CH 19. Small and Medium Entities Flashcards
Explain what is IFRS for small and medium-sized entities?
IFRS for small and medium-sized entities (the SMEs Standard) has been issued for use by entities that have no public accountability. This means that its debt or equity instruments are not publicly traded.
The SMEs Standard reduces the burden of producing information that is not likely to be of interest to current or potential investors in a small or medium-sized entity.
Define a small or medium entity?
Definition
A small or medium entity may be defined or characterised as follows:
- Usually owner-managed by a relatively small number of individuals such as a family group, rather than having an extensive ownership base
- They are usually smaller entities in financial terms such as revenues generated and assets and liabilities under the control of the entity
- usually have a relatively small number of employees
- They usually undertake less complex or difficult transactions which are normally the focus of a financial reporting standard.
What are the problems associated with differential reporting standards for SMEs?
- *The problem of differential reporting**
- *There are problems associated with having a set of reporting standards for**
Small and Medium entities:
- It can be difficult to define a small or medium entity.
- If a company ceases to qualify as a small or medium entity then there will be a cost and time burden in order to comply with full IFRS and IAS standards.
- There may be comparability problems if one company applies full IFRS and IAS Standards whilst another applies the SMEs Standard.
What is the effect of introducing the SMEs Standard?
Effect 1 - Standards only updated every 3 years vs full IFRS are updated regulerely
- The SMEs Standards updated approximately every three years.
- Vs
- In contrast, full IFRS and IAS Standards have to incur regular updates.
Effect 2 - IFRS requires 3,000 disclosure points vs approx IFRSSME Requires approx 300
- Accounting under full IFRS requires approximately 3,000 disclosure points
- Vs
- approximately 300 disclosure points for SME’s all contained within one document.
- Meaning this significantly reduces the time spent and costs incurred in producing financial statements.
Key omissions from the SMEs Standard
The subject matter of several reporting standards has been omitted from the SMEs Standard, as follows:
- Earnings per share (IAS 33)
- Interim reporting (IAS 34)
- Segmental reporting (IFRS 8)
- Assets held for sale (IFRS 5).
Omission of subject matter from the SMEs Standard is usually because the cost of preparing and reporting information exceeds the expected benefits for users
What Accounting choices are disallowed and the key simplifications under the SMEs Standard?
Under the SMEs Standard:
- Goodwill is always recognised as the difference between the cost of the business combination and the fair value of the net assets acquired. In other words, the fair value method for measuring the non-controlling interest is not available.
- Intangible assets must be accounted for at cost less accumulated amortisation and impairment. The revaluation model is not permitted for intangible assets.
-
After initial recognition, investment property is remeasured to fair value atthe year-end with gains or losses recorded in profit or loss.
- The cost model can only be used if fair value cannot be measured reliably or without undue cost or effort.
Key simplifications to be aware of are as follows:
- Borrowing costs are always expensed to profit or loss.
-
Associates and Jointly controlled entities can be accounted for using the equity method in the consolidated financial statements, they can also be held at cost (if there is no published price quotation) or fair value.
- Therefore, simpler alternatives to the equity method are available.
- Depreciation and amortisation estimates are not reviewed annually. Changes to these estimates are only required if there is an indication that the asset’s pattern of use has changed.
- R&D is always expensed to profit or loss.
- If an entity is unable to make a reliable estimate of the useful life of an intangible asset, then the useful life is assumed to be ten years.
- Goodwill is amortised over its useful life. If useful life cannot be reliably established, management should use the best estimate that does not exceed ten years.
- Disposal of an overseas subsidiary, cumulative exchange differences that have been recognised in other comprehensive income is not recycled to profit or loss
There are numerous simplifications with regards to financial instruments. These include:
- – Measuring most debt instruments at amortised cost.
-
– Recognising most investments in shares at fair value, changes in fair value are recognised in profit or loss.
- If fair value cannot be measured reliably then the shares are held at cost less impairment.
What are the advantages and disadvantages of the SMEs Standard?
Advantages
- There will be time and cost savings in preparing reports due to simplifications and omissions, particularly with regards to disclosure. (Quicker and Cheaper to prepare F.S)
- The SMEs Standard is worded in an accessible way. (Reports are easier to read)
- All standards are located within one document so it is, therefore, easier and quicker to find the information required. (Easier to use and apply standards)
Disadvantages
- There are issues of comparability when comparing one company that uses full IFRS and IAS Standards and another which uses the SMEs Standard.
- The SMEs Standard is arguably still too complex for many small companies. In particular, the requirements with regards to leases and deferred tax could be simplified.
What are the differences between IFRS and IFRS for SME regarding:
- Investment Property
- Intangible Assets
- Government Grants
- Borrowing Costs
- Development Costs
What are the differences between IFRS and IFRS for SME regarding:
- Pension actuarial gains and losses
- Financial Instruments
