Audit Committee Bulletin - Issue 2, 2020 Center for Board Matters - EY
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Center for Board Matters Audit Committee Bulletin Issue 2, 2020
Welcome to Audit Committee Bulletin,
published to bring you important information
on corporate and financial reporting matters.
On 22 May 2020, the Accounting and Corporate Regulatory Authority
(ACRA) issued the Financial Reporting Practice Guidance No. 1 of 2020
to help directors in their review of the upcoming financial statements.
In our first article, we look at the proposed areas of review focus by
directors on the financial statements affected by the COVID-19 pandemic
and the questions for directors’ consideration when assessing the impact
of the COVID-19 pandemic on financial statements.
With effect from 1 June 2020, the Singapore Exchange Regulation
(SGX RegCo) has removed the minimum trading price (MTP) rule for
issuers listed on the Mainboard (Mainboard issuers) and refined the criteria
for exiting the financial watch-list. In our Regulatory updates section,
we discuss this change and the two provisional measures announced
by the SGX RegCo to support Mainboard issuers amid the challenging
business and economic climate due to the COVID-19 outbreak.
We hope you have an enriching read.
Christopher Wong Gajendran Vyapuri
Head of Assurance Assurance Partner
Ernst & Young LLP Professional Practice
Ernst & Young LLP
Audit Committee Bulletin | 1ACRA’s proposed areas of review
focus by directors on financial
statements affected by the
COVID-19 pandemic
We highlight the proposed areas of focus and the questions
for directors’ consideration when assessing the impact of the
COVID-19 pandemic on financial statements.
On 22 May 2020, the Accounting and Corporate Regulatory Authority
(ACRA) issued the Financial Reporting Practice Guidance No. 1 of
2020 (the Practice Guidance), highlighting the focus areas for directors
when reviewing the financial statements for the financial year ended
31 December 2019 and beyond. The Practice Guidance also provides
directors with questions to ask when assessing the impact of the
COVID-19 pandemic on the financial statements.
1. Financial position and sustainability
Assumptions, estimates and judgments have taken on an increasingly
important role in view of the uncertainties caused by the COVID-19
pandemic. ACRA expects directors to pay close attention to the
following areas involving the management’s estimates and question
the assumptions vigorously.
Audit Committee Bulletin | 2(a) Impairment of property, plant and equipment, (b) Fair value measurement of investment
goodwill and other intangible assets properties and other non-current assets
The indicators of impairment are more present now Many governments have imposed lockdowns and circuit
than before due to the adverse impact of the COVID-19 breaker measures in response to the COVID-19 pandemic.
pandemic on the economy. Directors should expect: As a result, external valuers may not be able to conduct
on-site inspections as part of their valuation process.
• I► mpairment test assessments to be performed
Directors should ensure that the management has
• L
► ower recoverable amounts as compared to provided accurate information to external valuers for them
previous year to perform their valuation.
During their review of the impairment assessment, Given the uncertain economic outlook and restrictions
directors should ask the following questions: imposed by the governments in response to the outbreak,
external valuers may include other caveats in the valuation
• Has the discount rate used to estimate the asset’s
reports to address these challenges. Directors should
recoverable amount been updated to reflect the higher
consider the implications of these caveats on the valuation
risks associated with the COVID-19 pandemic?
for financial reporting purposes.
• Have the higher risks associated with the COVID-19
pandemic been reflected in the forecasted cash flows As the COVID-19 pandemic evolves, the fair value of
used to estimate the asset’s recoverable amount, if not some properties may change significantly between the
already reflected in the discount rate? year-end date and the date that the financial statements
are authorized for issue. Where significant changes in fair
• With the current uncertain situation, which may value are expected, directors should consider performing
result in difficulties in predicting the impact of the a revaluation and disclose the change in fair value as a
COVID-19 outbreak and large variabilities to cash flow non-adjusting event to help investors understand the
projections depending on different possible outcomes, material change in the carrying amount of those assets
has the management considered using an expected subsequent to year-end.
cash flow approach based on probability-weighted
scenarios, which may be more appropriate to reflect
the current uncertainty than a single best estimate?
Our point of view
• Has the management considered changes in ways of
Given the uncertainties in this current environment,
doing business and business strategies, how assets
significant management judgment is required to arrive
are being used or planned disposal of assets as
at a reasonable estimate of fair value. The robustness
possible outcomes when estimating the future
of the fair value measurement determination and the
cash flows?
review processes is important.
• Has the sensitivity analysis for reasonably
possible changes in key assumptions been Providing transparency over the valuation
meaningfully disclosed? techniques, key assumptions and inputs used in
determining fair value, including the sensitivities by
providing disclosures, is an integral part of fair value
measurement and is key to enhancing the usefulness
Our point of view
of financial reporting in this unprecedented time.
As the crisis evolves and conditions remain
unpredictable, the management is required to exercise
significant judgment to assert reasonable assumptions
that reflect the conditions existing at the reporting
date for impairment testing. We expect that in the
current situation, the majority of these assumptions
are subject to significant uncertainties. As such,
entities should consider providing detailed disclosures
on the assumptions and sensitivities.
Audit Committee Bulletin | 3(c) Measurement of inventories (d) Expected credit losses on trade receivables,
Lockdowns and circuit breaker measures have significant other receivables and contract assets
impact on the net realizable value (NRV) of inventories, The measurement of expected credit losses (ECL) should
particularly for companies in the retail, manufacturing be based on an unbiased, probability-weighted amount
and property development sectors. Seasonal inventories that is determined by evaluating a range of possible
and perishable products are by nature more susceptible to outcomes and reflecting time value of money. Companies
risk of loss due to damage or contamination. Government should exercise judgment and their best efforts to
measures that require shutdown of retail shops and consider all reasonable and supportable information
manufacturing facilities also result in reduced inventory available at the reporting date about past events, current
movement and changing patterns of customer purchases, conditions and forecast of future economic conditions.
and may have an impact on the NRV of inventories. This could include possible negative outcomes related to
Directors should ask the following questions when the COVID-19 pandemic or other macroeconomic and
reviewing the appropriateness of inventory industry factors.
values recorded:
Implication to ECL would vary depending on an entity’s
• A
► re inventories written down to their NRV? specific situation (e.g., severity of effects of COVID-19 at
• The company’s production may not be producing at the reporting date, risk profile and exposure of debtors)
its usual capacities and the production level may be and its methodology in assessing ECL.
abnormally low. Is the costing of inventories based on Directors are reminded to apply more rigor when
normal production capacity to avoid overstating the reviewing the management’s ECL estimates and consider
cost of inventories? the following:
• Are unallocated fixed overheads expensed off in the
• A
► re debt portfolios re-segmented based on factors
period in which they are incurred?
that reflect risk characteristics such as industry and
• Are fixed assets in idle production lines geographical region, rather than only by the aging of
continually depreciated? amounts due and historical repayment profile?
• For property companies, has the impact of shrinking • A
► re securities obtained on debts such as a pledged asset
demand on unsold units been considered when or a guarantee issued by a third party impacted?
determining the NRV of property inventories?
• A
► re forward-looking adjustments updated to reflect the
uncertainties of the COVID-19 pandemic?
Our point of view • H
► as each significant credit incident and loss after the
reporting date been identified and considered for
Decisions made in response to the pandemic could
possible adjustments to the ECL assessment?
lead entities to reassess the cost of their inventories.
Reduced demand may lead entities to write down their
inventories to NRV and determining NRV may require
Our point of view
significant judgment. Entities should carefully consider
whether additional disclosures are needed to assist The assessment of the impact of the COVID-19
users of the financial statements to understand the pandemic on ECL will require significant judgment,
impact of the pandemic on inventories. especially as it is not directly comparable with any
recent similar events. Entities will have to update
their macroeconomic scenarios and consider the use
of top-down management overlays to embed the ECL
risks that are not yet fully captured by their models.
Given the level of uncertainty and the sensitivity
of judgments and estimates, disclosures of the key
assumptions used and judgments made in estimating
ECL, as well as the impact of any relief measures,
will be important.
Audit Committee Bulletin | 4(e) Recognition and measurement of provisions (g) Ability to continue as going concern
As a result of the COVID-19 pandemic, some entities Reduced sales and collection issues can have an
may find themselves unable to perform obligations immediate impact on working capital, particularly when
under contracts that may trigger penalties for late or fixed overhead costs are substantial and cannot be
non-delivery under the contracts. Costs to fulfill contracts delayed. Directors, together with the management, should
may be higher due to the need to purchase alternative carefully evaluate the impact on projected working capital
raw materials at higher prices or replace employees who and the company’s ability to service its debt obligations
are quarantined. These may result in contracts becoming when they fall due. Directors should also work with the
onerous when the costs to fulfill contracts outweigh the management to plan for additional or alternative sources
benefits expected from the contracts. of financing, where necessary. During their review of
the financial statements, directors should consider
Directors should ask the following questions when
the following:
reviewing provisions for liabilities included in the
financial statements: • W
► ith the rapidly changing environment, have cash flow
projections been updated and reassessed before the
• Has the management identified all onerous, or
financial statements are authorized for issuance?
potentially onerous, contracts?
• A
► re there material uncertainties that cast significant
• When determining the provision amount, other than
doubt over the company’s ability to continue as a going
penalties arising from late or non-fulfillment of the
concern, resulting in the need for timely and adequate
contracts, have the applicable laws and enforceable
disclosures to investors?
force majeure clauses that may relieve the company
from the penalties been considered?
• Are restructuring expenses recognized only when there Our point of view
is a detailed formal plan and valid expectation has been
The degree of consideration, conclusion and the
set with the employees who will be affected?
level of disclosure will depend on the facts and
circumstances in each case, because not all entities
will be affected in the same manner and to the same
Our point of view extent. Significant judgment may be required given the
In assessing the unavoidable costs of meeting the nature of the pandemic and the uncertainties involved.
obligations under a contract at the reporting date, Continual updates to the assessments up to the date of
entities, especially those with non-standardized issuance of the financial statements are required.
contract terms, need to carefully identify and quantify
any compensation or penalties arising from the failure
to fulfill it.
(f) Classification of borrowings
Due to unexpected write-downs in the carrying amount
of assets and additional provisions being made, some
companies may inadvertently breach loan covenants.
This may result in the reclassification of the related
borrowings from non-current to current liabilities, or
additional margin calls by the lenders. To avoid last
minute surprises, directors should ask the management to
forecast financial performance and positions for assessing
compliance with loan covenants and engage lenders
early for waivers and/or to negotiate for refinancing
arrangements before year-end in order to remedy the
classification of the liabilities.
Audit Committee Bulletin | 5(h) Financial instruments (j) Government relief measures
The prices of commodities have fallen, in particular, oil To address economic concerns from the COVID-19
prices have dropped to an unprecedented low. Companies outbreak, many countries including Singapore have
in the energy and other commodity industries should introduced relief measures to support businesses.
relook at the economic viability of their long-term Directors should discuss with the management the
commodity contracts, both from the financial sustainability applicable measures and determine their appropriate
of their counterparties and fair valuation of the contracts. accounting treatments, including those impacting
Directors should focus on the following: subsidiaries operating overseas.
• H
► ave the directors looked out for any speculative
activities, which may run contrary to the
company’s policies?
Our point of view
The distinction between government grants and other
• I► f hedge accounting is applied, have the directors
forms of government assistance is important because
re-assessed with the management if the hedge is still
the accounting requirements differ. The assessment of
effective? If a hedged forecasted transaction is no longer
whether government relief measures are government
expected to occur, the hedge accounting should be
grants depends on the facts and circumstances of the
discontinued prospectively, with any accumulated gain
specific measures implemented by the government,
or loss immediately reclassified to profit or loss.
including government agencies and similar bodies.
• H
► ave the directors worked with the management to
tailor the financial risk management disclosures to
the company’s specific circumstances, such as
concentration of credit risk or the company’s plan to
manage liquidity risk?
(i) Subsequent events
Directors should pay attention to material subsequent
events that require disclosures. For example:
• D
► isclose that carrying values of significant commodity
inventories fell significantly after the year-end.
• D
► isclose the management’s plan to discontinue an
operation or temporarily downsize certain operations
after the year-end.
• D
► isclose that certain acquisition, disposal of assets
or businesses fell through due to the inability to meet
precedent conditions in the agreements after year-end.
Our point of view
Entities need to establish effective processes to
identify and disclose material events after the
reporting period, which could reasonably be expected
to influence decisions that the primary users of
financial statements make.
Audit Committee Bulletin | 62. Internal control and • H
► ave the directors engaged the management
and internal auditors on the measures to mitigate
audit considerations risks, particularly for high-risk areas such as
Under the Companies Act, directors and other officers cash management?
of public companies and their subsidiaries must devise • H
► as the management reviewed and ensured adequate
and maintain internal accounting controls to provide a segregation of duties for key processes?
reasonable assurance that:
• H
► ave the audit committees revised internal audit plans
• Assets are safeguarded against loss from unauthorized to prioritize the audits of high-risk areas and find ways
use or disposition to mitigate the risks?
• Transactions are properly authorized and that they are • H
► ave the directors worked with the management to
recorded as necessary to permit the preparation of true facilitate the work of statutory auditors if statutory
and fair financial statements and maintain accountability auditors face limitations in the scope of their work?
of assets.
• I► f the issuance of the modified audit reports cannot
In many countries including Singapore, employees are be avoided, have the directors implemented a plan to
working from home. This change in work procedures address the qualification with the aim of receiving a
may introduce gaps in internal controls. With travel clean audit report in the next financial year?
restrictions, internal auditors may not be able to visit
• H
► ave the directors and management engaged statutory
overseas businesses to conduct audits. This increases the
auditors early to discuss the audit plan for the next
risk of material misstatements in the financial statements,
financial year?
which could present opportunities for fraud.
• F
► or valuations and other accounting areas that involve
more judgments and estimates due to market volatility,
have the directors engaged the help of specialists?
Audit Committee Bulletin | 7Regulatory updates
SGX RegCo removed minimum
trading price rule on 1 June 2020
With effect from 1 June 2020, the Singapore Exchange 2. Refining criteria for exiting financial
Regulation (SGX RegCo) has removed the minimum
trading price (MTP) rule for issuers listed on the
watch-list
Mainboard (Mainboard issuers) and has refined the criteria Prior to the amendment of the listing rules, Mainboard
for exiting from the financial watch-list. This follows a issuers were placed on the financial watch-list if they
public consultation exercise conducted by the SGX RegCo recorded pre-tax losses for the past three consecutive
from 28 November 2019 to 27 December 2019, seeking financial years and had an average daily market
comments on proposals relating to the above changes capitalization of less than S$40 million over the last six
(the Consultation Paper). months. Mainboard issuers were allowed to apply to the
SGX to exit the financial watch-list if they had recorded a
1. Removal of MTP framework pre-tax profit for the most recently completed financial
year and had an average daily market capitalization of
The MTP framework was implemented to reduce the S$40 million or more over the last six months.
risks of potential manipulation and excessive speculation
in the market. Under the MTP framework, issuers were With effect from 1 June 2020, the exit criteria for the
placed on the MTP watch-list if their six-month volume financial watch-list are refined as follows:
weighted average price was below S$0.20 and their
• N
► on-recurrent income or income generated by activities
six-month average daily market capitalization was below
outside the ordinary course of business will be excluded
S$40 million.
in assessing whether issuers fulfill the profitability test
The SGX RegCo proposed to remove the MTP framework for exiting the financial watch-list.
as it is no longer viewed as a useful tool to address the For example, income arising from a write back of an
risk of manipulation following the implementation of impairment provision will generally be considered as
various measures by the Singapore Exchange (SGX), non-recurrent and be excluded from the issuer’s profit.
including the enhanced Trade with Caution alerts and The SGX will reject an application to exit the financial
Members Surveillance Dashboard. The SGX RegCo also watch-list if it is of the view that the issuer’s accounts do
noted that the shares of most of the issuers in the MTP not demonstrate profitability arising from the ordinary
watch-list have not been found to be manipulated. Yet course of business.
these issuers are subject to the risk of delisting as a result
of the MTP rule. Issuers on the MTP watch-list have also • A
► n issuer will not be considered to have met the
encountered challenges in borrowings from banks and profitability test for exiting the financial watch-list if its
developing business relationships. latest financial statements are subject to a modified
audit opinion, or if its auditors have highlighted a
With broad support of this proposal by the respondents to material uncertainty relating to going concern.
the Consultation Paper, the SGX RegCo announced that
• A
► rtificial distortion to share prices that are not
the MTP watch-list will cease to exist on 1 June 2020.
representative of true market demand will be ignored
Mainboard issuers that have been placed on the MTP
in the market capitalization test.
watch-list no longer need to satisfy the exit criteria and
apply for removal from the MTP watch-list. The SGX monitors trading of listed securities for
unusual trading activity. The SGX will consider if the
The SGX RegCo stated that it will continue to enhance its issuer’s share price during the relevant period has been
tools to prevent and detect manipulation. This includes determined by artificial means in assessing if the issuer
developing new capabilities such as the deployment of has met the market capitalization test for exiting the
artificial intelligence in its real-time monitoring system. financial watch-list.
Audit Committee Bulletin | 8Regulatory updates
Provisional measures to assist
issuers amid COVID-19
On 8 April 2020, the SGX RegCo, 1. Suspension of entry into financial watch-list
in consultation with the Monetary
Authority of Singapore, announced The SGX RegCo recognizes that placing issuers on the financial watch-list
two provisional measures to during this extraordinary period might cause undue prejudice to companies
support Mainboard issuers amid the in navigating the business challenges in this climate. Accordingly, the SGX
challenging business and economic RegCo will provisionally suspend the half yearly review on the first market
climate due to COVID-19: days of June 2020 and December 2020 to place issuers on the financial
watch-list.
The SGX RegCo will determine if there is a need for further extension of the
suspension in due course.
2. Enhanced Share Issue Limit for Mainboard issuers
With effect from 8 April 2020, Mainboard issuers are provisionally allowed
to seek a general mandate for an issue of pro-rata shares and convertible
securities of up to 100% of their share capital (excluding treasury shares and
subsidiary holdings in each class) as compared to 50% currently stipulated in
the listing rules (Enhanced Share Issue Limit).
A Mainboard issuer with intention to raise funds using the Enhanced Share
Issue Limit must seek shareholders’ approval by way of an ordinary resolution
either through obtaining a general mandate for the Enhanced Share Issue
Limit at its annual general meeting or specific shareholder approval by
convening an extraordinary general meeting.
The Enhanced Share Issue Limit will be in force until 31 December 2021.
Audit Committee Bulletin | 9Contact us
If you would like to know more about EY services, please contact:
Christopher Wong Gajendran Vyapuri
Head of Assurance Assurance Partner – Professional Practice Director
+65 6309 6935 +65 6309 6075
christopher.wong@sg.ey.com gajendran.vyapuri@sg.ey.com
Industry sectors
Consumer Products and Retail Resources and Transportation
Terry Wee Vincent Toong
+65 6309 6013 +65 6309 6805
terry.wee@sg.ey.com vincent.toong@sg.ey.com
Diversified Industries and Services Technology, Media and Telecommunication
Tan Swee Ho Chan Yew Kiang
+65 6309 8238 +65 6309 6564
swee.ho.tan@sg.ey.com yew-kiang.chan@sg.ey.com
Real Estate, Hospitality and Construction Emerging and Private Enterprise
Nelson Chen Sam Lo
+65 6309 6974 +65 6309 8093
nelson.chen@sg.ey.com sam.lo@sg.ey.com
The Singapore Assurance Partners listed are from Ernst & Young LLP.
The Audit Committee Bulletin brings you timely and important information on
corporate and financial reporting matters. For more information or past issues
of Audit Committee Bulletin, please contact us at ac.bulletin@sg.ey.com
Audit Committee Bulletin | 10EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com. © 2020 Ernst & Young LLP. All Rights Reserved. APAC No. 12002187 ED None Ernst & Young LLP (UEN T08LL0859H) is a limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A). This material has been prepared for general informational purposes only and is not intended to be relied upon as legal, accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com
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