Despite less than a year to the 1 January 2018 effective date of the Financial Reporting Standard 115 (FRS 115), many Singapore companies have yet to initiate the adoption the new revenue standard, and are facing challenges in the implementation, according to an EY poll of 53 finance executives in Singapore, conducted in late November 2016.
Sixty-two percent of the poll respondents indicated that they have not started identifying and evaluating the key impact of FRS 115 – the first stage of the adoption process – and only 6% have completed this process.
Further, 60% of the respondents share that their organizations have yet to decide which approach – full retrospective or modified retrospective – to adopt. Only 2% of those polled said their company was ready for FRS 115 adoption.
“Many companies that have undergone the implementation process have found the impact to be far-reaching through the organization,” says Ronald Wong, Partner, Financial Accounting Advisory Services, Ernst & Young LLP.
“For example, some companies found they needed to make changes to their existing information technology (IT) systems, processes and controls, and business operations. Yet, these organization-wide implications are often overlooked as executives usually focus on the accounting aspect. It is important that companies first understand the potential accounting impact, and go on to determine the wider-organizational impact.”
Improving quality of revenue reporting practices
FRS 115, based on the International Financial Reporting Standards 15 Revenue from Contracts with Customers, aims to improve the quality and consistency of revenue reporting practices across transactions and industries by providing a single control-based revenue recognition model for all contracts with customer (other than financial instrument, insurance or lease contracts). It will also provide a more robust framework for addressing revenue issues.
Revenue is recognized either over time or at a point in time, depending on the pattern of transfer of the goods or services to the customer. This is different from the current risks-and-rewards model that requires different treatments depending on the type and form of the transactions.
When entities adopt FRS 115 in 2018, they will need to restate the affected comparative financial information as though they have always applied FRS 115 (the full retrospective approach) unless they elect the option of not restating comparative information (the modified retrospective approach).
However, the latter approach cannot be applied by Singapore companies listed on the Singapore Exchange due to the additional requirement to adopt, for the first time in 2018, Singapore’s new financial reporting framework that is identical to International Financial Reporting Standards. Therefore, these companies must undertake the procedure of restating comparative financial information that are affected by the application of the new revenue standard.
Non-listed Singapore companies, on the other hand, can choose between full retrospective or modified retrospective approach when adopting FRS 115.
“There are various practical considerations in deciding the transition method to adopt. Entities with significant deferred revenue balances under current revenue standard may experience ‘lost revenue’ if those amounts were deferred at the adoption date and will, ultimately, be reflected in the restated prior periods or as part of the cumulative adjustment upon adoption.
“These figures will not be reported as revenue within the financial statements if included as part of the cumulative adjustment upon adoption. In terms of comparability, the full retrospective method provides users of the financial statements with useful trend information across all periods presented. Other factors that companies should consider are the extent and complexity of the impact on revenue, system and processes, availability of resources and time as well as the decisions made by the other companies in the industry,” Wong explains.
Requiring most effort in implementation
Respondents believed that the areas that will require most time and efforts in the FRS 115 implementation process are management and financial reporting (33%), business processes and practices (18%), information technology (IT) and accounting systems (17%), and internal controls and policies (11%).
Respondents also believed that apart from the finance and tax functions that need to be active in the implementation, other teams such as internal and external auditors (17%), sales and marketing (12%) and IT (11%) will need to be involved in the process as well.
Wong says: “This accounting change is effectively a business change, affecting multiple business functions and capabilities. The IT and accounting systems must be able to support the collection of the data for expanded reporting requirements. Key processes and controls, as well as contracting procedures and terms and conditions, may also need updating under the new standard. All these changes will need to be clearly communicated to key stakeholders in a timely manner.”
Accordingly, companies that have yet to start on their diagnostics assessment for FRS 115 may run into the following risks:
- Unavailability of historical data and IT system capabilities to manage change
- Lack of budget and resources for implementation
- Insufficient response to commercial and other organizational-wide implications, particularly if the implementation requires
restructuring of contracts, processes and controls, or incentive plans
“Adopting FRS 115 is not merely an accounting compliance exercise. It is also an opportunity for companies to revisit existing business processes and practices.
“Companies should start early and allow sufficient time to thoroughly assess the impact, plan and develop the approaches to execute the adoption, and communicate with key stakeholders in a clear and timely manner for a successful implementation,” concludes Wong.