: Directors should ask management to identify onerous, or potentially onerous, contracts. When determining the provision amount, directors should not only consider the penalties (if any) arising from late or non-fulfilment of these contracts, but also the enforceable force majeure clauses that may relieve the company from these penalties.
If a company is making plans to restructure, directors are reminded that the related expense can be recognised only when there is a detailed formal plan and valid expectations had been set with the employees who will be affected. Provision for future operating losses or business recovery costs is strictly prohibited.
- Borrowings: Directors should ask management to forecast financial performance and positions for assessing compliance with loan covenants. In the case where a breach is possible, management should engage lenders early for waivers and/or to negotiate for re-financing arrangements. Waivers obtained after year-end cannot be used to remedy the classification at year-end.
Going concern, disclosure and others
- Going concern: Directors should carefully evaluate with management the impact on projected working capital and the company’s ability to service its debt obligations when they fall due. Where necessary, directors should work with management to plan for additional or alternative sources of financing.
Cash flow projections should also be forecasted in sufficient granularity (e.g. by month) to ensure the company remains liquid and viable for the next 12 months and beyond. The financial statements may be approved many months after the financial year-end. With the rapidly changing environment, cash flow projections will need to be updated and re-assessed before authorising the financial statements.
If there are material uncertainties that cast doubt over the company’s going concern, directors must make necessary and timely disclosures to inform investors.
- Financial instruments: Companies in the energy and other commodity industries should re-look at the economic viability of their long-term commodity contracts, both from the financial sustainability of their counterparties and fair valuation of the contracts. Directors should also look out for any speculative activities, which may run contrary to the company’s policies.
If hedge accounting is applied, directors must re-assess with management if the hedge is still effective. If a hedged forecasted transaction is no longer expected to occur, the hedge accounting should also be discontinued prospectively, with any accumulated gain or loss immediately reclassified to profit or loss.
Directors should work with management to tailor the financial risk management disclosures to the company’s actual circumstances, moving away from the typical boilerplate disclosures.
- Subsequent events: Directors should pay attention to material subsequent events that require disclosures. The Guidance sets out examples of when investors should be made aware through disclosures in financial statements.
- Government relief measures: Directors should discuss with management the applicable Government relief measures and determine their appropriate accounting treatments.
The Institute of Singapore Chartered Accountants (“ISCA”) has published Financial Reporting Bulletins 5 and 6 to provide guidance on how to account for property tax rebates and job support scheme, respectively.
ISCA, in collaboration with ACRA, has also formed a joint Covid-19 working group to address challenges faced by the accounting profession in relation to Covid-19. FAQs sharing the working group’s deliberations on the accounting and auditing issues faced have been published.
Internal control and audit considerations
Under the Companies Act, directors and other officers of public companies and their subsidiaries must devise and maintain internal accounting controls sufficient to provide a reasonable assurance that (a) assets are safeguarded against loss from unauthorised use or disposition, and (b) transactions are properly authorised and that they are recorded as necessary to permit the preparation of true and fair financial statements and to maintain accountability of assets.
In many countries including Singapore, employees are working from home. With this change in work procedures, and with internal auditors unable to visit overseas businesses to conduct audits, the risk of material misstatements in the financial statements and opportunities for fraud will increase. ISCA’s joint Covid-19 working group will be publishing some FAQs to guide accountants in business in addressing these risks.
Directors should take the following action to address these concerns, including the following:
- Engage management and internal auditors on measures put in place to mitigate risks.
- Expect management to review and ensure adequate segregation of duties for key processes.
- Audit Committees should also revise internal audit plans to prioritise the audits of high risk areas, and find ways to mitigate the risks.
- Work with management to facilitate the work of statutory auditors.
- In the case where the issuance of the modified audit reports cannot be avoided, implement a plan to address the qualification with the aim to receive a clean audit report in the next financial year.
- Engage statutory auditors early to discuss the audit plan for the next financial year.
- Engage the help of specialists for valuations and other accounting areas that involve more judgements and estimates due to market volatility.
Guidance for public accountants conducting audits
To provide guidance on how public accountants should conduct their audits amid the Covid-19 situation, on 20 May 2020, ACRA issued Audit Practice Bulletin No.1 of 2020 titled “Key audit considerations - Covid-19”.
In addition, we have a cross-disciplinary Covid-19 Legal Task Force consisting of Partners across various practice areas to provide rapid assistance. Should you have any queries, please do not hesitate to get in touch with us at email@example.com.