Singapore Financial Reporting Standards (FRS) 115 comes into effect this year and IRAS has just published an e-guide on the income tax treatment on the revenue recognised by the adoption of this accounting standard.
Generally, the accounting revenue, as determined in accordance with FRS 115, would be accepted as the revenue for tax purpose in most cases. However, there are two main exceptions to this rule, namely :
a) where specific tax treatment has already been: - (i) established through case law; or (ii) provided under the law ; and
b) in exceptional circumstances where the accounting treatment deviates significantly from tax principles, in the case of contracts with significant financing components
The first exception would mostly apply to property developers, who might have to use percentage of completion method of recognising revenue. They will be glad to know IRAS would still only tax them when the project is substantially completed regardless of the revenue recognition method adopted.
The second exception would mostly apply when there are significant financing components present in the contracts and adjustments to either interest revenue or interest expenses have to be made in accordance with the accounting standard. IRAS will ignore these adjustments as they are accounting constructs and do not represent actual receipt or payment.
Please refer to Annex 1 of the guide for examples.
As it is with any adoption of a new accounting standard, there would likely be prior period adjustments. IRAS has made the tax effect of these adjustments simpler by allowing the upward or downward transitional adjustments that are revenue in nature to be taxed, deducted against exempt income or allowed a deduction in the initial Year of Assessment (YA). For further ease of compliance, the transitional adjustments would also be taxed at the rate applicable to trade income being taxed in the initial YA.
If you require more information on the adoption of FRS 115 or would like to know how this new standard affects your current revenue recognition method, do reach out to us for more information.