Moore Stephens Financial Reporting Seminar 2018€¦ · Source: IFRS Seminar 2017 slides, by Dr Andrew Lee Recap –ECL Practical Expedients •Example: Provision matrix based on

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21 September 2018

SFRS Precise. Proven. Performance.

Moore Stephens Financial

Reporting Seminar 2018

Contents1. Welcome address

2. Key Financial reporting changes

- Revenue Recognition

- Financial Instruments

- Adoption of SFRS(I)

- Leases

- Other changes

3. Break

4. Valuation of equity investments

5. Code of Corporate Governance 2018

6. Corporate Performance Management

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Welcome addressNeo Keng Jin,

Partner and Head of Audit, Moore Stephens LLP

Neo Keng Jin

Keng Jin joined Moore Stephens Singapore from another accounting firm in 1994 and was appointed a Partner in year 2001 in the Audit and Assurance Division. He is a Fellow Chartered Accountant of Singapore and an approved liquidator registered with the Accounting and Corporate Regulatory Authority of Singapore (“ACRA”).

During his career with Moore Stephens Singapore, he has been involved in audit, corporate recovery and special engagements for various industries including agriculture, consumer business, manufacturing, real estate, retail, shipping and technology companies. In addition, he has undertaken a number of special engagements in an advisory role in restructuring advice, business viability studies, financial due diligence and fraud and investigation audits.

Keng Jin is the Head of Initial Public Offerings (IPO) / Reverse Take Over (RTO) Group. He is also a director of Moore Stephens Asia Pacific Limited, panel member of ACRA’s Investigation and Disciplinary Committee and member of ISCA – Financial Statements Review Committee.

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Wong Koon Min

Koon Min is an Audit Partner at Moore Stephens LLP, and leads the technical and compliancefunctions within the firm, overseeing financial reporting and audit advisory as well as internalquality reviews and technical compliance. He presents widely in public presentations and privateclient seminars, and has more than eight years of advisory experience in the interpretation andapplication of International and Singapore Financial Reporting Standards. He is also a member ofthe Financial Reporting Committee of the Institute of Singapore Chartered Accountants.

Koon Min graduated with a Bachelor of Accountancy degree from the Nanyang Technological University in Singapore. He is a member of the Institute of Singapore Chartered Accountants and the Institute of Chartered Accountants in Australia. He has over 17 years of public accounting experience in Singapore.

Professor Andrew Lee

Andrew is currently Associate Professor of Accounting Practice at SMU, and has more than 30years of experience in both academia and the finance sector. Prior to joining SMU, Andrew heldvarious senior analyst appointments in several global financial institutions specializing in creditrisk, bond ratings and structured financial products. He was also previously a finance faculty andresearch director at NTU’s Nanyang Business School.

A recipient of multiple teaching awards throughout his academic career, Andrew has also taughtextensively in industry executive programmes, as well as consulted and led research projects formany private and public-sector organizations.

Andrew continues to serve actively in the academic and professional community. He waspreviously a council member of the Singapore Accounting Standards Council, and also serves onseveral committees of the Singapore Accountancy Commission.

Andrew’s current teaching and research interests are in the areas of financial instrumentsreporting, valuation, and financial data analytics. He holds a PhD degree in accounting andstatistics from New York University, and is a Fellow Chartered Accountant as well as CharteredValuer and Appraiser of Singapore.

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Lao Mei Leng

Mei Leng is an Audit Partner of Moore Stephens LLP and the Head of Risk Management.

She has more than 20 years of audit experience and provides internal and external audit services to a number of government agencies, MAS-regulated entities and public listed companies.

Mei Leng graduated with a Bachelor of Accountancy degree from the Nanyang Technological University and is a practicing member of the Institute of Singapore Chartered Accountants. She is a member of the Institute of Internal Auditors and a panel member of ACRA’s Practice Monitoring Sub-Committee. She was also a former council member and ex-chairperson of the Singapore Shipping Association’s Young Executives Group.

Agus Tirtoredjo

Agus is Director of the Moore Stephens IT Solutions. He holds a Masters Degree in Technology,and certified practitioner in Agile (SCRUM), Enterprise Architecture (TOGAF), ServiceManagement (ITIL), Supply Chain (APICS). In his 23 years in IT, he has carried out almost every ITconsulting role in some form. These include consultant (mostly ERP), project manager, programmanager, business process manager, IT business partner and portfolio manager.

Whilst being adapt in technical software engineering, Agus adopts of balanced focus of people-process-technology. Applying Agile and enterprise architectural approaches, he helps companiesto define and execute digital transformation programs. In a consulting environment, he has alsoheaded international consulting practices in ERP.

As the head of Moore Stephens IT Solutions, Agus is driving the adoption of emergingtechnologies in Corporate Performance Management, ERP and Data Analytics solutions.

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Revenue RecognitionWong Koon Min,

Partner, Moore Stephens LLP

Recap from past seminars…

Parkroyal on Pickering, 20 November 2015• SFRS(I) 15 key concepts and principles, by Assoc Professor Ng Eng Juan

M Hotel Singapore, 18 November 2016• Framework for SFRS(I) 15 implementation

Suntec City Convention Centre, 22 September 2017• Worked examples for the application of SFRS(I) 15 implementation framework

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Objective of Session

• Recap of key SFRS(I) 15 framework and principles

• Capitalisation of contract costs

• Contract assets & liabilities

• Disposal of non-financial assets

• Applying SFRS(I) 15 to Singapore residential properties

• Transition details

Recap – 5-step approach

Identify the contract with the customer

Identify the separate

performance obligations

Determine the transaction

price

Allocate the transaction price to the

separate performance obligations

Recognize revenue when a performance

obligation is satisfied

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Recap – Implementation framework

Company may be affected if “Yes” to any of the following:

• Does your Company have significant sales returns?

• Does your Company earn multiple revenue streams from a single contract (“multi-element contract”)?

• Does your Company earn long-term project revenue?

• Does your Company earn revenue from projects spanning multiple contractual documents?

• Does your Company have to deal with variation orders or other modifications to revenue contracts?

• Does your Company earn revenue that is variable (e.g. based on some contingency or market variable)?

• Does your Company issue warranties on sold products?

Company may be affected if “Yes” to any of the following:

• Does your Company earn revenue as a middleman (“Agent”)? • E.g. brokerage revenue, revenue earned by product distributor, main contractor on a project where project

where part of the work (and revenue) is sub-contracted.

• Does your Company earn revenue from the sale or licensing of intellectual property? • E.g. software, franchises, patents and trademarks

• Does your Company earn revenue from sales where the billing is done prior to delivery (“bill and hold” sales)?

• Does your Company provide customers with options for additional goods or services (e.g. as part of a customer loyalty program)?

• Does your Company sell gift cards, vouchers, non-refundable tickets, or other types of future promises to deliver, where the Company cannot deliver its promise until the customers utilize the gift cards/vouchers/tickets?

• Does your Company earn non-refundable up-front fees from customers (e.g. joining fee, activation fee)?

Recap – Implementation framework

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Capitalisation of Contract Costs

Assess purpose of cost

Assess whether the cost is within scope of another standard (e.g. SFRS(I) 1- 2)?

Assess if the cost is incremental * to obtaining a contract with a customer

Contract fulfilment

costs

Contract acquisition costs

Apply other standards

Assess whether costs meet all the following criteria:(a) costs relate directly* to a contract or anticipated contract can be specifically identified;(b) the costs generate or enhance resources that will be used to satisfy performance obligations in future; and(c) the costs are expected to be recovered.

Expense Capitalise

In scope of another standard

Not in scope of another standard

All criteria metNot all criteria met

IncrementalNot incremental

*1) “Incremental” – costs to obtain contract, that will not be incurred if contract was not obtained (e.g. sales commission).

2) “Relate directly” – see next slide.

Which Costs “Relate Directly” to ContractFulfillment costs that relate directly and may qualify for capitalization:

(a) direct labor;

(b) direct materials;

(c) allocations of costs that relate directly to contract;

(d) explicitly chargeable costs under the contract;

(e) other costs incurred only because entity entered into contract (e.g. subcontractor payments)

Following costs are expensed as incurred:

(a) general and administrative costs that are not explicitly chargeable;

(b) costs of wasted materials/labour/resources not reflected in contract price;

(c) costs that relate to fully/ partly-satisfied performance obligations;

(d) costs that cannot be distinguished as to whether they relate to satisfied or unsatisfied performance obligations.

Capitalized contract costs are amortized on a systematic basis that is consistent with transfer of the goods & services to the customer.

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Contract Assets & Liabilities

• Arises when either party to a contract has performed

• Depends on relationship between payment and performance

• Excludes unconditional rights to consideration, which is presented as Receivable.

• E.g. deferred income, work-in-progress.

• Contract asset subject to SFRS(I) 9 Expected Credit Loss provision

Disposal of Non-Financial Assets

• SFRS(I) 15 principles apply to disposal of non-financial assets including fixed assets, investment properties, and intangible assets

• E.g. disposal of fixed assets for contingent consideration → subject to revenue recognition constraint (i.e. only recognise revenue that very probably will not reverse)

• No similar constraint in SFRS(I) 10, on disposal of businesses →potential difference in timing of gain for disposal of asset vs. biz.

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Recognition of Revenue on Singapore Residential Properties

Source: Revenue Recognition for Sale of Uncompleted Residential Properties in Singapore, ISCA, 2017,https://isca.org.sg/media/2238612/isca_frs-115-revenue-recognition.pdf

Transition exemptions

First-time adopters of SFRS(I) with 31 Dec 2018 year end:

1. Need not restate contracts completed within same annual reporting period.2. Need not restate contracts completed before 1 Jan 2017.

3. No estimate of variable consideration required in comparatives for contracts with variable consideration completed by 31 Dec 2018.

4. Contract modifications before 1 Jan 2017 can be aggregated in considering accounting impact.

5. Need not disclose transaction price allocated to remaining performance obligations in comparatives.

Non-first-time adopters of SFRS(I) with 31 Dec 2018 year end:

• In addition to above, can elect not to restate comparatives; cumulative impact in equity on 1 Jan 2018.

https://isca.org.sg/media/2238612/isca_frs-115-revenue-recognition.pdf

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Key Takeaways

• SFRS(I) 15 only capitalises contract acquisition & fulfilment costs; prescriptive rules for capitalisation/ expensing

• Contract Asset is a new category under SFRS(I) 15; will affect financial statements presentation, disclosures; subject to ECL

• SFRS(I) 15 principles extend to disposal of fixed assets, investment properties, and intangible assets

• Specific guidance on Singapore residential property development revenue recognition by ISCA

• Transition exemptions available for both first-time and non-first-time adopters; can simplify exemption.

Financial InstrumentsWong Koon Min,


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Parkroyal on Pickering, 20 November 2015• IFRS 9 key concepts and principles, by Assoc Professor Ng Eng Juan

M Hotel Singapore, 18 November 2016• Framework for SFRS(I) 9 implementation

Suntec City Convention Centre, 22 September 2017• SFRS(I) 9 in detail, by Dr Andrew Lee



• Expected Credit Loss Estimation with Practical Expedients

• ECL for Inter-Company Loans

• Modification of Borrowings

• Valuation of Equity Investments (after the break)

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Recap – Expected Credit Loss (ECL)

State of financial asset since initialrecognition

Stage 1:No significant

increase in credit risk

Stage 2:Significant increase

in credit risk

Stage 3:Credit-impaired, or

loss event

Performing Under-performingNon-

performing

Recognition of expected credit losses

12-month Lifetime Lifetime

Recognition of effective interestincome

On gross carrying amount

On gross carrying amount

On amortized cost less loss allowance

Source: IFRS Seminar 2017 slides, by Dr Andrew Lee

Recap – ECL Practical Expedients

• Example: Provision matrix based on receivables ageing, and historical credit loss experience within each ageing band, performed separately for segments with different credit characteristics.

• SFRS(I) 9 B7.2.4: “An entity with little historical information may use information from internal reports and statistics (that may have been generated when deciding whether to launch a new product), information about similar products or peer group experience for comparable financial instruments, if relevant.”

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Provision Matrices –Example

Company X is assessing the Lifetime ECL on 31/12/2018 trade debtors of $100,000. X assesses that there is no significant financing component on the trade debtors under SFRS(I) 15, and applies the Simplified ECL approach. X decides to use the Provision Matrix to compute Lifetime ECL.

Step 1: Split trade debtors into customer groups with similar characteristics that affect credit rating.

Assessment: X assessed that its customers are all in one geographic region and in a similar region and they have similar credit characteristics. Accordingly, it regards all its trade debtors as a similar customer group.


Step 2: Build historical default profile for each customer group

Assessment: X reviewed its billing and receipts history and noted that it billed $1m to its customers over the past 12 months, of which $500,000 paid within the credit period, $200,000 paid within 30 days overdue, $100,000 between 31-60 days overdue, $125,000 paid after 60 days overdue, and the last $75,000 defaulted. X derives the following default rate for each category:

Historical profile of customer group A:

PeriodAmount unpaid at

start of each periodDefaulted %

Within credit period 1,000,000 75,000 7.50%

Overdue 1-30 days 500,000 75,000 15.00%

Overdue 31-60 days 300,000 75,000 25.00%

Overdue >60 days 200,000 75,000 37.50%

Unable to pay 75,000

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• Step 3: Adjust historical profile for forward-looking information.

Assessment: Based on data from World Bank, X notes that the GDP forecast and other economic information as at balance sheet date has not changed significantly from the past year from which data was used to build the Provision Matrix. Accordingly, X decides that no adjustments taking into account forward-looking information.

• Step 4: Apply the Provision Matrix to trade debtors at year end

Conclusion: X concludes that ECL is $15,000.

Trade debtors balance Prov % ECL

Current 50,000 7.50% 3,750

0-30 days 25,000 15.00% 3,750

30-60 days 15,000 25.00% 3,750

60-90 days 10,000 37.50% 3,750

Total 100,000 15,000

Recap – Measurement of ECL

Expected credit loss = Present value of (PD x EAD x LGD)where: PD = Probability of default over a given period (%)

EAD = Exposure at default ($)

LGD = Loss given default (%)

Loss given default (LGD) = 1 – Recovery rate given default

Loss given default takes into consideration collateral securing the debt as well as any other credit enhancements (e.g. guarantee).

Example: One-year loan. PD = 5%. EAD = $1,000,000. LGD = 70% (i.e. recovery rate of 30%). EIR = 2%. Then, expected credit loss is:

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0.05 × $1,000,000 × 0.70

1.02= $34,314

Source: IFRS Seminar 2017 slides, by Dr Andrew Lee

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Expected Credit Loss for Inter-company Loans

In scope of SFRS(I) 9 (e.g. loans to subsidiaries that

are in substance equity are out of scope)?

Apply provisions of other standards

Yes

Calculate % Probability of Default (PD)

Calculate % Loss Given Default (LGD)

Calculate value of Exposure At Default (EAD)

No

Expected Loss = PD x LGD x EAD

Inter-company ECL –Illustrative approach

Repayable on demand?

Has credit risk increased significantly since origination?

(Rebuttable presumption: “Yes” if debt exceed 30 days past due)

Can get enough liquid assets to repay immediately as at BS date

(e.g. guarantee, collateral, fire sale of assets)?

Can get enough liquid assets to repay at maturity (e.g. guarantee,

collateral, fire sale of assets)?

PD, e.g. using 12-month investment-

grade PD

PD practically 100%

Can use low-credit risk exemption, e.g. using

12-month investment-grade PD?

YesNo

Yes

Yes

No

No

PD practically 100%

No, or depends on future

No

Assess 12-month PD

Is borrower a going concern?

Yes

Assess Lifetime PDYes

Consider forward-looking information, and whether forward-looking economic data and other information suggests that historical PD needs to be adjusted.

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Modification of Liabilities

• Borrowing terms may be subject to renegotiation (e.g. upon default or borrower’s financial difficulties)

• Under IAS 39, borrower applies 10% test, possibly with qualitative consideration of changes in borrowing terms:• “Substantial” change – Account as extinguishment → Immediate P/L

• Not “substantial” – Original debt remains on books → Amend future EIR

• Under SFRS(I) 9, borrower recognises immediate P/L.• Regardless of whether change is “substantial”.

Key Takeaways

• Provision matrices require historical data to build; with consideration given to forward-looking information

• Inter-company loans are subject to ECL; may not be straightforward

• Immediate gain/ loss recorded upon modification of liabilities

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First-time Adoption of SFRS(I)Wong Koon Min,



Suntec City Convention Centre, 22 September 2017

• Key differences between SFRS and IFRS➢ Revaluation policy for fixed assets➢ Consolidation exemption for intermediate holding companies➢ Share-based payments➢ Co-operative entities➢ Foreign-sourced income

• Optional exemptions

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• In 2017, ACRA and SID jointly published a detailed convergence guide “IFRS Convergence 2018 – Implementation Roadmap”https://isca.org.sg/media/2238610/ifrs-convergence-2018-implementation-roadmap.pdf

• Highlighted key focus areas of transition exemptions• Business combinations• Attribution of profit/ OCI/ deficits to non-controlling interests• Goodwill and FV adjustments on foreign operations• Cumulative translation differences (considered in 2017 seminar)• Deemed cost exemption (considered in 2017 seminar)• Capitalisation of borrowing costs

• “Grandfathering” provisions under SFRS, may not be available upon transition to SFRS(I) unless optional exemptions elected.

The “Grandfathered” Issue

Date of historical

transaction

Date on which new standard becomes effective,

prospectively

1 Jan 2017 – Date of transition to SFRS(I)

1 Jan 2018 – SFRS(I) effective

New transactions accounted for per new standard

SFRS(I) at 1 Jan 2018 applied retrospectively to all historical transactions, unless exemptions available

Old transactions not restated (“Grandfathered”)

Potential Transition Adjustments Needed!

Don’t try to change me…

Transition used when first effective:

Transition approach under

SFRS(I) 1:

https://isca.org.sg/media/2238610/ifrs-convergence-2018-implementation-roadmap.pdf

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Business combinations (BC)

SFRS(I) 3, effective from 1 July 2009, introduced new requirements, e.g.:

• Contingent consideration to be held at FVPL

• Transaction costs for acquisition is expensed

• NCI is held at fair value or proportionate interest of net assets acquired (excl. goodwill); election on transaction-by-transaction basis

• Previously-held interest fair revalued through P/L upon step acquisition

Applied prospectively to BCs for which acquisition date is on or after first annual reporting period beginning on or after 1 July 2009.

Business combinations (BC)

1 Jan 2009 –

Subsidiary acquired

1 Jul 2009 -SFRS(I) 3 effective

1 Jan 2010 - 1st

annual period applying SFRS(I) 3



SFRS(I) 3 applied prospectively to acquisitions after 1 Jan 2010

SFRS(I) applied retrospectively to all acquisitions, unless exemptions adopted

Acquisition not restated for SFRS(I) 3

Acquisition restated for

SFRS(I) 1 if no exemptions

Example: Dec year-end client acquired new subsidiary on 1 Jan 2009. No restatement was done upon transition to SFRS(I) 3. However, restatement may be required upon transition to SFRS(I) 1, unless exemptions adopted.

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Business combinations (BC) -solutionsAdopt exemptions (with disclosures), to either:

• Apply SFRS(I) 3 prospectively to BCs after 1 Jan 2010* (possible re-assessment of control under SFRS(I) 10, effective from 2014);

• Apply SFRS(I) 3 prospectively to BCs after 1 Jan 2014* (when SFRS(I) 10 becomes effective); or

• Apply SFRS(I) 3 prospectively to BCs after 1 Jan 2017*.

* Assuming December year end

Non-controlling interests (NCI)

• Certain changes effective from 2009 under SFRS(I) 1-27:• Continue attributing losses to NCI even when in deficit

• Recognise gain/loss on changes of NCI without loss of control in equity

• Account for loss of control over subsidiary as full disposal accompanied by re-acquisition of retained interest at fair value

• Upon transition to SFRS(I), • if SFRS(I) 3 is applied retrospectively from an earlier date, the above must also

be applied from the earlier date.

• if SFRS(I) 3 is applied before 2009, pre-2009 NCI transactions impacted

• if SFRS(I) 3 is applied only on/after 1 Jan 2017*, above changes are also applied prospectively on/after 1 Jan 2017*.


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Translation of goodwill

• SFRS(I) 1-21 requires goodwill and fair value (FV) adjustments in BCs to be translated at closing rate for acquisitions in/ after 2005.

1 Jan 2004 –

Subsidiary acquired

1 Jan 2005- SFRS 21 changes

effective



SFRS(I) 1-21 amendments applied prospectively to acquisitions after 1 Jan 2005

SFRS(I) applied retrospectively to all acquisitions, unless exemptions adopted

Goodwill/ FV adj not

translated

Goodwill/ FV adj to be

translated

Translation of goodwill - solutions

Adopt exemptions (with disclosures), to either:

• Apply SFRS(I) 1-21 prospectively to BCs from same date as SFRS(I) 3; or

• Apply SFRS(I) 1-21 prospectively to BCs after 1 Jan 2017*.


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Capitalisation of borrowing costs

• Prior to 2009, SFRS(I) 1-23 provided option to expense all borrowing costs

• In 2009, SFRS(I) 1-23 required capitalisation of borrowing costs, applied prospectively

• On transition to SFRS(I), SFRS(I) 1-23 to be applied retrospectively unless optional exemptions adopted (with disclosures):• Apply SFRS(I) 1-23 prospectively from 1 Jan 2017*

• Apply SFRS(I) 1-23 prospectively from an earlier designated date


“Grandfathered” differences with no relief on transition to SFRS(I)Selected key differences include:• Requirements on capitalisation of finance leases from 1 Jan 2005• Changes to government grant accounting from 1 Jan 1985• Requirements on capitalisation of intangible assets from 1 Jul 2004• Changes to accounting for reacquired rights in BCs from 1 Jul 2009• Restriction to depreciate assets based on revenue from 1 Jan 2016• Requirement to account/ revalue investment properties under construction

as investment properties (i.e. through P/L) instead of fixed assets (i.e. through revaluation reserve) after 1 Jan 2009

• Changes to share-based payments from 1 Jul 2014 (on performance/ service/ market conditions)

• Requirement to FVPL Investment Entity subsidiaries, instead of consolidating them, from 1 Jan 2014.

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New standards effective in 2018 with “grandfathering” provisionsSelected key differences include:

• Amendment to SFRS(I) 2 Classification and measurement of SBP

• Amendment to SFRS(I) 4 Applying SFRS(I) 9 with SFRS(I) 4

• SFRS(I) 9 Financial Instruments

• SFRS(I) 15 Revenue from Contracts with Customers

• Amendment to SFRS(I) 1-28 Measuring an associate or JV at fair value

• Amendment to SFRS(I) 1-40 Transfers of Investment Property

• SFRS(I) INT 22 Foreign Currency Transactions and Advance Consideration

Key Takeaways

• Upon transition to SFRS(I), consideration should be given to “grandfathered” differences arising from new standards in the past

• SFRS(I) 1 provide transition exemptions that alleviate grandfathering issues for business combinations, NCI, translation differences, borrowing costs, etc.

• SFRS(I) 1 does not cater for exemptions on all “grandfathering” issues

• Some standards/ amendments effective in 2018 also have “grandfathering” clauses; may not be applicable if transiting to SFRS(I)

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Impact on Listed Companies – Quick Survey

Singtel DBS CDL Cosco SIA Wilmar

S$m S$m S$m S$m S$m US$mImpact on opening net assets 27 9 342 - 1,391 69 Opening net assets 29,681 49,811 12,183 517 14,619 17,054 % of impact 0.09% 0.02% 2.81% Nil 9.51% 0.40%Most significant adjustments

• Translation reserve of S$4.5b taken to retained earnings.

• S$58m impact from expected credit loss computations.

• Translation reserve of S$0.5b taken to retained earnings

• Retained earnings up by S$0.4b from reclassifying assets as FVPL.

• Translation reserve of S$54m taken to retained earnings.

• S$1.7b drop in fixed assets after regarding the fair value of aircraft as deemed cost.

• Translation reserve of US$1.5b taken to retained earnings.

LeasesWong Koon Min,


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Parkroyal on Pickering, 20 November 2015• Preview of SFRS(I) 16

M Hotel Singapore, 18 November 2016• SFRS(I) 16 key concepts and principles, by Assoc Professor Ng Eng Juan

Suntec City Convention Centre, 22 September 2017• Worked examples illustrating key issues in SFRS(I) 16



• Current year focus is on SFRS(I) 16 common pitfalls:• Residual value guarantees

• Variable lease payments

• Lease extension/ termination clauses

• Discount rates

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Recap - SFRS(I) 16: Leases

➢Effective date: 1 Jan 2019

➢Basic changes:❖To require lessee to capitalize all leases

(except (i) short term leases and (ii) leases with low value underlying asset)

❖No major changes for lessor

Residual value guarantees (RVG)

• Charterer bareboat charters (i.e. leases) Ship from LeasingCo for 20 years for $120,000/year.

• Charterer agrees to top up the difference in cash if the value of Ship falls below $2,000,000 at end of lease term (i.e. RVG).

• Market value of a 20-year old Ship at lease inception and reporting date is $2,000,000, therefore charterer expects to pay nothing for RVG.

• Charterer already classified this as finance lease under SFRS(I) 1-17

Question: Any adjustment by Charterer upon transition to SFRS(I) 16?

Yes. • SFRS(I) 1-17 lease asset/ liability capitalises max RVG exposure, i.e. $2m; no reassessment• SFRS(I) 16 lease asset/ liability capitalises only expected RVG payment, i.e. nil; reassessed each

reporting date • Note: LeasingCo should include $2m RVG in lease asset, if this qualified as a finance lease for

LeasingCo; capitalised items are not symmetrical for lessee vs. lessor in SFRS(I) 16

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Variable Lease Payments

• Ship Owner (SO) contracts to include his Ship into a Shipping Pool (SP) for 5 years. In return, the Points allocated to him grants him 20% of SP’s earnings each year.

• SP has assessed that this pooling arrangement is a lease in which SP is the customer.

Question: How much should SP capitalise as lease asset/ liability under SFRS(I) 16?

Nil.• Variable lease payments depending on sales or usage of underlying asset, including profit, are

excluded from lease liability• Illustrative example only. In practice, more considerations exist for pool accounting, e.g.

• SP may need to assess whether it is the customer, or merely an intermediary agent.• Usually SO can remove his ship from the pool with short-term notice (< 1 year) therefore

may qualify for SFRS(I) 16’s short-term exemption to expense lease payments.

Variable Lease Payments

• Ship Owner (SO) contracts to bareboat charter (i.e. lease) a tanker for 5 years to Charterer, based on 125% of WorldScale (a global freight rate index published annually).

• Charterer has assessed that this charter agreement meets the definition of a lease.

Question: How much should Charterer capitalise as lease asset/ liability under SFRS(I) 16?

Lease asset/ liability capitalised based on WorldScale at inception of contract.• Variable lease payments depending on index or rate of underlying asset, are included in lease

liability.• Lease asset/liability is capitalised based on index when charter is contracted, updated at every

reporting date.• No need to forecast the index.

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Lease Extension/ Termination Clauses• Who has the option?

• If lessee has the option, include option period cash flows in lease asset/ liability if lessee is reasonably certain to exercise the option

• If lessor has the option, include option period cash flows in lease asset/ liability

• When is lessee “reasonably certain” to exercise? Consider:

• Favourable market terms & conditions vs prevailing market conditions

• Significant leasehold improvements undertaken

• High costs to end the lease (e.g. termination penalties, costs of finding and integrating new replacement asset, etc.)

• Importance of asset to lessee

• Conditionality associated with exercising the option

• Lessee’s past practices

• What about JTC 30+30 leases where lessee has built a factory on the land?➢ Careful consideration needed – the factory on the land is a significant incentive to extend the lease.

• Reassessment: Required upon occurrence of significant event or significant change in circumstances that:• Is within lessee’s control; and

• Affects whether lessee is reasonably certain to exercise the optionChanges in market rates usually

outside lessee’s control; not a trigger for reassessment

Discount Rates

• Discount using Implicit Interest Rate (IIR)

• For lessee (but not lessor), if IIR cannot be readily determined, use Incremental Borrowing Rate (IBR)

• Estimation of IIR involves estimating residual value at end of lease; data available in some industries (e.g. shipping, property)

• For other industries, IIR may not be available to lessee

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Discount Rates – Estimating IBR

• SFRS(I) 16: IBR - rate of interest that lessee would have to pay:a) over similar termb) with a similar securityc) to obtain an asset of similar value to the ROU assetd) in a similar economic environment

• Potential challenges:a) For long-term leases, obtaining borrowing or risk-free rates of similar tenor may present challenges.b) IBR has to reflect similar security and an asset of similar value to ROU; lessee’s general borrowing rate may

not be appropriatec) IBR has to reflect similar economic environment, which will require similar currency/ country. Consideration

of economic fluctuations (e.g. interest rate rises) may be challenging.

• Property yields may be starting point for property lessees (SFRS(I) 16 basis of conclusions). However may require adjustment for lessee’s credit conditions.

• WACC is not an appropriate discount rate as WACC includes cost of equity.

Key Takeaways

• Unlike finance leases in SFRS(I) 1-17, lessees only capitalize residual value guarantees based on how much payment is expected.

• Variable lease payments are accounted for differently depending on terms:• if based on sales/ usage of underlying asset, not capitalized • if based on index/ rate, capitalized based on prevailing rate

• Lease extension/ termination clauses are accounted for differently depending on who can exercise the option.

• Discount rates used by lessee to obtain value of lease asset/ liability should reflect similar financing in terms of financing term, security, asset value, and economic environment.

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Other SFRS(I) Changes Wong Koon Min


Other changes in 2018

New standard or amendment Effective date For more information…

Amendments to SFRS(I) 2: Classification and Measurement of Share-based Payment Transactions

1 Jan 2018 Financial Reporting Seminar 2017

Amendments to SFRS(I) 1-40: Transfers of Investment Property


Amendment to SFRS(I) 1-28 Measuring associates and joint ventures at fair value


Applying SFRS(I) 9 Financial Instruments with SFRS(I) 4 Insurance Contracts

1 Jan 2018 Optional exemptions/ relief for insurers from SFRS(I) 9

SFRS(I) INT 22 Foreign Currency Transactions and Advance Consideration


32

Other changes beyond 2018

New standard or amendment Effective date For more information…

Amendments to SFRS(I) 9: Prepayment Features with Negative Compensation

1 Jan 2019 Coming up next…

Amendments to SFRS(I) 1-28: Long-term Interests in Associates and Joint Ventures


Improvements to SFRS(I) (March 2018)• SFRS(I) 3 Business Combinations and SFRS(I) 11 Joint Arrangements • SFRS(I) 1-12 Income Taxes • SFRS(I) 1-23 Borrowing Costs


Amendments to SFRS(I) 1-19: Plan Amendment, Curtailment or Settlement


SFRS(I) INT 23 Uncertainty over Income Tax Treatments 1 Jan 2019 Coming up next…

SFRS(I) 17 Insurance Contracts 1 Jan 2021 New framework for insurers

Amendments to SFRS(I) 10 and SFRS(I) 1-28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

To be determined Financial Reporting Seminar 2016

Prepayment Features with Negative Compensation• Investor lends $1,000,000 to Debtor for 5 years at 5% per annum.

• Loan can be prepaid in the fourth year.

• If interest rates have fallen by the fourth year, Debtor will have to top up the interest differential for the final year.

• However if interest rates have risen, Investor will compensate the interest differential for the final year.

Question: Can the above loan qualify as amortised cost?

Key points:• Prepayable loans may qualify as SPPI if prepayment amount represents substantially unpaid

principal and interest and “reasonable additional compensation” for early termination. • If qualify for SPPI, the loan may be amortised cost subject to business model test.• Latest amendment clarifies that the “compensation” can be negative (e.g. Investor may end

up incurring the “compensation” if interest rates rise)

33

Long-term Interests in Associates and Joint Ventures• Investor holds equity-accounted investments in Associates and Joint Ventures (“AJV”).

• Investor extended interest-free loans of $1m to these AJVs that are not repayable in the foreseeable future, that in substance constitute part of the net investment in AJVs, and are capitalized as part of “Investments in AJVs” in Investor’s balance sheet but no equity-accounting is performed.

Question: Are SFRS(I) 9 ECL provisions required for the $1m loan?

Key points:• From 1 Jan 2019, amendment requires ECL provisions for such loans to AJVs.

Previously-held interests in Joint Operations• On 1 Jan 20X0, Investor A obtained 10% participation right in a business (“BizOp”) that is an unincorporated

joint arrangement with Investors B and C. All decisions require unanimous consent of B and C (but not A).

• On 1 Jan 20X1, Investor A increased its participation in BizOp to 33%. All decisions now require unanimous consent of A, B and C.

• On 1 Jan 20X2, Investor A acquired 100% of BizOp

Questions:

• On 1 Jan 20X1, should Investor A fair value its previously-held 10% interest in BizOp?

• On 1 Jan 20X2, should Investor A fair value its previously-held 33% interest in BizOp?

Key points:From 1 Jan 2019: • When an entity obtains joint control of a business that is a joint operation, the entity does not

remeasure previously held interests in that business. • When an entity obtains control of a business that is a joint operation, it remeasures previously held

interests in that business. Therefore Investor A should fair value its previously-held interest on 1 Jan 20X2 but not 1 Jan 20X1.

34

Income tax consequences of dividends• Company is in a jurisdiction where additional tax is payable upon declaration of dividends.

• For the financial year 31 Dec 20X1, the Company paid 10% corporate income tax on $1m of profit.

• On 31 Dec 20X1, the Company declared ordinary share dividends out of the above $1m profit, and was charged an additional 30% dividend tax.

Question: Should the 30% dividend tax be offset against dividend paid in equity, or charged to profit and loss?

Key points:• Amendment clarified that an entity must recognize all income tax consequences of dividends

in P/L, OCI or equity, depending on where the entity recognized the originating transaction or event that generated the distributable profits giving rise to the dividend.

• Therefore Company should charge 30% dividend tax to P/L.

Borrowing costs eligible for capitalization• On 1 Jan 20X0, Company borrowed $1m at 5% interest to construct Building A, repayable 31 Dec

20X5

• Company already holds additional $1m of general borrowings at 3% on 1 Jan 20X0, repayable 31 Dec 20X5

• On 1 Jan 20X2, Company completes construction of Building A but did not repay 5% loan.

• On 1 Jan 20X3, Company spent $1m to construct Building B which remained under construction at 31 Dec 20X3.

Question: Should borrowing costs be capitalized on Building B based on a) 3%;b) 4%; or c) 5%?

Key points:• Amendment clarifies that when a qualifying asset is ready for its intended use or sale, and

some of the specific borrowing related to that qualifying asset remains outstanding at that point, that borrowing is to be included in the funds that an entity borrows generally.

→ Company capitalizes 4% interest on Building B (i.e. average rate including Building A loan).

35

Plan Amendment, Curtailment or Settlement• On 1 Jan 20X0, Company starts a pension scheme for its employees that qualifies as a defined

benefit obligation (DBO).

• On 1 Jan 20X1, Company amends the terms to reduce the pension scheme payout.

Question: On 1 Jan 20X1, should the DBO liability, and subsequent net interest and current service costs be computed based on actuarial assumptions on 1 Jan 20X0, or 1 Jan 20X1?

Key points:• Amendment requires that if a plan amendment, curtailment or settlement occurs, the

current service cost and the net interest for the period after the remeasurement should be determined using the assumptions used for the remeasurement.

• Amendments included to clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling.

→ DBO liability, subsequent net interest and current service costs based on 1 Jan 20X1 actuarial assumptions when amendment effective.

Uncertainty over Income Tax Treatments• Company files income tax returns with computed taxes of $2m.

• Company believes that Comptroller is likely to dispute some of the tax positions in those tax returns.

• Based on tax advice, Company believes that it is probable it can successfully defend any challenges; $2m is the most probable estimate

• If Company fails to defend the challenges, the most probable tax payable is $1.5m.

Question: Should tax expense be recorded based on $1.5m or $2m?

Key points:• Amendment requires entities to consider tax filings to determine tax expense.• If it is probable that the tax treatments in filings will be accepted, financial statements should

be consistent with tax filings. • If it is not probable that the tax treatments in filings will be accepted, financial statements

should be based on most likely tax amount or expected value. → Company should book $2m tax since income tax filing amount is most probable estimate.

36

Key Takeaways

• Loans that require lender to compensate borrower upon prepayment may still qualify for amortized cost if other criteria met.

• Loans that are in substance equity investments (“quasi-equity” loans) in associates and joint ventures are subject to SFRS(I) 9 expected credit loss provisions.

• Remeasurement of previously-held interest in joint operations (JO), to fair value, is required upon acquisition of control of JO business, but not upon joint control.

• Tax consequences arising from declaration of dividends are recognized in P/L, OCI or equity depending on source of distributable profits.

• Capitalizable general borrowing costs includes loans obtained for assets that are no longer "qualifying" (i.e. construction completed).

• Upon curtailment, amendment, or settlement of defined benefit obligation plan, updated actuarial assumptions are required in accounting for remainder of plan.

• Estimating income tax for financial reporting will require an assessment of tax submissions made.

Break (3.40pm – 4.10pm)

37

Equity valuation for financial reporting: Issues and challengesDr. Andrew Lee

Associate Professor of Accounting Practice, SMU

Scope of presentation

• Not valuation of physical assets, intangibles, goodwill or cash generating unit.

Valuation of equity securities (ordinary shares) of an unlisted entity

• Not for other purposes such as acquisition, litigation, purchase price allocation etc.

Valuation for financial reporting purpose

38

Fair value under IFRS 13 (Fair Value Measurement)

• IFRS 13:9: “Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”• An exit price, not an entry price.

• An orderly transaction, not a distressed or forced-liquidation sale.

• An arms-length transaction between market participants, not with related party.

• IFRS 13:2: “Fair value is a market-based measurement, not an entity-specific measurement.”• Value based on what market participants would think, not what the entity thinks.

• Entity-specific factors cannot be factored into fair value, if such factors are not transferable to another market participant.

Valuation approaches under IFRS 13 (Fair Value Measurement)

Market approach

Based on prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

Example:• Use of market multiples (e.g. price-earnings

multiple) derived from a set of comparable peers

Cost approach

Amount required currently to replace the service capacity of an asset (e.g. replacement cost)

Example:• Cost to acquire or construct a substitute

asset of comparable capacity, adjusted for obsolescence

Income approach

Discounting of future cash flows or earnings to present value

Examples:• Present value (DCF) techniques• Option pricing models (e.g. Black-Scholes,

binomial)• Multi-period excess earnings model

39

Market approach to equity valuation

• Simple to compute and widely used.

• Practical challenges: • Choice of comparable

peer(s).

• What is the right multiple benchmark number to apply?

• Consider industry sector and company size when selecting peer or benchmark.

Price−earnings multiple =Price per share

Earnings per share

Price−to−book multiple =Price per share

Book value of equity per share

Price−to−sales multiple =Price per share

Revenues per share

Market approach to equity valuation

EV−to−EBITDA multiple =Enterprise value

EBITDA

EV−to−EBIT multiple =Enterprise value

EBIT

EV−to−Free cash flow multiple

Enterprise value = Total operating assets

(i.e. excluding financial assets) – Current operating liabilities

(i.e. excluding financial liabilities)

Value of equity = Enterprise value + Financial assets

– Financial liabilities – Preference share capital – Non-controlling interests

40

Income approach to equity valuation: Dividend discount model

𝑉𝑒 =𝑑1

1 + 𝑟+

𝑑21 + 𝑟 2

+𝑑3

1 + 𝑟 3+⋯

where Ve = value of equity

and 𝑟 = cost of equity

Practical challenges:

• Forecasting future dividend stream requires many

subjective assumptions.

• What if a firm pays no dividends (e.g. high-growth

firms, private companies)?

Microsoft paid no dividends for the first

16 years of its IPO. Yet its stock price

rose 289 times.

Mar 1986: IPO.

Jan 2003: First-ever cash dividend

Stock price Net profit

1986 $21 (IPO)$24 million

(1985)

2003$6,077

(splits-adj.)$7.5 billion

CAGR 42.5% 43.2%

CAGR = compounded annual growth rate

Income approach to equity valuation: Dividend discount model

Assuming dividends grow at a constant rate of 𝑔, we have:

𝑉𝑒 =𝑑1

𝑟 − 𝑔

Assuming constant divided payout ratio, then 𝑔 is also the growth rate of earnings.

➢ 𝑔 can be estimated as the long-run growth rate of the industry or the economy.

Re-arranging, we have:

𝑟 =𝑑1𝑉𝑒

+ 𝑔

Cost of

equity, or

Return on

the stock

Dividend

yield

Growth

rate

41

Income approach to equity valuation: Free cash flow-to-firm (FCFF) model

𝑉𝐵 =𝐶𝐹11 + 𝑘

+𝐶𝐹2

1 + 𝑘 2+⋯+

𝐶𝐹51 + 𝑘 5

+𝐶𝐹5 1 + 𝑔

𝑘 − 𝑔 1 + 𝑘 5

where 𝑉𝐵 = Value of the firm or business, and 𝑘 = Weighted average cost of capital.

• Assumptions: • Free cash flow = Operating cash flow before interest after tax – Capex.

• Free cash flow after Year 5 grows at a constant rate of 𝑔 (for terminal value).

• To determine value of equity:

Value of equity = Value of business – Financial liabilities + Financial assets.

• Practical challenges for investors: • Forecasting future cash flows requires many subjective assumptions.

• Estimates of terminal value are very sensitive to assumptions about 𝑘 and 𝑔.

Perspective:How value investors look at value

Assets-in-place

Excess earnings power

Growth potential

Value of

business

Value of business = Value of assets-in-place + Value of excess earnings power + Value of growth potential

42


Value of assets Replacement cost of existing assets

• Assuming free entry and no competitive

advantage

Value of excess

earnings power

Power to generate sustainable earnings above

what existing assets would normally yield

• Due to franchise value from current competitive

advantage

Value of growth

potential

Growth potential

• Arising from franchise value and competitive

advantage

• Require additional investment in assets

More reliable information

Less reliable information

Perspective:Value of assets-in-place

• Objective: Replacement cost of existing assets of the business.• Assume free entry, no competitive advantage, no entity-specific considerations.

• What does it cost a new entrant to replicate the portfolio of assets?

• Starting point: Net operating assets on balance sheet.• Net operating assets = Total operating assets (excluding financial assets) – Current operating

liabilities (excluding financial liabilities).

• Assess each major line item whether carrying amount fairly reflect replacement cost.

• What about off-balance sheet assets? E.g. Expensed R&D with 3-year useful life that a new entrant would otherwise have to incur.

• Deferred tax assets may have little value. Goodwill or intangibles may either have little value or significant value.

• Replacement cost should reflect approximately the present value of future cash flows that can be generated from the assets by a new entrant with no competitive advantage.

43

Perspective:Value of excess earnings power

• Objective: Sustainable earnings power of the business, beyond normal return on assets-in-place, given its competitive advantage.• What competitive advantage does the firm have over a new entrant?

• Starting point: Operating profits on the income statement.• Remove one-time items. • Include items ‘below the line’ if recurring and operating in nature.• After tax.• Consider trend over several years. What level of earnings is sustainable?

Value of sustainable earnings power =Annual sustainable earnings

Weighted average cost of capital

Value of excess earnings power (a.k.a. franchise value)= Value of sustainable earnings power − Value of assets−in−place

Perspective:Value of growth potential

• Objective: How much is growth potential worth?• Growth is of little or no value if there is no competitive advantage.

• Growing at return on invested capital (ROIC) that is less than cost of capital is value destroying.

• Starting point: Franchise value of the business.• Return on invested capital (ROIC) versus weighted average cost of capital (WACC).

• What is a long-run sustainable growth rate (𝑔) in terms of its addressable market?

Value of a growing firm = Invested capital ×ROIC − 𝑔

WACC − 𝑔

Value of growth potential= Value of growing firm − Value of excess earnings power − Value of assets−in−place

44


Value of equity

= +

Value of excess

earnings power

Value of assets

-in-place

Value of growth

potential

Value of the business

+Net

financial liabilities

-

Financial liabilities

minus Financial

assets

Discount rates: The Capital Asset Pricing model (CAPM)

Under the capital asset pricing model (CAPM):

• Unsystematic (diversifiable) risk of a security or asset can be diversified away and hence is not priced (i.e. investors will not be rewarded for taking unsystematic risk).

• Systematic (market) risk cannot be diversified away and hence is priced (i.e. investors are rewarded for taking systematic risk). Higher systematic risk ⇒ higher return.

• Systematic risk is measured by the beta coefficient of the security or asset.

• The expected return on a security/asset comprises a risk-free rate and a risk premium.

𝐸 𝑅 = 𝑅𝑓 + 𝛽(𝐸(𝑅𝑚) − 𝑅𝑓)

Discount rate

(expected return

on security)

Risk-free

return Market risk

premium

Beta coefficient

of security

45

Discount rates: The Capital Asset Pricing model (CAPM)

𝐸(𝑅)

𝛽

𝑅𝑓

𝐸 𝑅𝑚

1

CAPMBeta (𝛽) is the slope of a regression line

with the security’s return against the market return, and measures how the security return co-vary with the overall

market return.

𝑅

𝑅𝑚

slope = 𝛽

Estimating discount rates

➢Estimate risk-free return (𝑅𝑓) = Return on 10-year government bonds – Country default risk premium. See Damodaran (http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html) for country default risk premium.

➢Estimate equity market risk premium = Return on overall market – Risk-free return. See Damodaran for international equity risk premium.

➢Estimate security’s beta: Run regression of return on security with return on market (say, over 60 months).

➢Calculate cost of equity using CAPM = 𝑅𝑓 + 𝛽 × Market risk premium .

➢Calculate weighted average cost of capital (𝑘):

𝑘 =Debt

Debt+Equity× Cost of debt +

Equity

Debt+Equity× Cost of equity

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

46

Risk-free return and equity market risk premium (Damodaran)

Country Moody’s sovereign credit rating

Country default risk premium

Equity market risk premium

China A1 0.81% 5.89%

Hong Kong Aa2 0.57% 5.65%

Indonesia Baa3 2.54% 7.62%

Malaysia A3 1.38% 6.46%

Singapore Aaa 0.00% 5.08%

Thailand Baa1 1.84% 6.92%

Source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html.

Damodaran (January 2018)

An alternative to CAPM:Size-adjusted discount rates

• Early research showed that CAPM appears to hold true prior to 1970.

• Since 1970 (up till today), relationship appears either weak or non-existent. More recently, some studies even suggest that the relationship is in fact reverse – i.e. Higher beta risk ⇒ lower returns!

• Many subsequent studies reveal anomalies:

• Size effect: Stocks of small firms yield higher average returns than those of large firms, where firm size is measured by market capitalization.

• P/E and P/B effects: Stocks with low P/E or P/B ratios (i.e. high earnings-to-price, or high book-to-price ratios) yield higher average returns than those with high P/E or P/B ratios.

• Size-adjusted discount rate is related to firm-size premium:

𝐸 𝑅 = 𝑅𝑓 + 𝛽(Small−firm return − Large−firm return)

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

47

Revised Code of Corporate Governance 2018Lao Mei Leng


Code of Corporate Governance (“2018 Code”)

• 6 August 2018, the Monetary Authority of Singapore issued:

• Revised Code of Corporate Governance

• Practice Guidance.

• SGX will update its Listing Rules for important changes.

• Why?

Describe how Group

Practices are consistent

with Principles

Describe CG Practices wrt Prin & Prov and explain deviations

Compliance with

Principles is compulsory

94

Effective 1 Jan 2019 except for certain

requirements

48

2018 Code - Board Composition

• Strengthen Board Composition

• Independence and Diversity

➢ Disclose Board Diversity Policy

➢ Disclose progress against its objectives

➢ Diversity of thought and background.

A Board, independent of management, will be able to uphold the interest of all stakeholders better

95

CG ➢1st

time

2018 Code - Board Composition

• Board Composition

➢ Majority to be non-executive directors

Independent directors on a Board with a non-independent chairman must now be “a majority” instead of “at least half”.

❖ At least 1/3 Board should comprise of independent directors … Rule 210 (5)(c)

96

CG Enhancement

CG ➢1st

time

SGX LR by 2022

49

2018 Code - Director Independence

❖ Rule 210 (5)(di) - Employed by Company and related corporations in current or any past 3 years?

❖ Rule 210 (5)(dii) - Immediate family is or has been employed by Company or related corporations for the past 3 years and whose remuneration is determined by the RC?

❖ Rule 210 (5)(diii) - Been a director for more than 9 years?

97

An "independent" director is one who is independent in conduct, character and judgement, and has no relationship with the company, its related corporations, its substantial shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director's independent business

judgement in the best interests of the company.------CG 2018 Provision 2.1

SGX LR by2019

SGX LR by 2022

SGX Listing Rules – Director Independence

2022

• Rule 210 (5)(diii) : 9 year rule for Independent Directors

• Two-tier voting process

• All shareholders

• All shareholders excluding directors, CEO and associates

98

50

2018 Code - Director Independence

More on Independence….

• Any business relationships?

Reduction of shareholding threshold from 10% to 5%.

Amount and nature of the service is disclosed.

99

Practice Guidance✓ Director/IMF:

Aggregated payments over FY >S$50k other than compensation for Board service

✓ Director/IMF-related organisation: Aggregated payments to over FY

>S$200k

SIGNIFICANT

Spirit and letter

SGX Listing Rules – Other Changes

What else by 2019?❖ Rule 210 (5)(a) - …a director who has no prior experience as a director of an issuer

listed on the Exchange must undergo training in the roles and responsibilities of a director of a listed issuer as prescribed by the Exchange.

❖ Rule 210 (5)(e) - One or more committees as may be necessary to perform the functions of an AC, NC, and RC, and with written terms of reference.

❖ Rule 720 (5) - An issuer must have all directors submit themselves for re-nomination and re-appointment at least once every three years.

❖ Rule 720 (6) When a candidate is proposed to be appointed for the first time or re-elected to the board at a general meeting, the issuer shall:❑ Provide the information relating to the candidate as set out in Appendix 7.4.1 ❑ The issuer must announce the outcome of the shareholder vote in accordance

with Rule 704(16).

100

51

SGX Listing Rules – Other Changes

What other disclosures by 2019?

❖ Rule 704 (24) - If no dividends are declared or recommended, this must be announced together with the reason(s) for such decision.

❖ Rule 1207 (10A) - The relationship between the chairman and chief executive officer of the issuer must be disclosed if they are immediate family members.

❖ Rule 1207 (10B) - All directors, including their designations (i.e. independent, non-executive, executive, etc.) and roles (as members or chairmen of the board or board committees), must be identified in the annual report.

❖ Rule 1207 (10C) - Audit committee’s comment on whether the internal audit function is independent, effective and adequately resourced.

101

SGX Listing Rules – Other ChangesWhat else by 2019?

102

IA scope ?

52

SGX Listing Rules – Other ChangesWhat else in 2019?

103

Code of Corporate Governance 2018 -Practice Guidance 8

104

Illustrative Examples of KMP Banding

Bands no wider than S$250k for top 5 KMP➢ Bands no wider than S$100k for employees who are substantial shareholders or are IFM of a director, CEO or substantial shareholder

53

Code of Corporate Governance 2018-Practice Guidance 8Disclosures on the relationship between Remuneration, Performance and Value Creation:❖ Definition of Value creation and how measured❖ Formulation process of remuneration policies including governance of process❖ Way remuneration is used to drive corporate performance❖ Way remuneration is used to manage risk❖ Way performance is measured❖ Way performance is assessed and taken into account❖ Breakdown of metrics used as part of variable remuneration❖ Metrics used and why appropriate❖ Periods over which performance is assessed❖ Payouts that can be achieved for reaching or exceeding targets❖ Form of payout❖ Breakdown in company and individual performance outcomes and actual remuneration paid

(and explanations if targets not achieved)❖ Where discretion by Board or RC can be exercised, the existence of any gateways; and

clawbacks for malfeasance

105

Code of Corporate Governance 2018

• Trust and Authenticity

• More concise

• More thoughtful application

• Consider and balance needs and interests of material stakeholders

• Industry-led Corporate Governance Advisory Committee (CGAC)

106

Transformative..What do you think?

54

Corporate Performance ManagementAgus Tirtoredjo

Director, MS IT Solutions

If you fail to plan, you plan to fail.

If you fail to plan correctly, you plan to fail.

55

Why Most Financial Analysis is a Waste

Who Gave You the Projections?

56

4 Reasons why most FP&A are ineffective.

Your Plans are Outdated, Static, Disconnected.

Reason #1

57

Traditional Forecasting

Issues:

• Requires detailed projections 15 months in advance.

• Outdated once finalized. Resource allocations not changed to reflect changes in business.

• Focus is to secure resources, individual performance; not on driving success of organization.

The Wall

Budget

Typical finance teams spend:

*Association of Finance Professionals Benchmarking Survey October, 2016,

**Adaptive Insights CFO Indicator Survey Q4 2016

to complete

annual budgets*

83%

to prepare

a forecast*

spent on

non-strategic

tasks**

Days

Days

of time

20

77

and little time

for analysis.

Leaving plans

and forecasts out-

of-date

58

What if… You can update your plans continuously

Rolling Forecast for 12 month horizon.

Benefits:

• Update to plans continuously in line of internal and external

fluctuations.

• Reduce risks. Reallocate resources early and often.

IBM study on Rolling Fcst:

• 12% more accuracy

• 50% less budget

preparation time

• 10% more profitable

The Challenge:Time to Update Forecasts

59

Data disconnected.

Marketing

Demand

Gen

MAS

Social

Events

Targets

Reporting

Capital

Financial

Statements

ERP

Finance

KPIs

Operations

Real Estate

Hosting

IT

Manufacturing

MRP

Quota

Pipeline

CRM

Comp

Plan

Partners

AgreementsRamped

Reps

SQL

Sale

s

Productivity

SQL

CoverageContractors

Employees

HCM

Benefits

Hiring

TMS

HR

Executive

Dashboards

BI

Investor /

BOD Packs

Collaboration

What If… All Your Plans and Data are Inter-connected.

Benefits:• Clarity - interdependencies.

• Consistency – one version of truth.

• Scenario Planning.

60

What if… Planning can be decentralized, coordinated centrally

Active Planning :

- Planning by people closest to the business

- Easy to do and enable quick decisions

- Informed by reporting and analytics

- Integrated into a corporate financial plan

What if… You can integrate your plans

• Integrated plans, actuals, forecasts, calculations, and cell notes to ensure integrity.

• Consolidated source of truth.

WHAT

IF?

61

You spend more time processing and consolidating data,

rather than analyzing.

Reason #2

#3 You spend more time processing and consolidating data rather than analysing.

62

Source: CEB Global

What if… Your Dashboards and Reports are integrated and real-time

• Create visualizations on the fly.

• Connected to underlying plans and actuals.

63

What if… Your Dashboards and Reports are integrated and real-time

• Unified With Microsoft Office, 100% Cloud Connected.

• Formatting Control in Office.

What if… You can consolidate and adjust reports for management and statutory reports.

• Real-time financial consolidation and intercompany eliminations.

• Automate currency translations, reclassifications, and reporting.

64

Your Dashboards and Reports show symptoms,

not actionable insights

Reason #3

What if…. You can troubleshoot business interactively in any report / dashboard

• Real-time drill-down enables analysis of multidimensional data interactively address key issues.

• Updates to key drivers an data are fully traceable via audit trail

65

You are not leveraging on available technology.

Reason #4

Growth of Data

66

Short-Term Plan

Do

Check

Act

Long-Term Plan

Corporate Performance Management• Planning, Budgeting• Driver-Based Modelling• Scenario Planning

CPM• Forecasting• Variance Analysis &

Diagnostics• Consolidation• Dashboard & Reporting

ERP• Sales, Procurement, Supply

Chain, HR• Financial Acctg (General

Ledger, Bank Acctg, Cost Acctg, Profit Ctr Acctg)

Analytics

1. Flexible and Integrated Modelling

2. Collaboration

3. Integration with Transactional System

4. Integrated Dashboards & Reports

5. Management and Ad-Hoc Reporting

6. Ad-hoc Diagnostics

7. Financial Consolidation

Is CPM just glorified spreadsheets?

Excel CPM

√

√

√

√

√ √√

√

8. Traceability √

9. Business Continuity √

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The True Cost of Static Planning

•Wastes or Opportunity Costs from:

1. Resources for preparing budgets and monthly reports.

2. Opportunities lost due to lack of visibility and flexibility of your business plans.

3. Misallocation of resources.

• Eg. Working capital lock-in from excess inventory, resources.

4. Recurring problems due to inability to identify root causes.

5. Lack of (or delays in) decision making.

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Financial Support for SMEsCapability Development Grant

• CDG aims “to support SMEs to scale up business capabilities and ensure business sustainability.”

• Up to 70 percent of project costs such as consultancy, training, certification and equipment costs.

Eligibility:• Registered and operating in Singapore;• Have a minimum of 30% local shareholding; and• Have group annual sales turnover of not more than

$100m or group employment size of not more than 200 employees.

Takeaways:Call to action

Assess:

1. How Finance team is playing strategic role. What are the gaps?

2. Your current planning and reporting process. What are the gaps and cost to business?

3. How your tools uncover actionable insights.

4. Business case for Corporate Performance Management and/or Analytics.

• Consider Capability Development Grant

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And The Next Time Your Boss Gives You the Projections…

Panel Discussion

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Thank you!

Documents

Moore Stephens Financial Reporting Seminar 2018€¦ · Source: IFRS Seminar 2017 slides, by Dr Andrew Lee Recap –ECL Practical Expedients •Example: Provision matrix based on