Adopting Financial Reporting Standard (FRS) 39 and 109 and its Tax Implications

Income tax implications arising from the adoption of Financial Reporting Standard (“FRS”) 39 - Financial Instruments: Recognition & Measurement and FRS 109 - Financial Instruments

Objective of FRS 39 Tax Treatment

Effective 1 Jan 2005, companies are required to comply with FRS 39 - Financial Instruments: Recognition & Measurement for accounting purposes, except for companies that are temporarily exempt by the Accounting and Corporate Regulatory Authority (ACRA) from complying with FRS 39. 

To minimise tax adjustments that companies have to make as a result of adopting FRS 39, the income tax treatment of financial assets and liabilities was also changed. The revised tax treatment is referred to as the "FRS 39 tax treatment".

For companies that are temporarily exempt by ACRA from complying with FRS 39 for accounting purposes, the pre-FRS 39 tax treatment will continue to apply to them.

Impact of FRS 39 Tax Treatment

Under the FRS 39 tax treatment, the income tax treatment of financial instruments on revenue account is aligned with the accounting treatment under FRS 39.

Gains or losses recognised in the profit or loss account will be taxed or allowed notwithstanding that such gains or losses are not realised.

Election to remain on pre-FRS 39 tax treatment

The FRS 39 tax treatment is the default tax treatment for all taxpayers who adopt FRS 39 for accounting purposes. A taxpayer who wishes to be subject to tax on a realisation basis (i.e. remain on pre-FRS 39 tax treatment) for its financial instruments on revenue account must elect in writing at the time of submission of its tax return in the first YA that FRS 39 is adopted for accounting purposes.

The taxpayer may elect for the FRS 39 tax treatment thereafter and this election for the FRS 39 tax treatment is irrevocable.

Taxpayer holds 1,000 shares in Company A on revenue account. The shares were acquired for $500,000 on 15 Jun 2016 and YA 2017 is the first YA that taxpayer is required to file a tax return. Taxpayer has a 31 Dec year end.

Market value of 1,000 shares as at 31 Dec 2016 - $700,000

On 30 Nov 2017, the 1,000 shares in Company A were sold for $300,000 and taxpayer was liquidated shortly thereafter during the basis period for YA 2018.

The tax computations for the relevant YAs are as follows:

  1. Under FRS 39 tax treatment
  2. Taxpayer did not opt out of the FRS 39 tax treatment at the point of submitting its YA 2017 tax return.

    Tax Computation for YA 2017

    $

    Taxable gain / chargeable income

    (700,000 - 500,000)

     

    200,000
    ======

    Tax payable

    Yes

    Tax Computation for YA 2018$

    Adjusted loss

    (300,000 - 700,000)

    400,000

    Less: Loss carried back to YA 2017 (capped at maximum of $100,000)

    (100,000)

    -----------

    Unabsorbed loss c/f

    300,000

    =======

    Tax payable

    No

    Revised Tax Computation for YA 2017$

    Chargeable income

    200,000

    Less: Loss carried back from YA 2018

    (100,000)
    -----------

    Revised chargeable income

    100,000
    =======

    Revised tax payable

    Yes

  3. ii.    Under pre-FRS 39 tax treatment

Taxpayer elects to remain on the pre-FRS 39 tax treatment at the point of submitting its YA 2017 tax return.


Tax Computation
YA 2017 ($)YA 2018 ($) 

Taxable gain / chargeable income

NIL

NIL

Unabsorbed loss c/f
(YA 2018: 300,000 - 500,000)

NIL

200,000

Tax payable*

No

No

* Under pre-FRS 39 tax treatment, taxpayer has no tax payable for both YAs.

 

Taxpayer holds 1,000 shares in Company B on revenue account. The shares were acquired for $500,000 on 15 Jun 2016 and YA 2017 is the first YA that taxpayer is required to file a tax return. Taxpayer has a 31 Dec year end.

Market value of 1,000 shares as at 31 Dec 2016 - $600,000

On 30 Nov 2017, the 1,000 shares in Company B were sold for $700,000 and taxpayer was liquidated shortly thereafter during the basis period for YA 2018.

The tax computations for the relevant YAs are as follows:

  1. Under FRS 39 tax treatment

 Taxpayer did not opt out of the FRS 39 tax treatment at the point of submitting its YA 2017 tax return.

Tax Computation for YA 2017

$

Taxable gain / chargeable income

(600,000 - 500,000)

 

100,000
======

Tax payable

Yes

 

Tax Computation for YA 2018

$

Taxable gain / chargeable income

(700,000 - 600,000)

 

100,000
======

Tax payable

Yes

 

ii.     Under pre-FRS 39 tax treatment

Taxpayer elects to remain on the pre-FRS 39 tax treatment at the point of submitting its YA 2017 tax return.


Tax Computation
YA 2017 ($)YA 2018 ($) 

Taxable gain / chargeable income

(YA 2018: 700,000 - 500,000)

NIL

200,000

Unabsorbed loss c/f

NIL

NIL

Tax payable*

No

Yes

* Under pre-FRS 39 tax treatment, taxpayer is taxed on its gain on sale of shares only on a realisation basis i.e. in YA 2018.

 

 

Objective of FRS 109 Tax Treatment

Effective date of FRS 109 – Financial Instruments

 

The FRS 109 replaces the existing FRS 39 and it applies to companies for financial years beginning on or after 1 Jan 2018.  An entity may choose to apply FRS 109 early.    

FRS 109 tax treatment

 

To minimise tax adjustments, the tax treatment of financial assets and liabilities on revenue account that are recognised and measured under FRS 109 will generally follow the accounting treatment.  This tax treatment is termed as “FRS 109 tax treatment”.

 Companies that adopt FRS 109 will have to apply the FRS 109 accounting treatment for tax purposes.  Unlike the approach adopted for FRS 39, there is no option for companies to opt out of the FRS 109 tax treatment. 

 For companies that do not need to comply with FRS 109 for accounting purpose1, the FRS 109 tax treatment does not apply.  However, these companies may elect to apply the FRS 109 tax treatment by submitting a written application to the Comptroller of Income Tax (“CIT”).  The option to apply the FRS 109 tax treatment is irrevocable once it is exercised.

1 For example, taxpayers which qualify for and have chosen to comply with the Singapore Financial Reporting Standards for Small Entities 

 

Impact of FRS 109 Tax Treatment

The alignment of tax treatment with FRS 109 accounting treatment would mean that all gains or losses (including the related exchange differences) in respect of financial assets on revenue account recognised in the profit and loss account will be taxed or allowed as a deduction, regardless of whether the gains or losses are realised or not.

Under FRS 109, financial assets may be measured at fair value through other comprehensive income (“FVOCI”). For debt and equity instruments measured at FVOCI, the gain or loss recognised in other comprehensive income (“OCI”) (i.e. not in the profit and loss account) will not be taxed or allowed as a deduction until they are realised.

For debt instruments on revenue account, at the time of de-recognition, the cumulative gains or losses previously recognised in OCI and transferred from OCI to the profit and loss account will be taxed or allowed as a deduction.

For equity instruments on revenue account, at the time of de-recognition, the cumulative gains or losses recognised and remaining in OCI (i.e. they are not transferred to the profit and loss account) will be taxed or allowed as a deduction.

Example 1:

Company X holds 1,000 shares in Company C on revenue account. The shares were acquired for $100,000 on 15 Jun 2018. Company X has a 31 Dec financial year end and YA 2019 is the first YA that Company X adopts FRS 109. The shares in Company C are measured at FVOCI. As at 31 Dec 2018, the market value of the shares is $200,000. During the year 2019, Company X sold the shares at $400,000. The tax computations for the relevant YAs are as follows:

Tax Computation  YA 2019 ($) YA 2020 ($)
 Taxable gain/ chargeable income NIL

 300,000

(400,000-100,000)

 Tax payable by Company X No Yes

 

Under the FRS 39 incurred loss model, impairment losses are recognised in the profit and loss account when there is objective evidence of impairment as a result of loss events.  FRS 109, on the other hand, introduces an expected credit loss model where impairment losses may be recognised in the profit and loss account even when the loss event has not occurred (i.e. the financial instruments are not credit-impaired). 

Under the FRS 109 tax treatment, only impairment losses recognised in the profit and loss account in respect of credit-impaired financial instruments on revenue account are allowable as a deduction.  Such impairment losses that are allowed and subsequently reversed and recognised in the profit and loss account will be subject to tax. For impairment losses in respect of non-credit impaired financial instruments, no deduction is allowable even if the financial instruments are on revenue account. 

 

For more details, please refer to the e-Tax Guide on Income Tax: Income Tax Treatment Arising from Adoption of FRS 109 – Financial Instruments (679KB).

 

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