© Emile Woolf International Ltd 1 IFRS for small and medium-sized entities (IFRS for SMEs)...

© Emile Woolf International Ltd 1

IFRS for small and medium-sized entities (IFRS for SMEs)

Published July 2009

Background

• Exposure draft published early 2007

• Field visits and post exposure deliberations took place

• Final standard published July 2009 Many changes from original draft

Stand alone, no fall back to full IFRSIncome taxes (IAS 12 ED presumed)JCEs (no proportionate consolidation)

© Emile Woolf International 2

Overview of IFRS for SMEs

• Applies to general purpose financial statements of SMEs within scope of the IFRS for SMEs

• Organised by topic 35 chapters, 230 pages, plus B4C and illustrative

financial statements All paragraphs have equal authority, but some

appendices include implementation guidance that is not part of the IFRS

• Will be maintained by a 3 yearly (subject to urgency) cycle of updates


Overview of IFRS for SMEs

• No cross reference to full IFRS save in the case of financial instruments where a full IAS 39 could be applied

• Transition rules are included Based on IFRS 1 Apply whether going from National GAAP, or from full IFRS

• By comparison to full IFRS, the IFRS for SMEs Is simplified (no choices) Has reduced disclosures Should be less costly to implement and apply annually


Scope of IFRS for SMEs• SMEs are entities that

Do not have public accountability Publish general purpose financial statements for

external users

• An entity has public accountability if Its debt or equity instruments are traded in a public

market (or in process…); or It holds assets in a fiduciary capacity for a broad

group of outsiders as one of its primary businesses


Scope of IFRS for SMEs

• The preface to the IFRS makes it clear that the decision as to which entities will be required/permitted to use the IFRS for SMEs will lie with regulatory and legislative authorities in each jurisdiction

• However, if a publicly accountable entity uses this IFRS (permitted or required by jurisdiction), its financial statements shall not be described as conforming to the IFRS for SMEs as the entity would not meet the definition of SME


Concepts and pervasive principles• Drawn from the IASB framework

Objectives of financial statements Qualitative characteristics Financial position and Performance Recognition of assets, liabilities, income and expenses Measurement of assets, liabilities, income and expenses Pervasive recognition and measurement principles

Refers to a hierarchy in section 10 for determining suitable accounting policies

Accrual basis Initial measurement Subsequent measurement Offsetting


Financial statement presentation• Explanation of the principle “fair presentation of financial

statements”• Explanation of going concern principle• Frequency of reporting• Consistency of presentation• Comparatives• Materiality and aggregation• Complete set of financial statements

SOCI alternative – Statement of Income and Retained Earnings

• Identification of the financial statements (and presentation of additional information not required by this IFRS)

• All the above drawn from full IFRS (IAS 1)© Emile Woolf International 8

Statement of financial position

• List of minimum information

• Current/non-current distinction

• Definitions of current assets/liabilities

• Sequencing and format of items

• Information to be presented either in the SOFP or in the notes

• All drawn from IAS 1


Statement of comprehensive income and income statement

• An entity shall present its total comprehensive income either: In a single statement; or In two statements

• A change from the single-statement approach to the two-statement approach, or vice versa, is a change of accounting policy

• The two-statement approach has profit or loss for the period as the “overlapping” item



SOCIRevenue X

Expenses (X)

Share of profit of associate X

Profit before tax X

Income tax expense (X)

Profit from continuing ops X

Loss from discontinued ops (X)

PROFIT FOR THE YEAR X

Other comprehensive income:

Translation differences on subsidiary X

Change in fair value of hedging instr. (X)

OCI before tax X

Tax relating to OCI (X)

OCI after tax X

TOTAL COMPREHENSIVE INCOME X

May be two separate statements


SOCIRevenue X

Expenses (X)


Profit before tax X








OCI before tax X


OCI after tax X


These are analysed into amounts attributable to owners

of the parent and to the NCI


SOCIRevenue X

Expenses (X)


Profit before tax X








OCI before tax X


OCI after tax X


The components of OCI could also be presented as net of

tax amounts rather than gross with tax deducted

Statement of comprehensive income and income statement

• Items that are treated other than through the P&L part of SOCI are Retrospective adjustment for correction of error and

change of accounting policy (In SOCIE) Three types of OCI

Some gains and losses arising on the translation of financial statements of a foreign operation

Some actuarial gains and lossesSome changes in fair values of hedging instruments

• Otherwise, this section is derived from IAS 1, including a list of minimum line items


Multi choice question• The SME standard specifies only 3 items can

pass through OCI – which of the following items would you find within OCI under full IFRS?1. Investment property gains and losses

2. Gain or loss on available for sale investments

3. Revaluation of property, plant and equipment

4. Transactions in Treasury shares

A 1, 2 and 3

B 2, 3 and 4

C 1 and 4

D 2 and 3© Emile Woolf International 15

Statement of changes in equity and statement of income and retained earnings

• An entity shall present either Statement of changes in equity (SOCIE); or Statement of income and retained earnings

(if the only changes in equity in the period arise from profit or loss, dividends paid, corrections of errors and changes in accounting policy)


Statement of cash flows

• Appears to be virtually identical to IAS 7 requirements No voluntary disclosures No section dealing with reporting cash flows

on a “net basis” since these are largely financial institution issues


Notes to the financial statements

• Specifies the structure of the notes

• Requires disclosure of accounting policies

• Requires disclosure about Judgements Key sources of estimation uncertainty

• Drawn from IAS 1© Emile Woolf International 18

Consolidated and separate financial statements

• Requirement to present consolidated financial statements – all drawn from IAS 27 Exception for sub-groups Describes control, presumptions, potential voting rights

• SPEs - incorporates SIC 12

• Consolidation procedures Derived from IAS 27 revised Loss of control (much simplified)

• Disclosures specified• Separate financial statements requirements

Investments at cost or FVTPL

• “Combined financial statements” described© Emile Woolf International 19

Multi choice question• The SME standard that investments in

subsidiaries be carried at cost or fair value through profit and loss in the stand-alone parent balance sheetA This requirement is the same as full IFRS

B Full IFRS allows the use of the equity method

C Full IFRS specifies only an IAS 39 method

D Full IFRS specifies a choice of cost or an IAS 39 method


Accounting policies, estimates and errors

• Drawn from IAS 8• Sections deal with

Selection and application of accounting policies Consistency of accounting policies Changes in accounting policies Changes in accounting estimates Corrections of prior period errors

• No requirement to disclose impact of new standard “IFRS for SMEs” in issue, not yet effective


Financial instruments - overview

• IFRS for SMEs includes two sections on Financial Instruments Section 11 “Basic financial instruments”

Relevant to all entities

Section 12 “Other financial instruments issues”More complex transactions – primarily hedge accounting

• Entities with only basic financial instruments should check to ensure that they are exempt the requirements of section 12


Basic financial instruments• Accounting policy choice

To apply the IFRS for SMEs; or To apply IAS 39, and the disclosure requirements of

the IFRS for SMEs

• Introduction and scope Examples given of the instruments that would be

covered by section 11, and those that are within scope of section 12

• Basic financial instruments Taken from the descriptions we now find in the IAS

39 “Classification and Measurement” exposure draft


Question for debate• Can anyone think of circumstances when an

SME would find the application of IAS 39 to its financial instruments to be necessary?


Basic financial instruments – examples

• Cash• Demand and fixed-term deposits when the entity is the

depositor, eg bank accounts• Commercial paper and commercial bills held• Accounts, notes and loans receivable and payable• Bonds and similar debt instruments• Investments in non-convertible preference shares and

non-puttable ordinary and preference shares• Commitments to receive a loan if the commitment

cannot be net settled in cash


Multi choice question• Why would an investment in convertible

preference shares, or puttable ordinary/preference shares NOT be “basic financial assets”?

A.Such instruments are difficult to fair value

B.Such instruments are uncommon

C.Such instruments have “embedded derivative” features


Not basic financial instruments – examples

• Asset-backed securities, such as collateralised mortgage obligations, repurchase agreements and securitised packages of receivables

• Options, rights, warrants, futures contracts, forward contracts and interest rate swaps that can be settled in cash or by exchanging another financial instrument

• Financial instruments that qualify and are designated as hedging instruments in accordance with the requirements in Section 12.

• Commitments to make a loan to another entity.• Commitments to receive a loan if the commitment can be net

settled in cash.


Basic financial instruments• Initial recognition and measurement• Subsequent measurement

Amortised cost Fair value (cost if no reliable FV measurement) through P&L No “AFS equivalent”

• Impairment of instruments measured at cost or amortised cost No restrictions on reversal

• Derecognition Based on the exposure draft of IAS amendments (March 2009)

• Disclosures Much simplified from full IFRS


Other financial instruments issues

• Apart from obvious cross-references back to section 11, for those complex instruments that are within scope of section 12, this section deals only with hedge accounting and hedge accounting disclosures Very much simplified from IAS 39 equivalents No 80-125% effectiveness test specified Reduced documentation requirements


Inventories

• Drawn from IAS 2

• Sections deal with Scope Costs Techniques and cost formulas Impairment and expense recognition Disclosures


Multi choice question• What cost formulas are acceptable for

Inventories?

A.FIFO only

B.Weighted average only

C.FIFO or weighted average

D.LIFO


Investments in associates

• Associates defined – drawn from IAS 28

• Accounting policy election (for all associates) Cost model Equity method Fair value model

• Disclosures


Investments in joint ventures

• JVs defined – drawn from IAS 31

• JCOs, JCAs – drawn from IAS 31

• JCEs – accounting policy election Cost model Equity model Fair value model

• Transactions between venturer and JV

• Disclosures© Emile Woolf International 33

Multi choice question• The SME standard suggests three different

methods may be used for accounting for Associates and Joint ventures in consolidated financial statements

• Which of these methods are allowed under full IFRS?A. Cost and equity method only

B. Cost and fair value model only

C. Equity method only

D. Fair value model and equity method only


Investment property

• Scope only IP that can be measured reliably at FV is included –

otherwise it is P,P and E

• Definition and initial recognition Includes the operating lease possibility Mixed use property is described

• Initial measurement• Subsequent measurement

Only a fair value model is allowed

• Transfers• Disclosures


Property, plant and equipment• Scope – includes IP that cannot be reliably fair valued• Recognition – drawn from IAS 16• Initial measurement – drawn from IAS 16

Does not allow capitalisation of borrowing cost

• Subsequent measurement Cost model only

• Depreciation – drawn from IAS 16• Impairment• Derecognition• Disclosures


Intangible assets other than goodwill• Scope

• Recognition – excludes internally generated intangibles

• Initial measurement – drawn from IAS 38

• Internally generated intangibles All expenditure to be expensed

• Subsequent measurement Cost model only

• Amortisation – drawn from IAS 38 Finite life assumed; zero residual unless 3rd party commitment or

active market 10 year life presumption if no other reliable estimate available

• Impairment

• Retirement and disposals

• Disclosures© Emile Woolf International 37

Multi choice question• How does the SME standard differ from full

IFRS in respect of intangibles other than goodwill?A. No capitalisation of internally generated intangibles is allowed

B. No capitalisation of internally generated intangibles is allowed, and all intangibles are amortised

C. Full IFRS specifies an assumed life for intangible amortisation of 20 years


Business combinations and goodwill

• Scope and business combinations defined• Accounting – drawn largely from IFRS 3R

Transaction costs are capitalised No time limits for adjusting contingent consideration Goodwill is amortised (10 year presumption) Goodwill is impairment tested according to the

requirements of section 27 (only when there are indications)

• Disclosures


Leases• Leases – drawn from IAS 17• Sections cover

Scope Classification Finance leases

Lessee accountingLessor accounting

Operating leasesLessee accountingLessor accounting

Disclosures S & LB


Provisions and contingencies

• Drawn from IAS 37, including AG 9 examples

• Sections cover Scope Initial recognition Subsequent measurement Contingent liability and contingent asset Disclosures


Liabilities and equity

• Drawn from IAS 1 and IAS 32• Sections cover

Scope and classification of an instrument as liability or equity Original issue of shares or other equity instruments Sale of options, rights and warrants Capitalisation or bonus issues and share splits Convertible debt or similar instruments Treasury shares Distributions to owners (inc IFRIC 17) NCI and transactions in shares of a consolidated subsidiary

(derived from IAS 27R)


Revenue• Incorporates IAS 18 and IAS 11, and appendix

examples from IAS 18• Sections cover

Scope Measurement Identification of the revenue transaction Sale of goods Rendering of services Construction contracts Percentage completion method Interest, royalties and dividends Disclosures


Government grants


• Sections cover Scope Recognition and measurement

Does not seem to allow deduction of the grant from a specific asset

Disclosures


Borrowing costs

• Must be expensed in all circumstances

• No disclosures are specified in this section


Share-based payment• Drawn from IFRS 2 and IFRICs 8 and 11, but

significantly simplified• Sections cover

Scope Recognition, including with vesting conditions Equity settled transactions

Measurement principle is fair value 3 tier hierarchy described (level 3 includes directors judgement)

Cash settled transactions Choice of settlement Group plans Government-mandated plans Disclosures


Impairment of assets• Drawn from IAS 2 and IAS 36• Sections cover

Objective and scope Impairment of inventories Impairment of assets other than inventories

When there are indications

Additional requirements for goodwillAllocation to CGUsGrossing-up for NCINo reversal

Reversals of impairment for assets other than goodwill Disclosures – much less onerous


Employee benefits• Drawn from IAS 19• Sections cover

Scope – same as IAS 19 General recognition principle for all employee

benefits Short-term benefits, other long-term benefits and

termination benefits DC pension plans DB pension plans

No corridorActuarial differences recognised in full either in P&L or OCI

Group plans and disclosures© Emile Woolf International 48

Multi choice question• How does the SME standard differ from full

IFRS in respect of defined benefit pension actuarial differences?

• Full IFRSA. Requires the use of the corridor method

B. Requires that actuarial differences must be recorded in the profit and loss account

C. Requires companies to make a choice of accounting policy between recognising actuarial differences under the corridor method in P&L or OCI

D. Requires companies to make a choice of accounting policy between recognising actuarial differences under the corridor method in P&L, or in full in the P&L, or in full in OCI


Income tax• Drawn from IAS 12 and the March 2009 ED of

proposed amendments• Sections cover

Scope Steps in accounting for income tax Current tax (and withholding tax) Deferred tax

Temporary difference approach retained (new, simpler definition of tax base)

Valuation allowance for DT assetsTax uncertainties (measurement and disclosures)

Presentation and disclosures


Foreign currency translation


• Sections cover Scope Functional currency (including changes in) Reporting transactions in the functional

currency Net investment in a foreign operations Translation to presentation currency Disclosures


Hyperinflation



Events after the end of the reporting period


• Sections cover Events after the end of the reporting period

definition Recognition and measurement

Adjusting eventsNon-adjusting eventsDividends

Disclosures© Emile Woolf International 53

Related party disclosures


• Sections cover Scope and definitions

Structured differently, by listing– People– Entities

Disclosures, but apparently very little relief from IAS 24 requirements


Specialised activities

• Provides guidance on Agriculture (drawn from IAS 41) Extractive industries (refers to PP&E,

intangibles other than goodwill, and Provisions sections)

Service concession arrangements (drawn from, but much simplified, IFRIC 12)


Transition to IFRS for SMEs

• Applies to all entities adopting IFRS for SMEs, irrespective of the GAAP they are departing from

• Transition rules are derived from IFRS 1, but simplified• Retrospective application is primarily required with

Five exceptions (Same four as IFRS 1 plus discontinued operations)

Twelve exemptions (See next slide)

• Restatements to the opening position do not have to be made if they are impracticable

• An entity can only be a first-time adopter once in its life• Reconciliations are required (same as IFRS 1)



IFRS for SMEs financials for a first-time adopter – overview

1 Jan 10 31 Dec 10

BSBS

Total CI (PorL)

IFRS for SMEs BSBS

Total CI (PorL)

BS

Total CI (PorL)

Reconcile equity

Reconcile equity

Reconcile

31 Dec 11

Previous GAAP

Transition to IFRS for SMEs - exemptions

• Business combinations (no IAS 21 g/w equivalent)• Share-based payment (any plan before adoption)• Fair value as deemed cost (PP&E, intangible or IP)• Revaluation as deemed cost (Same scope as above)• CTDs (identical to IFRS 1)• Separate financial statements (identical to IFRS 1)• Compound financial instruments (identical to IFRS 1)• Service concession arrangements (for SCAs before

transition)• Arrangements involving a lease (identical to IFRS 1)


Transition to IFRS for SMEs – exemptions

• Decommissioning liabilities included in the cost of PP&E (identical to IFRS 1)

• Extractive industries (identical to 2009 amendment to IFRS 1 regarding full cost accounting)

• Deferred tax Not an exemption in IFRS 1 No recognition if “undue cost and effort”


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