Slide 25.1 Alan Melville, International Financial Reporting, 3rd Edition, © Pearson Education Limited 2011 Chapter 25 - SMALL AND MEDIUM-SIZED ENTITIES

Slide 25.1

Alan Melville, International Financial Reporting, 3rd Edition, © Pearson Education Limited 2011

Chapter 25 - SMALL AND MEDIUM-SIZED

ENTITIES

ACTG 6580

(IFRS for SMEs)

Slide 25.2


Introduction to IFRS for SMEs

• Full IFRS has over 3,000 pages of rules and requires extensive disclosures. This is appropriate for large companies with complex finances but is not generally suitable for smaller companies.

• IFRS for SMEs has only 230 pages and is tailored for use by small and medium-sized entities.

• IFRS for SMEs was issued in July 2009 and is a single self-contained standard.

• Updated only once every three years.

• Over 95% of companies worldwide are SMEs.

Slide 25.3


Small and medium-sized entities

a) do not have public accountability, andb) publish general purpose financial statements

for external users".

The IFRS for SMEs defines small and medium-sized entities as "entities that:

Over 70 countries to date have either adopted the IFRS for SMEs or are planning to do so.

In general, an entity has public accountability if its shares are publicly traded or are financial institutions. Therefore the IFRS for SMEs is intended mainly for use by unlisted companies.

Slide 25.4


Concepts and Pervasive Principles

• Similar to IASB Conceptual Framework• Objective of financial statements• Qualitative characteristics• Definitions of elements• Recognition criteria• Measurement (historical cost or fair value)• Accrual basis• Offsetting not allowed

Slide 25.5


Financial Statement Presentation

• Similar to IAS1 in full IFRS• Fair presentation required• Compliance with the IFRS for SMEs• Going concern basis• Frequency of reporting and comparative

information• Materiality and aggregation• Specification of a complete set of financial

statements for a small or medium-sized entity

Slide 25.6


Financial Statement Presentation

• A set of financial statements under IFRS for SMEs (similar to full IFRS) comprises:

1. A statement of financial position2. A statement of comprehensive income (or a separate

income statement and a statement of comprehensive income)

3. A statement of changes in equity4. 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

Slide 25.7


Complete Set of Financial StatementsA complete set of financial statements for a small or medium-sized entity is normally the same as in full IFRS, but:

• An entity with no "other comprehensive income" may present just an income statement rather than a statement of comprehensive income

• An entity with no "other comprehensive income" and no transactions with owners other than dividends may combine the income statement and the statement of changes in equity into a "statement of income and retained earnings".

In the statement of financial position, assets and liabilities may be presented in order of liquidity rather than being classified as current or non-current.

Slide 25.8


Main Differences Between the IFRS for SMEs and Full IFRS

Sections 11/12 Financial Instruments

• Simplified treatment of basic financial instruments

• Entities may instead apply the recognition and measurement requirements of IAS39

Section 14 Investments in Associates

• Investments in associates may be measured using either the cost model, the equity method or the fair value model

• The same measurement model should be used for all investments in associates

Slide 25.9



Section 15 Investments in Joint Ventures

Section 16 Investment Property

• Investments in jointly controlled entities may be measured using either the cost model, the equity method or the fair value model

• The same measurement model should be used for all investments in jointly controlled entities

• Proportionate consolidation is not allowed

• All investment property should normally be measured at fair value (cost model is permitted only if fair value cannot be measured reliably)

Slide 25.10



Section 17 Property, Plant and EquipmentSection 18 Intangible Assets Other Than Goodwill

• Revaluation model is not permitted

• residual values, useful lives and depreciation or amortization methods need not be reviewed unless there are indications of change

• No special treatment of assets held for sale (but an impairment review is triggered)

• Internally generated intangible assets must not be recognized

Slide 25.11



Section 19 Business Combinations and Goodwill

• Goodwill is amortized and is measured at cost less accumulated amortization and any accumulated impairment losses

• If the useful life of goodwill cannot be measured reliably, it is presumed to be ten years

Section 20 Leases

• Actuarial method is required for finance leases

• Straight line basis does not apply to operating leases where payments rise in line with expected inflation

Slide 25.12



Section 24 Government Grants

• Grants that do not impose performance conditions are recognized as revenue as soon as receivable

• Grants that impose performance conditions are recognized as revenue when these conditions are met

Section 25 Borrowing Costs

• Borrowing costs must be treated as an expense and cannot be capitalized

Slide 25.13



Section 27 Impairment of assets

• Goodwill is tested for impairment only if there are indications of impairment

• Impairment losses are generally recognized as an expense (no problem with revalued assets since revaluation model is not permitted)

Section 28 Employee Benefits

• Simpler accounting treatment of defined benefit pension schemes

• Actuarial profits and losses cannot be carried forward

Slide 25.14



Section 29 Income Tax

• Deferred tax assets should be recognized in full but a "valuation allowance" should then be deducted to ensure carrying amount does not exceed recoverable amount (if necessary)

Section 33 Related Party Disclosures

• Key management personnel compensation may be disclosed in total, rather than being analyzed into categories

Slide 25.15


Topics Not Covered in the IFRS for SMEs

• Segment reporting

• Earnings per share

• Interim financial reporting

None of these topics is thought to be relevant to small or medium-sized entities.

Slide 25.16


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

Slide 25.17


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

Documents

Slide 25.1 Alan Melville, International Financial Reporting, 3rd Edition, © Pearson Education Limited 2011 Chapter 25 - SMALL AND MEDIUM-SIZED ENTITIES