By Samuel Bediako&

Mo Zhang

IFRS for Small and Medium Entities(SME)

SME back ground & Definition Developed in 2009 IFRS made the Guide to Small and Medium sized Companies

in response to the international demand for regulations for emerging and developed economies.

SMEs are defined as entities that do not have public accountability (securities not publicly traded, not financial institutions), and

publishes general purpose financial statements for external users.

Who Can Use IFRS For SMES1. Any entity that publishes general purpose financial statements

for external users and does not have public accountability.2. Subsidiary of a listed company can use it if the subsidiary itself

is not listed.

IFRS For Small and Medium Entities(SME)Objectives Of Financial Statements

The objective of financial statements of SMEs applying IFRS is to provide information about the financial position, performance and cash flows of the entity that is useful for economic decision-making by users who are not in a position to demand reports tailored to meet their particular information needs.

Financial statements also show the results of the stewardship of management — the accountability of management for the resources entrusted to them.

IFRS For Small and Medium Entities(SME)Statement of Financial Position

The financial position of an entity is the relationship of its assets, liabilities and equity as of a specific date.

(a) an asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity;

(b) a liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits; and

(c) equity is the residual interest in the assets of the entity after deducting all its liabilities.

IFRS For Small and Medium Entities(SME)Key Features

Complete stand alone feature not linked to full IFRS

Much smaller in regulations only 230 pages compared to full IFRS 2,500 pages and GAAP 17,000 pages.

Simplification from Full IFRS

IFRS For SMEs Simplification from Full IFRS

Simpler options where Full IFRS require accounting policy options.

Measurement and Recognitions are simplified

Reduced discloser

Simplified drafting

Elimination of irrelevant reporting standard that does not apply to SME in full IFRS.

Elimination of reporting standards for SMEs from full IFRS Segment reporting

Interim reporting

Earnings per share

Assets held for sale

Options taken out of full IFRS to fit SMEs

Revaluation model for Property, Plant Equipment Intangible Assets

Proportional consolidation for investments for 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 Financial instruments options

IFRS For SMEsFinancial Instruments

Accounting policy choice for all financial instruments to

Financial instruments sections of IFRS for SMEsIAS 39 plus disclosure requirements of IFRS for

SMEsFinancial instruments covered in two

sectionSection 11 – Basic financial instruments (criteria:

returns, prepayment, loss of principal or interest by holder)

Section 12 – Other financial instrumentsTwo classification categories

Amortized cost using effective interest rateFair value through profit or loss

Recognition and Measurement Simplifications

Financial Instruments two categories; Amortized Cost and Fair Value through profit and lose

Goodwill (and other intangible assets) amortized over useful life (or over 10 years if useful life cannot be reliably estimated)

Expenses all R&D and borrowing costs Cost model for investments in associates

and Joint Ventures allowed. Goodwill impairment – indicator approach

meaning not necessarily annually

Recognition and Measurement Simplifications

Pension accountingDefined benefit – No corridor or deferrals; Not required to use

the projected unit credit method if impracticableAll past service cost must be recognized immediately in profit

or lossAll actuarial must be recognized immediately either through

profit or loss or Other Comprehensive Income Exchange differences recognized initially in Other

Comprehensive Income need not to be reclassified to profit or losses on disposal of related investments

Shares based payments Director’s judgment can be used in estimating value if market prices are not available

Policy Options in IFRS for SMEsOptional transition exemption from full

retrospective application for first-time adoptionPresent 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

Policy Options in IFRS for SMEsApply Fair Value or cost through profit and

loss model for investments in associates and Joint Ventures

Accounting for investments in separate financial statements at cost or fair value through profit and loss

Recognizing actual profit and loss in the period in which they occur in the profit and loss statement or comprehensive income

IFRS For SMEs Accounting Policy Hierarchy

Level 1. The guidance in IFRS for SMEs dealing with similar or related issues

Level 2. The definitions, recognition criteria, and measurement concepts, 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

IFRS For SMEs Financial Statement PresentationA statement of financial position

A statement of comprehensive income

A statement of changes in equity

A statement of cash flows (using either the direct or indirect method)

Notes, comprising a summary of significant accounting policies and other explanatory information

IFRS For SMEs Disclosure Simplifications

Roughly 300 disclosures for SME compared to 3000 disclosures for full IFRS

Some disclosures in full IFRS are more relevant to investment decisions in public capital markets

Some disclosures omitted relate to disallowed complex recognition and measurement options in full IFRS

Transition to IFRS for SMEsAdditional 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

Pros for adopting IFRS for SMEs

Improved access to capitalImproved comparability Reduced time and effort to prepare financialsFocused on the needs of users of SME

financial statementsAttract foreign investorsLess disclosure requirementsUpdated only once every 3 yearsHarmonization of internal and external

reporting

Cons for adopting IFRS for SMEs

Increase in workload and cost for first-time adoption

Personnel trained in IFRS Impact on information systemDifference in interpretations from more

principles based standards Impact on debt convents, taxes and

customer supplier contracts in transition