C. REPORTING THE FINANCIAL PERFORMANCE OF A RANGE OF ENTITIES - SME's Flashcards
Small or medium-sized entities often have the following characteristics:
Small or medium-sized entities often have the following characteristics:
Owner-managed with a small, close shareholder base
Relatively small number of employees and other key stakeholders
Less subject to external attention and scrutiny
Generate less revenue, control fewer assets and have smaller liabilities
Undertake less complex transactions
These characteristics mean there are some issues with trying to apply full IFRS to small and medium-sized entities such as:
These characteristics mean there are some issues with trying to apply full IFRS to small and medium-sized entities such as:
Relevance. Some IFRSs are not relevant to small and medium-sized company accounts (like IAS 33 EPS)
Cost to prepare. One of the underlying principles of financial reporting is that the cost and effort required to prepare financial statements should not exceed the benefits to users. Smaller entities are more likely to make use of this as a reason not to comply with full IFRS.
Materiality. IFRSs apply to material items. In the case of smaller entities, the amount that is material may be very small in monetary terms. However, the effect of not reporting that item may be material by nature in that it would mislead users of the financial statements.
IFRS for SMES scope
Scope. The standard is intended for small and medium-seized entities, defined as those that:
Do not have public accountability (ie do not issue debt or equity instruments in a public market or hold assets in a fiduciary capacity for others) and
Do publish general purpose financial statements for external users.
Transition to the IFRS for SMEs
Transition to the IFRS for SMEs. Transition to the IFRS for SMEs from previous GAAP is made retrospectively as a prior period adjustment at the beginning of the earliest comparative period presented. The standard allows all of the exemptions in IFRS 1 First time adoption of IFRSs. It also contains ‘impracticability’ exemptions for comparative information and the restatement of the opening statement of financial position.
Key omissions from the IFRS for SMEs.
Key omissions from the IFRS for SMEs. Some standards are omitted completely, mainly due to standards not being relevant or cost of reporting exceeding perceived benefits:
Earnings per share – IAS 33 to be applied for listed companies, so not relevant for SMEs
Interim reporting – IAS 34 applies when entity prepares interim reports, which is unlikely for SMEs
Segmental reporting – IFRS 8 applies to listed companies, so not relevant for SMEs and unlikely to have such diverse operations in any case
Assets held for sale – IFRS 5 the cost of reporting in this way is expected to exceed the benefits for SMEs.
Different accounting treatments under the IFRS for SMEs.
Investment property
Investment property – Fair value through profit or loss must be used (if fair value can be measured without undue cost or effort); otherwise the cost model is applied.
o Full IFRS allows a choice between fair value and cost model.
Different accounting treatments under the IFRS for SMEs.
Intangible assets
Intangible assets - The revaluation model is not permitted. Intangible assets must be held at cost less accumulated amortisation.
o Full IFRS permits revaluation where active market
Different accounting treatments under the IFRS for SMEs.
Government grants
Government grants – If no specified future performance conditions, recognize as income when the grant is receivable. Otherwise, recognize as income when performance conditions met
o Full IFRS for income recognized in profit or loss over the period, if for asset as deferred income or deducted from CA
Different accounting treatments under the IFRS for SMEs.
Borrowing costs
Borrowing costs – expensed when incurred
o Capitalized when relate to qualifying asset
Different accounting treatments under the IFRS for SMEs.
Development costs
Development costs – all internally generated research and development expenditure expensed
o Full IFRS capitalized if meets IAS 38 criteria
Different accounting treatments under the IFRS for SMEs.
Pension actuarial gains or losses
Pension actuarial gains or losses – Actuarial gains or losses can be recognized immediately in profit or loss or other comprehensive income. Simplified calculation of defined benefit obligation permitted if not able to use projected unit credit method.
o Full IFRS remeasurement in OCI only and projected unit credit method must be used.
Different accounting treatments under the IFRS for SMEs.
Financial instruments
Financial instruments – all classified at either cost or amortised cost or fair value through profit or loss. Basic debt instruments at amortised cost. Investments in shares (excluding convertible preference shares and puttable shares either fair value through profit ot loss or cost less impairment (where fair value cannot be measured reliably). Other financial instruments fair value through profit or loss
SMEs simplification. Presentation and disclosure.
Presentation and disclosure.
Combined statement of profit or loss and other comprehensive income and statement of changes in equity permitted (where no OCI nor equity movements other than profit or loss, dividends or prior period adjustments (not permitted in full IFRS).
Segment disclosures and earnings per share not required (required per full IFRS); other disclosures reduced by 90% versus full IFRSs.
SMEs simplification. Revenue
Revenue.
Goods: when significant risks and rewards of ownership transferred.
Services: stage of completion (Full IFRS when performance obligation satisfied).
SMEs simplification. Intangible assets.
Intangible assets.
All intangible (including goodwill) are amortised (only amortised if finite useful life in full IFRS).
Useful life cannot exceed 10 years if cannot be established reliably (no specific limit in full IFRS).
An impairment test is required only if there is an indication of impairment (annual impairment for goodwill and indefinite in full IFRS).
