Accounting for Financial Instruments
The accounting treatment for financial assets and financial liabilities is governed under the Singapore Financial Reporting Standards (SFRS) or the Financial Reporting Standard for Small Entities (SFRS for Small Entities) for eligible smaller entities.
(a) From 1 January 2005 (to 31 December 2017), companies with annual periods beginning on or after 1 January 2005 (to 31 December 2017) have to comply with Financial Reporting Standard (FRS) 39 Financial Instruments: Recognition and Measurement for accounting purposes. Entities who apply FRS 39 for accounting purposes and have to reflect their financial assets and liabilities at market values in their financial statements must also apply FRS 39 tax treatment from the YA of the basis period in which FRS 109 is first applied for accounting purpose.
(b) From 1 January 2011, the eligible smaller entities in Singapore may apply the SFRS for Small Entities as a separate set of accounting standards for accounting periods beginning on or after 1 January 2011 or opt to continue to apply the full set of SFRS.
(c) From 1 January 2018, the FRS 109 Financial Instruments replaces FRS 39 and applies to entities for financial periods beginning on or after 1 January 2018. An entity may choose to apply FRS 109 early. Entities who apply FRS 109 for accounting purpose must also apply FRS 109 tax treatment from the YA of the basis period in which FRS 109 is first applied for accounting purpose.
THE PRE-FRS 39 TAX TREATMENT
Financial assets
Financial assets on revenue account
For financial assets on revenue account, only realised gains or losses arising from the disposal of such financial assets are subject to tax or allowed as a deduction.
There is however an exception, where the financial assets on revenue account are carried at the lower of cost and market value, and a provision for diminution in value has been made, such provision may be allowed as a deduction for tax purposes while any write-back up to the cost will be brought to tax.
Financial assets on capital account
For financial assets on capital account, any gains or losses are not taxable or allowed as a deduction.
Similarly, the provision for diminution in value of such capital asset is also not allowed as a deduction.
Hedging instruments
For banks and certain other entities that engage frequently in financial derivatives for both hedging and trading purposes, since 1996, there is an administrative concession granted to accept the accounting treatment for financial derivatives on the condition that they follow certain accounting treatment.
Financial derivatives for trading
For financial derivatives for trading, they are accounted on a marked-to-market basis and the resultant gains or losses are recognised immediately and taken to the profit or loss.
Financial derivatives used for hedging purposes
For financial derivatives used for hedging purposes, they must be clearly identified at the outset and the gains or losses realised must be amortised over the life of the underlying hedged transactions and matched with the gains or losses or income or expenditure of the latter transactions, in all cases where there is a mismatch in the timing of the closing out of the two types of transactions. The bank will maintain clear rules on how this matching is done.
Financial liabilities
For financial liabilities, such as loans taken, or bonds issued, the interest expense incurred on such liabilities is allowed as a deduction by virtue of section 14(1)(a) of the Income Tax Act when the conditions in that section are met.
In the case of financial liabilities that do not constitute accretion to capital, any premium or discount incurred is taxed or allowed as a deduction.
OPTION TO REMAIN IN PRE-FRS 39 TAX TREATMENT
The FRS 39 (section 34A) tax treatment is the default tax treatment for all entities who adopt FRS 39 or SFRS for Small Entities for accounting purposes.
An entity, however, can elect in writing under section 34(4) or section 34(4A) at the time of submitting the tax return in the YA in which it adopts FRS 39 for accounting purposes to remain on the pre-FRS 39 tax treatment with the option of moving to the FRS39 tax treatment at any time thereafter.
Such entities have to determine the transitional adjustments as at the first day of the annual period in which the FRS 39 tax treatment is first applied.
The option to move to the section 34A tax treatment is irrevocable once it is exercised.
An entity that moves to the section 34(A) tax treatment at any time after the 5th YA from the YA that it adopts FRS 39 for accounting purposes will not be granted the 5-year instalment plan for the additional tax arising from the transitional tax adjustments.
Conditions for persons that opt to remain in pre-FRS 39 tax treatment
Entities that opt to remain under the pre-FRS 39 tax treatment are required to comply with the following two conditions:
(a) furnish details showing how the tax adjustments are arrived at;
(b) maintain relevant documents to support the tax adjustments made. This would mean that the period of storage of such records may exceed the statutory record-keeping period if the financial assets are not disposed of within this period.
If any entity fails to comply with the above conditions, it will be required to move to the section 34A tax treatment from the YA in which the failure to comply with the conditions arises. Once the section 34A tax treatment is applied to any YA due to this failure, the person will not be allowed to revert to the pre-FRS 39 tax treatment even if it is able to comply with the 2 conditions subsequently.
With the adoption of SFRS for Small Entities, an entity that has elected to remain on the pre-FRS 39 tax treatment (i.e. an entity that did not align the tax treatment with the accounting treatment for financial instruments on revenue account) when FRS 39 came into effect on 1 January 2005 can choose to:
(a) continue to remain on pre-FRS 39 tax treatment, or
(b) align the tax treatment for financial instruments on revenue account with the accounting treatment under SFRS for Small Entities (.ie. align the tax treatment for financial instruments with the accounting treatment going forward). This may result in tax adjustments.
Persons not required to comply with FRS 39
For persons who do not need to comply with the FRS 39 for accounting purposes or companies that are temporarily exempted by the Accounting & Corporate Regulatory Authority from complying with FRS 39 for accounting purposes, the pre-FRS 39 tax treatment continues to apply to them.
Last reviewed: 3 January 2018