SMEs and Micro - Entities

Applying standards and disclosures

Recent changes IFRS for SMEs Exposure Draft

Questions
Do you use IFRS for SMEs
Is their a benefit using IFRS for Smes
Is there a need for a Micro Entity Standard

Why is an IFRS for SMEs needed

Global trend to follow full IFRS or alternatively to merge
standards with IFRS
110 Jurisdictions mandate IFRS for Listed Entities
Burdensome more interested in short term cash flows
and liquidity and solvency
In some countries the implementation of full IFRS is substandard
Development of own SMEs standards have serious
limitations not understood by the users nor lenders and
capital providers

IFRS for SMEs versus full IFRS

230 pages less then 10% of full IFRS
Topics not relevant are omitted e.g. eps, interim financial
reporting and segment reporting
Limitation in terms of choices in accounting policy for example
no revaluation of p.p.e or intangible assets, cost depreciation
model for investment property
Simplification of recognising and measuring assets, liabilities,
income and expenses for example amortisation of goodwill,
expense all borrowing and R&D
Significantly fewer disclosures 300 vs 3000
Clear translatable language
Limitation to once every three years
Undue cost and effort in certain circumstances

Scope of IFRS FOR SMEs

The IFRS for SMEs is aimed at entities that:
Do not have debt or equity instruments traded in a public
market;
Do not hold assets in a fiduciary capacity for a broad
group of outsiders, and
Prepare general purpose financial statements.
The first two bullets relate to entities that have public
accountability.

Micro-Entities
IASB states that this is appropriate for all entities without
public accountability preparing general purpose financial
statements irrespective of size
Includes micro sized entities with less then 10 employees
and owner managed businesses
If entity prepares AFS for income tax authorities this is
not deemed general purpose AFS
Guide covers transactions and circumstances not
applicable to a Micro - Entity but the IASB does not
believe this imposes a burden on such entities.

Micro-Entities
Structure of standard makes it easy for Micro Entities
to identify aspects that are relevant
IASB acknowledges that extensively simplified and brief
set of accounting requirements for micro-entities might
result in low costs to micro-entities in preparing the AFS
IASB concluded that simplified would not meet the aim of
general purpose AFS and might not improve the microentities ability to obtain capital
Therefore the IASB has not pursued the project

Basic Differences

IFRS

IFRS for SMES

Financial
Statements

A statement of changes in equity is required, presenting a

reconciliation of equity items between the beginning and the end of
the period.

Only changes to equity during the period are as a result

of profit or loss, payment of dividends, correction of
prior-period errors or changes in accounting policy, a
combined statement of income and retained earnings can
be presented of both a statement of comprehensive
income and a statement of changes in equity.

Business
Combinations

Transaction costs are excluded under IFRS 3 (revised).

Transaction costs are included in the acquisition costs.

Contingent consideration is recognised regardless of the probability of

payment.

Contingent considerations are included as part of the

acquisition cost if it is probable that the amount will be
paid and its fair value can be measured reliably.

Investments in associates are accounted for using the equity method.

An entity may account for its investments in associates or

jointly controlled entities using one of the following:

Investments in
Associates and
Joint ventures

The cost and fair value model not permitted except in separate
financial statements.
To account for jointly controlled entities, either the proportionate
consolidation method or the equity methods are allowed.

Expense
recognition

Research costs are expensed.

Development costs are capitalised and amortised when specific
criteria are met.
Borrowing costs are capitalised if certain criteria are met.

The cost model (cost less accumulated

impairment losses)

The equity method

The fair value through profit or loss model.

All research and development costs and all borrowing

costs are recognised as an expense.

Basic Differences
IFRS
Financial instruments
derivatives and hedging

IAS 39, Financial Instruments: Recognition and measurement,

distinguishes four measurement categories of financial instruments:

There are two sections dealing with financial

instruments:

financial assets at fair value through profit or loss

held to maturity investments

A section for simple payables and receivables

and other basic financial instruments

loans and receivables, and

A section for other, more complex financial

instruments.

available-for-sale financial assets.

NON FINANCIAL ASSETS and

GOODWILL

For tangible and intangible assets, there is an accounting policy

choice between the cost model and the revaluation model.

IAS 38, Intangible Assets

Goodwill and other intangibles with indefinite lives are reviewed for
impairment and not amortised.
The useful life of an intangible asset is either finite or indefinite.
Indefinite are not amortised and an annual impairment test is
required.

IAS 40, Investment Property

IFRS 5, Non-current assets held
for sale and discontinued
operations

IFRS for SMEs

Most of the basic financial instruments are measured

at amortised cost; the complex instruments are
generally measured at fair value through profit or
loss.
Cost model is the only permitted model.

All intangible assets, including goodwill, are assumed

to have finite lives and are amortised.
No distinction between assets with finite or infinite
lives.
Amortisation approach therefore applies to all
intangible assets.
Intangibles are tested for impairment only when there
is an indication.
Entities have an accounting policy choice between the fair value and Investment property is carried at fair value if this fair
cost method.
value measured without undue cost or effort.
There is no separate standard dealing with this. The
IFRS 5 requires non-current assets to be classified as held for sale
where the carrying amount is recovered principally through a sale
decision to sell an asset is considered an impairment
indicator.
transaction rather than through continuing use.

Basic Differences
Income taxes

IFRS

IFRS for SMEs

A deferred tax asset is only recognised to the

extent that it is probable that there will be
sufficient future taxable profit to enable recovery of
the deferred tax asset.

A valuation allowance is recognised so that the net

carrying amount of the deferred tax asset equals
the highest amount that is more likely than not to
be recovered. The net carrying amount of deferred
tax asset is likely to be the same between full IFRS
and IFRS for SMEs.

No deferred tax is recognised upon the initial

recognition of an asset.
There is no specific guidance on uncertain tax
positions. In practice, management will record the
liability measured as either a single best estimate
or a weighted average probability of the possible
outcomes, if the likelihood is greater than 50%.

No such exemption.

Management recognises the effect of the possible

outcomes of a review by the tax authorities. This is
measured using the probability-weighted average
amount of all the possible outcomes. There is no
probable recognition threshold.

Transition to the IFRS for SMEs

Transition to the IFRS for SMEs
Transitioning to the IFRS for SMEs entails the first time adoption of the
accounting framework and the discontinuance of the previous GAAP
applied by the entity.
What guidance is available for the transition?
Transition to IFRS for SMEs is the beginning of the earliest period for
which the entity prepares full comparative information in accordance
with this standard in its first financial statements that conform

The IFRS for SMEs sets out the transition principles to be applied in
Section 35 when an entity prepares its first set of financial statements in
which an unreserved and explicit statement of compliance is made.

What entities must do

Recognise all assets and liabilities required to be recognised

by IFRS for SMEs
Derecognise all assets and liabilities not permitted by IFRS for
SMEs
Reclassify any items that should be classified differently under
IFRS for SMEs
Align accounting policies which differ from those under IFRS
for SMEs and make a cumulative adjustment to equity.

Retrospective Restatement
Is there relief from retrospective restatement?

Entities shall not restate financial statements for:

derecognition of financial assets and liabilities
hedge accounting
accounting estimates
discontinued operations and the
measurement of non-controlling interests
Assets classified as held for sale or discontinued operations

Moreover, entities nay elect to apply several available

exemptions which relate to, inner alia, business combinations,
share-based payments and cumulative translation differences.

Transition
What should transitioning entities disclose?
Entities are required to disclose how the transition has affected the entitys
reported financial position. To achieve this, the entity shall disclose:
A description of the nature of each change in accounting policy;
A reconciliation between its equity determined under the previous framework
and equity determined under IFRS for SMEs for both

The date of transitioning to IFRS for SMEs and

The end of the latest period presented in accordance with the entitys previous
framework.

A reconciliation of profit or loss determined in accordance with its previous

framework for the latest period presented to the IFRS for SMEs based profit for
the same period.

Questions
Q: Will it cost less to apply the IFRS for SMEs?
This will depend largely on the complexity of the operations of the client and whether the client
previously needed extensive disclosure in terms of standards such as IFRS 7 (Financial
Instruments: Disclosure) and IAS 19 (Employee Benefits). Many sections and disclosures have
been simplified, which may lead to audit efficiencies and lower the cost of the compliance with
the financial reporting framework of the entity.
Q: Is there a downside compared with applying full IFRS?
Applying the IFRS for SMEs must be carefully considered by subsidiaries, associates and joint
ventures of investors that report in terms of full IFRS, due to the fact that accounting policies
must be aligned when the investor reports its consolidated/combined results.

Amendments to IFS for SMEs

IASB published an amendment to IFRS for SMEs
57 proposed amendments
Most of amendments clarify existing requirements or
supporting guidance
Most significant is Section 29 Deferred Taxation
Applicable one year after being issued
Early adoption permitted
Deadline is 3 March 2014

Exposure Draft
Section 1 Small Medium Sized Entities

If entity holds assets in fiduciary they are not

publicly accountable
Medium automatically
Sized Entities

Section 1 Small and

If parent doescapacity
not have public
accountability
If an entity holds assets in a fiduciary
they
are it
may present separate AFS in accordance with
not automatically publicly accountable.
IFRS for SMEs
If parent does not have public accountability it may
present
separate
AFS
in accordance
with
SMEs
Section
2 Concepts
and Pervasive
Principles
Guide on undue
cost IFRS
and effortfor
therefore
if

excessive incremental cost or excessive

additional effort the SME exempt from this
regard
Section 2 Concepts and Pervasive
Principles
Investments in Equity instruments at fair
value therefore if
Guidance on undue cost and effort
Recognition of intangible assets
excessive incremental cost or excessive
additional
effort
Offsetting of income
tax assets and
liabilities

the SME would be exempt from specific requirement

Exposure Draft
Section 18 & 19 Intangible Assets and
Goodwill

Unable to make reliable estimate of

useful life of intangible asset not to
Assets
&years
Goodwill
exceed 10

Section 18 & 19 Intangible

Unable to make a reliable estimate of useful of intangible
asset useful life not to exceed 10 years
Section 19 Business Combinations and
Goodwill

Replacement of wording
Clarifies the employee benefit
arrangements and deferred tax when
allocating the cost of a business
combination
Clarity on the calculation of no controlling
interest

Exposure Draft
Section 29 Deferred Taxation

Alignment of the main principles of

Section 29 with IAS 12 Income Taxes for
the recognition and measurement of
deferred tax, modified to be consistent
with the other requirements in IFRS for
SMEs
Addition of undue cost and effort when
applying offsetting of tax assets and tax
liabilities

Exposure Draft
Alignment with full IFRS
Section 5 and Section 6 incorporates the main change
under IAS 1 clarification of statement in changes of
equity and Presentation of items of other income
Section 17 Classification of servicing equipment
Section 26 aligns the scope and definitions with IFRS 2
Section 33 aligns the definition of relate party
Section 35 incorporates various amendments to IFRS 1