You are here


Making sense of financial statements amid rule changes

IN 2018, Singapore transitioned from local to International Financial Reporting Standards (IFRS), also known as Singapore Financial Reporting Standards (International) (SFRS (I)). This shift is mandatory for all listed companies issuing equity or debt on the Singapore Stock Exchange. In addition, all Singapore companies have to adopt the new accounting standards for Revenue (SFRS 115) and for Financial Instruments (SFRS 109).

Users of financial statements have longed for simple, easy-to-understand and easily digestible information. With all these changes, as an accounting expert, I would say it will become even more difficult for users to understand and assess the underlying performance of companies using their financial statements.

I would like to highlight two main issues:

The transition to SFRS (I) allows for some flexibility in accounting choices that companies can use. This could result in diversity in practice and a lack of comparability of financial statements; and

Market voices on:

The move towards fair-value accounting requires significant judgements and estimates to be included in the fair-value adjustments. Most of these unrealised changes in fair values are recorded directly in the income statement, without a clear distinction between realised and unrealised components. As such, users are finding it difficult to understand and analyse the underlying performance of the companies.

As part of the transition from SFRS to SFRS (I), companies are allowed to choose from a number of accounting methods to ease their transition effort. For example, companies can choose to revalue certain assets (property, plant and equipment) to fair value on the transition date, and use these fair values as the new carrying costs of the assets. For investment properties, companies can choose to refresh their accounting policy and change it from the fair-value model (where assets are re-measured at fair value) to the cost model (where assets are carried at historical costs) or vice versa.

Such adjustments are made directly in the opening retained earnings, and hence reduce the impact to the companies' income statement in future periods. As different companies may make different accounting policy choices, stakeholders should keep an eye on these transition adjustments and the related disclosures in the financial statements. They should be aware that the earnings performance of these companies may not be comparable on an apples-to-apples basis, due to the different accounting methods chosen.

The further move towards fair-value accounting principles often requires management of the companies to exercise significant judgments and make estimates when calculating the fair-value adjustments. The real test of how well management was able to estimate fair value is when it is realised, that is, when the assets are sold. This is why the differentiation between unrealised valuation gains (or losses) and realised results is important.

However, the requirements of the new accounting standards treat all such results the same, as they are taken directly into the income statement as gains or losses. Furthermore, some of these fair-value or mark-to-market adjustments are more subjective in nature than others. This is especially the case for certain investment properties, biological assets, unlisted equity investments, as well as any financial instruments that are illiquid and difficult to value (such as private equity and distressed debt), as they rely on unobservable parameters.


Using the new financial instruments accounting standard (SFRS 109) as an example, companies are now generally required to take the unrealised mark-to-market gains or losses of their equity investments directly to the income statements, even when these investments are still owned by the companies at the reporting date, as the alternative to account for them at cost is no longer available. The new treatment makes no distinction between realised and unrealised results in the income statement and it will significantly impact the reported earnings figures of companies with large equity holdings, such as Temasek Holdings and Berkshire Hathaway.

Warren Buffett, chairman of the board at Berkshire, wrote in his recent May 4 annual shareholder letter on Q1 2019 earnings release, where Berkshire reported a whopping US$21.7 billion in net earnings, as compared to a US$1.1 billion loss a year ago: "I've warned you about the distortions. The bottomline figures are gonna be totally capricious… I just hope nobody gets misled."

For Berkshire, its advice for stakeholders is to focus on its operating earnings instead, excluding the unrealised mark-to-market swings from its large equity portfolio.

One way users can enhance their understanding of the company's underlying performance is to trace the income statements to the cash flow statements to get an indication of what are the realised components generated by the company during the year. On the other hand, a more comprehensive approach is for companies to provide additional information to the users, so that they can distinguish between realised and unrealised results, as well as to better explain the reconciliation to the cash flows presented.

With this in mind, stakeholders will have a more meaningful set of information to facilitate their understanding of the financials, and for better comparability and decision-making purposes.

For the coming season of annual general meetings, stakeholders are encouraged to take the opportunity to seek clarifications from management on the impact of the accounting choices made and any significant unrealised valuation results that impact the income statement for the past year 2018. It may be difficult, at least for the first year, to have meaningful comparisons with past years' performance without additional disclosure and relevant data being provided.

  • The writer is chairman, Financial Reporting Committee, of the Institute of Singapore Chartered Accountants (ISCA)