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IFRS for SMEs
Based on Paul Pacter’s (IASB) PresentationOctober 3, 2014
IFRS Adoption Around the World
One of the most significant regulatory changes in accounting history
World-wide, over 120 nations require IFRS-based financial reporting for listed companies (including all EU countries, Canada, Switzerland, Australia and Hong Kong)
Unlisted companies require IFRS in over 100 jurisdictions
IFRS is set to become the global accounting language
IFRS for SMEs - Background
Issued on July 9, 2009, in response to strong international demand from both developed and emerging economies for ‘little IFRS’, that is much simpler than full IFRS
Around 80 jurisdictions already permit or require its use or plan to do so in the next 3 years
Over 99% of private entities around the world are expected to be eligible to use the standard
IFRS for SMEs - Background
The 52 largest stock exchanges in the world together have only 45,000 listed companies
Europe: 25 million private sector enterprises
USA: 20 million private sector enterprises
UK alone: 4.7 million private sector enterprises
99.6% have fewer than 100 employees
Scope and Definition
SMEs are defined as entities that: Do not have public accountability (securities
not publicly traded, not financial institutions), but
Must produce general purpose financial statements that present fairly financial position, operating results, and cash flows for external capital providers & others
Subsidiary of a listed company can use it if the subsidiary itself is not listed
Key Features Tailored for SMEs and needs of users of
their financial statements
Completely stand-alone standards – not linked to full IFRS
The only ‘fallback’ option to full IFRS is the option to use IAS 39 instead of the financial instruments sections of IFRS for SMEs
Much smaller: about 230 pages versus 2,500 in full IFRS and 17,000 in U.S. GAAP
Organized by topics (35 Sections)
Updated only once every 3 years
Simplifications from full IFRS
Simplifications from Full IFRS
Some topics included in full IFRS omitted if irrelevant to SMEs
Where IFRS have accounting policy options, only simpler option included
Recognition and measurement simplifications
Reduced disclosures
Simplified drafting
Examples of Omitted Topics
Segment reporting
Interim reporting
Earnings per share
Assets held for sale
Examples of Disallowed Options
The revaluation model for PP&E and intangible assets
Financial instruments options (e.g., ‘available for sale’, ‘held to maturity’, ‘fair value option’)
Proportionate consolidation for investments in jointly controlled entities
Free choice of treatment on investment property
Various options for the accounting for government grants
Capitalization of borrowing costs
Capitalization of development costs
Deferral of actuarial gains and losses of defined benefit plans
Recognition and Measurement Simplifications
Financial instruments (two classifications: amortized cost; fair value through profit or loss)
Goodwill (and other intangible assets) amortized over useful life (or over 10 years if useful life cannot be reliably estimated)
Goodwill impairment – indicator approach meaning not necessarily annually
Cost model for investments in associates and JVs allowed
Expense all R&D
Expense all borrowing costs
Recognition and Measurement Simplifications
Pension accounting: Defined benefit – No corridor or deferrals; Not required to use
the projected unit credit method if impracticable
All past service cost must be recognized immediately in profit or loss
All actuarial gains and losses must be recognized immediately either in profit or loss or other comprehensive income (OCI)
Exchange differences recognized initially in OCI are not reclassified to profit or loss on disposal of the related investment (the need for tracking them eliminated)
Share-based payment – Director’s judgment can be used in estimating value if market prices are not available
Financial Instruments Accounting policy choice for all financial
instruments to use either: Financial instruments sections of IFRS for SMEs; or
IAS 39 plus disclosure requirements of IFRS for SMEs
Financial instruments covered in two sections: Section 11 – Basic financial instruments (criteria:
returns, prepayment, loss of principal or interest by holder)
Section 12 – Other financial instruments
Two classification categories: Amortized cost using effective interest rate
Fair value through profit or loss
Other Policy Options in IFRS for SMEs
Optional transition exemptions from the full retrospective application on first-time adoption
Present single statement of comprehensive income, or separate income statement and statement of comprehensive income; Present expenses by nature or by function
Combined statement of income and retained earnings allowed in some circumstances
Present operating cash flows using the direct or indirect method; Classify interest and dividends as operating, investing, or financing
Other Policy Options in IFRS for SMEs
Apply the cost, or FV through P&L model, or the equity method for investments in associates and joint ventures
Account for investments in separate financial statements at cost or at FV through P&L
Recognize actuarial gains and losses in the period in which they occur in profit or loss or in other comprehensive income
Accounting Policy Hierarchy
Level 1. The guidance in IFRS for SMEs on similar or related issues
Level 2. The definitions, recognition criteria, and measurement concepts in Section 2, Concepts and Pervasive Principles, of the Standard
Level 3. The requirements and guidance in full IFRS dealing with similar or related issues; no reference to considering the pronouncements of other standard-setters
Financial Statement Presentation
A set of financial statements under IFRS for SMEs (similar to full IFRS) comprises:
1. A statement of financial position
2. A statement of comprehensive income (or a separate income statement and a statement of comprehensive income)
3. A statement of changes in equity
4. A statement of cash flows (using either the direct or indirect method)
5. Notes, comprising a summary of significant accounting policies and other explanatory information
Disclosure Simplifications
Reduced disclosure requirements: Full IFRS – more than 3,000 items in the
disclosure checklist
IFRS for SMEs – roughly 300 disclosures
Some disclosures omitted relate to disallowed complex recognition and measurement options in full IFRS
Some disclosures in full IFRS are more relevant to investment decisions in public capital markets
Transition to IFRS for SMEs
Additional simplifications are provided in relation to comparative information on first-time adoption of IFRS for SMEs
An impracticability exception from having one year comparative information and with respect to restating the opening statement of financial position is included
Adopting IFRS for SMEs - Pros
Improved comparability
Improved access to capital
Focused on the needs of users of SME financial statements
Reduced time and effort to prepare financials
Less disclosure requirements
Updated only once every 3 years
Attract foreign investors
Harmonization of internal and external reporting
Adopting IFRS for SMEs - Cons
Increased cost and workload on first-time adoption
Need for personnel trained in IFRS
Impact on information systems
Different interpretations due to more principles-based standards
Impact on taxes, debt covenants and other customer/supplier contracts in transition
Comprehensive Review
Progress to date on the update every 3 years:
Requests for information issued in 2012
SME Implementation Group met in 2013
Issued recommendations for comment in early 2014
SMEIG reviewing responses and will make recommendations to the IASB late 2014/early 2015
2016 Effective target date for revisions
Proposed Amendments
Will not have a material impact for most SMEs
Useful life of goodwill must not exceed 10 yrs.
Income tax – align with IAS 12
Additional guidance on some standards including classifying financial instruments as equity or liability
New exemptions where measurements involve “undue cost or effort”