Singapore companies rely heavily on estimates: KPMG study

Singapore companies rely heavily on estimates: KPMG study

    By Toni Waterman
    POSTED: 05 Aug 2013 8:25 PM
 
KPMG analysed the financial statements of 200 companies on the Singapore Exchange and found that 82 per cent of the total assets on their balance sheets are valued on estimates and some form of human judgement.

SINGAPORE: Eighty-two per cent of the total asset values on a typical balance sheet today are based on estimates, according to a KPMG study.

KPMG analysed the financial statements of 200 companies on the Singapore Exchange (SGX) and found that 82 per cent of the total assets on their balance sheets are valued on estimates and some form of human judgement.

KPMG's head of audit Ong Pang Thye, said: "The problem with having estimates in the books are the issues of comparability and consistency.

"The other issue that we are looking at is whether they are susceptible to human errors and are unintentional, or if they are subject to one form or another of human bias. This could be in the form of the more intentional ones."

The study shows that as little as a one per cent fluctuation in the total asset value can result in a 38 per cent change in net profit and up to a 50 per cent change in comprehensive income.

This means that even slight changes could turn a profit into a loss and vice versa.

Although fair value estimates for financial instruments were a key concern during the global financial crisis, it appears they are less of a concern for companies in Singapore as less than one per cent of total assets on average use unobservable inputs - known as "level three inputs" - and are subjected to level three fair value measurements.

Those who create financial statements said another problem with estimation is consistency.

BW Maritime's group CFO, Nicholas Gleeson, said: "The risk is that the shareholders become a little bit lost.

"They look at two sets of financial statements and think the companies are quite comparable but what they see flowing to the profit and loss in one (statement) is different from what is happening in the other (statement)."

The study shows that no sector is spared from the use of estimates and that some sectors like energy and telcos rely more heavily on estimation then others.

The study looked at 11 industries, including information technology, industrials, healthcare, real estate and energy.

Sam Ong, group senior executive vice president and group deputy CEO of Hyflux, said: "What I want to challenge the profession is that of all this volatility and accuracy that we are trying to derive, we have to make sure that we present it in such a way that is structured and as comparable as possible."

There is no expectation that estimation will stop being a part of financial reporting.

However, the study suggests that a robust process for deriving estimations and auditors with the right skill set to work with those estimates could make them more accurate and consistent.

Of the 200 companies analysed by KPMG, about 58 per cent were classified as small-cap, nine per cent as mid-cap and 33 per cent as large cap.

About 60 per cent of these companies are local and 40 per cent are foreign companies with significant presence in Singapore.

- CNA/fa

- wong chee tat :)