ACCOUNTING STANDARDS BILL

ACCOUNTING STANDARDS BILL: Order for Second Reading read.

3.58 pm

The Minister of State for Finance (Mrs Lim Hwee Hua): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Bill before the House seeks to establish the Accounting Standards Council in place of the Council on Corporate Disclosure and Governance (CCDG) to issue accounting standards applicable to companies, and other incorporated and unincorporated bodies. The Bill will also require certain statutory bodies to prepare their financial statements in accordance with accounting standards established by the Accountant-General.

Background

In August 2002, the CCDG was set up under the Companies Act as the authority to prescribe accounting standards, namely, the Singapore Financial Reporting Standards (SFRS), for all companies. It

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also advises the Ministry of Finance on corporate governance issues pertaining to listed companies.

The CCDG has served its purpose well. In the area of corporate governance, it has laid down the foundation of a strong and robust corporate governance framework for listed companies. It is now timely for this function to be taken over by MAS and SGX, given the synergies with their role as market regulators of listed companies. This would help to ensure a consistent approach in prescribing mandatory requirements and best practices for listed companies.

Similarly, in the area of accounting standards, the CCDG has done much to improve the efficiency and rigour of the accounting standards setting process for companies. The CCDG, however, has no authority to issue accounting standards for non-corporate entities such as societies and co-operatives, as it derives its authority from the Companies Act. These non-corporate entities have often been adopting the SFRS, even though they are not legally required to do so.

This is not surprising as their auditors need to audit them against an acceptable accounting standards framework, which, by default, is the SFRS. This is not always satisfactory for these non-corporate entities as they find themselves having to comply with accounting standards that may not be suitable for their purposes since the SFRS were drawn up primarily for companies.

Consolidated accounting framework for private and people sector entities

Hence, to address this gap, the Accounting Standards Bill provides for the creation of a well-represented council, which would be known as the Accounting Standards Council, or ASC for short.

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Parts I and II of the Bill establish the ASC and set out its functions, constitution, as well as the procedures for its meetings and proceedings. Clause 3 establishes the functions of the ASC, namely, to prescribe accounting standards for companies and for any other entities like societies, charities and co-operatives. With its functions on corporate governance issues and company accounting standards taken over by the SGX/MAS and the ASC respectively, the CCDG will be dissolved. I would like to, at this moment, thank the Chairman and members of the CCDG for their significant achievements and contributions.

Clause 4 of the Bill allows the Minister for Finance to appoint a Chairman and up to 15 members to the ASC. The ASC will comprise senior accounting professionals, regulators, preparers and users of financial information, among other stakeholders.

Part III sets out the manner the ASC would go about setting accounting standards. Clause 9 of the Bill provides the objectives behind the accounting standards formulated by the ASC. The ASC would ensure that the accounting standards set are relevant to the entities they are applicable to, are readily understandable by both the preparers and users of financial information and can facilitate comparability. In addition, to ensure that stakeholders are fully aware of the accounting standards issued, the ASC is required, under clause 10 of the Bill, to publish a notice of the making of that accounting standard. It will also have to make available copies of it, and with all prior amendments, for inspection by members of the public.

In formulating the accounting standards for non-corporate sector entities, the ASC will consider the suitability of the proposed accounting standard to the entities concerned and will, if necessary, apply different

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accounting requirements to different types of entities. The ASC is empowered to propose suitable modifications to existing SFRS to make them more appropriate and relevant for these entities, but without compromising the quality of the standards. In areas where there is presently no SFRS, the ASC may consider either issuing its own standards or adopting an alternative set of standards.

This framework which consolidates the accounting standards setting authority for both corporate and non-corporate entities under one roof will ensure consistency in standards, facilitate comparison of accounts between different entities, and enhance the credibility and transparency of reporting. The ASC is responsible only for the formulation and promulgation of accounting standards. The monitoring and enforcement of compliance with accounting standards will remain the prerogative of the respective regulators, namely, ACRA for companies, Commissioner of Charities for charities, Registrar of Co-operatives for co-operatives and Registrar of Societies for societies.

Accounting standards for charities

Currently, a charitable organisation may be set up as a company, a society or a trust, before registering with the Commissioner of Charities as a charity. While charities incorporated as companies are required by the Companies Act to comply with the SFRS, there is no such requirement for charities that are registered as societies or trusts. This inconsistent treatment creates an uneven situation where certain charities are subject to a more stringent disclosure regime owing to the legal vehicle they have adopted. This also makes it difficult to compare the financial health of, say, two charities which may be pursuing the same charitable objects, but are set up using different legal vehicles.

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To address this, the consequential amendments to the Companies Act and the Societies Act provide that once the accounting standards for charities have been formulated and promulgated, they will take precedence over accounting standards for companies and for societies. This means that in future, a charity, regardless of the legal vehicle it uses, will have to comply exclusively with the accounting standards for charities. This is in line with the policy objective of having accounting standards that are more appropriate and relevant to the purpose the entity is set up to pursue.

This practice of having a separate set of accounting standards for charities is consistent with the practice in the UK. Under the ASC, the accounting standards for charities would continue to take reference from the SFRS and would be supplemented with specific requirements to meet the special accounting needs of charities.

As the ASC would need some time to formulate the accounting standards for charities, the Ministry of Community Development, Youth and Sports would, in the meantime, conduct a holistic review of the Charities Act. Hence, the necessary consequential amendments to the Charities Act to make it mandatory for all charities to comply with the charities' accounting standards would be moved in Parliament at a later date.

Accounting standards for statutory boards

Sir, let me move on to the accounting standards for statutory boards. Clause 11 of the Bill empowers the Accountant-General (AG) to establish accounting standards for statutory boards. This is, in effect, a formalisation of the current arrangement whereby MOF, through the Accountant-General's Department, would issue finance circulars to prescribe the accounting standards to be complied with by statutory boards.

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While statutory boards may share certain characteristics of corporations, there is a fundamental difference, which is that statutory boards do not have public shareholders and are directly accountable to Parliament. Hence, standards that are formulated based on the profit motive, which is of paramount concern to shareholders and creditors or donors, may not always be appropriate for statutory boards. Instead, the accounting standards for statutory boards would be driven by the three objectives of enhancing statutory boards' accountability to Parliament, strengthening transparency, and ensuring a better and more efficient stewardship of public assets.

Let me assure the House that this will not lead to a "cherry-picking" of accounting standards for statutory boards. Clause 11(2) of the Bill provides that the Accountant-General, in establishing the accounting standards, shall first take reference from the standards and interpretations issued by the ASC. The Accountant-General would modify or introduce new standards or guidelines only in areas where the SFRS is lacking or where the SFRS is providing insufficient guidance to statutory boards. An example of an area currently not clearly addressed by the SFRS, which might necessitate the intervention of the Accountant-General, is how assets of Public-Private Partnerships (PPP) should be accounted for in the books of public sector agencies.

Conclusion

Sir, the creation of the ASC is a positive step towards ensuring that local accounting standards are of a consistent high quality. More importantly, the ASC will draw up standards that are customised to the circumstances of non-corporate entities, which would help them to provide a clearer link between their

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objectives, activities and results to their stakeholders.

Sir, I beg to move.

Question proposed.

4.09 pm

Mr Gautam Banerjee (Nominated Member): Mr Speaker, Sir, thank you for giving me the opportunity to comment on the Accounting Standards Bill. I would like to declare my interest upfront. I am both a practising public accountant and also serve as a board member of a statutory body where I am presently the Chairman of the Audit Committee. Hence, my keen interest in the Bill.

I would like to begin by applauding the Government for seeking to establish through this Bill an Accounting Standards Council, or ASC, whose main function will be to formulate accounting standards for companies and non-profit making entities. This is an improvement on the present arrangement as the role of the current standard setting body, the Council on Corporate Disclosure and Governance, or CCDG, does not extend to non-profit making entities such as charities and co-operative societies.

However, the Bill also has the objective of requiring statutory bodies to prepare their accounts and financial statements in accordance with accounting standards set, not by the proposed ASC but by the Accountant-General. I have several reservations about this proposal.

Firstly, an accounting standard setting body must have some elements of independence, appropriate representation of different stakeholders' interests and be seen to follow due process. Can the office of the Accountant-General, no matter how conscientious and competent, meet these exacting criteria for a standard setting body?

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Unlike the proposed ASC, which is likely to be made up of representatives from the private and public sectors, the accounting profession, academia and other stakeholder representatives, the Accountant-General is an arm of the Executive and would generally not be perceived as independent of statutory bodies. Indeed, some people would liken the Accountant-General to be the Government's CFO. Businesses do not set their own accounting rules for financial reporting to shareholders. Of course, their views are taken into consideration in the due process of issuance of new or amended accounting standards. However, they are never able to set their own rules. The governance and segregation of duties are paramount to public confidence and trust. So why should the practice in the public sector be any different?

One reason given in the explanatory statement to the Bill is that, unlike companies and other corporations, statutory bodies are accountable to Parliament, whose priorities and interests in the matter are distinctly different from ordinary stakeholders. While that may be so, when it comes to the adoption of appropriate accounting standards for statutory bodies, most MPs would, I am sure, be happy to rely on the judgment of an independent body of competent individuals following due process. A related point that I would like to make is that while statutory bodies are accountable to Parliament, they do have a number of other stakeholders such as their employees, customers, creditors and, in some cases, where they have tapped the financial markets, financial institutions. So, wherever possible, laws and regulations relating to statutory bodies should be transparent and consistent with the private sector.

Secondly, I would like to deal with the issue of comparability. How do the proposals in this Bill compare with the practice in other countries?

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Sir, in Australia and New Zealand, the same bodies set the accounting standards for both the private and public sectors. In the UK, it is different. The central government departments, agencies and other bodies prepare financial statements that are made available publicly in accordance with the Government Financial Reporting Manual issued by the Treasury. Although the standards are issued by the Treasury, which is part of the financial control function of the government, by law, the Financial Reporting Advisory Board, or FRAB, led by an independent Chairman, has a statutory role to ensure that any adaptations of, or departures from, the UK accounting standards for businesses and companies in the government accounting manual are justified and properly explained. Members of FRAB consist of preparers, auditors, academia, accounting standard board members and economists. The FRAB issues yearly reports on its activities and recommended departures from the UK accounting standards. These reports are read at Parliament hearings and are available publicly.

It should be noted that the UK government will adopt International Financial Reporting Standards(IFRS) for its public sector entities from financial year 2008-2009, including publicly-funded initiatives and public-private partnerships. They took the time just to make sure that they were comfortable with it but they would now adopt it for PPPs. The FRAB is in the process of evaluating the adaptations from IFRS that are required.

Hence, the international practice is very clear. Substantively, the same rules and due process apply to both the private and the public sectors.

Coming back to Singapore, if the Government entrusts accounting standards setting for statutory bodies to fall

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outside the jurisdiction of the proposed ASC, then like in the UK, an independent and robust process should be put in place to approve changes to accounting standards, specifically for statutory bodies. In the UK, for example, although the Treasury has the power to issue its own accounting standards, it cannot depart from the established framework without endorsement from the FRAB, which is independent of the Treasury.

I am sure that, as Members of Parliament, we would feel more comfortable knowing that the accounts of our public entities are being prepared based on Financial Reporting Standards adopted by the ASC and, if and when there is a departure, they have been reviewed and approved by an independent body, not just another group within the Ministry of Finance. Mr Speaker, Sir, when it comes to governance, independence and due process must not only exist but also be seen to exist.

Thirdly, I would like to deal with the issue of due process and cost.

Let me explain to all of you the due process of setting IFRS, which I appreciate many non-accountants among you may not be familiar with.

The reason why I am making reference to IFRS is that Singapore Financial Reporting Standards are based on IFRS and, in almost all cases, word-for-word, identical to IFRS. The use of IFRS as the basis of Singapore Financial Reporting Standards allows our companies to be benchmarked against international companies easily and, among other benefits, gives them better access to key capital markets. In fact, more than 100 countries, including Hong Kong, Australia and those in the European Union, are in the same position as Singapore. In the near future, the Asian powerhouse economies, China and India, will also do the same.

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The due process of setting accounting standards by the International Accounting Standards Board, or IASB, is fairly elaborate and requires considerable resources. The board members of the IASB have decorated financial reporting backgrounds, 12 out of 14 are full-time members. They are supported by a team of technical directors and managers. Before the issuance of a new or revised standard or interpretation, accounting issues are often discussed by the Board, their comments and decisions are recorded and reported publicly. Discussion papers and proposed draft standards are issued to all stakeholders for comments, roundtable discussions are held and, sometimes, field tests of the standards are conducted, all in the interest that the standards issued are of high quality and capable of practical implementation.

My point, Sir, is that the due process, which is necessary, is also costly.

The proposed ASC and its predecessor, the CCDG, in the past, had a form of due process in place for the adoption of IFRS as Singapore Financial Reporting Standards. Similarly, it is not unreasonable to expect some elements of independence and due process for setting accounting standards for statutory bodies if this is to be done by the Accountant-General and not the ASC. But how will the Accountant-General achieve this without considerable duplication and cost? Would it not be better to entrust all accounting standards setting to the ASC?

Mr Speaker, Sir, to recap, I have raised three main points regarding this Bill: the issue of governance and independence, comparability with other countries and cost.

In conclusion, I would now ask the Government to consider two proposals to address these issues within the parameters set out in this Bill. Firstly,

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accounting standards for statutory bodies should be based on those issued by the ASC with any departures clearly explained. The ASC's views on these departures should be obtained and submitted to the Public Accounts Committee of Parliament. This proposal would help to address the governance and independence issue as well as bring us closer to the international best practice.

Secondly, in the longer term, I would propose that the ASC be responsible for the issuance of accounting standards for all entities, including statutory bodies, as I can see this achieving better confidence, consistency and cost efficiency. This would also be in line with best practice elsewhere. I am proposing this to be in the longer term to allow the ASC more time to develop its role for the not-for-profit sector. Let the ASC start with charities and societies and move to statutory bodies in the next phase.

Sir, with these proposals in mind, I support the Bill.

4.20 pm

Mrs Lim Hwee Hua: Mr Speaker, Sir, first, I would like to thank Mr Gautam Banerjee for his support of the Bill and for his very well-argued comments.

Let me now respond specifically to his suggestions relating to the setting of accounting standards for the statutory boards. The Member has actually asked that departures from IFRS be clearly explained and submitted to the Public Accounts Committee of Parliament. This may not actually be appropriate as the Public Accounts Committee of Parliament is non-executive in nature and it does not actually have executive powers vested in it. Currently, the Public Accounts Committee has its remit revolving around the observations that are contained in the

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Auditor-General's Report. But having said that, it does not stop the Public Accounts Committee from raising any issues or questions that they may have regarding accounting standards if it wants to or when it needs to. It is free to do so, to seek clarification on how an accounting standard is applied or why there is a deviation from international accounting standards. And for that matter, it does not stop any Member of Parliament in this House to raise any questions that he or she may have pertaining to not just accounting standards but also on any matter of statutory boards because that represents the greatest extent of the kind of check and balance that we have for the statutory boards.

On his suggestion and reservation about whether the ASC should be responsible for the issuance of accounting standards for all entities, including the statutory boards, let me just provide the following points by way of providing assurance regarding the need to benchmark against international standards as well as the due process. Firstly, if I may reiterate, clause 11(2) has very specifically stated that the Accountant-General will take reference from or have regard for the accounting standards that are established by the ASC. So, as a default, that will be the starting point. The IFRS will be the starting point. In other words, there will be no cherry picking. They begin with that set of accounting standards.

I also wish to inform the Member that the Accountant-General will be assisted and advised by a committee with independent members, with representatives from the Auditor-General's Office, the statutory boards, the academic community and the public accounting firms. So there is a broad representation of membership. This is actually in substance not very different from what the UK is practising where the Treasury

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prepares the standards and submits it to the Advisory Committee for consultation.

The third point is that there are areas, as I have mentioned in my Second Reading speech, where the SFRS does not provide sufficient guidance for statutory boards, for example, how the assets of PPPs should be accounted for, and that is why there should be this special purview accorded to the Accountant-General.

Sir, if I may just summarise, in reference to the other comments that Mr Banerjee has also made. Ultimately, our goal is to enhance accountability, therefore, adopting standards that are appropriate to our circumstances, in a sustainable manner, is most crucial. The Government will continue to emphasise substance over form. We would have to choose the form that is appropriate to us, but the substance remains the same as that being practised in most of the other jurisdictions. Currently, we are also very much guided by the type of resources that we have for the ASC to carry out its mission. It is not appropriate to enlarge the ASC's ambit at this juncture to include statutory boards or other entities not specifically mentioned in clause 3. The Council, as it is, with 16 members, including the Chairman, is already quite big, and enlarging its ambit would require the inclusion of even more members. It will also cause the Council to lose its focus and, worse still, slow down the accounting setting process.

Nonetheless, the Government will review this arrangement two years down the road to see whether there are benefits to widening the ASC's mandate to include statutory boards and other entities as well as whether the ASC should be composed differently.

Question put, and agreed to.

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Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Mrs Lim Hwee Hua].

Bill considered in Committee; reported without amendment; read a Third time and passed.

Mr Speaker: Order. I propose to take the break now. I suspend the Sitting and will take the Chair again at 4 .40 pm.

Sitting accordingly suspended

at 4.21 pm until 4.40 pm.