In 2021, Singapore Exchange Regulation (SGX RegCo) began using artificial intelligence and regtech solutions to enhance its monitoring of issuers’ financials. These solutions were initially used to automatically extract relevant financial data. Technology was also used to compute certain pre-determined financial indicators.

The data generated helped SGX RegCo identify issuers where queries on their financials were warranted. The ultimate objective was to ensure that boards fully apprise investors of the issuer’s financial position so that investors can make an informed investment decision and better understand its financial performance.

Since then, we have surmised that if we make clear our expectations around disclosures in respect of financials, we may be able to help issuers improve their exchange filings around such matters. Better disclosures will call for fewer regulatory queries as issuers take it upon themselves to ensure their disclosures are clear, current and complete. Overall governance will improve as the market learns to self-regulate.

We are taking a step towards this self-regulated market with this column summarizing our expectations of disclosures in respect of three financial indicators, namely liquidity ratios, non-current trade and other receivables, and significant advances or prepayments. In particular, we note that most issuers currently produce what we have described below as “standard disclosures”. With the issuance of this column and our guidance note on Financial Statements Disclosure (below), issuers whose financial indicators are at concerning thresholds should consider pivoting towards more “substantive disclosures” on a proactive basis, thereby ensuring timelier disclosure of key information and minimizing regulatory queries.

We have selected three financial indicators to be included in this column out of all the indicators the SGX RegCo uses regtech to track, as they are the likeliest to be material enough to warrant investor concern given the prevailing economic conditions where relatively high interest rates and inflation have weighed on demand and as the effects of Covid-19 continue to affect the longer-term outlook for some businesses.

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This indicator measures the issuer’s ability to meet short-term financial obligations due within the next 12 months, taking into account its cash and cash equivalent balances, the cash flow generated from its operating activities and the effects of changes to the interest rate environment.

Liquidity ratios are one of the commonly used financial measures to estimate an issuer’s ability to (i) meet its short-term financial obligations as and when they fall due; and (ii) operate as a going concern.

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An issuer with a lower liquidity ratio faces an increased risk of:

<ol><li>Breaching its debt covenants and potential cross-defaults; and</li><li>Inability to operate as a going concern.</li></ul>

Issuers are expected to disclose these assessments in conjunction with its financial results announcements.

In response to SGX RegCo’s queries on liquidity ratios, some issuers have made comprehensive disclosures on how they planned to meet their short-term financial obligations along with the board’s assessment. Such disclosures included the following:

<ol><li>A detailed breakdown of the sources of funds which are expected to be available to the issuer for the next 12 months (including proposed equity fund-raising exercises, divestment of non-core assets);</li><li>Available credit facilities and their unutilized amounts, as well as whether such facilities are committed/uncommitted;</li><li>Cost-cutting measures;</li><li>New financing or refinancing arrangements;</li><li>Strategies and plans to improve collection of outstanding receivables;</li><li>Confirmation as to whether any breach of financial covenant(s) have been rectified or waived; and</li><li>Confirmation as to whether the Board has reviewed and is satisfied with, at the minimum, a 12-month cashflow forecast from the date of the latest financial statements.</li></ul>

For example, the board should carefully assess the financial standing of its parent company or Sponsor as well as the effectiveness of financial support. The board should consider the types and timing of the committed financial support so as to be assured of its effectiveness.

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2. Non-current trade and other receivables

Receivables that are to be collected after more than one year may raise questions about collectability. The concern for significant non-current receivables is whether the issuer will face cashflow issues from delays / non-collectability or has adopted inappropriate revenue recognition policies. In the worst-case scenario, the non-current trade receivables may raise concerns about the veracity of the sales. While non-current trade and other receivables may have been more prevalent during the Covid-19 pandemic and plausible reasons may exist to explain why such receivables will only be collected after one year or more, as businesses return to normalcy, issuers should employ targeted efforts to reduce such non-current receivables in an effort to improve collectability.

For issuers that report significant non-current receivables, the board and management are expected to make an assessment of the collectability of such non-current receivables and to disclose these assessments in conjunction with its financial results announcements.

To do so, the board and management should closely monitor such non-current receivables, including but not limited to, analysing the nature, breakdown and ageing schedule of such receivables and tracking the issuers’ plans for collection.

In addressing our queries over trade and other receivables, some issuers have provided substantial insights into factors considered when assessing collectability. These include credit evaluation of customers’ financial conditions, reviewing information such as payment history, age of debts, external ratings and credit agency information, audited financial statements, cash flow projections, and available press information. Issuers also disclose a credit loss assessment that has been performed in accordance with the relevant accounting standards. Some issuers have also disclosed whether the external auditors tested the reasonableness of the assumptions pertaining to the collectability of trade and other receivables.

Issuers may also consider including an explanatory note to the financial statements, to explain the nature of these non-current receivables and why they remain persistent on the balance sheet. The note could further explain whether this stems from an industry-wide systematic risk or an issuer-specific risk. The board should also state if there are any underlying governance issues and whether any improvement in controls is required.

3. Existence of significant advances or prepayments

Significant advances or prepayments may be considered to be in the ordinary course of business for certain issuers or may have arisen as a consequence of macroeconomic factors like the Covid-19 pandemic and related supply chain disruption. However, an issuer may want to pay attention to significant advances or prepayments, especially when it does not commensurate with the issuer’s scale of operations.

The concerns for significant prepayments and advances include whether these prepayments are long outstanding and hence are exposed to impairment, and the sufficiency of controls in place for such payments (e.g. approval limits). The board must assess the rationale and need to make significant advances or prepayments as well as the risks associated with it. Such an assessment is expected to be included in the issuer’s financial statements to provide greater assurance to shareholders on the collectability and veracity of such prepayments or advances.

For issuers with significant advances or prepayments, the Board and the management are expected to assess the breakdown of these advances and prepayments (e.g. deposits to subcontractors, prepayment for projects), the nature and terms of the respective advances and prepayments, and determine whether such balances should be impaired. It is also important for the board to understand the rationale for recognizing significant prepayments and/or advances, especially in cases where the counterparties are related parties of the issuer.

In addressing our queries over significant advances or prepayments, some issuers have made comprehensive disclosures such as detailed explanations on the nature of the prepayments and/or advances, the specific projects it relates to, the progress of transactions involved, whether it would be utilized or offset against any expected costs, and an explanation on whether any allowance for impairment loss is required.

Issuers may also consider disclosing in its financial statements whether it is common market practice for entities in the same industry to recognize such prepayments and advances, the adequacy and effectiveness of the issuer’s internal controls, and the efforts taken to recover or utilise such prepayments and advances.

Singapore’s disclosure-based regime requires the board to continuously disclose material information, including information to do with the three financial indicators highlighted here when these indicators may give rise to investor concern.

Since the roll-out of SGX RegCo’s initiative to use regtech to analyze financial data, we have observed more detailed disclosures in response to our queries. Shareholders could further engage the Boards of their investee companies with regard to these queries to seek clarity or further action where needed.

As mentioned earlier, SGX RegCo directs the use of regtech on a broad range of indicators though only three are discussed here. This list of indicators is thus not exhaustive and investors should continue to be vigilant and monitor disclosures by issuers in their annual report as well as financial statements and updates on SGXNet. It is conceivable that SGX RegCo will add other indicators to this AI-assisted review and expand our expectations of disclosures around these indicators in future.

Guidance Note on Financial Statements Disclosure

In 2021, SGX RegCo commenced using regulatory technology to enhance its regulatory monitoring of listed issuers’ financials. These solutions automate the extraction of relevant data from issuers’ financial results announcements and compute certain pre-determined financial indicators. This guidance note is issued in conjunction with the Regulator’s Column series titled, “What SGX RegCo expects of disclosures around key financial indicators” and serves as an informational guide to investors and Boards of Directors, with the intention to uphold market quality. This note covers some of the financial indicators, as well as illustrates several examples of mitigating actions and governance practices that have been applied by various SGX listed issuers.

For the avoidance of doubt, the information presented in this guidance note is not exhaustive and does not take into account specific circumstances of each issuer.

2. Financial indicators and other factors of consideration

Reviewing financial statements and annual reports can be overwhelming given the availability of information. It is thus helpful to frame the analysis by asking targeted questions, in addition to performing the standard qualitative / quantitative financial analysis and ratio analysis. SGX RegCo has provided several pertinent questions in Appendix A, to help reviewers and issuers focus their analyses of financial statements and annual reports. Reviewers can also consider engaging the board of directors and key management, if certain financial indicators of the company are of concern. It is imperative to interpret the financial indicators and the specific circumstances of the issuers holistically, prior to considering any mitigating measures highlighted below.

3. What can Issuers and Boards do after assessing the financial indicators

This guidance note focuses on the three financial indicators presented in the regulator’s column (above), being, (a) liquidity ratios; (b) Non-current trade and other receivables; and (c) significant advances or prepayments. The following segments present the potential actions that have been taken by various issuers to address such financial indicators.

Effective internal controls to monitor and assess liquidity risk

Complying with Listing Rule 719 requires an issuer to implement adequate and effective systems of internal controls (including financial, operational, compliance and information technology controls) and risk management systems.

An established system to monitor and assess on-going liquidity requirements is important, especially in a high interest rate environment, amidst other macroeconomic conditions. One key component of such an internal control system, would be a mandatory periodic assessment of liquidity risk and sensitivity analysis. In their engagement with management, the boards of directors should take an active role in the capital budgeting process, by assessing the reasonableness of the financial projections and their underlying assumptions.

Some issuers have in place processes to monitor financial covenants on a regular basis. Such processes entail setting internal limits on key liquidity ratios, assimilating such limits into formal policy, and conducting periodic reviews. Issuers should also keep track of other financial indicators like non-renewal of credit facilities, consistent negative operating cashflows and payment defaults.

In addition to financial indicators, some issuers monitor other operational indicators such as loss of major customers and changes in macroeconomic conditions. In the case where such financial limits are breached and/or adverse events have been observed, prompt escalation is made to the audit committee and the board so that any potential liquidity concerns can be addressed in a timely manner.

Where there is a breach of a financial covenant which has not been waived and may trigger cross defaults, issuers should undertake an assessment of the ability to operate as a going concern. Where issuers are unable to continue as a going concern, they should disclose this information via SGXNet immediately and make a request for trading suspension pursuant to Listing Rule 1303.

3.2 Non-current trade and other receivables

Establishing effective collection systems

Some issuers utilize an autonomous collections system with clear contracts, end-to-end invoicing to billing processes, payment reminder triggers, and a periodic data driven credit review of counterparties (emphasis added). The periodic credit review allows management to implement and maintain relevant differentiated credit controls based on an evolving customer risk profile.

Counterparties identified with a lower credit rating are monitored closely by the accounts collection team, especially if such counterparties exhibit signs of potential financial distress. Tighter credit controls for counterparties with lower credit ratings can be automatically administered via the collections system, based on preset parameters set by management. Tighter credit controls entail implementing stricter repayment schedules or even capping / restricting any credit sales to the counterparty. Cash only sales may be considered for customers who have failed to pay within the credit periods.

In addition, the data-driven credit review also improves capital budgeting and working capital efficiency. The review could identify varying credit / pricing terms employed across all contracts / customers, for management to consider streamlining such terms.

Other methods to safeguard receivables

Other methods employed by issuers include monitoring the status of receivables using receivable turnover ratio, incentivizing prompt repayment, taking security or obtaining corporate guarantees from debtors for major contracts. Some issuers also evaluate the historical trend of non-current trade receivables to compute an "expected credit loss" ratio and make appropriate impairment on a regular basis.

3.3 Significant prepayments and advances

Proactive Board and Audit Committee

Boards and audit committees should take a proactive role to satisfy themselves on the veracity and reasonableness of significant prepayments and advances. Appropriate steps or due diligence procedures need to be performed to verify management’s representation regarding such payments, especially where such payments are made to related parties.

Issuers should also implement adequate and sufficient internal controls for prepayments and advances, which include but are not limited to:

<ol><li>proper authorization for cash disbursements; and</li><li>proper due diligence conducted on transactions and counterparties prior to such disbursement of funds.</li></ul>

Where such prepayments and advances relate to major projects, the board and management should undertake that the proper due diligence procedures are in place (including feasibility studies or financial projections). Such procedures would also encompass, the rationale for the prepayments and advances, safeguards on the recoverability of the prepayments and whether such transactions are at arms-length. Where possible, some issuers also introduce additional commercial safeguards to ensure that the transaction remains in the best interest of the issuer. These measures dovetail toward addressing the risk of non-recoverability of the significant prepayments and advances.

Periodic reviews of prepayments and advances

Following the disbursement of funds for such prepayments and advances, some issuers perform periodic reviews of the ageing and vary the credit limits of counterparties where necessary. Should there be long outstanding prepayments and advances in the issuer’s books, the board should make enquiries with the management and take collective efforts to recover these outstanding amounts.

What SGX RegCo expects of disclosures around key financial indicators

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