Accounting standards and tax obligations for companies

SINGAPORE'S accounting landscape is evolving at an unprecedented rate. For one, companies are racing against time to adopt the Financial Reporting Standards 115 Revenue from Contracts with Customers (FRS 115) and 109 Financial Instruments (FRS 109), which take effect for financial periods beginning on or after Jan 1, 2018. Early adoption is permissible.

These new standards may have a significant impact on the financial reporting of some companies, which serves as a starting point for companies to compute their income tax liabilities for tax accounting and compliance purposes.

In adopting FRS 115 and FRS 109, are the tax challenges the greatest risk you can't see?

Neglecting the tax aspects of these new standards will be foolhardy. Companies have to understand and consider the tax implications in order to confidently and proactively monitor and ensure that they are indeed ready for the tax regimes of these accounting standards.

ASSESSING THE INCOME TAX IMPACT

To minimise complexities and the tax compliance burden, the prescribed tax treatments of revenue recognised under FRS 115 and accounting gains or losses recognised under FRS 109 are largely aligned with the accounting treatment, unless exceptions apply.

Companies do not have a choice to opt in or opt out of the tax treatments for FRS 115 and FRS 109. In this regard, it is in a company's interest to thoroughly assess the income tax impact of the adoption of FRS 115 and FRS 109. There may be significant impact on timing and quantum of a company's taxable income.

Further, special tax rules have been drawn up on the new accounting standards, especially for FRS 109 in areas such as the impairment of financial instruments on revenue account for banks (including merchant banks) and qualifying finance companies in certain circumstances.

To effectively comply with the prescribed income tax rules, the finance team or tax function should work out rigorous documentation policies and structured training programmes so as to ensure that the new tax requirements can be applied accurately and consistently.

Assessing the tax impact of transitional accounting adjustments is also critical, given that the new accounting standards are to be applied retrospectively.

There are also prescribed rules under the e-Tax Guides issued by the Inland Revenue Authority of Singapore (Iras), which cover the details of transitional tax adjustments to be made in the YA of initial application of the new accounting standards.

Companies must recognise these transitional tax adjustments and the magnitude of the potential impact on the cash-flow position in the YA of initial application of the standards. Take for instance, under the FRS 115 transitional tax treatment, any gains or losses arising from the transitional accounting adjustments will be taxed or allowed a tax deduction in the YA of initial application as a one-time tax adjustment.

In view of the above, the finance team or tax function must be able to appreciate and discern the financial fluctuations contributed by such transitional tax adjustments from the companies' ordinary course of business operations, and be able to articulate the fluctuations in their reporting to the relevant stakeholders such as boards and audit committees.

BEWARE OF MISALIGNMENT BETWEEN TAX AND ACCOUNTING

It pays to note that the alignment of tax treatment with accounting treatments under FRS 115 and FRS 109 does not apply under certain prescribed circumstances, particularly if the accounting treatment deviates fundamentally from tax principles. This includes notional accounting entries or where the amount recognised for accounting purposes is not reflective of the revenue derived or expense incurred for tax purpose.

For example, under FRS 115, an entity is required to consider the effects of the time value of money if the timing of payments as agreed to by the parties to a contract (either explicitly or implicitly) provides a significant benefit of financing the transfer of the goods or services to the customer or the entity. Such contracts are considered to contain a significant financing component, which is required to be recognised under FRS 115. The entity would have to present the effect of financing (interest income or interest expense) separately from the revenue from contracts with customers under certain circumstances. Such interest income and interest expense are considered notional adjustments made due to accounting requirements under FRS 115 and hence will be disregarded for tax purposes.

Depending on the accounting impact and the companies' businesses, the extent of such situations may be more pervasive for some companies.

To facilitate the tax adjustments, companies will have to assess whether the existing accounting systems and documentation requirements adequately support the new tax requirements. Companies also need to account for the current and deferred tax implications arising from possible timing differences accurately.

As companies evaluate and adopt the new accounting standards, a comprehensive tax discussion on the new accounting standards with key stakeholders, external auditors and tax advisers is needed, if not already done. This will help to unlock meaningful insights into the possible tax implications and mitigating measures to manage the income tax impact with foresight.