The Accounting Standards Council issued Financial Reporting Standard (FRS) 115 Revenue from Contracts with Customers on 19 Nov 2014. FRS 115 applies to contracts which an entity has with its customers. It is effective from annual periods beginning on or after 1 January 2018. Earlier application is permitted.
Tax Implications
The accounting changes under FRS 115 now based on the satisfaction of performance obligations are relevant for tax purposes because the accounting profit serves as the starting point for computation for tax liabilities.
Prior to FRS 115, the tax principles provide that income are subject to tax when it is accrued to the entity. With the adoption of FRS 115, revenue is now recognised when the entity has performed its obligations, whether it is entitled to the income or not.
For ease of compliance, IRAS accept the accounting revenue under FRS 115 as the revenue for tax purposes in most cases, with a few exceptions (see below).
Any upward transitional adjustment that is revenue in nature would be subject to tax and any downward transitional adjustment that is revenue in nature would be deducted from the amount of exempt income or allowed as a deduction (as the case may be), in the year of assessment (“YA”) relating to the basis period in which the FRS 115 is adopted for the first time (hereafter referred to as “initial YA”).
The exceptions to accepting accounting revenue for tax purposes
The few exceptions to the general tax treatment where IRAS will not accept the accounting revenue as the revenue for tax purposes are:
- where specific tax treatment has been
- established through case law; or
- provided under the law, e.g. section 10F on the ascertainment of income from certain public private partnership arrangements, and
- in exceptional circumstances where the accounting treatment deviates significantly from tax principles, e.g. tax adjustments for significant financing components recognised as interest income or expenses.
Transitional provisions for adopting FRS 115
An entity would adopt FRS 115 using one of the following two methods:
(a) retrospectively to each prior reporting period presented in accordance with FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors; or
(b) retrospectively with the cumulative effect of initially applying the FRS 115 recognised at the date of initial application (i.e. the start of the reporting period in which an entity first applies the FRS 115).
Transitional tax adjustments
Regardless of whether method (a) or (b) is adopted for accounting purposes, the upward or downward transitional adjustments which are revenue in nature would be assessed to tax, deducted against exempt income or allowed a deduction in the initial YA.
Section 341 Adjustment arising from adoption of FRS 115 was in operation on 26 October 2017, and applies where –
(a) a person prepares or maintains the person’s financial accounts for any basis period for a year of assessment in accordance with FRS 115 for the first time (Initial YA);
(b) as a result of the application of FRS 115, an adjustment has to be made to the amount of revenue in the person’s financial accounts in any previous basis period (the adjusted revenue amount); and
(c) the statutory income or any exempt income of the person for the year of assessment for that previous basis period would have been a different amount (amount A) than the amount actually assessed for that year of assessment (amount B), had the Comptroller used an amount of profit that included the adjusted revenue amount as the starting point in assessing such income.
In the initial YA, there could be an over-recognition or under-recognition of income attributable to prior YAs. The difference is treated as:
- income chargeable to tax, to be deducted from the amount of exempt income, or
- allowable as a deduction (as the case may be)
for the YA of the basis period in which FRS 115 is first applied.
Any upward transitional adjustment that is revenue in nature would be subject to tax and any downward adjustment that is revenue in nature would be deducted from the amount of exempt income or allowed as a deduction (as the case may be), in the year of assessment (“YA”) relating to the basis period in which the FRS 115 is adopted for the first time (hereafter referred to as “initial YA”).
The same would apply to income under-recognised in prior YAs, i.e. the income that was under-recognised should be taxed in the initial YA.
In other words, the Comptroller will treat the profit or loss arising from transitional FRS 115 adjustments as income or loss subject to tax under section 10(1)(a) in the Initial YA where the income is derived from a trade, business, profession or vocation. Such income or loss will be subject to tax at the same tax rate(s) that apply to the trade income derived during the basis period for that YA. This is notwithstanding that the adjustments may pertain to a prior year in which the entity was enjoying incentives.
To elaborate, the tax rates that would apply for each instance in the relevant YA would be:
| Where the entity is: | Applicable tax rate |
| Not enjoying any incentive on its trade income | Taxed at the applicable normal tax rate (“NTR”) in the year of change |
| Enjoying incentive and concessionary tax rate (“CTR”) on its trade income | Taxed at the applicable CTR in the year of change |
| Enjoying incentives and enjoying multiple CTR and/or NTR on its trade income | Apportionment to the different applicable tax rates in the year of change based on the respective revenue from the different trades |
Last reviewed: 6 February 2018