On or about 13 November 2019, the Inland Revenue Authority of Singapore (IRAS) has updated the content on adopting financial reporting standard (FRS) 39 and 109 and its tax implications.
Effective 1 January 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.
The income tax treatment of financial assets and liabilities was also changed to minimise tax adjustments that companies have to make as a result of adopting FRS 39. The revised tax treatment is referred to as the “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.
Further, the FRS 39 tax treatment is the default tax treatment for all taxpayers who adopt FRS 39 for accounting purposes. Taxpayers who wish 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.
Singapore Financial Reporting Standard (International) or SFRS(I)) 9 sets out the requirements for recognising and measuring financial instruments for companies that have issued or are in the process of issuing equity or debt instruments for trading in a public market in Singapore, is similar to FRS 109 except for the transition provisions.
The FRS 109 replaces the existing FRS 39 and it applies to companies for financial years beginning on or after 1 January 2018. An entity may choose to apply FRS 109 early.
To minimise tax adjustments, the tax treatment of financial assets and liabilities on revenue account that are recognised and measured under FRS 109 and SFRS(I) 9 will generally follow the accounting treatment. This tax treatment is termed as “FRS 109 tax treatment”.
There is no option for companies to opt out of the FRS 109 tax treatment unlike the approach adopted for FRS 39.
The FRS 109 tax treatment does not apply for companies that do not need to comply with FRS 109 or SFRS(I) 9 for accounting purpose. However, these companies may elect to apply the FRS 109 tax treatment by submitting a written application to the Comptroller of Income Tax. The option to apply the FRS 109 tax treatment is irrevocable once it is exercised.
For more information, please refer to the e-Tax Guide on Income Tax: Income Tax Treatment Arising from Adoption of FRS 109 – Financial Instruments.
Source: IRAS website, 13 November 2019