EFRAG Compatibility Analysis

8/12/2019 EFRAG Compatibility Analysis

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EFRAG staff

IFRS for SMEs and the Fourth and Seventh Council Directives

Compatibility Issues

EFRAG WORKING PAPER

IFRS for SMEs Council Directives AssessmentNot incompatible

Not assessed

Incompatible

1.1 The IFRS for SMEs is intended for use by small andmedium-sized entities (SMEs).This section describes the characteristics of SMEs.

No relevant articles The paragraph states for what entitiesIFRS for SMEs are intended. Thecontent of the paragraph cannot beincompatible with the Council Directives.

1.2 Small and medium-sized entities are entities that:(a) do not have public accountability, and(b) publish general purpose financial statementsfor external users. Examples of external users includeowners who are not involved in managing thebusiness, existing and potential creditors, and creditrating agencies.

No relevant articles The paragraph defines what isconsidered to be small and medium-sizedentities according to IFRS for SMEs. Theparagraph is relevant in relation toparagraph 1.1 and is thus notincompatible with the Council Directives

1.3 An entity has public accountability if:(a) its debt or equity instruments are traded in a publicmarket or it is in the process of issuing suchinstruments for trading in a public market (a domesticor foreign stock exchange or an over-the-countermarket, including local and regional markets), or

No relevant articles The paragraph is relevant for paragraph1.2, and is thus not incompatible with theCouncil Directives.


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(b) it holds assets in a fiduciary capacity for a broadgroup of outsiders as one of its primary businesses.This is typically the case for banks, credit unions,insurance companies, securities brokers/dealers,mutual funds and investment banks.

1.4 Some entities may also hold assets in a fiduciarycapacity for a broad group of outsiders because theyhold and manage financial resources entrusted tothem by clients, customers or members not involvedin the management of the entity. However, if they doso for reasons incidental to a primary business (as,for example, may be the case for travel or real estateagents, schools, charitable organisations, co-operative enterprises requiring a nominal membershipdeposit, and sellers that receive payment in advanceof delivery of the goods or services such as utilitycompanies), that does not make them publiclyaccountable.

No relevant articles The paragraph is relevant for paragraph1.3 and is thus not incompatible with theCouncil Directives.

1.5 If a publicly accountable entity uses this IFRS, itsfinancial statements shall not be described asconforming to the IFRS for SMEseven if law orregulation in its jurisdiction permits or requires thisIFRS to be used by publicly accountable entities.

The Council Directives do not describe whatcould be stated as conforming to IFRS forSMEs

As the Council Directives do not describewhat could be stated as conforming toIFRS for SMEs, the paragraph is notincompatible with the Council Directives.

1.6 A subsidiary whose parent uses full IFRSs, or that ispart of a consolidated group that uses full IFRSs, isnot prohibited from using this IFRS in its own financialstatements if that subsidiary by itself does not havepublic accountability. If its financial statements aredescribed as conforming to the IFRS for SMEs, itmust comply with all of the provisions of this IFRS.

The Council Directives do not describe whatcould be stated as conforming to IFRS forSMEs

As the Council Directives do not describewhat could be stated as conforming toIFRS for SMEs, the paragraph is notincompatible with the Council Directives.

Concepts and Pervasive Principles

2.1 This section describes the objective of financialstatements of small and medium-sized entities(SMEs) and the qualities that make the information inthe financial statements of SMEs useful. It also setsout the concepts and basic principles underlying thefinancial statements of SMEs.

As par. 2.1 just explains the content ofsection 2, it is not incompatible with theCouncil Directives.

2.2 The objective of financial statements of a small ormedium-sized entity is to provide information aboutthe financial position, performance and cash flows ofthe entity that is useful for economic decision-making

The Council Directives do not include anyobjective of the financial statements

The Directives do not include a statementregarding the purpose of the financialstatements. However, it does not seem topreclude the purpose of 2.2. as long as it


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by a broad range of users who are not in a position todemand reports tailored to meet their particularinformation needs.

is not an overriding principle and therequirements that flow from this is inaccordance with the Directives.

Accordingly, par. 2.2 is not assessed tobe incompatible with the CouncilDirectives.

2.3 Financial statements also show the results of thestewardship of managementthe accountability ofmanagement for the resources entrusted to it.

The Directives do not include a statementregarding the purpose of the financialstatements. However, it does not seem topreclude the purpose of 2.2. as long as itis not an overriding principle and therequirements that flows from this is inaccordance with the Directives.

Accordingly, par. 2.2 is not assessed tobe incompatible with the CouncilDirectives.

2.4 UnderstandabilityThe information provided in financial statementsshould be presented in a way that makes itcomprehensible by users who have a reasonableknowledge of business and economic activities andaccounting and a willingness to study the informationwith reasonable diligence. However, the need forunderstandability does not allow relevant informationto be omitted on the grounds that it may be toodifficult for some users to understand.

4. art. 2

2. They shall be drawn up clearly and inaccordance with the provisions of thisDirective.3. The annual accounts shall give a true andfair view of the company's assets, liabilities,financial position and profit or loss.

7. art. 16.3

Consolidated accounts shall give a true andfair view of the assets, liabilities, financialposition and profit or loss of the undertakingsincluded therein taken as a whole.

Understandability is not mentionedexplicitly in the Council Directives.However, it is assessed that it could bepart of a true and fair view. Accordingly,par. 2.4 is not assessed to beincompatible with the Council Directives.

2.5 RelevanceThe information provided in financial statements mustbe relevant to the decision-making needs of users.Information has the quality of relevance when it iscapable of influencing the economic decisions ofusers by helping them evaluate past, present or futureevents or confirming, or correcting, their pastevaluations.

4. art. 2.3

The annual accounts shall give a true andfair view of the company's assets, liabilities,financial position and profit or loss.

7. art. 16.3

Consolidated accounts shall give a true andfair view of the assets, liabilities, financialposition and profit or loss of the undertakings

Relevance is not mentioned explicitly inthe Council Directives. However, it isassessed that it could be part of a trueand fair view. Accordingly, par. 2.5 is notassessed to be incompatible with theCouncil Directives.


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included therein taken as a whole.

2.6 MaterialityInformation is materialand therefore hasrelevanceif its omission or misstatement couldinfluence the economic decisions of users made onthe basis of the financial statements. Materialitydepends on the size of the item or error judged in theparticular circumstances of its omission ormisstatement. However, it is inappropriate to make, orleave uncorrected, immaterial departures from theIFRS for SMEs to achieve a particular presentation ofan entitys financial position, financial performance orcash flows.

The Council Directives state that somespecific requirements can be omitted if theamounts are immaterial. However, there isno general materiality principle.

It could be argued that only when theCouncil Directives specifically state thatspecific requirements can be omitted ifthe amounts are immaterial, thatinformation can be omitted if the amountsare immaterial. However, it could also beargued that Materiality couldbe said tobe included in the true and fair view.

Accordingly, although the CouncilDirectives do not specifically exempt fromrequirements if the amounts areimmaterial, the Council Directives couldbe interpreted as if an entity is notrequired tobut allowed toomitinformation that is not material.

Accordingly, it has been assessed thatpar. 2.6 cannot be said to be incompatiblewith the Council Directives.

2.7 ReliabilityThe information provided in financial statements mustbe reliable. Information is reliable when it is free frommaterial error and bias and represents faithfullythat which it either purports to represent or couldreasonably be expected to represent. Financialstatements are not free from bias (ie not neutral) if, bythe selection or presentation of information, they areintended to influence the making of a decision or

judgement in order to achieve a predetermined resultor outcome.

4. art. 2.3


7. art. 16.3


Although true and fair could/shouldinclude more than reliability, reliabilityseems to be a valid interpretation of partof true and fair. Accordingly, it has beenassessed that par. 2.7 is not incompatiblewith the Council Directives.

2.8 Substance over formTransactions and other events and conditions shouldbe accounted for and presented in accordance withtheir substance and not merely their legal form.This enhances the reliability of financial statements.

4. art. 4.6

Member States may permit or require thepresentation of amounts within items in theprofit and loss account and balance sheet tohave regard to the substance of the reportedtransaction or arrangement. Suchpermission or requirement may be restrictedto certain classes of company and/or toconsolidated accounts as defined in theSeventh Council Directive 83/349/EEC of 13

The requirement of substance over formis assessed to be compatible with theFourth Council Directive art. 4.6.


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June 1983 on consolidated accounts.

4. art. 2.3


7. art. 16.3


2.9 PrudenceThe uncertainties that inevitably surround manyevents and circumstances are acknowledged by thedisclosure of their nature and extent and by theexercise of prudence in the preparation of thefinancial statements. Prudence is the inclusion of adegree of caution in the exercise of the judgementsneeded in making the estimates required underconditions of uncertainty, such that assets or incomeare not overstated and liabilities or expenses are notunderstated. However, the exercise of prudence doesnot allow the deliberate understatement of assets orincome, or the deliberate overstatement of liabilities orexpenses. In short, prudence does not permit bias.

4. art. 31.1(c )valuation must be made on a prudent basis,and in particular:(aa) only profits made at the balance sheetdate may be included,(bb) account must be taken of all liabilitiesarising in the course of the financial yearconcerned or of a previous one, even if suchliabilities become apparent only between thedate of the balance sheet and the date onwhich it is drawn up,(cc) account must be taken of alldepreciation, whether the result of thefinancial year is a loss or a profit;

It is noted that the Commission in 2003amended the Council Directives inrelation to provisions. Art. 20.2 that waspreviously required became a MemberState option in order to a line the CouncilDirectives and IAS.

It is assessed that prudence in theCouncil Directives can be interpreteddifferently. Some would interpretprudence in the Council Directives to bemore conservative than in IFRS forSMEs. Others would interpret itdifferently.

Accordingly, it has been assessed that

Prudence in the Council Directives canbe interpreted differently. However, thedefinition of IFRS for SMEs cannot besaid to be incompatible with the CouncilDirectives.

2.10 CompletenessTo be reliable, the information in financial statementsmust be complete within the bounds of materiality andcost. An omission can cause information to be false ormisleading and thus unreliable and deficient in termsof its relevance.

4. art. 2.3


Completeness is not explicitly required bythe Council Directives, however, it couldbe interpreted as being included in thetrue and fair view.

It has been assessed whether it would be


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7. art. 16.3


incompatible with the Council Directivesto consider completeness within thebounds of cost. It was noted that therequirements of section 2 of IFRS forSMEs should be taken into considerationwhen IFRS for SMEs does not specificallyaddress a transaction, other event orcondition and to assess when therequirements of IFRS for SMEs would notresult in a fair presentation. Accordingly,it was assessed that an entity could notgenerally avoid presenting information byreference to cost it would incur in doingso. Therefore, it was assessed that therequirements of par. 2.10whenassessed in the contextwould not beincompatible with the Council Directives.

2.11 ComparabilityUsers must be able to compare the financial

statements of an entity through time to identify trendsin its financial position and performance. Users mustalso be able to compare the financial statements ofdifferent entities to evaluate their relative financialposition, performance and cash flows. Hence, themeasurement and display of the financial effects oflike transactions and other events and conditionsmust be carried out in a consistent way throughout anentity and over time for that entity, and in a consistentway across entities. In addition, users must beinformed of the accounting policies employed in thepreparation of the financial statements, and of any

changes in those policies and the effects of suchchanges.

4. art. 3

The layout of the balance sheet and of theprofit and loss account, particularly asregards the form adopted for theirpresentation, may not be changed from onefinancial year to the next.

4. art 31.1(b)the methods of valuation must be appliedconsistently from one financial year toanother;

Art. 43

In addition to the information required underother provisions of this Directive, the noteson the accounts must set out information inrespect of the following matters at least:(1) the valuation methods applied to the

various items in the annual accounts, andthe methods employed in calculating thevalue adjustments. For items included inthe annual accounts which are or wereoriginally expressed in foreign currency,the bases of conversion used to express

Both IFRS for SMEs and the CouncilDirectives require that the financial

statements are comparable over time. Inaddition par. 2.11 requires financialstatements to be comparable betweenentities. This is the purpose of theCouncil Directives, and is accordingly notassessed to be incompatible with theCouncil Directives.


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them in local currency must be disclosed;

2.12 TimelinessTo be relevant, financial information must be able toinfluence the economic decisions of users. Timelinessinvolves providing the information within the decisiontime frame. If there is undue delay in the reporting ofinformation it may lose its relevance. Managementmay need to balance the relative merits of timelyreporting and the provision of reliable information. Inachieving a balance between relevance and reliability,the overriding consideration is how best to satisfy theneeds of users in making economic decisions.

No explicit requirements regardingtimeliness and reliable information inDirectives.

Timeliness is not explicit mentioned in theCouncil Directives. The Member Statesdetermine the deadlines for preparingfinancial statements. Accordingly, therequirement is assessed not to beincompatible with the Council Directives.

2.13 Balance between benefit and costThe benefits derived from information should exceedthe cost of providing it. The evaluation of benefits andcosts is substantially a judgemental process.Furthermore, the costs are not necessarily borne bythose users who enjoy the benefits, and often thebenefits of the information are enjoyed by a broadrange of external users.

Not addressed in the Council Directives The issue whether it would beincompatible with the Council Directivesto take cost into consideration isdiscussed in relation to par. 2.10. For thesame reasons as stated in relation topar. 2.10, it is assessed that par. 2.13 isnot incompatible with the CouncilDirectives.

2.14 Financial reporting information helps capital providersmake better decisions, which results in more efficientfunctioning of capital markets and a lower cost ofcapital for the economy as a whole. Individual entitiesalso enjoy benefits, including improved access tocapital markets, favourable effect on public relations,and perhaps lower costs of capital. The benefits mayalso include better management decisions becausefinancial information used internally is often based atleast partly on information prepared for generalpurpose financial reporting purposes.

Not addressed in the Council Directives Par. 2.14 just explains types of benefits.It is assessed that this explanation cannotbe incompatible with the CouncilDirectives.

2.15 The financial position of an entity is the relationship ofits assets, liabilities and equity as of a specific date aspresented in the statement of financial position.These are defined as follows:(a) An asset is a resource controlled by the entity as a

result of past events and from which futureeconomic benefits are expected to flow to theentity.

(b) A liability is a present obligation of the entityarising from past events, the settlement of which isexpected to result in an outflow from the entity of

No definitions in the Directives See par. 2.45


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resources embodying economic benefits.(c) Equity is the residual interest in the assets of the

entity after deducting all its liabilities.

2.16 Some items that meet the definition of an asset or aliability may not be recognised as assets or liabilitiesin the statement of financial position because they donot satisfy the criteria for recognition in paragraphs2.272.32. In particular, the expectation that futureeconomic benefits will flow to or from an entity mustbe sufficiently certain to meet the probability criterionbefore an asset or liability is recognised.

No such requirement in the Directives In relation to liabilities see par. 2.39

2.17 The future economic benefit of an asset is its potentialto contribute, directly or indirectly, to the flow of cashand cash equivalentsto the entity. Those cash flowsmay come from using the asset or from disposing ofit.

The Council Directives do not explain whatassets are.

The explanation in par. 2.17 seemscompatible with the Council Directives

2.18 Many assets, for example property, plant andequipment, have a physical form. However, physicalform is not essential to the existence of an asset.Some assets are intangible.

The Council Directives do not explain whatassets are.

The Council Directives do not explainwhat assets are. However, it appearsfrom the Council Directives that someassets are also according to the CouncilDirectives regarded as intangible (see forexample the Fourth Council Directive art.9). It is therefore assessed that par. 2.18is not incompatible with the CouncilDirectives.

2.19 In determining the existence of an asset, the right ofownership is not essential. Thus, for example,property held on a lease is an asset if the entitycontrols the benefits that are expected to flow fromthe property.

The Council Directives do not includerequirements that assets should be ownedby an entity

The Council Directives do not explainwhat assets are. It is therefore assessedthat par. 2.19 is not incompatible with theCouncil Directives.

2.20 An essential characteristic of a liability is that theentity has a present obligation to act or perform in aparticular way. The obligation may be either a legalobligation or a constructive obligation. A legalobligation is legally enforceable as a consequence ofa binding contract or statutory requirement. Aconstructive obligation is an obligation that derivesfrom an entitys actions when:(a) by an established pattern of past practice,published policies or a sufficiently specific currentstatement, the entity has indicated to other partiesthat it will accept particular responsibilities, and

The Council Directives do not include anexplanation of essential characteristics of aliability

The Council Directives do not explainessential characteristics of a liability. It istherefore assessed that par. 2.19 is notincompatible with the Council Directives.


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(b) as a result, the entity has created a validexpectation on the part of those other parties that itwill discharge those responsibilities.

2.21 The settlement of a present obligation usuallyinvolves the payment of cash, transfer of other assets,provision of services, the replacement of thatobligation with another obligation, or conversion of theobligation to equity. An obligation may also beextinguished by other means, such as a creditorwaiving or forfeiting its rights.

The Council Directives do not include anexplanation about settlement of an obligation

It is assess that par. 2.21 is notincompatible with the Council Directives.

2.22 Equity is the residual of recognised assets minusrecognised liabilities. It may be subclassified in thestatement of financial position. For example, in acorporate entity, subclassifications may include fundscontributed by shareholders, retained earnings andgains or losses recognised directly in equity.

The Council Directives do not include anexplanation about how to calculate equity.

The Council Directives includesrequirements regarding subclassifications ofequity.

The Council Directives do not state howto calculate equity. On this issue par.2.22 is assessed not to be incompatiblewith the Council Directives.

The subclassification example listed inpar. 2.22 isas stated - only an exampleand it is therefore assessed that this partof par. 2.22 is also not incompatible with

the Council Directives.2.23 Performance is the relationship of the income and

expenses of an entity during a reporting period. ThisIFRS permits entities to present performance in asingle financial statement (a statement ofcomprehensive income) or in two financialstatements (an income statement and a statement ofcomprehensive income). Total comprehensive incomeand profit or loss are frequently used as measures ofperformance or as the basis for other measures, suchas return on investment or earnings per share.Income and expenses are defined as follows:

(a) Income is increases in economic benefits duringthe reporting period in the form of inflows orenhancements of assets or decreases of liabilitiesthat result in increases in equity, other than thoserelating to contributions from equity investors.(b) Expenses are decreases in economic benefitsduring the reporting period in the form of outflows ordepletions of assets or incurrences of liabilities thatresult in decreases in equity, other than those relatingto distributions to equity investors.

4. art. 22

For the presentation of the profit and lossaccount, the Member States shall prescribeone or more of the layouts provided for in

Articles 23 to 26. If a Member Stateprescribes more than one layout, it mayallow companies to choose from amongthem.

By way of derogation from Article 2(1),

Member States may permit or require allcompanies, or any classes of company, topresent a statement of their performanceinstead of the presentation of profit and lossitems in accordance with Articles 23 to 26,provided that the information given is at leastequivalent to that otherwise required bythose Articles.

The Fourth Council Directive requires thatentities present a profit and loss accountor a statement of their performance(statement of comprehensive income).

The Council Directives do not includedefinitions of income and expenses. Theexplanations included in par. 2.23 are notby themselves assessed to beincompatible with the Council Directives.

2.24 The recognition of income and expenses results The Council Directives do not include any It is assessed that the explanation in par.


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policies used or by notes or explanatory material. items that are required to be recognisedcannot just be disclosed.

2.29 The concept of probability is used in the firstrecognition criterion to refer to the degree ofuncertainty that the future economic benefitsassociated with the item will flow to or from the entity.

Assessments of the degree of uncertainty attachingto the flow of future economic benefits are made onthe basis of the evidence relating to conditions at theend of the reporting period available when thefinancial statements are prepared. Thoseassessments are made individually for individuallysignificant items, and for a group for a largepopulation of individually insignificant items.

The Council Directives do not include anexplanation about how to assess uncertaintyrelated to different items.

It is assessed that par. 2.29, explainingprobable in par. 2.27 is not incompatiblewith the Council Directives.

2.30 The second criterion for the recognition of an item isthat it possesses a cost or value that can bemeasured with reliability. In many cases, the cost orvalue of an item is known. In other cases it must beestimated. The use of reasonable estimates is an

essential part of the preparation of financialstatements and does not undermine their reliability.When a reasonable estimate cannot be made, theitem is not recognised in the financial statements.

The Council Directives do not include anyexplanation about reliability

The issue related to reliableis discussedin relation to par. 2.39

2.31 An item that fails to meet the recognition criteria mayqualify for recognition at a later date as a result ofsubsequent circumstances or events.

The Council Directives do not include anyrecognition criteria

As the Council Directives do not includeany general recognition criteria, par. 2.31is assessed not to be incompatible withthe Council Directives

2.32 An item that fails to meet the criteria for recognitionmay nonetheless warrant disclosure in the notes orexplanatory material or in supplementary schedules.This is appropriate when knowledge of the item is

relevant to the evaluation of the financial position,performance and changes in financial position of anentity by the users of financial statements

It is generally assed that disclosurerequirements included in IFRS for SMEscannot be incompatible with the CouncilDirectives as the Council Directives do

not prohibit additional information to bedisclosed in the notes.

2.33 Measurement is the process of determining themonetary amounts at which an entity measuresassets, liabilities, income and expenses in its financialstatements. Measurement involves the selection of abasis of measurement. This IFRS specifies whichmeasurement basis an entity shall use for many typesof assets, liabilities, income and expenses.

The Council Directives do not explainmeasurement

The explanation in par. 2.33 ofmeasurement is not incompatible with theCouncil Directives. The Council Directivesdo neither explain this term nor use it.

2.34 Two common measurement bases are historical cost 4. art. 35 The Council Directives to not include an


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and fair value:(a) For assets, historical cost is the amount of cash orcash equivalents paid or the fair value of theconsideration given to acquire the asset at the time ofits acquisition. For liabilities, historical cost is theamount of proceeds of cash or cash equivalentsreceived or the fair value of non-cash assets

received in exchange for the obligation at the time theobligation is incurred, or in some circumstances (forexample, income tax) the amounts of cash or cashequivalents expected to be paid to settle the liability inthe normal course of business. Amortised historicalcost is the historical cost of an asset or liability plus orminus that portion of its historical cost previouslyrecognised as expense or income.(b) Fair value is the amount for which an asset couldbe exchanged, or a liability settled, betweenknowledgeable, willing parties in an arms lengthtransaction.

2. The purchase price shall be calculated byadding to the price paid the expensesincidental thereto.3. (a) The production cost shall be calculatedby adding to the purchasing price of the rawmaterials and consumables the costs directly

attributable to the product in question.(b) A reasonable proportion of the costswhich are only indirectly attributable to theproduct in question may be added into theproduction costs to the extent that theyrelate to the period of production.4. Interest on capital borrowed to finance theproduction of fixed assets may be includedin the production costs to the extent that itrelates to the period of production. In thatevent, the inclusion of such interest underAssets must be disclosed in the notes on

the accounts.

4. art. 42b

1. The fair value referred to in Article 42ashall be determined by reference to:(a) a market value, for those financialinstruments for which a reliable market canreadily be identified. Where a market valueis not readily identifiable for an instrumentbut can be identified for its components orfor a similar instrument, the market value

may be derived from that of its componentsor of the similar instrument; or(b) a value resulting from generally acceptedvaluation models and techniques, for thoseinstruments for which a reliable marketcannot be readily identified. Such valuationmodels and techniques shall ensure areasonable approximation of the marketvalue.

2. Those financial instruments that cannot be

overall definition of historical cost and fairvalue. In relation to some assets andliabilities it is stated how the cost or fairvalue shall be calculated. It is assessedwhether or not IFRS for SMEs iscompatible with the Council Directives inthese cases. The general explanation of

historical cost and fair value in par. 2.34is not by itself regarded as incompatiblewith the Council Directives.


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measured reliably by any of the methodsdescribed in paragraph 1, shall be measuredin accordance with Articles 34 to 42.

2.35 The requirements for recognising and measuringassets, liabilities, income and expenses in this IFRSare based on pervasive principles that are derivedfrom the IASB Framework for the Preparation and

Presentation of Financial Statements and fromfull IFRSs. In the absence of a requirement in thisIFRS that applies specifically to a transaction or otherevent or condition, paragraph 10.4 provides guidancefor making a judgement and paragraph 10.5establishes a hierarchy for an entity to follow indeciding on the appropriate accounting policy in thecircumstances. The second level of that hierarchyrequires an entity to look to the definitions, recognitioncriteria and measurement concepts for assets,liabilities, income and expenses and the pervasiveprinciples set out in this section.

4. art. 2.3

The annual accounts shall give a true andfair view of the company's assets, liabilities,

financial position and profit or loss.

7. art. 16.3


The Council Directives do not includespecific guidance on what to do inabsence of a requirement that appliesspecifically to a transaction or other event

or condition. The compatibility ofparagraph 10.4 and 10.5 are assessedbelow.

As mentioned above it is generallyassessed that the pervasive principles setout in IFRS for SMEs represent validinterpretations of true and fair. Also theconcepts of assets and liabilities, incomeand expenses were assessed not to beincompatible with the Council Directives.

Accordingly, it is assessed that the

method described in the second level ofthe hierarchy mentioned in paragraph2.35 would not be incompatible with theCouncil Directives.

2.36 An entity shall prepare its financial statements, exceptfor cash flow information, using the accrual basis ofaccounting. On the accrual basis, items arerecognised as assets, liabilities, equity, income orexpenses when they satisfy the definitions andrecognition criteria for those items.

4. art. 31.1 (d)

account must be taken of income andcharges relating to the financial year,irrespective of the date of receipt or paymentof such income or charges;

The Council Directives do not includerequirements regarding cash flowstatements. Use of the accrual basis inthe remaining part of the financialstatements is in accordance with theCouncil Directives.

2.37 An entity shall recognise an asset in the statement offinancial position when it is probable that the future

economic benefits will flow to the entity and the assethas a cost or value that can be measured reliably. Anasset is not recognised in the statement of financialposition when expenditure has been incurred forwhich it is considered not probable that economicbenefits will flow to the entity beyond the currentreporting period. Instead such a transaction results inthe recognition of an expense in the statement ofcomprehensive income (or in the income statement, ifpresented).

The Council Directives do not includerecognition requirements.

The Council Directives do not includegeneral recognition criteria. It has

therefore been assessed that par 2.37 isnot incompatible with the Directives.

2.38 An entity shall not recognise a contingent asset as an The Council Directives do not include As the Council Directives do not include


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asset. However, when the flow of future economicbenefits to the entity is virtually certain, then therelated asset is not a contingent asset, and itsrecognition is appropriate.

requirements regarding contingent assets requirements regarding contingentassets, it is assessed that par. 2.38 is notincompatible with the Council Directives.

2.39 An entity shall recognise a liability in the statement offinancial position when(a) the entity has an obligation at the end of the

reporting period as a result of a past event,(b) it is probable that the entity will be required totransfer resources embodying economic benefits insettlement, and(c) the settlement amount can be measured reliably.

The Council Directives do not includerecognition requirements.

4. art. 20

1. Provisions are intended to cover liabilitiesthe nature of which is clearly defined andwhich at the date of the balance sheet areeither likely to be incurred, or certain to beincurred but uncertain as to amount or as tothe date on which they will arise.

2. The Member States may also authorizethe creation of provisions intended to covercharges which have their origin in the

financial year under review or in a previousfinancial year, the nature of which isclearly defined and which at the date of thebalance sheet are either likely to be incurred,or certain to be incurred but uncertain as toamount or as to the date on which they willarise.

3. Provisions may not be used to adjust thevalues of assets.

It is assessed that the Council Directivesdo not include recognition criteria. Article20 of the Fourth Council Directive only

explains what provisions are, but notwhen they should be recognised.

It is therefore assessed that :

Criteria (a) is not incompatible with theCouncil Directives. Article 20.2 of theFourth Council Directive (to recogniseliabilities that may not be obligations as ofthe balance sheet date)is only an option.

Criteria (b) is not incompatible with the

Council Directives, even when likely inart. 20.1 of the Fourth Council Directive isinterpreted as a lower probability thanprobable in par. 2.39 (b), as art. 20.1only defines provisions and not statewhen they should be recognised.

In relation to criteria (c ) it is assessedthat in order for the financial statementsto be able to present a true and fair viewit would also be required by the CouncilDirectives that the settlement amount can

be measured reliably in order to be ableto recognise a liability.

2.40 A contingent liability is either a possible but uncertainobligation or a present obligation that is notrecognised because it fails to meet one or both of theconditions (b) and (c) in paragraph 2.39. An entityshall not recognise a contingent liability as a liability,except for contingent liabilities of an acquiree in abusiness combination (see Section 19 BusinessCombinations and Goodwill).

The Council Directives do not include adefinition of contingent liabilities.

It is assessed that the Council Directivesdo not include recognition criteria andpar. 2.40 accordingly assessed not to beincompatible with the Council Directives.

See par. 19.4 in relation to contingentliabilities of an acquirer in a businesscombination.


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2.41 The recognition of income results directly from therecognition and measurement of assets and liabilities.

An entity shall recognise income in the statement ofcomprehensive income (or in the income statement, ifpresented) when an increase in future economicbenefits related to an increase in an asset or adecrease of a liability has arisen that can be

measured reliably.

Article 31.1 ( c) (aa)

only profits made at the balance sheet datemay be included,

See par 2.9

2.42 The recognition of expenses results directly from therecognition and measurement of assets and liabilities.

An entity shall recognise expenses in the statement ofcomprehensive income (or in the income statement, ifpresented) when a decrease in future economicbenefits related to a decrease in an asset or anincrease of a liability has arisen that can be measuredreliably.

No requirements included in the CouncilDirectives

It is assessed that the Council Directivesdo not specify whether income andexpenses results from recognition andmeasurement of assets and liabilities orvice versa. Accordingly, it is assessedthat par. 2.42 is not incompatible with theCouncil Directives.

2.43 Total comprehensive income is the arithmeticaldifference between income and expenses. It is not aseparate element of financial statements, and a

separate recognition principle is not needed for it.

The Council Directives do not includerecognition principles for totalcomprehensive income.

As the Council Directives do not includerecognition principles for totalcomprehensive income, it is assessed

that par. 2.43 is not incompatible with theCouncil Directives.

2.44 Profit or loss is the arithmetical difference betweenincome and expenses other than those items ofincome and expense that this IFRS classifies as itemsof other comprehensive income. It is not a separateelement of financial statements, and a separaterecognition principle is not needed for it.

The Council Directives do not includerecognition principles for profit or loss.

It is assessed that profit or loss alsounder the Council Directives arecalculated as stated in par. 2.44.

Accordingly, it is assessed that par. 2.44is compatible with the Council Directives.

2.45 This IFRS does not allow the recognition of items inthe statement of financial position that do not meetthe definition of assets or of liabilities regardless ofwhether they result from applying the notion

commonly referred to as the matching concept formeasuring profit or loss.

The Council Directives do not includedefinitions of assets and liabilities.

As the Council Directives do not includedefinitions of assets and liabilities. It hastherefore been assessed whether thedefinitions would prohibit assets and

liabilities, required to be recognised underthe Council Directives, from beingrecognised and vice verse.

It has been assessed that the CouncilDirectives allows some items that do notmeet the definitions in par. 2.45 to berecognised. However, they do notprohibit that only those items that meetthe definition are recognised.

Accordingly, it has been assessed that


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(b) investment property that an entity measures at fairvalue (see paragraph 16.7).(c) agricultural assets (biological assets andagricultural produce at the point of harvest) that anentity measures at fair value less estimated costs tosell (see paragraph 34.2).

2.51 Most liabilities other than financial liabilities are

measured at the best estimate of the amount thatwould be required to settle the obligation at thereporting date.

4. art. 42

Provisions may not exceed in amount thesums which are necessary.

The Council Directives do not specify

whether a most likely outcome or anexpected value approach or somethingelse should be used for measuringrecognised non-financial liabilities.

Accordingly, the requirement of par. 2.51is assessed not to be incompatible withthe Council Directives.

2.52 An entity shall not offset assets and liabilities, orincome and expenses, unless required or permittedby this IFRS.

(a) Measuring assets net of valuation allowancesfor

example, allowances for inventory obsolescence andallowances for uncollectible receivablesis notoffsetting.

(b) If an entitys normal operating activities do notinclude buying and selling non-current assets,including investments and operating assets, then theentity reports gains and losses on disposal of suchassets by deducting from the proceeds on disposalthe carrying amount of the asset and relatedselling expenses.

4. art. 7

Any set-off between asset and liability items,or between income and expenditure items,shall be prohibited.

Par. 2.52 is not in itself incompatible withthe Council Directives. However, if IFRSfor SMEs would require something to beoffset that would not be allowed under theCouncil Directives and vice versa, this

would be incompatible with the CouncilDirectives. This is, however, notassessed in relation to par. 2.52.

Financial Statement Presentation

3.1 This section explains fair presentation of financialstatements, what compliance with the IFRS for SMEsrequires, and what is a complete set of financialstatements.

Par. 3.1 only explains the scope ofsection 3 and is accordingly notincompatible with the Council Directives.

3.2 Financial statements shall present fairly the financialposition, financial performance and cash flows of anentity. Fair presentation requires the faithfulrepresentation of the effects of transactions, otherevents and conditions in accordance with thedefinitions and recognition criteria for assets,liabilities, income and expenses set out in Section 2

7. art. 16 (similar to 4. art. 2)

1. Consolidated accounts shall comprise theconsolidated balance sheet, theconsolidated profit-and-loss account and thenotes on the accounts. These documentsshall constitute a composite whole. Member

The Council Directives do not requirepresentation of cash flows. However,they do not prohibit this either (see art.16.1 of the Seventh Council Directive).The concepts and pervasive principles ofsection 2 were assessed not to beincompatible with the Council Directives.


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Concepts and Pervasive Principles.

(a) The application of the IFRS for SMEs, withadditional disclosure when necessary, is presumed toresult in financial statements that achieve a fairpresentation of the f inancial position, financialperformance and cash flows of SMEs.

(b) As explained in paragraph 1.5, the application ofthis IFRS by an entity with public accountability doesnot result in a fair presentation in accordance with thisIFRS.

The additional disclosures referred to in (a) arenecessary when compliance with the specificrequirements in this IFRS is insufficient to enableusers to understand the effect of particulartransactions, other events and conditions on theentitys financial position and financial performance.

States may permit or require the inclusion ofother statements in the consolidatedaccounts in addition to the documentsreferred to in the first subparagraph

2. Consolidated accounts shall be drawn upclearly and in accordance with this Directive.

3. Consolidated accounts shall give a trueand fair view of the assets, liabilities,financial position and profit or loss of theundertakings included therein taken as awhole.

4. Where the application of the provisions ofthis Directive would not be sufficient to givea true and fair view within the meaning ofparagraph 3 above, additional informationmust be given.

5. Where, in exceptional cases, theapplication of a provision of Articles 17 to 35and 39 is incompatible with the obligationimposed in paragraph 3 above, thatprovision must be departed from in order togive a true and fair view within the meaningof paragraph 3. Any such departure must bedisclosed in the notes on the accountstogether with an explanation of the reasonsfor it and a statement of its effect on theassets, liabilities, financial position and profit

or loss. The Member States may define theexceptional cases in question and lay downthe relevant special rules.

6. A Member State may require or permit thedisclosure in the consolidated accounts ofother information as well as that which mustbe disclosed in accordance with thisDirective.

Accordingly, the fair presentation requiredby the par. 3.2 would also be assessednot to be incompatible with the CouncilDirectives.

3.3 An entity whose financial statements comply with theIFRS for SMEs shall make an explicit and unreserved

The Council Directives do not includerequirements regarding statements about

The Council Directives do not prohibit anentity from stating that its financial


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statement of such compliance in the notes. Financialstatements shall not be described as complying withthe IFRS for SMEs unless they comply with all therequirements of this IFRS.

compliance with IFRS for SMEs statements comply with the IFRS forSMEs, when the requirements are met.

Accordingly, par. 3.3 is not incompatiblewith the Council Directives.

3.4 In the extremely rare circumstances whenmanagement concludes that compliance with thisIFRS would be so misleading that it would conflict

with the objective of financial statements of SMEs setout in Section 2, the entity shall depart from thatrequirement in the manner set out in paragraph 3.5unless the relevant regulatory framework prohibitssuch a departure.

7. art. 16.5

Where, in exceptional cases, the application

of a provision of Articles 17 to 35 and 39 isincompatible with the obligation imposed inparagraph 3 above, that provision must bedeparted from in order to give a true and fairview within the meaning of paragraph 3. Anysuch departure must be disclosed in thenotes on the accounts together with anexplanation of the reasons for it and astatement of its effect on the assets,liabilities, financial position and profit or loss.The Member States may define theexceptional cases in question and lay down

the relevant special rules.

The concepts and pervasive principles ofsection 2 were generally assessed not tobe incompatible with the Council

Directives. Accordingly, the fairpresentation required by par. 3.4 wouldalso be assessed not to be incompatiblewith the Council Directives.

3.5 When an entity departs from a requirement of thisIFRS in accordance with paragraph 3.4, it shalldisclose the following:

(a) that management has concluded that the financialstatements present fairly the entitys financial position,financial performance and cash flows.

(b) that it has complied with the IFRS for SMEs,except that it has departed from a particularrequirement to achieve a fair presentation.

(c) the nature of the departure, including the treatmentthat the IFRS for SMEs would require, the reason whythat treatment would be so misleading in thecircumstances that it would conflict with the objectiveof financial statements set out in Section 2, and thetreatment adopted.

See above If a departure from IFRS for SME wouldalso be a departure from the CouncilDirectives, an entity should also disclosethe effect of the departure on the assets,liabilities, financial position and profit orloss. However, this additionalrequirement is only considered to be adifference and does not result in par. 3.5being incompatible with CouncilDirectives.

3.6 When an entity has departed from a requirement ofthis IFRS in a prior period, and that departure affectsthe amounts recognised in the financial statements forthe current period, it shall make the disclosures set

See above It is generally assessed that requirementsincluded in IFRS for SMEs about notedisclosures cannot create anyincompatibility issues with the Council


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out in paragraph 3.5(c). Directives.

3.7 In the extremely rare circumstances whenmanagement concludes that compliance with arequirement in this IFRS would be so misleading thatit would conflict with the objective of financialstatements of SMEs set out in Section 2, but therelevant regulatory framework prohibits departure

from the requirement, the entity shall, to the maximumextent possible, reduce the perceived misleadingaspects of compliance by disclosing the following:

(a) the nature of the requirement in this IFRS, and thereason why management has concluded thatcomplying with that requirement is so misleading inthe circumstances that it conflicts with the objective offinancial statements set out in Section 2.

(b) for each period presented, the adjustments toeach item in the f inancial statements that

management has concluded would be necessary toachieve a fair presentation.

The Council Directives would not prohibitdepartures from the requirements included inIFRS for SMEs when compliance with thestandard would be misleading (see above)

For the reasons stated in the previouscolumn, par. 3.7 is assessed not to beincompatible with the Council Directives.

3.8 When preparing financial statements, themanagement of an entity using this IFRS shall makean assessment of the entitys ability to continue as agoing concern. An entity is a going concern unlessmanagement either intends to liquidate the entity or tocease operations, or has no realistic alternative but todo so. In assessing whether the going concernassumption is appropriate, management takes intoaccount all available information about the future,which is at least, but is not limited to, twelve months

from the reporting date.

4. art. 31.1

The Member States shall ensure that theitems shown in the annual accounts arevalued in accordance with the followinggeneral principles:

(a) the company must be presumed to becarrying on its business as a going concern;

It is assessed to be compatible with theCouncil Directives to require themanagement to assess the entitys abilityto continue as a going concern.

3.9 When management is aware, in making itsassessment, of material uncertainties related toevents or conditions that cast significant doubt uponthe entitys ability to continue as a going concern, theentity shall disclose those uncertainties. When anentity does not prepare financial statements on agoing concern basis, it shall disclose that fact,together with the basis on which it prepared thefinancial statements and the reason why the entity isnot regarded as a going concern.

4. art. 31.2

Departures from these general principlesshall be permitted in exceptional cases. Anysuch departures must be disclosed in thenotes on the accounts and the reasons forthem given together with an assessment oftheir effect on the assets, liabilities, financialposition and profit or loss.

The Council Directives would also requirean entity to disclose the effect of thedeparture on the assets, liabilities,financial position and profit or loss, if thefinancial statements are not preparedunder the going concern assumption.However, this additional requirement isonly considered to be a difference anddoes not result in par. 3.9 being assessedto be incompatible with the Council


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Directives.

It is generally assessed that requirementsincluded in IFRS for SMEs about notedisclosures (including disclosures aboutmaterial uncertainties related to events or

conditions that cast significant doubt uponthe entitys ability to continue as a goingconcern) cannot be incompatible with theCouncil Directives.

3.10 An entity shall present a complete set of financialstatements (including comparative informationseeparagraph 3.14) at least annually. When the end ofan entitys reporting period changes and the annualfinancial statements are presented for a period longeror shorter than one year, the entity shall disclose thefollowing:

(a) that fact.

(b) the reason for using a longer or shorter period.

(c) the fact that comparative amounts presented in thefinancial statements (including the related notes) arenot entirely comparable.

No requirements included in the Fourth andSeventh Council Directives

It is generally assessed that requirementsincluded in IFRS for SMEs about notedisclosures cannot be incompatible withthe Council Directives.

3.11 An entity shall retain the presentation andclassification of items in the financial statements fromone period to the next unless:

(a) it is apparent, following a significant change in the

nature of the entitys operations or a review of itsfinancial statements, that another presentation orclassification would be more appropriate havingregard to the criteria for the selection and applicationof accounting policies in Section 10 AccountingPolicies, Estimates and Errors, or

(b) this IFRS requires a change in presentation.

4. art. 3

The layout of the balance sheet and of theprofit and loss account, particularly asregards the form adopted for their

presentation, may not be changed from onefinancial year to the next. Departures fromthis principle shall be permitted inexceptional cases. Any such departure mustbe disclosed in the notes on the accountstogether with an explanation of the reasonstherefore.

The cases mentioned in par. 3.11 couldbe regarded as exceptional casesasmentioned in article 3 of the FourthCouncil Directive. Accordingly, theparagraph is assessed not to be

incompatible with the Council Directivesas IFRS for SMEs do not require morechanges than what would be allowed bythe Council Directives.

3.12 When the presentation or classification of items in thefinancial statements is changed, an entity shallreclassify comparative amounts unless the

4. art. 4.4

In respect of each balance sheet and profit

Reclassifying comparative amounts iscompatible with option of the CouncilDirectives to do so. Also it is generally


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reclassification is impracticable. When comparativeamounts are reclassified, an entity shall disclose thefollowing:

(a) the nature of the reclassification.

(b) the amount of each item or class of items that is

reclassified.

(c) the reason for the reclassification.

and loss account item the figure relating tothe corresponding item for the precedingfinancial year must be shown. The MemberStates may provide that, where these figuresare not comparable, the figure for thepreceding financial year must be adjusted. Inany case, non-comparability and any

adjustment of the figures must be disclosedin the notes on the accounts, with relevantcomments.

assessed that requirements included inIFRS for SMEs about note disclosurescannot be incompatible with the CouncilDirectives.

3.13 If it is impracticable to reclassify comparativeamounts, an entity shall disclose why reclassificationwas not practicable.

See above Reclassification of comparative amountsis not required by the Council Directives,and it is generally assessed thatrequirements included in IFRS for SMEsabout note disclosures cannot beincompatible with the Council Directives.

3.14 Except when this IFRS permits or requires otherwise,an entity shall disclose comparative information in

respect of the previous comparable period for a llamounts presented in the current periods financialstatements. An entity shall include comparativeinformation for narrative and descriptive informationwhen it is relevant to an understanding of the currentperiods financial statements.

See above The Council Directives requirecomparative figures in relation to the

balance sheet and the profit and lossaccount but does not prohibit it in relationto other information as well. Accordinglyit is assessed that par. 3.14 is compatiblewith the Council Directives.

Exceptions to the requirement areassessed in relation to the relevantparagraphs.

3.15 An entity shall present separately each material classof similar items. An entity shall present separatelyitems of a dissimilar nature or function unless they are

immaterial.

4. art. 4.3

The balance sheet and profit and loss

account items that are preceded by Arabicnumerals may be, combined where:

(a) they are immaterial in amount for thepurposes of Article 2 (3); or

(b) such combination makes for greaterclarity, provided that the items so combinedare dealt with separately in the notes on theaccounts. Such combination may berequired by the Member States.

The Council Directives allow somecombination of items in the balance sheetand profit and loss account (the Council

Directives do not include anyrequirements for the cash flow statementsand the requirements of par. 3.15 cantherefore be applied in relation to thecash flow statements without creating anyconflicts). The Council Directives maylimit the options to combine immaterialclasses. However, this is regarded as adifference that could be overcome byfollowing the requirements of the CouncilDirectives in these circumstances.


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7. art. 16.2 (similar to 4. art. 2.2)


3.16 Omissions or misstatements of items are material if

they could, individually or collectively, influence theeconomic decisions of users made on the basis of thefinancial statements. Materiality depends on the sizeand nature of the omission or misstatement judged inthe surrounding circumstances. The size or nature ofthe item, or a combination of both, could be thedetermining factor.

The Council Directives do not include an

explanation of material

The explanation of material in par. 3.16

is in itself not in conflict with the CouncilDirectives as material is not defined in theCouncil Directives.

3.17 A complete set of financial statements of an entityshall include all of the following:

(a) a statement of financial position as at the reportingdate.

(b) either:(i) a single statement of comprehensive income forthe reporting period displaying all items of income andexpense recognised during the period including thoseitems recognised in determining profit or loss (whichis a subtotal in the statement of comprehensiveincome) and items of other comprehensive income, or(ii) a separate income statement and a separatestatement of comprehensive income. If an entitychooses to present both an income statement and astatement of comprehensive income, the statement of

comprehensive income begins with profit or loss andthen displays the items of other comprehensiveincome.

(c) a statement of changes in equity for the reportingperiod.

(d) a statement of cash flows for the reporting period.

(e) notes, comprising a summary of significantaccounting policies and other explanatory information.

4. art. 2

1. The annual accounts shall comprise thebalance sheet, the profit and loss accountand the notes on the accounts. These

documents shall constitute a compositewhole.

Member States may permit or require theinclusion of other statements in the annualaccounts in addition to the documentsreferred to in the first subparagraph.

4. art. 22

By way of derogation from Article 2(1),Member States may permit or require all

companies, or any classes of company, topresent a statement of their performanceinstead of the presentation of profit and lossitems in accordance with Articles 23 to 26,provided that the information given is at leastequivalent to that otherwise required bythose Articles

7. art. 16

1. Consolidated accounts shall comprise the

A statement of financial position isanother word for balance sheet andincome statement the same as profit andloss account. A single statement ofcomprehensive income is considered to

be a statement of performance.Accordingly, IFRS for SMEs requires allthe elements also required by the CouncilDirectives and some more, which is notincompatible with the Council Directives.


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consolidated balance sheet, theconsolidated profit-and-loss account and thenotes on the accounts. These documentsshall constitute a composite whole.

Member States may permit or require theinclusion of other statements in the

consolidated accounts in addition to thedocuments referred to in the firstsubparagraph.

3.18 If the only changes to equity during the periods forwhich financial statements are presented arise fromprofit or loss, payment of dividends, corrections ofprior period errors, and changes in accounting policy,the entity may present a single statement of incomeand retained earnings in place of the statement ofcomprehensive income and statement of changes inequity (see paragraph 6.4).

4. art. 33.2

(a) Where paragraph 1 is applied, theamount of the difference between valuationby the method used and valuation inaccordance with the general rule laid downin Article 32 must be entered in therevaluation reserve under Liabilities.The treatment of this item for taxation

purposes must be explained either in thebalance sheet or in the notes on theaccounts. For purposes of the application ofthe last subparagraph of paragraph 1,companies shall, whenever the amount ofthe reserve has been changed in the courseof the financial year, publish in the notes onthe accounts inter alia a table showing:the amount of the revaluation reserve atthe beginning of the financial year,the revaluation differences transferred tothe revaluation reserve during the financial

year,the amounts capitalized or otherwisetransferred from the revaluation reserveduring the financial year, the nature ofany such transfer being diclosed,the amount of the revaluation reserve atthe end of the financial year.

4. art. 42d (d) / 7. art. 34.14 (d)

Where valuation at fair value of financial

The Council Directives do not require astatement of changes in equity.However, the Council Directives includesome requirements about disclosuresabout changes in certain reserves.These disclosures should be provided inorder to comply with the requirements ofthe Council Directives. However, par.3.18 does not result in a conflict with the

Council Directives.

In relation to statement of retainedearnings see section 6.


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instruments has been applied, the notes onthe accounts shall disclose:

(d) a table showing movements in the fairvalue reserve during the financial year.

3.19 If an entity has no items of other comprehensiveincome in any of the periods for which financialstatements are presented, it may present only anincome statement, or it may present a statement ofcomprehensive income in which the bottom line islabelled profit or loss.

The Council Directives do not requireentities to present a statement ofcomprehensive income. It would be inaccordance with the Council Directivesalways to only present an incomestatement.

3.20 Because paragraph 3.14 requires comparativeamounts in respect of the previous period for allamounts presented in the financial statements, acomplete set of financial statements means that anentity shall present, as a minimum, two of each of the

required financial statements and related notes.

4. art. 4.4

In respect of each balance sheet and profitand loss account item the figure relating tothe corresponding item for the preceding

financial year must be shown. The MemberStates may provide that, where these figuresare not comparable, the figure for thepreceding financial year must be adjusted. Inany case, non-comparability and anyadjustment of the figures must be disclosedin the notes on the accounts, with relevantcomments.

Par. 3.20 is assessed to be in accordancewith the Council Directives.

3.21 In a complete set of financial statements, an entityshall present each financial statement with equalprominence.

No specific requirements included in theCouncil Directives

Par. 3.21 is assessed not to beincompatible with the Council Directives.

3.22 An entity may use titles for the financial statements

other than those used in this IFRS as long as they arenot misleading.

No specific requirements in the Council

Directives. The Council Directives use theterms balance sheet and profit and lossaccount.

If an entity applies the terms of the

Council Directives this would be inaccordance with the Council Directives.

3.23 An entity shall clearly identify each of the financialstatements and the notes and distinguish them fromother information in the same document. In addition,an entity shall display the following informationprominently, and repeat it when necessary for anunderstanding of the information presented:

(a) the name of the reporting entity and any change in

7. art. 16.2 (similar to 4. art. 2.2)


Par. 3.23 is assessed to be in line withthe Council Directives. The additionalinformation required by par. 3.23 isassessed not to be incompatible with theCouncil Directives.


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its name since the end of the preceding reportingperiod.

(b) whether the financial statements cover theindividual entity or a group of entities.

(c) the date of the end of the reporting period and the

period covered by the financial statements.

(d) the presentation currency, as defined in Section30 Foreign Currency Translation.

(e) the level of rounding, if any, used in presentingamounts in the financial statements.

3.24 An entity shall disclose the following in the notes:

(a) the domicile and legal form of the entity, itscountry of incorporation and the address of itsregistered office (or principal place of business, if

different from the registered office).

(b) a description of the nature of the entitysoperations and its principal activities.

It is generally assessed that requirementsincluded in IFRS for SMEs about notedisclosures cannot create any conflictswith the Council Directives.

3.25 This IFRS does not address presentation of segmentinformation, earnings per share, or interim f inancialreports by a small or medium-sized entity. An entitymaking such disclosures shall describe the basis forpreparing and presenting the information.

4. art. 43.1 (8)

In addition to the information required underother provisions of this Directive, the noteson the accounts must set out information inrespect of the following matters at least:

the net turnover within the meaning of Article

28, broken down by categories of activityand into geographical markets in so far as,taking account of the manner in which thesale of products and the provision ofservices falling within the company'sordinary activities are organized, thesecategories and markets differ substantiallyfrom one another;

The Council Directives do not includerequirements regarding earnings pershare and interim financial report.However, it is generally assessed thatrequirements included in IFRS for SMEsabout note disclosures cannot create anyconflicts with the Council Directives.

The Council Directives requires segmentinformation about turnover. However, thisdifference can be overcome by providingthis information in financial statementsprepared in accordance with IFRS forSMEs as IFRS for SMEs does notprohibit this information to be disclosed.

Statement of Financial Position

4.1 This section sets out the information that is to bepresented in a statement of financial position and how

Par. 4.1 only explains the scope ofsection 4 and is accordingly not in conflict


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to present it. The statement of financial position(sometimes called the balance sheet) presents anentitys assets, liabilities and equity as of a specificdatethe end of the reporting period.

with the Council Directives.

4.2 As a minimum, the statement of financial positionshall include line items that present the followingamounts:

(a) cash and cash equivalents.

(b) trade and other receivables.

(c) financial assets (excluding amounts shown under(a), (b), (j) and (k)).

(d) inventories.

(e) property, plant and equipment.

(f) investment property carried at fair value throughprofit or loss.

(g) intangible assets.

(h) biological assets carried at cost less accumulateddepreciation and impairment.

(i) biological assets carried at fair value through profitor loss.

(j) investments in associates.

(k) investments in jointly controlled entities.

(l) trade and other payables.

(m) financial liabilities (excluding amounts shownunder (l) and (p)).

(n) liabilities and assets for current tax.

(o) deferred tax liabilities and deferred tax assets

4. art. 4

1. In the balance sheet and in the profit and

loss account the items prescribed in Articles9, 10 and 23 to 26 must be shownseparately in the order indicated. A moredetailed subdivision of the items shall beauthorized provided that the layouts arecomplied with. New items may be addedprovided that their contents are not coveredby any of the items prescribed by thelayouts. Such subdivision or new items maybe required by the Member States.

2. The layout, nomenclature and terminology

of items in the balance sheet and profit andloss account that are preceded by Arabicnumerals must be adapted where the specialnature of an undertaking so requires.Such adaptations may be required by theMember States of undertakings forming partof a particular economic sector.

3. The balance sheet and profit and lossaccount items that are preceded by Arabicnumerals may be, combined where:

(a) they are immaterial in amount for thepurposes of Article 2 (3); or

(b) such combination makes for greaterclarity, provided that the items so combinedare dealt with separately in the notes on theaccounts. Such combination may berequired by the Member States.

7. art. 21

It has been assessed that entitiesapplying IFRS for SMEs could use thelayout schemes presented in the Council

Directives in order to be able to complywith the Council Directives.

In addition it has been assessed how anentity could comply with the requirementsof the Council Directives art. 9 and therequirements of par. 5.5.

It is assessed that:

(a) cash and cash equivalents couldcorrespond to IV Cash at bank and in

hand. As cash is not defined in theCouncil Directives, it is assessed that thedefinition of cash and cash equivalents ofIFRS for SMEs can be applied.

(b) trade and other receivables couldcorrespond to II Debtors (except thatsubscribed capital called but not paidcannot be included see par 22.7 andprepayments and accrued income shouldbe shown separately in accordance withthe option included in the Council

Directives)

(c ) financial assets are further specifiedin the Council Directives than in IFRS forSMEs, however, the amounts that wouldcorrespond to (c ) financial assets can befound in a balance sheet prepared inaccordance with the requirements of theCouncil Directives

(d) inventories corresponds to (I) Stocks


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(these shall always be classified as non-current).

(p) provisions.

(q) non-controlling interest, presented within equityseparately from the equity attributable to the ownersof the parent.

(r) equity attributable to the owners of the parent.

The amount attributable to shares insubsidiary undertakings included in theconsolidation held by persons other than theundertakings included in the consolidationshall be shown in the consolidated balancesheet as a separate item with an appropriateheading.

7. art. 33

1. Where an undertaking included in aconsolidation exercises a significantinfluence over the operating and financialpolicy of an undertaking not included in theconsolidation (an associated undertaking) inwhich it holds a participating interest, asdefined in Article 17 of Directive78/660/EEC, that participating interest shallbe shown in the consolidated balance sheet

as a separate item with an appropriateheading. An undertaking shall be presumedto exercise a significant influence overanother undertaking where it has 20 % ormore of the shareholders' or members'voting rights in that undertaking. Article 2shall apply.

in the Council Directives

(e) property plant and equipmentcorresponds to (II) Tangible assets in theCouncil Directives

(f) investment property carried at fair

value through profit or loss. Investmentproperties are not included in the layoutschemes included in the CouncilDirectives and the line item may thus beincluded.

(g) intangible assets corresponds to (I)Intangible assets in the CouncilDirectives.

(h) biological assets carried at cost lessaccumulated depreciation and impairment

are not included in the layout schemesincluded in the Council Directives and theline item may thus be included.

Further specification of the item in theCouncil Directives: (3) Participatinginterests would be necessary to meet therequirement to present separateamounts for (j) investments in associatesand (k) investments in jointly controlledentities. It is assessed that such aspecification would be in line with article

4.1 (A more detailed subdivision of theitems shall be authorized provided thatthe layouts are complied with.)

(l) trade and other payables are specifiedin the Council Directives in (4) Tradecreditors and other accounts if necessary.

(m) financial liabilities (excluding amountsshown under (l) and (p) are furtherspecified in the council directives.


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In order to present (n) liabilities andassets for current tax, tax in (8) Othercreditors including tax and social securitymust be specified separately inaccordance with the Council Directives.Likewise (4) Other debtors (or other

relevant line item) must be furtherspecified.

(o) deferred tax liabilities and deferred taxassets (these shall always be classifiedas non-current). Deferred tax liabilitiesare included in a separate section of thebalance sheet named provisions. Aseparate line item must be included underassets if a deferred tax asset exists.

(p) provisions corresponds to (3) other

provisions in the Council Directives.

In addition to the requirements of article21 of the Seventh Council Directives, asubtotal should be included showingequity attributable to the owners of theparent.

4.3 An entity shall present additional line items, headingsand subtotals in the statement of financial positionwhen such presentation is relevant to anunderstanding of the entitys financial position.

4. art. 4

1. In the balance sheet and in the profit andloss account the items prescribed in Articles9, 10 and 23 to 26 must be shown

separately in the order indicated. A moredetailed subdivision of the items shall beauthorized provided that the layouts arecomplied with. New items may be addedprovided that their contents are not coveredby any of the items prescribed by thelayouts. Such subdivision or new items maybe required by the Member States.

Par 4.3 is assessed not to beincompatible with the Council Directivesas long as the requirements of theCouncil Directives are met when addingline items, headings and subtotals.

4.4 An entity shall present current and non-currentassets, and current and non-current liabilities, asseparate classifications in its statement of financial

4. art. 20.1

Provisions are intended to cover liabilities

The option/requirement to present theitems of the balance sheet based onliquidity when this provides information


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position in accordance with paragraphs 4.54.8,except when a presentation based on liquidityprovides information that is reliable and morerelevant. When that exception applies, all assets andliabilities shall be presented in order of approximateliquidity (ascending or descending).

the nature of which is clearly defined andwhich at the date of the balance sheet areeither likely to be incurred, or certain to beincurred but uncertain as to amount or as tothe date on which they will arise.

that is reliable and more relevant cannotbe used when an entity is preparingfinancial statements under the CouncilDirectives the option can be used byentities within the scope of CouncilDirective on the annual accounts andconsolidated accounts of banks and other

financial institutions. However, thesedirectives are not considered in thisanalysis. It has been assessed that adifference exists, as a presentation basedon liquidity could be said not to provideinformation that is more reliable forentities within the scope of the Fourth andSeventh Council Directives. Accordingly,entities within the scope of the CouncilDirectives cannot present a balancesheet based on liquidity.

4.5 An entity shall classify an asset as current when:

(a) it expects to realise the asset, or intends to sell orconsume it, in the entitys normal operating cycle;(b) it holds the asset primarily for the purpose oftrading;(c) it expects to realise the asset within twelve monthsafter the reporting date; or(d) the asset is cash or a cash equivalent, unless it isrestricted from being exchanged or used to settle aliability for at least twelve months after the reportingdate.

See above. The Council Directives do not include a

definition of current assets and liabilities.The Council Directives include a definitionof fixed assets.

It is noted that the Council Directivesdefine fixed assets, whereas IFRS forSMEs defines current assets on a generallevel. It has been considered whethersome items should be accounted for asproperty plant and equipment under IFRSfor SMEsbut as something else (forexample inventory) under the Council

Directives. However, as the CouncilDirectives would allow a presentationbased on the current non-currentdistinction (instead of the fixed/currentdistinction), it is assessed that non-current is not the same as fixed andaccordingly current is not what is notfixed. Instead, it is assessed thatdistinction between current and non-current can be based on IFRS for SMEs.

Accordingly it is assessed that par. 4.5 do


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not result in conflicts with the CouncilDirectives.

4.6 An entity shall classify all other assets as non-current.When the entitys normal operating cycle is not clearlyidentifiable, its duration is assumed to be twelvemonths.

See above. See above.

4.7 An entity shall classify a liability as current when:

(a) it expects to settle the liability in the entitys normaloperating cycle;(b) it holds the liability primarily for the purpose oftrading;(c) the liability is due to be settled within twelvemonths after the reporting date; or(d) the entity does not have an unconditional right todefer settlement of the liability for at least twelvemonths after reporting date.


4.8 An entity shall classify all other liabilities as non-current.


4.9 This IFRS does not prescribe the sequence or format

in which items are to be presented. Paragraph 4.2simply provides a list of items that are sufficientlydifferent in nature or function to warrant separatepresentation in the statement of financial position. Inaddition:(a) line items are included when the size, nature orfunction of an item or aggregation of similar items issuch that separate presentation is relevant to anunderstanding of the entitys financial position, and

(b) the descriptions used and the sequencing of itemsor aggregation of similar items may be amended

according to the nature of the entity and itstransactions, to provide information that is relevant toan understanding of the entitys financial position.

As mentioned in relation to par. 4.2,

entities will have to follow the sequenceand other layout rules prescribed in theCouncil Directives. However, par. 4.9 isnot assessed to create a conflict with theCouncil Directives.

4.10 The judgement on whether additional items arepresented separately is based on an assessment ofall of the following:

(a) the amounts, nature and liquidity of assets.

(b) the function of assets within the entity.

As mentioned in relation to par. 4.2,entities will have to follow the sequenceand other layout rules prescribed in theCouncil Directives. The CouncilDirectives would allow furtherspecifications of items. Accordingly, par.4.10 could be applied in this relation andthe paragraph would accordingly not


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(c) the amounts, nature and timing of liabilities. create a conflict with the CouncilDirectives.

4.11 An entity shall disclose, either in the statement offinancial position or in the notes, the followingsubclassifications of the line items presented:

(a) property, plant and equipment in classifications

appropriate to the entity.

(b) trade and other receivables showing separatelyamounts due from related parties, amounts due f romother parties, and receivables arising from accruedincome not yet billed.

(c) inventories, showing separately amounts ofinventories:(i) held for sale in the ordinary course of business.(ii) in the process of production for such sale.(iii) in the form of materials or supplies to be

consumed in the production process or in therendering of services.

(d) trade and other payables, showing separatelyamounts payable to trade suppliers, payable torelated parties, deferred income and accruals.

(e) provisions for employee benefits and otherprovisions.

(f) classes of equity, such as paid-in capital, sharepremium, retained earnings and items of income and

expense that, as required by this IFRS, arerecognised in other comprehensive income andpresented separately in equity.

If the requirements of par. 4.11 cannot bemet by following the provisions of theCouncil Directives in relation to the lay-out of the balance sheets, the disclosurescould be provided in the notes.


4.12 An entity with share capital shall disclose thefollowing, either in the statement of financial positionor in the notes:

(a) for each class of share capital:(i) the number of shares authorised.(ii) the number of shares issued and fully paid, andissued but not fully paid.

If the requirements of par. 4.12 cannot bemet by following the provisions of theCouncil Directives in relation to the lay-out of the balance sheets, the disclosurescould be provided in the notes.

It is generally assessed that requirementsincluded in IFRS for SMEs about note


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(iii) par value per share, or that the shares have nopar value.(iv) a reconciliation of the number of sharesoutstanding at the beginning and at the end of theperiod.(v) the rights, preferences and restrictions attaching tothat class including restrictions on the distribution of

dividends and the repayment of capital.(vi) shares in the entity held by the entity or by itssubsidiaries or associates.(vii) shares reserved for issue under options andcontracts for the sale of shares, including the termsand amounts.

(b) a description of each reserve within equity.

disclosures cannot create any conflictswith the Council Directives.

4.13 An entity without share capital, such as a partnershipor trust, shall disclose information equivalent to thatrequired by paragraph 4.12(a), showing changesduring the period in each category of equity, and the

rights, preferences and restrictions attaching to eachcategory of equity.

The Council Directives may not apply tosuch an entity. However, when this is thecase and the requirements of par. 4.13cannot be met by following the provisions

of the Council Directives in relation to thelay-out of the balance sheets, thedisclosures could be provided in thenotes.


4.14 If, at the reporting date, an entity has a binding saleagreement for a major disposal of assets, or a groupof assets and lia

Documents

EFRAG Compatibility Analysis