Compilation of financial statements and accounting standards

As audit requirements are gradually being relaxed in Singapore for companies, more cloud bookkeepers and cloud accountants have been advising their clients that do not require to perform an audit to do a compilation of financial statements instead. So, what exactly is a compilation and is it necessary?

Compilation of financial accounts

To put it simply, a compilation of financial statements is preparation of a set of financial statements without doing the same level of verification as doing a full audit. Under the Companies Act, it is necessary for the directors of the company to prepare a set of financial statements annually. This requirement is stated under section 201 of the Companies Act:

(1) The directors of every company must lay before the company at its annual general meeting the financial statements for the financial year in respect of which the annual general meeting is held.
(2) Subject to subsections (12) to (15), the financial statements referred to in subsection (1) shall comply with the requirements of the Accounting Standards and give a true and fair view of the financial position and performance of the company.

When we talk about cloud bookkeeping, the end product will be a set of management accounts comprising of balance sheet and income statement with schedules showing movement or breakdown of the various ledger accounts in financial figures. The main difference between the management accounts and the financial statements is the disclosures that is mandated by the accounting standards. The accounting standards that are referred to is what is commonly known as Financial Reporting Standards Singapore (FRSs). The Accounting Standards Council (ASC) is the main body that establishes the set of FRSs that companies have to prepare their financial statements according to. Most countries follow closely the international financial reporting standards and Singapore is no exception.

There are certain disclosures that are required by the standards that cannot be directly extracted from the management accounts. For example, the company has to disclose the committed operating leases that it has entered into and is still not completed as at the financial year end. The company also has to disclosure what transactions is with related parties such as loans to directors. These are normally information that is useful to shareholders or investors but which cannot be found in the balance sheet or profit and loss.

Accounting standards

Accounting standards tend to change over time as legislators try to improve on companies’ reporting and provide better, more relevant information to shareholders and investors while trying to balance the burden of reporting on companies. Currently, there’s more than thirty FRSs that companies need to comply with and the trend seems to be increasing over time! We noticed that a lot of corporate services firms have been using the changes in financial reporting standards to increase the prices charged for compilation of financial statements due to the increasing complexities of applying all the relevant standards.

However, business owners and managers have an alternative choice and that is a simplified version of the financial reporting standards aptly named SFRS for small entities. A statement was issued by the ASC which states that companies that meet the following criteria is eligible to use the simplified standards:

Subject to paragraphs 11 and 12, an entity is eligible to use the SFRS for Small Entities if:
(a) it is not publicly accountable (see paragraph 5); and
(b) it publishes general purpose financial statements for external users; and
(c) it is a small entity (see paragraph 6).
(Extracted from Statement of Applicability issued by ASC)

In our opinion, it makes more sense for most small companies owners and managers to use SFRS for Small Entities as they are normally both owner and manager, there is not much added advantage to additional disclosures which only increases the burden of reporting. For us, we would always recommend the better and easier alternative for our clients. To find out more, Drop us a note.

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