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Continued......CAN YOUR RESTRUCTURING APPLYMERGER ACCOUNTING?In most circumstances, the tricky issue is not just aboutthe application of merger accounting for a commoncontrol combination but also the identification of such acombination.One of the common scenarios that might take place is asfollows:In 20X0, UHC was the Ultimate Holding Company and ithad a few subsidiaries, namely Entities A, B, IHC and D.In 20X1, UHC decided to reorganise its group structure bymaking IHC an immediate holding company of Entities Band D. Simultaneously, UHC transferred another subsidiaryEntity E, which it bought from a third party E, to IHC.IHC is then made the listing vehicle and is required toprepare the financial information for IPO.BeforeAfterUHC100% 100% 100% 100%Entity A Entity B Entity IHC Entity DEntity AEntity BUHC100% 100%Entity IHC100% 100% 100%Entity DEntity EAccording to Part IX of the Fifth Schedule to the Securitiesand Futures (Offers of Investments) (Shares and Debentures)Regulations 2005 paragraph 1(1), common control businessis defined as a business which at the time of registration of theprospectus had been acquired by the relevant corporationor any other entity in the group and immediately prior to itsacquisition by the relevant corporation of other entity in thegroup, was held and controlled, directly or indirectly, by aperson who controls the relevant corporation.This is in line with the definition in SFRS 103 which onlyrequires the combining entities to be under control fromthe same source (in this case, UHC) before and after thetransaction and does not require relative interests and rightsof the controlling parties to be the same before and after thecombination.SFRS 103:13 applies to group restructurings wheresubsidiaries or businesses are transferred within a grouphaving the same parent regardless of whether the interestof any minority interest is changed by the combination. Inthis case, Entity B and Entity D were transferred from UHCto Entity IHC where the entities were still under commoncontrol of UHC and would qualify for merger accountingunder the relevant standards and rules.Hence, in view that the underlying concept of using mergeraccounting is that no acquisition has occurred and therehas been a continuation of the risks and rewards to thecontrolling party (or parties) that existed prior to the businesscombination, RAP 12:16 requires the financial statementsof Entity B and Entity D to be included in the consolidatedaccounts of Entity IHC as if the combination had occurredfrom the date when Entity B and Entity D first came undercontrol of UHC.Concurrently, UHC had acquired Entity E from a third party,E, before immediately transferring it to Entity IHC. RAP12:7 indicates that as Entity E was, in substance, acquiredfrom a third party, Entity E’s financial statements are tobe included in the combined financial statements of thebusiness combination under Entity IHC from the date of theprevious acquisition (the date of purchase from the thirdparty, E) using the acquisition values (fair values) recognisedas of the date.Furthermore, RAP12:9 indicates that the businesscombination under Entity IHC will recognise assets andliabilities including goodwill and minority previouslyrecorded in UHC’s books as of the date of acquisition in thecombined financial statements.In conclusion, even if merger accounting were not used forthe purpose of business combinations involving entities orbusinesses under common control, management shoulduse its judgement in developing and applying an accountingpolicy that results in useful information.
GUIDEBOOK FOR AUDIT COMMITTEESIN SINGAPOREArticle contributed by:Kwek Wee HengManagerRisk AdvisoryServicesDID: 68289117weeheng@<strong>bdo</strong>.com.sgThe Audit Committee Guidance Committee(ACGC) has published its Guidebook for AuditCommittees in Singapore on 30 Oct 08 to assistaudit committees (ACs) of SGX-listed companiesin better appreciating their responsibilities andenhancing their effectiveness in carrying outtheir duties.The industry-led ACGC was established on 15Jan 08 by the Monetary Authority of Singapore(MAS), the Accounting and Corporate RegulatoryAuthority (ACRA) and the Singapore ExchangeLimited (SGX). ACGC was tasked to developpractical guidelines for audit committees tostrengthen corporate governance practices oflisted companies in Singapore.The guidebook was developed with inputs from,and in consultation with industry. Dialoguesessions and focus groups were conducted withthe business community and stakeholder groupsto identify key areas where guidance for ACs wasneeded. This was supplemented with a surveyof AC members on the practical difficulties andchallenges that they face in discharging theirduties, as well as the areas in which they wouldwelcome practical guidance.The guidebook comprises two main sections:• AC Composition• Roles and Responsibilities of ACsThe ‘AC Composition’ section aims to provideguidance for current and prospective AC membersto assess their independence and suitability formembership in the AC. It provides extracts ofkey regulatory requirements and guidelines fromthe Companies Act, SGX-ST Listing Manual andthe Singapore Code of Corporate Governance.The ‘Roles and Responsibilities of ACs’ sectionsis divided further into sub-sections: InternalControls; Risk Management; Internal Audit;Financial Reporting; External Audit; and OtherDuties & Responsibilities (Interested PersonTransactions, Conduct of Meetings, PerformanceAssessment, Whistleblowing, Training). As withthe previous section, it also provides extracts ofkey regulatory requirements and guidelines, aswell as best practices, FAQs and case studies toclarify areas in which ACs often face uncertainty,and to provide practical solutions and guidance toissues ACs commonly face.The FAQs and case studies offer insights on issuessuch as dealing with fraud; the approach ACscould take to oversee a weak control environment;establishing an internal audit function; probingManagement on financial reporting; use of specialpurpose entities/vehicles; reviewing of unusualtransactions, private sessions with internal andexternal auditors; frequency and conduct of ACmeetings; dealing with allegations of bribery, etc.In addition to the FAQs and case studies, theguidebook also provides many useful templatesand information in the appendices such as:sample AC terms of reference, sample fraudpolicy, questions AC might ask Management oninternal control, fraud warning signals, sampleinternal audit activity charter, differences betweenInterested Person Transactions (IPT) and RelatedParty Transactions (RPT), examples of goodpractices for an effective AC Chairman, sample ACself-assessment checklist, and other useful tools.The wealth of knowledge from many experiencedindustry professionals has been condensed intothis guidebook for practioners to better carryout their duties effectively, and to improve thecorporate governance standards in the businesscommunity. Although the guidebook is neithermeant to be exhaustive nor prescriptive, it is avery useful tool and reference for ACs and Boardmembers to be reminded of best practices, as wellas common pitfalls in the business environment.The guidebook can be downloaded from the MASwebsite:h t t p : / / w w w. m a s . g o v. s g / r e s o u r c e / f i n _development/corporate_governance/Final%20inside%20text%20241008cast.pdfIt is also available from the ACRA and SGXwebsites.References:1. Guidebook for Audit Committees in SingaporeAudit Committee Guidance Committee2. Monetary Authority of Singapore Press Releasedated 30 Oct 2008
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