Singapore Financial Reporting Standards (SFRS): What SMEs Need to Know for Their Audit

Introduction

In Singapore, Small and Medium Enterprises (SMEs) form the backbone of the economy, accounting for nearly 99% of all enterprises. With a strong regulatory framework, businesses must adhere to the Singapore Financial Reporting Standards (SFRS) to ensure compliance, transparency, and accountability in their financial statements.

For SMEs, understanding SFRS compliance is crucial, especially when undergoing an audit. Many SMEs may believe that financial reporting standards are complex and designed for large corporations, but the SFRS for Small Entities (SFRS for SE) provides a streamlined framework tailored to smaller businesses.

In this article, we will break down the key aspects of SFRS that SMEs need to know, how compliance affects their audit process, and what business owners can do to ensure smooth financial reporting.

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1. Understanding SFRS and Its Applicability to SMEs

1.1 What is SFRS?

The Singapore Financial Reporting Standards (SFRS) is a set of accounting standards issued by the Accounting Standards Council (ASC) that businesses in Singapore must follow when preparing their financial statements. The SFRS is based largely on the International Financial Reporting Standards (IFRS) to maintain consistency and global comparability.

1.2 Applicability to SMEs

SMEs in Singapore may choose to adopt either:

1. Full SFRS (for larger companies that require comprehensive reporting).
2. SFRS for Small Entities (SFRS for SE) (a simplified version of SFRS designed for SMEs).

To qualify for SFRS for SE, a company must:

• Be not publicly accountable (not listed on a stock exchange).
• Prepare general-purpose financial statements for external users.
• Meet at least two of the following three criteria:
  • Total annual revenue ≤ S$10 million
  • Total assets ≤ S$10 million
  • Number of employees ≤ 50

If an SME meets these conditions, it can benefit from a less complex reporting framework under SFRS for SE.

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2. Key Differences Between Full SFRS and SFRS for SE

Feature	Full SFRS	SFRS for SE
Complexity	High	Lower
Disclosure requirements	Extensive	Reduced
Fair value accounting	More frequent	Less frequent
Consolidation rules	Required	Exempt for some entities
Use of financial instruments	More detailed	Simplified

SMEs that do not have external financing obligations or complex operations often find SFRS for SE more practical for their reporting needs.

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3. Why SFRS Compliance Matters for SME Audits

3.1 Mandatory Audit Requirements in Singapore

Under Singapore’s Companies Act, all private companies (unless exempted) must have their financial statements audited by a public accountant. However, SMEs may qualify for an audit exemption if they are considered a small company or part of a small group:

• A small company must meet at least two out of three criteria:

  • Revenue ≤ S$10 million
  • Total assets ≤ S$10 million
  • Employees ≤ 50

• A small group (if the company is part of a group) must meet the small company criteria at the group level.

Even if a company is audit-exempt, maintaining SFRS-compliant financial records is crucial for:

• Tax filing and compliance with IRAS.
• Securing bank loans or investor funding.
• Business valuation for potential mergers, acquisitions, or sales.

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4. Common SFRS Compliance Issues SMEs Face During Audits

4.1 Incomplete or Inaccurate Revenue Recognition

SFRS 115 governs revenue recognition and outlines the five-step process:

1. Identify the contract with the customer.
2. Identify performance obligations.
3. Determine the transaction price.
4. Allocate transaction price to performance obligations.
5. Recognize revenue when (or as) the entity satisfies performance obligations.

Many SMEs make errors in revenue recognition, particularly with long-term contracts or milestone-based payments.

4.2 Incorrect Expense Classification

Expenses must be classified correctly between:

• Cost of Goods Sold (COGS) (e.g., raw materials, production costs).
• Operating expenses (e.g., salaries, rent, utilities).
• Capital expenditures (e.g., machinery, office renovation).

Misclassifications can lead to inaccurate profit calculations, affecting financial decisions and tax filings.

4.3 Impairment of Assets and Inventories

Under SFRS 36, businesses must test assets for impairment. SMEs sometimes fail to account for:

• Inventory write-downs when goods become obsolete.
• Impairment losses on receivables (bad debts).

Proper impairment testing prevents overstatement of assets and potential audit adjustments.

4.4 Lack of Proper Lease Accounting

SFRS 116 requires all leases (long-term) to be reported as Right-of-Use Assets and Lease Liabilities on the balance sheet. Many SMEs still treat leases as rental expenses, which is incorrect under SFRS.

4.5 Inadequate Disclosure and Documentation

Common SME mistakes include:

• Missing financial disclosures.
• Poor record-keeping of related-party transactions.
• Insufficient backup for accruals or provisions.

Auditors may request supporting documents, and failure to provide them can lead to audit qualifications.

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5. Best Practices for SMEs to Ensure SFRS Compliance

To avoid audit issues, SMEs should:

1. Use Accounting Software

   • Adopt cloud-based accounting software like Xero, QuickBooks, or MYOB for automated compliance.

2. Engage a Professional Accountant

   • An accountant ensures proper classification of transactions and compliance with SFRS.

3. Review Financial Statements Regularly

   • Conduct quarterly reviews instead of waiting until the year-end audit.

4. Document All Transactions Properly

   • Maintain sales invoices, purchase receipts, contracts, and bank statements for verification.

5. Train Finance Staff

   • Ensure finance teams are updated on SFRS changes and best practices.

6. Work Closely with Auditors

   • Communicate openly with auditors to resolve potential issues early.

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6. Conclusion

Understanding Singapore Financial Reporting Standards (SFRS) is crucial for SMEs to ensure compliance, avoid audit risks, and maintain financial transparency. Whether adopting full SFRS or the simplified SFRS for Small Entities, businesses must follow key financial reporting guidelines to avoid errors in revenue recognition, lease accounting, impairment, and disclosures.

By leveraging accounting software, professional accountants, and regular financial reviews, SMEs can improve their financial reporting quality and make audits smoother. Even for audit-exempt companies, proper SFRS compliance ensures easier tax filing, better loan approvals, and stronger business credibility.

For SMEs looking to navigate SFRS effectively, seeking professional guidance from accountants or auditors can be invaluable in ensuring accurate and efficient financial reporting.