ACCT201 Topic01 FinancialReportingEnvironment

Topic I:
The Financial Reporting Environment
ACCT201 Corporate Reporting & Financial Analysis

Dr. ZANG Yoonseok
Prof. ZANG Yoonseok 1

Reading materials
Revsine et al. Ch. 1 & 7.

FRS Preface to the Financial Reporting Standards
FRS 1 Presentation of Financial Statements
SGX Listing Manual
Chap 7 Rules 702-711, Chap 12, and Appendices 7.1 & 7.2
FRS 34 Interim Financial Reporting
Self Review of Financial Statements: Revsine et al. Ch. 2, 4, & 17

Part I:
Economics of Financial Reporting

Economics of financial information
SUPPLY
DEMAND
Financial statement is The supply of financial

demanded because of its value information is guided by the
as a source of information costs of producing and
about company performance, disseminating it and the
financial condition, and benefits it will provide to the
stewardship of resources. company.

Demand for financial information
Informational objective
To provide information about the financial position, performance, and
changes in financial position of an enterprise that is useful to users in
making economic decisions.
Information asymmetry problem
Example: lemons problem by Akerlof (1970)
Managers have information about the company that investors dont have
but want to have Information Asymmetry.
Problem is how to get managers to truthfully reveal (signal) the
information that investors want:
Mandatory disclosure force managers to reveal.
Voluntary disclosure incentivize managers to reveal.

Demand for financial information
Stewardship objective
To show the results of the stewardship of management, or the
accountability of management for the resources entrusted to it.
Moral hazard problem or Agency problem
Shareholders (principal) demand financial/accounting information about
company in order to evaluate managers (agent) performance.
But information is supplied/produced by manager himself and he has
incentive to reveal information that maximizes his own interest.
Problem is how to get managers to truthfully reveal the information that
can accurately reflect his efforts:
Mandatory disclosure force managers to reveal.
Voluntary disclosure incentivize managers to reveal.

Supply of financial information
Mandated reporting (e.g., quarterly and annual reports) plus

voluntary disclosures (e.g., management earnings forecasts)
that go beyond the minimum requirements.
Voluntary disclosure is guided by cost/benefit considerations.
Disclosure benefits Disclosure costs
Avoid the lemons problem, ie, Information production.
signaling. Competitive disadvantage.
Lower cost access to capital. (proprietary costs)
Litigation cost.
Political cost.
Companies that confront different financial reporting costs and

benefits are likely to choose different accounting and reporting
practices.

Increased Cost of Borrowing (%)
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8
Generally Accepted Accounting
Principles (GAAP)
Financial statements are prepared under a set of Generally Accepted
Accounting Principles (GAAP).
GAAP is reflected in a set of Accounting Standards promulgated by the
standards setting body in the country.
International Accounting Standards Board (IASB) based in London sets
International Financial Reporting Standards (IFRS) which are adopted by many
countries including Singapore, Hong Kong, China, Korea, etc.
In the U.S., the Financial Accounting Standards Board (FASB) sets Statements
of Financial Accounting Standards (US GAAP)
In Singapore, the Accounting Standards Council (http://www.asc.gov.sg) sets
Financial Reporting Standards (FRS) which follow closely IASB
pronouncements.
Proposed new standards or changes in standards are first circulated publicly as
exposure drafts (ED) for comments/feedback, before revision and adoption (see
next slide).

Adversarial nature of financial reporting
GAAP permits alternatives (e.g., FIFO vs Average), requires estimates

(e.g., useful life of building), and incorporates management judgments
(assets impaired?).
Managers have incentives to sometimes exploit the flexibility of GAAP.

Here are some ways they can do it:
Smoothing the reported earnings numbers.
Manipulating revenues or expenses to achieve bonus goals.
Government authorities, along with auditors and the courts, serve to

counterbalance opportunistic financial reporting practices.
Case study: flexibility of GAAP

Case study: flexibility of GAAP
--America Online (now Time Warner)
Wall Street analysts were uneasy about earnings quality because of AOLs
unorthodox and aggressive accounting for certain marketing costs.
PR Newswire (Oct 29, 1996): The company also announced that effective
immediately it will expense all marketing costs as they are incurred.
Previously, the company has deferred the cost of certain of its marketing
activities, such as the costs of mailing diskettes to prospective customers,
and then amortized those costs over a period of time.

AOLs accounting method change
Triggered a $385 million balance sheet write-off.

Produced a net loss of $354 million for the quarter and erased
five-years of reported profits.
A TPS (think-pair-share) Question:
Should AOLs stock price fall or up when the change was announced?
Assuming the change was the only new information.
Why?
TPS: Think of answers. Pair up with another student and jot down brief
answers on a piece of paper. Then the pair share the answers with the
class.

Part II:
Financial Reporting Environment in Singapore

Standard setting in Singapore:
Accounting Standards Act (2007) requires the Accounting Standards Council

(ASC) to be established to issue accounting standards (FRS) in Singapore.
The ASC prescribes accounting standards for both companies and non-corporate
entities (e.g., charities, societies).
The ASC is responsible only for the formulation and promulgation of accounting
standards (FRS).
The monitoring and enforcement of compliance with accounting standards will
remain the prerogative of the respective regulators, viz. ACRA for companies
(http://www.acra.gov.sg), Commissioner of Charities for charities, Registrar of
Co-operative societies for co-operative societies and Registrar of Societies for
societies.
ACRA stands for Accounting and Corporate Regulatory Authority.

Compliance with FRS
Compliance with FRS is legally required; must be 100%.

Legal penalty otherwise.
Non-compliance exceptions:
May be allowed if companies apply standards other than FRS
(e.g., US GAAP) in exceptional cases.
May be approved if noncompliance is necessary for the
accounts to present a true and fair view of the company (see
the next slide).
Cost of compliance on its own is insufficient to justify an
exemption.
Particulars of the non-compliance, the reasons, and its effect
should be disclosed with a statement by the auditor.

Substance over form
Is compliance with GAAP the only goal?
Compliance is necessary but not sufficient. Economic reality must

override legal compliance.
The overriding factor is that financial statements must present a true and
fair view of the financial affairs of the enterprise (FRS1).
Therefore, true and fair view overrides compliance with
Accounting Standards, i.e., substance over form.
If it is a wolf but it was disguised in a legal form to look like a goat,
Substance Over Form would prevail to reinstate it is a wolf and not a goat!
To differentiate Substance from Form, one needs to be vigilant to have good
knowledge of the companys operation and takes a more in-depth approach so
as to seek further evidence or proof.

Examples: substance over form
A company has recorded one transaction in a group of

transactions as a sale to a customer. Another transaction records
a loan to the same customer for a similar amount.
Form: there are a sale (thus sales revenue) and a loan, independently.
Substance: the sale may be without substance as it has been funded by
the company.
Enron group's use of over 3,000 Special Purpose Entities (SPEs)
structured in such a way as to enable the company to avoid
including extensive debt in the consolidated financial statements
of the group.
Form: Enron does not own majority shares of these SPEs, so no need to
consolidate their results to Enrons books.
Substance: Enron controls these SPEs through its directors, so should be
consolidated.
Part III:
Singapore Disclosure Requirements
and Accounting Standards

Singapore disclosure requirements
Companies Act (Cap 50), as amended to-date

Part VI (s199-209A).
Financial Reporting Standards (FRS) issued by ASC.

Interpretation of FRS (INT FRS) issued by ASC.
Singapore Exchange Listing Manual (SGXLM) issued
by SGX.
Code of Corporate Governance governed by MAS and
SGX (not covered in ACCT201).
Securities & Futures Act (Part XIII) dealing with share
offering prospectuses (not covered in ACCT201).

Key financial reports to be produced
Operating and Financial Review (OFR) SGXLM 1207;

- a.k.a. Management Discussion & Analysis (MD&A) OFR Guide (voluntary)
Corporate Governance Report SGXLM 710;
Code of Corporate Governance
Directors Report CA s201(5)-(12)
Directors Statement (signed by at least two directors) CA s201(15)
Auditors Report CA s201(4)
Statement of Comprehensive Income CA s201; FRS1; SGXLM
Statement of Financial Position (Balance Sheet) CA s201; FRS1; SGXLM
Statement of Changes in Equity FRS1
Statement of Cash Flows FRS1,7
Accounting Policies FRS1,8
Explanatory Notes to Accounts FRS1
Miscellaneous Items CA; FRS; SGXLM

Directors statement: Singapore Post

Complete set of financial statements
FRS 1 para. 10
A complete set of financial statements comprises:
(a) a statement of financial position as at the end of the period;
(b) a statement of comprehensive income for the period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising a summary of significant accounting policies and
other explanatory information; and
(f) comparative financial statements of the prior periods.
An entity may use titles for the statements other than those used in this
Standard.
Balance Sheet, Profit or Loss Account, Statement of Earnings, etc

Statement of Financial Position (B/S)
Presentation of assets and liabilities is based on a current and non-current

distinction.
Some liquid investments could be non-current if we intend to hold it to maturity.
Classification of asset/liability as current:

Main criteria: cash or cash equivalent, or items expected to be sold, consumed or
settled within the entitys normal operating cycle, or within 12 months after
balance sheet date.
All other assets and liabilities are non-current.

No-par-value share capital
(effective 30 Jan 2006)
Singapore Companies Act

62A. (1) Shares of a company have no par or nominal value.
(2) Subsection (1) shall apply to all shares, whether issued before, on or after
30th January 2006.
Transitional provisions for section 62A

62B. (2) On 30th January 2006, any amount standing to the credit of a
companys share premium account and any amount standing to the credit of
a companys capital redemption reserve shall become part of the companys
share capital.

Singapore Airlines 2005



Statement of Comprehensive Income
Comprehensive income is the change in equity [net assets] of a business enterprise

during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners.
All components of profit or loss
Other comprehensive income (OCI)
Other comprehensive income comprises items of income and expense (including
reclassification adjustments) that are not recognised in profit or loss as required or
permitted by other FRSs.
(a) changes in revaluation surplus (see FRS 16 Property, Plant and Equipment and FRS
38 Intangible Assets);
(b) gains and losses arising from translating the financial statements of a foreign
operation (see FRS 21 The Effects of Changes in Foreign Exchange Rates);
(c) gains and losses on remeasuring available-for-sale financial assets (see FRS 39
Financial Instruments: Recognition and Measurement);
(d) actuarial gains and losses on defined benefit plans recognised in accordance with
paragraph 93A of FRS 19 Employee Benefits; - not covered in ACCT201
(e) the effective portion of gains and losses on hedging instruments in a cash flow hedge
(see FRS 39). - not covered in ACCT201

EZRA 1Q2010: separate I/S & St. of C.I.

Boardroom Ltd. AR2010: A single St. of C.I.

Profit or loss
An entity shall recognize all items of income and expense in a period in

profit or loss unless an FRS requires or permits otherwise (FRS 1.88).
When items of income and expense are material, their nature and amount
shall be disclosed separately (FRS 1.97-98). e.g.
Write-downs of inventories or property, plant and equipment (PPE).
Restructuring costs
Gains or losses on disposal of non-current assets
Discontinued operations
Litigation settlements

Statement of Changes in Equity
An entity shall present a statement of changes in equity showing in the

statement:
(a) total comprehensive income for the period, showing separately the total
amounts attributable to owners of the parent and to minority interest;
(b) the amounts of transactions with owners in their capacity as owners,
showing separately contributions by and distributions to owners; and
(c) for each component of equity, a reconciliation between the carrying
amount at the beginning and the end of the period, separately disclosing
each change.

Boardroom Ltd. AR2010

Other required disclosures (FRS 1)
Statement of Cash Flows FRS 7 (Cash Flow Statements)

Notes to the Accounts.
Accounting Policies used.
Key sources of estimation uncertainty
Assumptions used in estimating the effects of uncertain future events on the
carrying amounts of assets and liabilities.
Entitys objectives, policies and processes for managing capital
Summary qualitative and quantitative information. Must explain debt capital
structure.
Compliance with externally imposed capital requirements, if any (e.g. capital
adequacy requirements for banks).
Others:
Dividends proposed or declared but not yet recognized in accounts.
Country of incorporation and registered address.
Description of principal activities and operations.
Name of immediate parent and ultimate parent company.

Additional disclosures under SGX Listing
Manual (only for listed firms)
Some of the key additional disclosures required under SGX Listing Manual Chap
12 & Appendix 7.2:
Review of operating and financial performance, business outlook, and

commentary of significant trends and competitive industry conditions
See also CCDG Guide for Operating and Financial Review for listed
companies. However, adherence to this guide is voluntary.
Fees paid to auditors for non-audit work. (in case of conflicts that auditors
need to settle)
Directors interests in shares of the company.
Material contracts with CEO, directors or controlling shareholders.
Shareholding structure.
Listing of real estate properties (with details).
Directors remuneration.
Employee share option scheme.
Debt due within one year/after one year, secured/unsecured.
Net asset value per share.

Deadlines for release of annual
results
4 months
60 days 14 days
Financial Preliminary Full annual Share-

year-end annual financial financial report to holders
(e.g. Dec statements per shareholders & AGM
31, 2007) SGX LM Rule SGX per SGX per CA
705, in the format LM Rule 707 and s201(1)
per SGX LM App CA s203
7.2

Interim financial reporting (FRS 34)
For interim reports, a company may produce a complete set of financial statements
(as in annual reporting) or a condensed set of financial statements.
In Singapore, quarterly financial reporting is now mandatory for all listed companies
whose market capitalization on Mar 31, 2003 exceeded S$75 million.
The market capitalisation of companies exempted from quarterly reporting will be
reviewed at the end of each calendar year, starting Dec 31, 2006.
A company will not be exempted from quarterly reporting should its market capitalisation
fall below $75 million subsequently.
Exempted companies should report semi-annual reports within 45 days after the relevant
financial period.
Quarterly financial report must be released within 45 days of quarter-end.
Financial report for the final interim period (i.e. 4th quarter) is not necessary, but .
if an estimate is changed significantly during the final interim period, the nature and
amount of the change should be disclosed in the annual statements.

Part IV:
Singapore Exchange (SGX)
Corporate Disclosure Policy

SGX corporate disclosure policy
SGX Listing Manual chap 7 Rule 703 and Appendix 7.1:

Require all listed companies to disclose price-sensitive information on
a continuing basis. (immediately - within 24 hours)
Price-sensitive information defined as information known
to the company:
that is necessary to avoid the establishment of a false market for the
companys securities.
that would likely have a material effect on price or value of its
securities.
Dissemination of information should be thorough and public,
not selective (i.e., fair disclosure).

Common events triggering
disclosure under Rule 703
Merger, acquisition, joint venture Significant change in capital investment

Firm evidence of significant plans
improvement or deterioration in near- Significant change in valuation of assets
term prospects
Rumors or reports in the media that
Acquisition or loss of significant require confirmation, denial and/or
contract clarification.
Purchase or sale of significant asset (But no response to an analyst or media
Significant new product or discovery report predicting future sales or earnings
Significant sale of securities is required, unless the report is
Change in control, tender offer materially incorrect and may mislead
investors, or report suggests leakage of
Significant change in management
confidential information.)
Large borrowing
Unusual trading activity in the firms
Event of default on debt securities shares
Significant litigation Leakage of hitherto confidential
Dispute with customers or supplies information

Disclosure exemptions under Rule 703
Disclosure is exempted only if:

Disclosure would breach the law.
A reasonable person would not expect the information to be disclosed and the
information is kept confidential.
Information is of the following nature:
It concerns an incomplete proposal or negotiation unless and until in-principle terms
of deal are agreed.
It comprises matters of supposition or is insufficiently definite.
It is generated for internal management use.
It is a trade secret.
Such exemption from disclosure may be temporary; disclosure may become
necessary at some later stage.
However, the following should be observed:
Undisclosed information should be kept strictly confidential.
Access to information should be restricted to key officers on need-to-know basis.
Such officers should be either prohibited from trading in the firms securities
during a specified time frame or be required to report all such trades.

Example: Neptune Orient Lines
NOL dives on Dow Jones report of rights issue plan

Tuesday, 10 March 2009 16:23
The EDGE Singapore
Shares of Neptune Orient Lines (NEPS.SI), the worlds seventh-largest

container shipper, fell as much as 12.7% today after a Dow Jones report that the
company is considering a rights issue to raise more than US$250 million,
according to Reuters.
By 3:52pm, NOL was down 10.8% at 91 cents, underperforming the benchmark

Straits Times Index which gained 0.8%.
NOL did not respond to emails asking for a comment or answer telephone calls.
Banking sources told Reuters that NOL, like other companies in which
Singapore state investor Temasek Holdings (TEM.UL) has a stake, is
considering ways to bolster its capital, but no mandates have been given out.

Example: Neptune Orient Lines
ANNOUCEMENT ON SHARE PRICE FLUCTUATIONS
Neptune Orient Lines Limited (the "Company") wishes to announce that in the
course of its business, the Company continually evaluates all available options
to improve its performance and strategic position. It is the Companys policy not
to comment on market rumour or speculation. We confirm that the Company has
not entered into any agreements that would require disclosure in accordance
with the SGX-ST Listing Rules.
It is the Companys policy to make appropriate announcements to update

shareholders as and when circumstances warrant.
10 March 2009

Example Singapore Exchange Ltd.
Business Times 25 June 2007, Corporate disclosure: SGX must be the standard bearer
On June 11, in response to queries from the Monetary Authority of Singapore (MAS)
over a sudden surge in its share price the SGX said that it 'is not aware of any
information not previously announced concerning the business of SGX and its
subsidiaries, which, if known, might explain the price increase'. It also said that it 'has
not entered into negotiations or agreements which are discloseable under the Listing
Rules'
A few days after the June 11 query and response, the Tokyo Stock Exchange (TSE)
announced that it had taken a 4.99 per cent stake in the SGX in an attempt to deepen
ties already established with the local bourse. But doesn't the Listing Manual say that a
company must, at any time, disclose any information that would likely 'materially
affect the price or value of its securities'?
Surely the exchange must have known after the price of its stock had shot up more than
25 per cent that something must have been afoot.
The exchange has been collaborating with the TSE since at least December last year
and in mid-December,
MCQ for Review
When is the deadline for release of preliminary annual financial
statements per SGX Listing Manual Rule 705?
A. Within 30 days after financial year-end.
B. Within 45 days after financial year-end.
C. Within 60 days after financial year-end.
D. Within 75 days after financial year-end.
E. Within 90 days after financial year-end.
Which of the following is not required additional disclosure in annual
reports under SGX listing manual?
A. Fees paid to auditors for non-audit work.
B. Employee share option scheme.
C. Shareholding structure.
D. Information on customers that contribute more than five percent of total
revenues.
E. Listing of real estate properties.
-- END OF TOPIC --

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Topic I:

The Financial Reporting Environment

ACCT201 Corporate Reporting & Financial Analysis

Prof. ZANG Yoonseok 1

Revsine et al. Ch. 1 & 7.

Prof. ZANG Yoonseok 2

Prof. ZANG Yoonseok 3

Financial statement is The supply of financial

Prof. ZANG Yoonseok 4

Prof. ZANG Yoonseok 5

Prof. ZANG Yoonseok 6

Mandated reporting (e.g., quarterly and annual reports) plus

Companies that confront different financial reporting costs and

Prof. ZANG Yoonseok 7

Prof. ZANG Yoonseok

Prof. ZANG Yoonseok 9

GAAP permits alternatives (e.g., FIFO vs Average), requires estimates

Managers have incentives to sometimes exploit the flexibility of GAAP.

Government authorities, along with auditors and the courts, serve to

Case study: flexibility of GAAP

Prof. ZANG Yoonseok 11

Prof. ZANG Yoonseok 12

Triggered a $385 million balance sheet write-off.

Prof. ZANG Yoonseok 13

Prof. ZANG Yoonseok 14

Accounting Standards Act (2007) requires the Accounting Standards Council

Prof. ZANG Yoonseok 15

Compliance with FRS is legally required; must be 100%.

Prof. ZANG Yoonseok 16

Is compliance with GAAP the only goal?

Compliance is necessary but not sufficient. Economic reality must

Prof. ZANG Yoonseok 17

A company has recorded one transaction in a group of

Prof. ZANG Yoonseok 19

Companies Act (Cap 50), as amended to-date

Financial Reporting Standards (FRS) issued by ASC.

Prof. ZANG Yoonseok 20

Operating and Financial Review (OFR) SGXLM 1207;

Prof. ZANG Yoonseok 21

Prof. ZANG Yoonseok 22

Prof. ZANG Yoonseok 24

Presentation of assets and liabilities is based on a current and non-current

Classification of asset/liability as current:

Prof. ZANG Yoonseok 25

Singapore Companies Act

Transitional provisions for section 62A

Prof. ZANG Yoonseok 26

Prof. ZANG Yoonseok 27

Prof. ZANG Yoonseok 28

Prof. ZANG Yoonseok 29

Comprehensive income is the change in equity [net assets] of a business enterprise

Prof. ZANG Yoonseok 30

Prof. ZANG Yoonseok 31

Prof. ZANG Yoonseok 32

An entity shall recognize all items of income and expense in a period in

Prof. ZANG Yoonseok 33

An entity shall present a statement of changes in equity showing in the

Prof. ZANG Yoonseok 34

Prof. ZANG Yoonseok 35

Statement of Cash Flows FRS 7 (Cash Flow Statements)

Prof. ZANG Yoonseok 36

Review of operating and financial performance, business outlook, and

Prof. ZANG Yoonseok 37