IFRS For SMEs
IFRS For SMEs
IFRS For SMEs
Features of an SME
(i) Require relatively small capital investment to start.
(ii) Offer relatively high labour to capital ratio.
(iii) Improve forward and backward linkages between conomically, socially and
geographically diverse sectors.
(iv) Breeding ground for entrepreneurial talent.
(v) Act as ancillaries to large industries.
(vi) Serve as training ground for local skills and entrepreneurs.
(vii)Highly flexible operations.
(viii) Positioned to absorb business shocks and adjust to business cycle.
(ix)Usually sole proprietorships, partnerships entrepreneurs
(x) Labour intensive production processes
(xi)Centralised management
(xii)
The IFRS for Small and Medium-sized Entities is organized by topic, with each topic
presented in a separate section. All of the paragraphs in the standard have equal
authority.
The standard is appropriate for general purpose financial statements and other
financial reporting of all profit-oriented entities. General purpose financial
statements are directed towards the common information needs of a wide range of
users, for example, shareholders, creditors, employees and the public at large.
The IASB intends to issue a comprehensively reviewed standard after two year's
implementation, to address issues identified and also, if appropriate, recent
changes to full IFRSs. Thereafter, an omnibus proposal of amendments will be
issued, if necessary, once every three years.
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o Income: Inflows of resources that increase equity, other than owner
investments
o Expenses: Outflows of resources that decrease equity, other than owner
withdrawals
Financial position: the relationship of assets and liabilities at a specific date
Performance: the relationship of income and expenses during a reporting period
Total comprehensive income: arithmetic difference between income and expenses
Profit or loss: arithmetic difference between income and expenses other than those
items of income or expense that are classified as 'other comprehensive income'.
There are only 3 items of other comprehensive income (OCI) in the IFRS for SMEs:
o Some foreign exchange gains and losses relating to a net investment in a
foreign operation (see Section 30)
o Some changes in fair values of hedging instruments – in a hedge of variable
interest rate risk of a recognised financial instrument, foreign exchange risk
or commodity price risk in a firm commitment or highly probable forecast
transaction, or a net investment in a foreign operation (see Section 12) (Note
that hedge accounting is optional)
o Some actuarial gains and losses (see Section 28) (Note that reporting actuarial
gains and losses in OCI is optional)
Basic recognition concept – An item that meets the definition of an asset, liability,
income, or expense is recognised in the financial statements if:
o it is probable that future benefits associated with the item will flow to or
from the entity, and
o the item has a cost or value that can be measured reliably
Basic measurement concepts
o Historical cost and fair value are described
o Basic financial assets and liabilities are generally measured at amortised
cost
o Other financial assets and liabilities are generally measured at fair value
through profit or loss
o Non-financial assets are generally measured using a cost-based measure
o Non-financial liabilities are generally measured at settlement amount
This Section includes pervasive recognition and measurement principles
Source of guidance if a specific issue is not addressed in the IFRS for SMEs
Concepts of profit or loss and total comprehensive income
Offsetting of assets and liabilities or of income and expenses is prohibited unless
expressly required or permitted
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Statement of Comprehensive Income and Income Statement
Presents information about an entity's changes in cash and cash equivalents for a
period
o Cash equivalents are short-term, highly liquid investments (expected to be
converted to cash in three months) held to meet short-term cash needs
rather than for investment or other purposes
Cash flows are classified as operating, investing, and financing cash flows
Option to use the indirect method or the direct method to present operating cash
flows
Interest paid and interest and dividends received may be operating, investing, or
financing
Dividends paid may be operating or investing
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Income tax cash flows are operating unless specifically identified with investing
or financing activities
Separate disclosure is required of some non-cash investing and financing
transactions (for example, acquisition of assets by issue of debt)
Reconciliation of components of cash
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o If the subsidiary becomes an associate, follow
o If the subsidiary becomes a jointly controlled entity,
o If investment does not qualify as an associate or jointly controlled entity, treat
it as a financial asset
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o A comprehensive example of split accounting is included
Minority interest changes that do not affect control do not result in a gain or loss
being recognised in profit and loss. They are equity transactions between the entity
and its owners.
Dividends paid in the form of distribution of assets other than cash are recognised
when the entity has an obligation to distribute the non-cash assets. The dividend
liability is measured at the fair value of the assets to be distributed.
Revenue
Revenue results from the sale of goods, services being rendered, construction
contracts income by the contractor and the use by others of your assets
Some types of revenue are excluded from this section and dealt with elsewhere:
o leases
o dividends from equity accounted entities
o changes in fair value of financial instruments
o initial recognition and subsequent re-measurement of biological assets and
initial recognition of agricultural produce
Principle for measurement of revenue is the fair value of the consideration received
or receivable, taking into account any possible trade discounts or rebates, including
volume rebates and prompt settlement discounts
If payment is deferred beyond normal payment terms, there is a financing
component to the transaction. In that case, revenue is measured at the present value
of all future receipts. The difference is recognised as interest revenue.
Recognition – sale of goods: An entity shall recognise revenue from the sale of goods
when all the following conditions are satisfied:
(a) The entity has transferred to the buyer the significant risks and rewards of ownership of
the goods.
(b) The entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold.
(c) The amount of revenue can be measured reliably.
(d) It is probable that the economic benefits associated with the transaction will flow to the
entity.
(e) The costs incurred or to be incurred in respect of the transaction can be measured reliably.
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Recognition – royalties: Royalties shall be recognized on an accrual basis in
accordance with the substance of the relevant agreement.
Recognition – dividends: Dividends shall be recognized when the shareholder's
right to receive payment is established.
Appendix of examples of revenue recognition under the principles
o Award credits or other customer loyalty plan awards need to be accounted
for separately. The fair value of such awards reduces the amount of revenue
initially recognized and, instead, is recognized when awards are redeemed.
First-time adoption is the first set of financial statements in which the entity makes
an explicit and unreserved statement of compliance with the IFRS for SMEs: '...in
conformity with the International Financial Reporting Standard for Small and
Medium-sized Entities'.
Can be switching from:
o National GAAP
o Full IFRSs
o Or never published General Purpose Financial Statements in the past
Date of transition is beginning of earliest period presented
Select accounting policies based on IFRS for SMEs at end of reporting period of first-
time adoption
o Many accounting policy decisions depend on circumstances – not 'free choice'
o But some are pure 'free choice'
Prepare current year and one prior year's financial statements using the IFRS for
SMEs
But there are many exceptions from restating specific items
o Some exceptions are optional
o Some exceptions are mandatory
And a general exemption for impracticability
All of the special exemptions in IFRS 1 are included in the IFRS for SMEs