IN 2021, Singapore Exchange Regulation (SGX RegCo) began using artificial intelligence and regulatory technology (regtech) solutions to enhance its monitoring of issuers’ financials.

The data generated helped SGX RegCo identify when queries to issuers on their financials were warranted.

We believe that if we make clear our expectations around disclosures in respect of financials, we may be able to help issuers improve their exchange filings around such matters.

This column summarises our expectations of disclosures regarding three financial indicators: liquidity ratios, non-current trade and other receivables, and significant advances or prepayments.

Most issuers produce what we have described as standard disclosures. With the issuance of this column, issuers whose financial indicators are at concerning thresholds should consider substantive disclosures on a proactive basis.

These three financial indicators are most likely to warrant investor concern, given the prevailing economic conditions of relatively high interest rates and inflation.

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Liquidity ratios

This indicator measures the issuer’s ability to meet short-term financial obligations due within the next 12 months.

An issuer with a lower liquidity ratio faces an increased risk of breaching its debt covenants, potential cross-defaults and an inability to operate as a going concern.

Comprehensive disclosures on how issuers plan to meet their short-term financial obligations, along with the board’s assessment, could include:

• A detailed breakdown of the sources of funds expected to be available to the issuer for the next 12 months (including proposed equity fundraising exercises and divestment of non-core assets);

• Available credit facilities and their unutilised amounts, as well as whether such facilities are committed or uncommitted;

• Cost-cutting measures;

• New financing or refinancing arrangements;

• Strategies and plans to improve collection of outstanding receivables;

• Confirmation whether any breach of financial covenants has been rectified or waived; and

• Confirmation that the board has reviewed and is satisfied with, at the minimum, a 12-month cashflow forecast from the date of the latest financial statements.

Where the issuer relies on an undertaking of financial support from its parent company or sponsor to operate as a going concern, the board should carefully assess the financial standing of its parent company or sponsor, as well as the effectiveness of financial support.

The board should consider the types and timing of the committed financial support, to be assured of its effectiveness.

Non-current trade and other receivables

Receivables to be collected after more than one year may raise questions about collectability. The concern is whether the issuer will face cashflow issues from either delays or non-collectability, or whether the issuer has adopted inappropriate revenue recognition policies.

In the worst-case scenario, the non-current trade receivables may raise concerns about the veracity of sales.

The board and management should closely monitor non-current receivables. They should analyse the nature, breakdown and ageing schedule of such receivables; and track the issuers’ plans for collection.

Some substantial insights into factors considered when assessing collectability include credit evaluation of customers’ financial conditions, payment history, age of debts, external ratings and credit agency information, audited financial statements, cash flow projections, and available press information.

Issuers may also disclose a credit loss assessment performed in accordance with the relevant accounting standards. Some issuers have also disclosed whether external auditors tested the reasonableness of the assumptions pertaining to collectability.

Issuers may also consider including an explanatory note to the financial statements, to explain the nature of these non-current receivables and why they remain persistent on the balance sheet.

The note could further explain whether this stems from an industry-wide systematic risk or an issuer-specific risk. The board should also state if there are any underlying governance issues and whether any improvement in controls is required.

Existence of significant advances or prepayments

An issuer may want to pay attention to significant advances or prepayments, especially when they do not commensurate with the issuer’s scale of operations.

The concerns for significant prepayments and advances include whether these prepayments are long outstanding and hence are exposed to impairment, and the sufficiency of controls in place for such payments, such as approval limits.

Comprehensive disclosures may include detailed explanations on the nature of the prepayments and/or advances, the specific projects these relate to, the progress of transactions involved, whether these would be utilised or offset against any expected costs, and an explanation on whether any allowance for impairment loss is required.

Issuers may also consider disclosing whether it is common market practice for entities in the same industry to recognise such prepayments and advances; the adequacy and effectiveness of the issuer’s internal controls; and the efforts taken to recover or utilise such prepayments and advances.

Since the roll-out of SGX RegCo’s initiative to use regtech to analyse financial data, we have observed more detailed disclosures in response to our queries. Shareholders could further engage the boards of their investee companies with regard to these queries, to seek clarity or further action where needed.

This list of indicators is not exhaustive, and investors should continue to be vigilant and monitor disclosures. SGX RegCo may add other indicators to this review and expand its expectations of disclosures around these indicators in the future.

Tan Boon Gin is chief executive at SGX RegCo, and June Sim is its head of listing compliance. This is an abridged and edited version of a column published by the regulator.