IFRS FOR SME’S

S E C TI O N 1 - S M AL L AN D M E DI UM S I Z E E N TE R PR IS E S
 SCOPE OF SECTION 1

• Describes the characteristics of SMEs and which

type of entities may apply IFRS for SMEs
 OBJECTIVE OF CPD FOR SECTION 1

• Understand what is IFRS for SMEs:

• Why was it developed
• The purpose of the framework
• Who can apply IFRS for SMEs- IFRS for SMEs requirements
and Co. act requirements
 1.1: INTRODUCTION TO IFRS FOR
SMES

• In July 2009 the International Accounting Standards

Board (IASB) published the International Financial
Reporting Standard (IFRS) for Small and Medium-
sized Entities (SMEs)
• Why? SMEs are estimated to represent well over 95
per cent of all companies in both developed and
developing countries
• Difference? The standard was developed to reduce
the complexities and burden associated with
applying IFRS whilst fulfilling the needs of the users of
SME Financial Statements.(type of business and
users)
1.2: A GLOBAL FINANCIAL REPORTING
STANDARD FOR SMES

• Mainly for comparability

• Comparability in terms the manner in which events,
transactions and conditions are accounted for by different
entities for the different users
• Users:
• Lenders to multinationals
• Vendors/suppliers who want to assess financial health of
foreign customers/suppliers
• Rating agencies use info to determine ratings
• Outside investors of an entity who are involved in day to
day
• Venture capital entities that provide lending
 1.3: NEEDS OF USERS OF FINANCIAL
STATEMENTS OF SMES

• Owner managed therefore much fewer users of financial

statements and NO PUBLIC ACCOUNTABILITY
• Main users as discussed above:
• Lenders to assess liquidity
• Vendors to make credit and pricing decisions.
• Customers to decide whether to do business
• Credit rating agencies to rate SMEs
• Non managerial shareholders to assess management of the
enterprise
• Short term cash flow
• ACTION POINT- PAST EVALUATION INSTEAD OF FORWARD
LOOKINGH INFO (NON-INVESTMENT)
 1.4: COST BENEFIT ANALYSIS OF
INFORMATION PRESENTED

• Full IFRS= costly

• Information reported is dependent on the needs of
users
• If SMEs users would benefit from full IFRS , a cost vs
benefit analysis should be performed to assess the
suitability.
1.5: ENTITIES THAT MAY USE IFRS FOR
SMES

• (a) Do not have public accountability, and [Refer:

paragraph 1.3]
AND
• (b) Publish general purpose financial statements for
external users.
WHAT IS PUBLIC ACCOUNTABILITY?

• (a) its debt or equity instruments are traded in a public

market or it is in the process of issuing such instruments
for trading in a public market (a domestic or foreign
stock exchange or an over-the counter market,
including local and regional markets) regardless of the
size of the entity, or

• (b) it holds assets in a fiduciary capacity for a broad

group of outsiders as one of its primary businesses. Most
banks, credit unions, insurance companies, securities
brokers/dealers, mutual funds and investment banks
would meet this second criterion (s.1.3).
 WHAT ARE GENERAL PURPOSE
FINANCIAL STATEMENTS?
• General purpose financial statements are those
financial statements that are aimed to provide
general financial information to a wide variety of
users who are not in a position to demand reports
tailored to meet their specific needs.
• The users include shareholders, creditors and
employees
 IN SUMMARY

The entity DOES NOT The entity DOES NOT If all these requirments
The entity DOES not have debt or hold assets in a are met, IFRS for SMEs
publishe general equity traded in a fiduciary capacity for can be applied as S
purpose financial public market AND a broad group of 1.2 is met
statemenets neither is it in the outsiders as one of its
process of doing so primary business √
 EXAMPLE 1

Can the following entity apply IFRS for SMEs?

• Fashion Retailers is an unlisted company primarily

involved in the clothing retail industry. Fashion
Retailers intends expanding its operations and issues
listed bonds on the Bond Exchange of South Africa
(BESA).
 SOLUTION

• Applying the definition of public accountability

above, as Fashion Retailers has issued bonds on the
Bond Exchange of South Africa, the bonds are
traded in a public market. This means fashion
retailers does have public accountability. Fashion
Retailers would therefore be required to provide
more extensive financial information to its users and
would be required to apply full IFRS and not IFRS for
SMEs.
 1.6: APPLYING IFRS FOR SMES IN
SOUTH AFRICA- CO ACT
REQUIREMENTS
• Types of companies
• Profit (Financial gain)
• Non-profit (non financial gain, public benefit, 3 or more persons)
• State-owned companies
• state-owned enterprise or municipality , SOC Ltd
• Private companies
• (MOI) prohibits the offering of securities to the public and transferring equity
• Min 1 member, “propriety limited = (Pty) Ltd
• Personal liability companies
• Meets requirments of Private co
• MOI states members are liable in personal capacity, Incorporated Inc
• Public Companies-Equity can be raised from a public offering and
shares can be transferred
• 1 or more persons
• Listed- JSE requirement to use full IFRS
• Unlisted- Can use IFRS for SMEs
 CO ACT AND IFRS

• IFRS and IFRS for SME’s are permitted

• All entities apart from public companies, state-
owned companies and certain non-profit
companies are allowed to apply the IFRS for SMEs.
• See table below for co. act requirements
 CO. ACT
Company Financial Reporting Standard
State owned companies Full IFRS, but in the case of any conflict with any
requirements in terms of the Public Finance
Management Act, or other applicable national
legislation, the latter prevails

Public companies listed on an exchange Full IFRS, but in the case of any conflict with the
applicable listing requirements of the relevant
exchange, the latter prevails

Public companies not listed on an exchange Full IFRS or IFRS for SMEs¹
Profit companies, other than state owned or public Full IFRS or IFRS for SMEs¹
companies, whose public interest score for the
particular financial year is at least 350.

Profit companies, other than state owned or public Full IFRS or IFRS for SMEs¹ or SA GAAP²
companies:
(a) whose public interest score for the particular
financial year is at least 100 but less than 350; or
(b) whose public interest score for the particular
financial year is less than
100, and whose statements are independently
compiled.

Profit companies, other than state owned or public There is no prescribed Financial Reporting Standard
companies, whose public interest score for the
particular financial year is less than 100, and whose
statements are internally compiled.
 CO. ACT

Non-profit companies that are required IFRS, but in the case of any conflict with
in terms of regulation 28 (2)(b) to have any requirements in terms of the Public
their annual financial statements audited Finance Management Act, or other
applicable national legislation, the latter
prevails
Non-profit companies, other than those Full IFRS or IFRS for SMEs¹
contemplated in the first row above,
whose public interest score for the
particular financial year is at least 350.
Non-profit companies, other than those Full IFRS or IFRS for SMEs¹ or SA GAAP²
contemplated in the first row above––
(a) whose public interest score for the
particular financial year is at least 100,
but less than 350; or
(b) whose public interest score for the
particular financial year is less than 100,
and whose financial statements are
independently compiled.
Non-profit companies, other than those There is no prescribed Financial
contemplated in the first row above, Reporting Standard – it is determine by
whose public interest score for the the company
particular financial year is less than 100,
and whose financial statements are
internally compiled.
 PI SCORES

• What is a PI score? A score used to determine what

financial reporting framework can be used
• The Public Interest Score is calculated as:
• 1 point for each employee or the average number of
employees throughout the year.
• 1 point per million rand of third party liability. This is the money
owed in terms of loans, debentures, and other financing.
• 1 point for each million rand of turnover during the financial
year. If the turnover is half a million rand, score ½ point.
• 1 point for every individual who, at the end of the year, is
known to have a direct or indirect beneficial interest in the
company. This will include shareholders, beneficiaries of a trust
where a trust is a shareholder and other stakeholders.
 1.9: SIGNIFICANT ESTIMATES AND
OTHER JUDGEMENTS

• Judgement in establishing if an entity has public

accountability or not should be disclosed under
significant estimates and judgements.
 CONCEPTS AND
PERVASIVE PRINCIPLES
SECTION 2
 S 2.1: SCOPE

• Objective of financial statements of small and

medium-sized entities (SMEs)
• qualities that make the information in the financial
statements of SMEs useful (Qualitative
characteristics)
• concepts and basic principles underlying the
financial statements of SMEs
 OBJECTIVES FROM CPD

• To understand the objective of financial statements

of small and medium-sized entities (SMEs) .
• To understand and apply the qualitative
characteristics of IFRS for SMEs.
• Fundamental and
• Enhancing
• To understand concepts and basic principles
underlying the financial statements of SMEs
• To be able to recognise and apply the definitions
and recognition criteria of the elements of the
financial statement .
GENERAL INFORMATION: WHAT IS A
CONCEPTUAL FRAMEWORK?
• The rationale being that a conceptual framework will form a
theoretical basis for determining how transactions should be
measured and communicated to the users in the financial
statements.
• A conceptual framework from an IASB perspective is a frame
of reference for the evaluation of existing IFRS and the
development of new standards
• A well-developed conceptual framework should assist the
IASB in developing a global set of financial reporting
standards which produces financial statements that are
relevant, reliable and comparable to users regardless of
where an entity is operating.
• In summary the conceptual framework addresses the
underlying information presented in general purpose financial
statements. The objective of this is to facilitate the consistent
and logical formulation of IFRS standards
 S 2.2: OBJECTIVE OF FINANCIAL
STATEMENTS OF SMES

• The objective of financial statements of a small or

medium-sized entity is to provide information about
the financial position, performance and cash flows
of the entity that is useful for economic decision-
making by a broad range of 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 it.
 INFORMATION NEEDS OF USERS

• Information that is useful to users includes:

• information about the resources of the entity
• claims against the entity
• how efficiently and effectively the entity’s management
and governing board have discharged their responsibilities
to use the entity’s resources as well as the results of the
stewardship of management
 2.3: QUALITATIVE CHARACTERISTICS OF
INFORMATION IN FINANCIAL STATEMENTS

• Qualitative characteristics are the attributes that

make the information provided in financial
statements useful to users.
• There are 2 types of qualitative characteristics
• Fundamental
• Enhancing
 2.3.1: FUNDAMENTAL QUALITATIVE
CHARACTERISTICS

• Primary characteristics
• Relevance
• Information is relevant if it is capable of affecting the economic
decisions of users
• Reliability
• Information is reliable when it is free from material error and bias
and represents that which it either purports to represent or could
reasonably be expected to represent.
 2.3.1: ENHANCING QUALITATIVE
CHARACTERISTICS

• Understandability (s2.4)
• Classifying, characterising and presenting information clearly and concisely makes it understandable.
• F/Ss to be prepared on the assumption that users have a reasonable knowledge of business and economics.
• Materiality(s.2.6)
• Information is material if its omission will lead to the users of the financial statements making a different decision
• Substance over form (s2.8)
• Transactions and other events and conditions should be accounted for and presented in accordance with their
substance and not merely their legal form
• Prudence (s2.9)
• Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates
required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are
not understated
• Completeness (s2.10)
• To be reliable, the information in financial statements must be complete within the bounds of materiality and cost. An
omission can cause information to be false or misleading and thus unreliable and deficient in terms of its relevance.

• Comparability (s2.11)
• entity through time to identify trends – Change in accounting policy needs to be disclosed
• compare the financial statements of different entities
• Timeliness (s2.12)
• Timeliness involves providing the information within the decision time frame. Balance-relevance and reliability
• Balance between cost and benefit (s.2.14&s2.13)
• The benefits derived from information should exceed the cost of providing it.
EXAMPLE 1-SUBSTABCE OVER FORM

• In November 2015, the owners of a clothing business collectively decided to

purchase an industrial pressing iron to be used in the Hyde Park store. The
pressing iron was purchased from an overseas supplier the entity a flexible
repayment option. The supplier agreement allowed the entity either to pay for
the pressing iron upfront at a price of R7 500, where ownership would be
passed immediately. The second option was the entity could settle the
supplier on 1 November 2016 at a price of R 12 000, where ownership would
be passed only when payment has been made. The entity chose the second
payment option and used the pressing iron in the store since 1 November
2015.
• The owners insist that the pressing iron should be recognized as an asset at an
amount of R 12 000 on 1 November 2016 only.

Assuming the iron meets the asset definition, discuss the appropriateness of recognizing the asset at
R12 000 and not at R7 500. Your answer should make reference to the enhancing qualitative
characteristic “substance over form” in terms of section 2- concepts and pervasive principles.
 SOLUTION

• Since the supplier allowed Royal Addicted to pay

12 months later, the difference between the R 12
000 and the R 7 500 in substance reflects interest
expense. The difference should not be recorded as
part of the cost of the asset
 2.4: ELEMENTS OF THE FINANCIAL
STATEMENTS

• Financial statements portray the financial effects of

transactions, conditions and other events by
grouping them into broad classes according to their
economic characteristics. These broad classes are
called the ‘elements’ of financial statements.
 FINANCIAL POSITION

• The financial position of an entity is the relationship

of its assets, liabilities and equity as of a specific
date as presented in the statement of financial
position. These are defined as follows:

• The elements that are directly related to the

measurement of financial position, which is shown in
the statement of financial position
• Assets
• Liabilities
• Equity
 ASSET

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.

• Resource- An item of value that has the ability to

generate future economic benefits.
• **Control- The ability to obtain future economic benefits
and to restrict others from obtaining the future economic
benefits. This does not necessarily mean ownership.
• Future economic benefits- The future economic benefit
of an asset is its potential to contribute, directly or
indirectly, to the flow of cash and cash equivalents to
the entity
 LIABILITY
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.

• **Present obligation-
• Legal obligation- A legal obligation is legally enforceable as a consequence of a
binding contract or statutory requirement.
• Constructive obligation-
• A constructive obligation is an obligation that derives from an entity’s actions
when: by an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to other parties that
it will accept certain responsibilities;
• and as a result, the entity has created a valid expectation on the part of those
other parties that it will discharge those responsibilities.

• Outflow of future economic benefits-

• The settlement of a present obligation usually involves the payment of cash, the
transfer of other assets, the provision of services, the replacement of that obligation
with another obligation or the conversion of the obligation to equity.
 EQUITY

Equity is the residual interest in the assets of the entity

after deducting all its liabilities.
 FINANCIAL PERFORMANCE
• Performance is the relationship of the income and expenses of an entity during a
reporting period. Total comprehensive income and profit or loss is frequently used
as measures of performance or as the basis for other measures, such as return on
investment or earnings per share. Income and expenses are defined as follows:

• (a) Income is increases in economic benefits during the reporting period in the form
of inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity investors.
• Revenue
• Gains

• (b) Expenses are decreases in economic benefits during the reporting period in the
form of outflows or depletions of assets or incurrence of liabilities that result in
decreases in equity, other than those relating to distributions to equity investors.
• Expenses
• Losses
 RECOGNITION CRITERIA

• (a) It is probable that any future economic benefit

associated with the item will flow to or from the entity,
• Assessments of the probability attaching to the flow of future
economic benefits are made on the basis of the evidence
relating to conditions at the end of the reporting period
available when the financial statements are prepared.
• and

• (b) The item has a cost or value that can be measured

reliably.
• The second criterion for the recognition of an item is that it
possesses a cost or value that can be measured with reliability.
• A reliable estimate can also be made, this does not mean the
recognition criteria have no been met
 EXAMPLE 2- ASSET DEFINITION
Medical-Experts (Pty) Ltd is a private healthcare provider which operates a state-of-the-art cardiology unit.
During the current year, the board of directors of the hospital has authorised the lease of a 3D printer to be
used in the cardiology unit for 5 years. 3D printing is the process of making a three dimensional object by
using a computer to control the process of depositing layers of material such that a 3D model of any shape
or form can be produced. The images below provide illustrations of various 3D printers used in the medical
profession.

Cardiologists in the unit intend to use the printer to print 3 dimensional models of patients’ hearts. These will
be used as the basis of preparing for heart surgeries. The software designed for the 3D printer allows the
cardiologist to design a unique on-screen model of the patient’s heart by using medical-image data such
as X-rays and various other scans. The on-screen model is then printed in the form of a 3 dimensional
model. The anatomy of each patient’s heart is unique and is thus captured in the 3D model that gets
printed.

Cardiologists will be able to plan the best procedure and the best surgery unique to that patient. The team
believes that preparing for surgeries by reference to a model of the patient’s actual heart will minimize
errors in judgment and reduce operating time. Upon discussions held with cardiology units in other
hospitals, cardiologists have indicated that many complex procedures that can now be practiced and
performed at a successful rate.

The board of directors authorised the lease of the printer for use in the cardiology unit, but because it can
create 3D replicas of other organs and systems, medical staff from other units will also have access to the
machine. It is therefore considered an important asset to the hospital both in terms of its nature and the
value attributable to it. The terms of the lease agreement do however restrict the use of the printer by any
other third parties. The useful life of the printer is considered to be 5 years.
 EXAMPLE 2-ASSET DEFINITION

• Discuss how the hospital should account for the 3D

printer in the accounting records from a
conceptual point of view.
 SOLUTION
In deciding upon the correct accounting treatment of the 3D printer, of consideration is whether it meets
the definition and recognition criteria of an asset.
According to section 2.15 (a) of IFRS for SME’s, an asset is defined as:
A resource - the 3D printer is a hospital resource given the number of benefits it has both within the
cardiology unit and other units in the hospital
Controlled by the entity - section 2.19 of IFRS for SME’s states that in determining the existence of an asset,
right of ownership is not essential . Thus even though the printer is held on a lease, if the entity controls the
benefits that are expected to flow to the entity, the printer can be regarded as an asset . The hospital can
restrict its use by third parties by applying the terms of the contract . Also the term of the lease of 5 years is
the same as its useful life. Thus the hospital will obtain the majority of the benefits of the machine . As such
the hospital can be seen to control the printer
As a result of past event of entering into the lease agreement.
From which future economic benefits are expected to flow to the entity - section 2.17 of IFRS for SME’s
states that the economic benefit of an asset if its potential to contribute directly or indirectly to the flow of
cash to the entity . Use of the machine will result in planning of the best procedure , minimization of errors,
and success of complex operations, all of which can be expected to contribute directly and indirectly to
an increase in the number of patients seeking medical care which will ultimately increase the cash flow to
the unit. The reduction in operating cost would also reduce costs.
Section 2.27 of IFRS for SME’s states that an entity can only recognise an item as an asset if it meets the
following recognition criteria:
It is probable that any future economic benefit associated with the item will flow to the entity- in this regard
there is no evidence to suggest that the printer will not be able to be used for its intended use. It is
reasonable to assume that is its probable that future economic benefits will flow to the entity as the printer
has been used successfully in other hospitals.
It has a cost that can be measured reliably- a fair value/reliable measure would be included in the terms of
the contract.
Based on the above, the 3D printer must be accounted for as an asset.
•
 2.8: MEASUREMENT OF ASSETS,
LIABILITIES, INCOME AND EXPENSES
(2.33 & 2.34)
• Measurement is the process of determining the
monetary amounts at which an entity measures
assets, liabilities, income and expenses in its
financial statements.
• Most common:
• historical cost
• the amount of cash or cash equivalents paid or the fair value of
the consideration given to acquire the asset at the time of its
acquisition
• fair value
• Fair value is the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable,
willing parties in an arm’s length transaction.
UNDERLYING PRINCIPLES
 PERVASIVE RECOGNITION AND
MEASUREMENT PRINCIPLES
• The requirements for recognising and measuring
assets, liabilities, income and expenses in this
Standard are based on pervasive principles that are
derived from full IFRS. In the absence of a
requirement in this Standard that applies specifically
to a transaction or other event or condition,
paragraph 10.4 provides guidance for making a
judgement and paragraph 10.5 establishes a
hierarchy for an entity to follow in deciding on the
appropriate accounting policy in the
circumstances.
HIERARCHY FOR AN ENTITY TO FOLLOW IN
DECIDING ON THE APPROPRIATE
ACCOUNTING POLICY
• Develop an accounting policy that is relevant and
reliable
• Look for guidance in standards dealing with similar
and related issues in IFRS for SMEs
• Use the definitions, recognition criteria and
measurement concepts for assets, liabilities,
income and expenses and the pervasive principles
in Section 2 Concepts and Pervasive Principles
• consider the requirements and guidance in full IFRS
dealing with similar and related issues.
 2.7: ACCRUAL BASIS (2.36)

• On the accrual basis, items are recognised as

assets, liabilities, equity, income or expenses when
they satisfy the definitions and recognition criteria
for those items.
• Only statement of cash flow is recognized on the
cash flow basis
 2.8.1: INITIAL MEASUREMENT (2.46)

• At initial recognition, an entity shall measure assets

and liabilities at historical cost unless this IFRS
requires initial measurement on another basis such
as fair value.
 2.9: OFFSETTING (S2.52)

• An entity shall not offset assets and liabilities, or income

and expenses, unless required or permitted by this IFRS.
• (a) Measuring assets net of valuation allowances—for
example, allowances for inventory obsolescence and
allowances for uncollectible receivables—is not
offsetting.

• (b) If an entity’s normal operating activities do not

include buying and selling non-current assets, including
investments and operating assets, then the entity reports
gains and losses on disposal of such assets by deducting
from the proceeds on disposal the carrying amount of
the asset and related selling expenses.