The MS News. New Rules for Statutory Filing. New ACRA Regulations to enhance the regulatory framework for corporate service providers.

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1 The MS News October 2014 Maritime Matters 13th Annual Marine Money Week Asia Cyber Risk Facing the New Pirates of the Sea Read more on Page 2 Read more on Page 4 IFRS 15 International Financial Reporting Standards ( IFRS ) 15 - The New Paradigm For Revenue New ACRA Regulations New Rules for Statutory Filing Post Seminar Article Management of Risks Involved in Personal Data Protection ( PDPA ) in Singapore IFRS 15 - A standard under IFRS, will be effective for reporting periods beginning on or after 1 January Requirements and key changes may affect existing practice. New ACRA Regulations to enhance the regulatory framework for corporate service providers. PDPA Seminar provided a two-pronged perspective to advise business operations on commercial risks of data breach. Read more on Page 6 Read more on Page 10 Read more on Page 11

2 13th Annual Marine Money Week Asia The above event was held at the St. Regis Hotel, Singapore on the 23rd/24th September. As one of the premier shipping events in Asia, the event attracted more than 400 delegates. Mick Aw, Senior Partner Moore Stephens LLP, Singapore was the moderator for the session The best business model for investors, owners and financiers. Mick noted in the preamble that since the dark days of 2009, ship financing has rebounded. However, this has been at much lower loan to value ratios (typically 50% rather than the 75-80% in the boom years), and is heavily weighted towards relationship customers. This has created an equity gap which has been partly filled by private equity ( PE ) funds. Mr. Mick Aw, Senior Partner, Moore Stephens LLP Whilst private equity is a powerful source of funds, in reality their contribution is still quite small, representing approximately 2% of the value of the world fleet. PE funds have invested between US$32 billion US$35 billion to date. Marine Money reported that in 2013, there were more than 28 PE fund deals amounting to US$7 billion, with estimates hovering around US$5 billion so far this year. Whilst PE funds have been providing exit strategies for the banks, through the acquisition of distressed debts, they have also been investing directly into vessels or acquiring minority or even majority stakes in vessel owning companies. Mick went on to discuss the delicate balancing for owners and the somewhat different needs of long term financiers and short term financiers. Can a balance of conflicting needs ever be achieved? Needs of short-term capital (private equity investors) Control Very high returns Governance Strong business plan/ financial model Due diligence on counterparty Readily available financial and other information Short-term exit plan Short-term capital (Private equity) Long-term capital (Lenders) Owners Needs of long-term capital (lenders) Relationship Low loan to value ratio Quality borrowers (name lending) Credit risk assessment Financial information and good business plans Good financial performance Good collateral Compliance with loan covenants Needs of owners Less onerous compliance requirements Low-cost funding Long-term capital Good loan to value ratio Strategic business advice 2

3 In the pre-financial crisis days, whether through club or bilateral deals, owners and investors had a well worked out template. The arrival of altenative financing, incorporating structured financing and PE funds, have somewhat changed the dynamics. Owners still prefer the long term feature of traditional debt providers and the relatively lower costs but require short-term funding too in volatile times. Some banks have also returned to lending, if somewhat cautiously, much to the relief of shipowners. With the relative low activity from the banks, PE funds have played an important role in providing liquidity in recent years. The business model going forward will need to accommodate the requirements of such short-term financiers within the traditional framework. Partnering with PE funds will require a so-called Alignment of Vision, failing which serious fallouts may happen. Is the private equity wave over? There has been some cooling off of PE fund investment in shipping since the 2nd quarter of this year. Many commentators think that the highwater mark has been reached by earlier investments and they are on their way out. Although there have been a number of exits via the IPO route, some PE funds have pulled back. Investors focused on acquiring cheap equity have simply not seen the market performance deliver the equity returns they require. Other typical exit points such as trade sales or sale to other PE funds appear limited under the current circumstances. Given a typical PE fund horizon of 5-7 years, some are certainly in for the long haul. With some banks still holding on to plenty of distressed debts, further PE fund investment in the industry is inevitable. And with a large unfunded order book, will the banks be able to provide sufficient liquidity? The next 12 months in the shipping industry is sure to be as interesting as the last. chrisjohnson@moorestephens.com.sg 3

4 Cyber Risk Facing the New Pirates of the Sea Captain Hook has a new face and a new playground. International Maritime Bureau ( IMB ) commented, Recent events have shown that systems managing the movement of goods need to be strengthened against the threat of cyber-attacks. and warns that risk emerges that shipping and the supply chain is the next playground for hackers. Technology changes the way our service is being delivered. Today s shipping companies place heavy reliance on information technology ranging from transaction processing in the backroom, voyage management, to ship maintenance or condition monitoring of vessels. Some shipping organisations view their innovative use of cutting edge information technology as a competitive advantage in the market place. Others see it as a bare necessity. Either way, information technology has invaded the shipping business. The blinding pace of change in technology has also amplified the complexity and risks faced by the maritime industry. Take for an example, a shipping company that handles a large amount of data arising from online services consisting of placing and tracking orders, monitoring packages and so on. Their business process often includes storage of some personal data of customers and in some cases, sensitive business information. Any leakage of data could lead to an immediate termination of the relationship with business partners and a permanent damage to reputation. With the move to cloud-based technology, data security has become a big challenge. The threats and methods used by these pirates are getting more sophisticated and increasingly creative. The story of ZombieZero where malware-poisoned inventory scanners were used to steal information from databases of logistics and shipping companies serves as a reminder of how vulnerable companies are in the face of deadly cyber-attacks launched by hackers. These hackers have now become the new age pirates. These new age pirates have started to organise themselves and are planning their attacks carefully. More often than not, they infiltrate silently into organisations through a malicious spyware, slowly siphoning sensitive information while sipping on their afternoon tea. Once they do get discovered, it is almost always too late as the pirates would have moved on to the next victim. They are no longer satisfied with just hacking into poorly managed applications or websites to steal vanilla-type personal data to sell for a quick buck. Their technology has evolved and their techniques are more professional as a result of their well thought-out strategies. Incidents which first appear to be an innocent break-in at office facilities where damage seems to be minimal may well turn out to be an installation of spyware into the shipping company s IT network. These pirates can hack into the Automatic Identification systems easily to make vessels disappear altogether from tracking systems and make non existing ships appear, just like magic. 4

5 The pirates are also looking at long term sustainable operations which will yield longer term results. The piracy attacks are at times not driven by financial gains but by political or idealogy reasons. This is what makes it even scarier. Have we taken enough precaution against the September 11-type of attack in the maritime industry? The call has been made for increased vigilance in the maritime sector to guard against these new age pirates. Protecting your shipping organisation includes having an awareness of what sensitive information you have, what would happen if the data gets stolen and what impact would this have on your business if the information-piracy occurs. The approach to protecting data is evolving and other than the anti-virus software, shipping companies should reinforce the security perimeter of their IT systems and get professionals to test their IT security solutions. Typical security audits include vulnerability scanning and penetration testing. We believe that it is important for the shipping company to first understand their corporate ecology and then build up robust risk management policies designed to defend shipping companies against cyber-attacks. The management of security risk should ultimately be driven down from the Board level. To address the information security challenge, shipping companies should look to specialists who can help them with the management of the security risk. The case studies for shipping cyber-attacks are building up. The risk of losing money because of these new pirates of the sea is escalating and it is no longer a remote possibility. Lao Mei Leng - Partner and Head, Practice Development laomeileng@moorestephens.com.sg 5

6 International Financial Reporting Standards ( IFRS ) 15 - The New Paradigm For Revenue On 28 May 2014, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) issued converged standards on revenue recognition, IFRS 15 and ASU (Topic 606) respectively. IFRS 15 will replace the existing standard, IAS18, and will be effective for reporting periods beginning on or after 1 January 2017, with earlier application permitted. The Singapore Accounting Standards Council has not yet adopted IFRS 15, but this appears to be only a matter of time. Although there appears to be ample implementation time, the proposed changes can be significant, and it is prudent to take full advantage of the lead time to assess and prepare for the adoption of this new standard. In recognition of the potential implementation challenges, IASB and FASB have, in June 2014, announced the formation of a Joint Transition Resource Group (TRG) to meet regularly on potential implementation issues. Comprising of auditors, preparers, and users of financial statements from various industries and geographical locations, the first TRG meeting was held in July Key Provisions Accounting requirements for revenue The core principle of IFRS 15 is to recognise revenue to reflect the transfer of goods or services at the expected consideration. To achieve this, IFRS 15 implements a judgmental five-step framework: Identify the contract(s) with a customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognise revenue when (or as) the entity satisfies a performance obligation. Step 1: Identify the contract with the customer First, IFRS 15 requires a revenue-generating contract to be identified which is approved by the parties and which specifies payment terms as well as each party s rights to the transferred goods or services. The contract needs to have commercial substance, and it should be probable that the seller will be able to collect the consideration. IFRS 15 only applies when these criteria are met. Step 2: Identify the performance obligations in the contract IFRS 15 requires performance obligations within the contract to be segregated at the inception of the contract, and be accounted for separately. A performance obligation is a good or service that is separately identifiable in the contract from other contractual promises (if any), and is distinct, meaning, that it is capable of benefitting the customer on its own, or in conjunction with other readily available goods. For example, the sale of a battery-operated appliance can be regarded as a performance obligation, whether the batteries are included or sold separately as batteries are easily available. A series of goods and services that are transferred over time, with a single method to measure progress towards completion, can also be a performance obligation, e.g. a two-year contract to deliver cleaning services. 6

7 Step 3: Determine the transaction price The transaction price is usually not difficult to determine, except when the consideration is variable based on a future event (e.g. contingent discounts/ rebates/ refunds), in which case it is necessary to estimate the variable consideration and its likelihood. Variable consideration should be included in the transaction price if it is highly probable that it will not reverse significantly in the future, and is recorded either at the probability-weighted expected value, or the most probable payout, whichever best reflects the value of the consideration. An exception to this approach applies for sale or usage-based royalty revenue arising from licences of intellectual property, which is recognised only when the underlying sales or usage occur. Step 4: Allocate the transaction price to the performance obligations in the contracts The transaction price identified in step 3 needs to be allocated among the performance obligations identified in step 2, based on the relative standalone selling prices of each performance obligation. Where the standalone selling price is not readily observable, it should be estimated, which may create an implementation issue. Some estimation methods are discussed in IFRS 15. Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation Revenue may be recognised at a point in time (for most transfer of goods), or over a period of time (for most transfer of services). Under IFRS 15, this assessment is based on when control of the underlying asset is transferred. Control is the ability to direct the use of and obtain the benefits from the asset, and to prevent others from doing the same. The control-based model is one of the most notable changes in IFRS 15, and moves away from the risk and reward model to revenue recognition under IAS 18. Under IFRS 15, an entity recognises revenue over time if: the customer simultaneously receives and consumes the benefits provided by the entity s performance as the entity performs; the entity s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced; or the entity s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. If neither of the above criteria are met, an entity recognises revenue at the point in time when control of the asset is transferred and the performance obligation is satisfied. Considerations that may help ascertain this timing includes the timing of payment, timing of transfer of legal title, physical possession, and risks and rewards of the asset. 7

8 Contract costs Beyond the five-step model, IFRS 15 also addresses the accounting for contract costs. IFRS 15 requires capitalisation and amortisation of costs to obtain a contract that would not have been incurred if the contract had not been successfully obtained (e.g. agent commissions paid upon successful sale), if it is expected that these costs can be recovered. As a practical expedient, such costs can be expensed if the amortisation period is less than 12 months. Costs incurred to fulfil a contract are also capitalised and amortised if they relate directly to a contract (or a specific anticipated contract), generate or enhance resources to satisfy future performance obligations, and are expected to be recovered. Such costs include direct labour, direct materials, allocation of direct overheads. Disclosures The disclosure requirements in IFRS 15 are extensive and do not provide exemptions for commercially sensitive information. Companies may need to adapt their existing information systems to cater for the new disclosure requirements. Transition IFRS 15 can be applied using a full retrospective approach, in which case IFRS 15 offers certain practical expedients to facilitate this option. Alternatively, entities can apply IFRS 15 only from the year of adoption, without changing previously-reported prior-period figures, by adjusting the cumulative effect of IFRS 15 to the opening equity at the beginning of the period of adoption. Key Changes from Existing Practice In this section, we highlight some foreseeable changes that IFRS 15 may bring. As IFRS 15 has introduced a new revenue recognition model, and contains much more detailed guidance than IAS 18, the impact of these new requirements may not be fully determinable until implementation has occurred on a wider scale. 8

9 IFRS 15 offers new guidance on identifying separate performance obligations, and allocating revenue to these obligations (i.e. based on relative standalone selling prices). This could lead to revenue being allocated differently from current practice, both in the identification of performance obligations as well as the allocation of revenue. In particular, the requirement to estimate standalone selling prices may result in greater complexity in the revenue allocation process. IFRS 15 offers new guidance on recognition of variable consideration, which should be estimated and recognised to the extent that significant reversal of the recognised amount is improbable. This may advance the recognition of such variable consideration as compared to IAS 18, under which such variable consideration may have remained unrecognised on the grounds of being not reliably measurable. This could have particular implications for the mobile telecommunications industry where mobile phones may be given to customers as part of a contract for network services and part or all of the revenue for the mobile phone is embedded in periodic service fees that are contingent on providing our future service to customers. In moving to a control-based revenue recognition model, IFRS 15 enforces three criteria that must be met for revenue to be recognised over a period of time, as discussed in the previous section. These criteria may change the revenue recognition pattern for certain contracts, especially in real estate development and ship building industries. Specific contractual terms should be analysed to ascertain whether such contracts meet the criteria for recognition over time. Conclusion Mr. Wong Koon Min - Director, Moore Stephens LLP IFRS 15 introduces a new revenue recognition model that may result in significant changes for some companies. It moves away from the risk and rewards model to a control-based model of revenue recognition. While some changes can be foreseen, others may only be identifiable after more widespread implementation. The standard will only take effect in 2017, but it is advisable to take advantage of the significant lead time to assess and plan for the effects of IFRS 15. wongkoonmin@moorestephens.com.sg 9

10 New Rules For Statutory Filing The key policies in the new Accounting and Corporate Regulatory Authority ( ACRA ) (Service Providers) Regulations 2014 will enhance the regulatory framework for corporate service providers (CSPs). The new regime will benefit the CSP industry by raising professional standards. The new framework is expected to be implemented by end CSPs will soon need to register as filing agents before they can perform statutory filings with ACRA for their customers. Professionals employed by filing agents will also need to be registered as qualified individuals.the stricter regime comes as Singapore moves to comply with the accounting standards of the Financial Action Task Force (FATF), a global standard-setting body for anti-money laundering and terrorist financing. While CSPs do not typically handle services that involve large amounts of cash, there is a risk that the companies they help incorporate may be abused by criminals to set up complex or unusual business structures to conceal beneficial ownership and reduce the transparency of transactions. CSPs will be required to fulfil various criteria, including standards of conduct and service levels, and will have to renew their registration annually. The legal obligations of a registered filing agent are summarised below: Certain activities for which filing agents will have to comply with FATF recommendations. Establishing an Internal Policies, Procedures and Controls Document (IPPC) which would help the filing agent to discharge its responsibility for the prevention of money laundering, terrorism financing and provide a framework of direction to the filing agent s business, his qualified individuals and employees. Customer due diligence. If a filing agent is unable to apply customer due diligence in relation to a customer, he shall not commence a business relationship with the customer or terminate any existing business relationships with the customer and consider whether to make a suspicious transaction report under the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act, and Terrorism, (Suppressions of Financing) Act. On-going monitoring, which is required to be done throughout the course of a business relationship. The filing agent is required to perform enhanced on-going monitoring on the customer if the risks are assessed to be higher. Record-keeping. The records have to be maintained for ongoing business relationships. If the business relationship has ended, the records still have to be kept for 5 years from the end of the business relationship. Implement and maintain an audit function that is adequately resourced and independent, and able to regularly assess the effectiveness of the IPPC of the filing agent. Develop compliance management arrangements to continually review and update IPPC and appoint an employee or officer in management role as the compliance officer. Implement screening procedures for the hiring of fit and proper persons as employees. Ensure that employees are briefed on the laws for prevention of money laundering and terrorism financing, prevailing methods of and trends in money laundering and terrorism financing and on the filing agent s IPPC. The amendments also introduced enforcement powers for ACRA to sanction registered filing agents and qualified individuals who breach their legal obligations. 10 shirleylim@complete-corp.com.sg

11 Management Of Risks Involved In Personal Data Protection ( PDPA ) In Singapore Singapore Management University (SMU) - Lee Kong Chian School of Business MS Risk Management Pte. Ltd. together with Clyde & Co. Clasis Singapore and AcClarity jointly organised a Personal Data Protection (PDPA) Seminar held at the SMU, School of Business on Wednesday, 30 July Mr. Chris Johnson, Director of MS Risk Management Pte. Ltd. and Ms. Julia Yeo, Legal Director of Clyde & Co. Clasis Singapore were on hand to brief the audience. Ms. Julia Yeo, Legal Director, Clyde & Co. Clasis Singapore Mr. Chris Johnson, Director, MS Risk Management Pte. Ltd. Ms. Julia Yeo kicked off the session with an overview of what the PDPA applies to, the definition of personal data and the fundamental obligations in relation to personal data. She also cited several cases to better illustrate her presentation. Next, Mr. Chris Johnson followed up to explain how to implement a PDPA compliance framework, safeguarding personal data with technology, and how to manage personal data and the complaints process. Participants in deep thought as the speakers presented During the questions and answers session, the speakers shared further with the audience their perspectives on how PDPA may affect their business processes. The 3 hour seminar drew to a close as the participants gained more knowledge and understanding of the PDPA. Organised by Upcoming Events/Activities Release of Opcost Report October 2014 Accounting Updates week of 10th November 2014 (tentative) OpCost and Shipping Markets Update week of 17th November 2014 (tentative) Shipping Forum 23 April 2015 For details of these events, please visit: 11

12 Moore Stephens LLP Singapore Moore Stephens LLP Singapore is a member firm of Moore Stephens International Limited, which is regarded as one of the world s leading accounting and consulting association with 667 offices in 105 countries and more than 27,000 partners and professionals with billing in excess of US$2.6 billion per annum. We provide our services to a diverse range of clients, from large corporations, listed companies to private businesses, entrepreneurs and individuals across a broad array of industry sectors. At Moore Stephens LLP Singapore, our goal is to look beyond numbers and compliance issues, to provide our clients with practical advice to resolve problems and help them achieve their business goals. Moore Stephens Globally Moore Stephens International Limited is a global accountancy and consulting association with its headquarters in London. With our global network spanning 105 countries, you can be confident that we have access to the resources and capabilities to meet your needs. Moore Stephens International independent member firms share common values: integrity, personal service, quality, knowledge and a global view. By combining local expertise and experience with the breadth of our worldwide networks, clients can be confident that, whatever their requirement, Moore Stephens will provide the right solution to their local, national and international needs. Contact Information If you would like further information on any item within this publication, or information on our services please contact: Mick Aw - Senior Partner and Head, Corporate Finance & Corporate Restructuring T mickaw@moorestephens.com.sg Chris Johnson - Partner and Head, Shipping Group & Risk Management T chrisjohnson@moorestephens.com.sg Gerry G. Vetuz - Partner and Head, Technical, Training, Compliance & Methodology T gerrygvetuz@moorestephens.com.sg Neo Keng Jin - Partner and Head, Audit Assurance & Initial Public Offerings T neo-kj@moorestephens.com.sg Willy Ng - Partner and Head, China Services T willyng@moorestephens.com.sg Lao Mei Leng - Partner and Head, Practice Development T laomeileng@moorestephens.com.sg Poh Lay Choo - Director, Training and Methodology T pohlaychoo@moorestephens.com.sg Wong Koon Min - Director, Technical and Compliance T wongkoonmin@moorestephens.com.sg Chan Rouh Ting - Director, Audit & Assurance T chanrt@moorestephens.com.sg Koo Kah Yee - Director, Audit & Assurance T kookahyee@moorestephens.com.sg 10 Anson Road #29-15, International Plaza, Singapore T F We believe the information contained herein to be correct at going to press, but we cannot accept any responsibility for any loss occasioned to any person as a result of action or refraining from action as a result of any item herein. This brochure is not a substitute for professional advice. Printed and published by Moore Stephens LLP, a member firm of Moore Stephens International Limited, a worldwide association of independent firms. MSIL and its member firms are legally distinct and separate entities. Moore Stephens LLP (Unique Entity No : T08LL0862H) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A). Copyright 2014 Moore Stephens LLP. All rights reserved.