A Deeper Look at some FRS Hot Spots in Financial Statements

Description

In this timely and practical workshop, we will take a deeper look at some difficult and challenging areas in the application of accounting standards that Accountants and Auditors tend to face with. These areas are also constantly flagged by regulators worldwide.

Programme Outline

FRS 109 Impairment Practical Guide: Intercompany Loans in Separate Financial Statements

FRS 109 requires entities to recognise expected credit losses for all financial assets held at amortised cost, including most intercompany loans from the perspective of the lender. Under IFRS 9, lenders of intercompany loans will be required to consider forward-looking information to calculate expected credit losses, regardless of whether there has been an impairment trigger.

It is expected that many intercompany loans within the scope of FRS 109 will fall within:

• loans repayable on demand,
• with low credit risk,
• with a remaining life of 12 months or less or
• that have had no significant increase in credit risk since the loan was originated

Application of the 3-stage general impairment model in the following scenarios:

• Intercompany loans that are outside the scope of FRS 109 – loan is an investment in a group company
• Intercompany loans repayable on demand
• How should a lender calculate expected credit losses for an intercompany loan that is repayable on demand?
• If the borrower has sufficient highly liquid assets to repay the intercompany loan if it is demanded today, does that mean that the expected credit loss could be close to zero?
• If the borrower does not have sufficient highly liquid assets, what are the next steps?
• What discount rate should the lender use if recovery scenarios are required and the intercompany loan is interest free and repayable on demand?
• Low credit risk intercompany loans
• 12-month expected credit loss under stage 1 of the general model
• Stage 1 intercompany loans and loans whose life is 12 months or less
• Stage 2 or 3 intercompany loans

Goodwill impairment testing

Goodwill is required to be impairment tested annually, even when there are no impairment indicators. This requires a comparison of the assets of the cash generating units and the goodwill to be compared to the recoverable amount. Although recoverable amount is the higher of value-in-use (VIU) and fair values less cost of disposal, only VIU is determined in practice. the Determining value-in-use for goodwill impairment testing requires cash flow forecast to be developed based on requirements in FRS 16 Impairment of assets. Case study will be used to illustrate the development of cash flow, including the use of terminal growth rate.

Revenue recognition – Construction Contracts

• Identification of performance obligations in the contract: single vs multiple performance obligations
• Variable consideration: liquidated damages
• Estimate of variable consideration: expected value method vs most likely method
• Determination of whether there is significant financing component
• Performance obligation satisfied over time or at a point in time
• Measuring progress towards completion of a performance obligation: output method vs input method

Expected credit loss (ECL) – Trade Receivables

ECLs on trade receivables are measured by applying either the general model or the simplified model.

Companies using the simplified model often use provisioning matrices that are based on historical data. Those matrices are adjusted to incorporate reasonable and supportable information that is available at the reporting date, including economic uncertainty resulting from events such as geopolitical unrest, natural disasters, climate effects or inflationary pressures. This may include considering the need for additional scenarios and the impact of any government support schemes.

FRS 109 allows the use of practical expedients when measuring ECLs under the simplified approach – e.g. using a provision matrix. A company that applies a provision matrix may be applying segmentation to capture the significantly different historical credit loss experience for different customer segments. However, the segmentation has to be kept under review to reflect the different ways in which economic uncertainties affect different types of customers.

Provision matrices are based on historical loss experience but need to be adjusted to reflect information about current conditions and reasonable and supportable forecasts of future economic conditions. Certain economic uncertainties may lead to a significantly different loss rate for trade receivables compared with prior periods. Companies will need to consider how the timing and amount of cash flows generated by outstanding trade receivables might be affected and amend loss rates as necessary.

Practical example and illustrations will be used throughout the workshop to facilitate understanding and application of the standards in real life.

This workshop qualifies for 7.0 CPE hours in Financial and Sustainability Reporting Standards and Pronouncements (Category 1).

What you will learn

By the end of the workshop, you will :

• Be more confident in applying these standards in real life
• Appreciate and understand the challenges that arise when applying these standards, and know how to avoid the errors and pitfalls in your financial reporting or audit

Target Audience

• Accountants and Auditors

Expert Speaker

Chee Hay Kheong Daniel

Daniel holds an Honours degree in Accountancy from the National University of Singapore and is a Certified Information Systems Auditor (CISA). He has more than 15 years of experience in the accounting profession, having worked for one of the Big 4 accounting firms both in Singapore and in the United Kingdom. He has also more than 5 years of senior management experience with MNCs, managing their operations in Singapore and Asia.

Daniel is a highly sought-after seminar trainer. He was an Adjunct Professor in the School of Business, Singapore University of Social Sciences and an Adjunct Associate Professor in the Department of Accounting of the NUS Business School. He served as a committee member of both the IT Committee and the Examination Committee of ISCA, and was a Committee member of the Disciplinary Sub-Committee of Accounting and Corporate Regulatory Authority (ACRA).