IFRS for small and
medium-sized entities
A comparison with IFRS — the basics
Contents
Introduction
Chapter one — Preparation and presentation of financial statements
Chapter two — Business combinations and group financial statements
Chapter three — Elements of the statement of financial position
Chapter four — Elements of the statement of comprehensive income
Chapter five — Transition to the IFRS for SMEs
Contents by section
3
4
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52
102
114
118
Introduction
Shortly after its inception in 2001, the International Accounting Standards Board (IASB) started
a project to consider reporting issues for small and medium-sized entities (SMEs). Following a
Discussion Paper in 2004, and an Exposure Draft in 2007, the IFRS for SMEs standard was issued
in July 2009.
Possibly the greatest shift in the final standard was that the IASB considered this to be a standalone standard that is separate from full IFRS (full IFRS is the collective term used for all other
standards and interpretations issued by the IASB). In this guide, we take a top-level review of the
IFRS for SMEs standard and provide an overview of the differences between IFRS for SMEs and full
IFRS. In addition, we provide a commentary of the possible effects that the adoption of IFRS for
SMEs may have on a reporting entity, if its previous generally accepted accounting principles
(GAAP) had been full IFRS.
It would be near impossible to produce a publication that compares two broad sets of accounting
frameworks and includes all differences that could arise in accounting for the myriad of business
transactions that could possibly occur. The existence of any differences — and their materiality to
an entity’s financial statements — depends on a variety of specific factors including: the nature of
the entity; the detailed transactions it enters into; its interpretation of accounting principles; its
industry practices; and its accounting policy elections where IFRS for SMEs and IFRS offer a
choice. Therefore, this guide focuses on the recognition and measurement differences expected to
arise most frequently and, where applicable, provides an overview of how and when those
differences are expected to arise. It does not include a full comparison of the different disclosure
requirements of IFRS for SMEs compared to full IFRS.
The sections in the standard have been grouped into similar topics, such as presentation issues,
statement of financial position, etc. All IFRS for SMEs sections are compared with the relevant full
IFRS standards and interpretations as contained in the 2010 bound version published by the IASB.
The impact assessment from comparing these two frameworks is based on current documentation
and interpretations. As the IFRS for SMEs standard is new to reporting entities, interpretations
and practices will develop over time. This may lead to the identification of additional impacts that
should be considered by entities adopting this standard.
As full IFRS has been compared with many other local GAAPs, it is hoped that this comparison
may also provide some insight into the implication of transitioning from a reporting entity’s local
GAAP (if not IFRS) to IFRS for SMEs. In planning a possible move to IFRS for SMEs, it is important
that entities monitor the IASB’s agenda in respect of the IFRS for SMEs standard, as well as the
development of international interpretation and practice.
Overall, this guide is intended to help preparers, users and auditors to gain a general
understanding of the similarities and key differences between IFRS and IFRS for SMEs. We hope
you find this guide a useful tool for that purpose.
April 2010
INTRODUCTION ª 3
Chapter one
Preparation and presentation of
financial statements
Executive summary
In this chapter, we compare the following sections of the IFRS for SMEs with the relevant standard
under full IFRS.
IFRS for SMEs
IFRS
Section 1 Small and Medium-sized Entities
IAS 1 Presentation of Financial Statements
Section 2 Concepts and Pervasive Principles
Framework for the Preparation and Presentation
of Financial Statements
Section 3 Financial Statement Presentation
IAS 1 Presentation of Financial Statements
Section 4 Statement of Financial Position
IAS 1 Presentation of Financial Statements
Section 5 Statement of Comprehensive Income
and Income Statement
IAS 1 Presentation of Financial Statements
Section 6 Statement of Changes in Equity and
Statement of Income and Retained Earnings
IAS 1 Presentation of Financial Statements
Section 7 Statement of Cash Flows
IAS 7 Statement of Cash Flows
Section 8 Notes to the Financial Statements
IAS 1 Presentation of Financial Statements
Section 10 Accounting Policies, Estimates and
Errors
IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors
Section 32 Events after the End of the Reporting
Period
IAS 10 Events after the Reporting Period
Section 33 Related Party Disclosures
IAS 24 Related Party Disclosures
Section 31 Hyperinflation
IAS 29 Financial Reporting in Hyperinflationary
Economies
The concepts and principles of IFRS for SMEs are based on the Framework for the Preparation and
Presentation of Financial Statements (the Framework) and therefore are very similar to full IFRS.
Likewise, the statements needed to comprise a complete set of financial statements under IFRS
for SMEs are also very similar to that required by IFRS. The most significant difference in the
presentation of financial statements for SMEs is that there are less disclosure requirements in
some instances. IFRS for SMEs also permits some of the statements required to be omitted or
merged with other statements under certain circumstances, which will reduce the disclosure
requirements for SMEs. The detailed requirements are set out in the following pages.
Preparation and presentation of financial statements ª CHAPTER ONE ª 5
Section 1: Small and medium-sized entities
IFRS for SMEs
Section 1 Small and Medium-sized Entities
IFRS
IAS 1 Presentation of Financial Statements
Impact assessment
An entity applies IAS 1 when preparing and presenting
general-purpose financial statements in accordance with IFRS.
The scope of IFRS for SMEs restricts its use only to entities that
meet the definition of an SME. The standard clearly states that
entities that do not meet the definition of an SME cannot claim
compliance with IFRS for SMEs, even if they are permitted or
required to do so in their jurisdiction.
Scope
An SME is defined as an entity that:
• Does not have public accountability
and
• Publishes general-purpose financial statements for external
users.
Public accountability is further defined as an entity that:
• Has debt or equity instruments traded in a public market (or it
is in the process of issuing such instruments)
or
• Holds assets in a fiduciary capacity for a broad group of
outsiders as one of its primary businesses.
6 ª CHAPTER ONE ª Preparation and presentation of financial statements
Furthermore, guidance is provided in IFRS for SMEs that
subsidiaries within a group may apply the standard irrespective
of whether the parent and group report under full IFRS. As this
potentially would require a dual reporting system for statutory
and group purposes, it may not be favoured by such entities.
Section 2: Concepts and pervasive principles
IFRS for SMEs
Section 2 Concepts and Pervasive Principles
IFRS
Framework for the Preparation and Presentation of
Financial Statements
IAS 1 Presentation of Financial Statements
Impact assessment
The objective of financial statements is to provide information
about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making
economic decisions.
There is no difference in the objectives of a set of financial
statements under both bases of accounting.
Objective of financial statements
The objective of the financial statements of an SME is to provide
information about the financial position, financial performance
and cash flows of the entity that is useful for economic decisionmaking 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 management’s
stewardship of the resources entrusted to it.
The basis for conclusions states that the users of financial
statements of an SME have different needs to non-SMEs. In
writing the standard, these differences were taken into account.
Financial statements also show the results of the stewardship of
management.
Qualitative characteristics
The qualitative characteristics of financial statements listed in the The Framework lists similar qualitative characteristics and
considerations as IFRS for SMEs. In addition, the Framework
standard are:
deals with the following issues:
• Understandability
•
•
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•
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•
•
•
Relevance
Materiality
Reliability
Substance over form
Prudence
Completeness
Comparability
Timeliness
Balance between benefit and cost.
• Faithful representation
• Balance between the qualitative characteristics.
The Framework considers each of the qualitative characteristics
in more detail than IFRS for SMEs. However, both IFRS for SMEs
and the Framework are consistent in their underlying messages.
No difference in interpretation would be expected in this regard.
Elements of financial statements
In the statement of financial position, the elements are defined
as assets, liabilities and equity.
In the statement of financial position, the elements are defined
as assets, liabilities and equity.
For the purposes of performance, the elements described are
income and expenses.
For the purposes of performance, the elements described are
income and expenses.
Furthermore, the Framework considers capital maintenance
adjustments.
IFRS for SMEs is an abbreviated version of the Framework. The
fact that capital maintenance adjustments are not dealt with in
the standard should not pose any problem as specific IFRS
standards do not deal with these concepts.
Overall, no differences would be expected in the interpretation of
the standards.
Preparation and presentation of financial statements ª CHAPTER ONE ª 7
Section 2: Concepts and pervasive principles continued
IFRS for SMEs
Section 2 Concepts and Pervasive Principles
IFRS
Framework for the Preparation and Presentation of
Financial Statements
IAS 1 Presentation of Financial Statements
Impact assessment
The underlying recognition criteria of the elements of financial
statements are that:
The underlying recognition criteria of the elements of financial
statements are that:
IFRS for SMEs follows the IFRS Framework in terms of recognition
issues, albeit an abbreviated version.
• It is probable that any future economic benefit associated
with the item will flow to or from the entity
• The item has a cost or value that can be measured reliably.
• It is probable that any future economic benefit associated with
the item will flow to or from the entity
• The item has a cost or value that can be measured reliably.
No differences would be expected in the application of the
sections of the standard compared to the full IFRS standard.
The standard further considers the probability of future economic
benefit and reliability of measurement. Thereafter, the
recognition of assets, liabilities, income, expense and total
comprehensive income/profit and loss is considered.
The Framework further considers the probability of future
economic benefit and reliability of measurement. Thereafter, the
recognition of assets, liabilities, income and expense is
considered.
Recognition of elements
Measurement
IFRS for SMEs specifies two common measurement bases, which
are amortised historical cost and fair value. In most cases the
standard specifies which measurement must be used in different
sections.
The Framework considers different measurement bases that may
be used in the determination of monetary amounts of elements
in the financial statements.
Although the approach taken by IFRS for SMEs is more
prescriptive than the Framework, in practice, reporters under full
IFRS usually restrict measurement to amortised cost and fair
value.
An entity prepares its financial statements (other than the cash
flow statement) using the accrual basis of accounting.
No differences are expected on the application of the accrual
basis.
IAS 1 contains specific disclosures in respect of offsetting of
assets and liabilities, and income and expense.
No differences would be expected between the two bases of
accounting.
Accrual basis
An entity must prepare its financial statements, except for cash
flow information, using the accrual basis of accounting.
Offsetting
The standard specifically disallows offsetting of assets and
liabilities, and income and expense, unless required or permitted
in the relevant section.
8 ª CHAPTER ONE ª Preparation and presentation of financial statements
Section 3: Financial statement presentation
IFRS for SMEs
Section 3 Financial Statements Presentation
IFRS
IAS 1 Presentation of Financial Statements
Impact assessment
In considering fair presentation, IFRS for SMEs requires faithful
representation and use of the definitions and recognition criteria
in section 2.
IAS 1 requires fair presentation in the financial statements of an
entity. Specific reference is made to the definitions and
recognition criteria of the Framework in achieving this goal.
Both bases of accounting have similar requirements when
considering fair presentation. No differences would be expected
in terms of fair presentation.
Furthermore, it concludes that application of the standard (with
additional disclosures where necessary) would result in fair
presentation if the entity does not have public accountability.
Compliance with the standards would result in fair presentation.
Furthermore, achieving fair presentation may involve the
selection of accounting policies using the hierarchy in IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors,
providing information in a manner consistent with the qualitative
characteristics and additional disclosures where necessary.
Fair presentation
Compliance
Entities that apply this standard must claim compliance with
IFRS for SMEs.
Entities that apply IFRS standards must state compliance
with IFRS.
In extremely rare circumstances when management concludes
that compliance with the standard would be so misleading that it
would conflict with the objective of financial statements of SMEs,
they must depart from the standard. Special disclosures are
required.
In extremely rare circumstances when management concludes
that compliance with a requirement in IFRS would be so
misleading that it would conflict with the objective of financial
statements set out in the Framework, the entity must depart
from the standard. Special disclosures are required.
This requirement is similar and will ultimately be the
differentiator between financial statements that are prepared
under full IFRS and IFRS for SMEs.
It is envisaged that these deviations would be extremely rare, as
has been the case under full IFRS.
No differences are expected in the application of these
requirements.
Going concern
Entities are required to make an assessment as to whether they
are a going concern. Any material uncertainties regarding going
concern need to be disclosed. If the financial statements are not
prepared on a going concern basis, this fact and the basis of
preparation needs to be disclosed.
Entities are required to make an assessment as to whether they
are a going concern. An entity must prepare its financial
statements on a going concern basis, unless the assessment
indicates otherwise. Any material uncertainties regarding going
concern assessment need to be disclosed. If the financial
statements are not prepared on a going concern basis, this fact
and the basis of preparation needs to be disclosed.
While the requirements appear to be similar, IFRS for SMEs
(unlike full IFRS) is not specific in its requirements that financial
statements should be prepared on the going concern basis.
However, in reading the two paragraphs, it would be concluded
that this was the intention.
No differences are expected in this regard.
Preparation and presentation of financial statements ª CHAPTER ONE ª 9
Section 3: Financial statement presentation continued
IFRS for SMEs
Section 3 Financial Statements Presentation
IFRS
IAS 1 Presentation of Financial Statements
Impact assessment
Financial statements should be prepared at least annually.
Certain disclosures are required if the reporting period is longer
or shorter than a year.
No differences are expected in this regard.
The presentation and classification of items in the financial
statements must be consistent from period to period. Changes
may only be made if there is a significant change to the entity’s
operations or the standard requires a change.
The presentation and classification of items in the financial
statements must be consistent from period to period. Changes
may only be made if there is a significant change to the entity’s
operations or the standard requires a change.
No differences are expected in this regard.
When presentation and classification is changed, comparatives
should be similarly adjusted, unless impracticable. Specific
disclosures are required for such changes.
When presentation and classification is changed, comparatives
should be similarly adjusted, unless impracticable. Specific
disclosures are required for such changes.
Frequency of reporting
Financial statements should be prepared at least annually.
Certain disclosures are required if the reporting period is longer
or shorter than a year.
Consistency of presentation
Comparative information
Comparative information is required (unless specifically stated
otherwise) for all amounts disclosed. This is also required for
narrative and descriptive information when it is relevant to an
understanding of the financial statements.
Comparative information is required (unless specifically stated
otherwise) for all amounts disclosed. This is also required for
narrative and descriptive information when it is relevant to an
understanding of the financial statements.
No differences are expected in this regard.
Each material class of similar items must be separately disclosed.
The same is applicable to dissimilar items unless immaterial.
No differences are expected in this regard.
Materiality and aggregation
Each material class of similar items must be separately disclosed.
The same is applicable to dissimilar items unless immaterial.
10 ª CHAPTER ONE ª Preparation and presentation of financial statements
Section 3: Financial statement presentation continued
IFRS for SMEs
Section 3 Financial Statements Presentation
IFRS
IAS 1 Presentation of Financial Statements
Impact assessment
A complete set of financial statements includes:
A complete set of financial statements includes:
• A statement of financial position
• A statement of comprehensive income (or a separate income
statement and statement of comprehensive income)
• A statement of changes in equity
• A statement of cash flows
• Notes comprising significant accounting policies and other
explanatory information.
•
•
•
•
•
Essentially a set of financial statements is constructed on the
same basis under full IFRS and IFRS for SMEs. The major
difference is the ‘third balance sheet’ which is a requirement of
IFRS when retrospective changes have been performed – but not
required by IFRS for SMEs.
Complete set of financial statements
If the only changes to equity during the periods for which
financial statements are presented arise from profit or loss,
payment of dividends, corrections of prior period errors and
changes in accounting policy, the entity may present a single
statement of income and retained earnings in place of the
statement of comprehensive income and statement of changes
in equity.
A statement of financial position
A statement of comprehensive income
A statement of changes in equity
A statement of cash flows
Notes comprising significant accounting policies and other
explanatory information
• A statement of financial position at the beginning of the
earliest comparative period when a retrospective change in
accounting policy, restatement or reclassification occurs.
IFRS for SMEs also provides aggregation or omission of financial
statements under certain circumstances. In this, the standard
allows for a new concept the statement of income and retained
income. Hence, there may be presentational differences in the
items that constitute a set of financial statements.
If there are no items of other comprehensive income in all
periods, only an income statement need be presented.
Identification of financial statements
Clear identification of each of the financial statements is
required, including the name of the entity, whether the financial
statements are for a single entity or a group of entities, the date
of the reporting period, the presentation currency and level of
rounding.
Clear identification of each of the financial statements is
required, including the name of the entity, whether the financial
statements are for a single entity or a group of entities, the date
of the reporting period, the presentation currency and level of
rounding.
Further requirements must be included in respect of domicile,
incorporation, registered address and a description of operations
and principle activities of the entity.
Further requirements must be included in respect of domicile,
incorporation, registered address and a description of operations
and principle activities of the entity, name of parent entities and
details in respect of limited life.
Other than the relief provided in terms of disclosures, there are
no expected differences in this section.
Presentation of additional information
If segment information, earnings per share or interim financial
statements are presented, an entity should disclose the basis of
preparation.
Any other reports or statements presented outside the financial
statements are outside the scope of IFRS (this would include
environmental reports, etc.).
IFRS for SMEs does not require disclosure of certain items
and therefore the financial statements will appear different in
this respect.
Preparation and presentation of financial statements ª CHAPTER ONE ª 11
Section 4: Statement of financial position
IFRS for SMEs
Section 4 Statement of Financial Position
IFRS
IAS 1 Presentation of Financial Statements
Impact assessment
IAS 1 provides a list of items that, as a minimum, should be
disclosed on the face of a statement of financial position.
Additional line items and subtotals are permitted.
Although differences exist between these two lists, it would be
expected that, based on materiality and aggregation, the line
items of a statement of financial position under IFRS for SMEs
and full IFRS would be similar.
The statement of financial position presents current and
non-current assets and liabilities separately unless presentation
in order of liquidity is more reliable and relevant. Whichever
method is employed, disclosure must be made of amounts to be
recovered/settled within 12 months and after 12 months of the
reporting period.
Other than the specific liquidity disclosures under full IFRS,
no differences exist in respect of the requirements under
IFRS for SMEs.
Information to be presented
IFRS for SMEs provides a list of items that, as a minimum, should
be disclosed on the face of a statement of financial position.
Additional line items and subtotals are permitted.
Current and non-current distinction
The statement of financial position presents current and
non-current assets and liabilities separately unless presentation
in order of liquidity is more reliable and relevant.
A definition of current assets and liabilities is provided.
A definition of current assets and liabilities is provided.
Additional information to be disclosed
Specific disclosures in respect of the following are required:
Specific disclosures in respect of the following are required:
• Sub-classification of certain asset and liabilities
• Specific share capital details (or changes in capital where
there are no shares)
• Binding sale agreements for a major disposal of assets
(or group thereof).
• Sub-classification of certain asset and liabilities
• Specific share capital details (or changes in capital where
there are no shares)
• Reclassification of puttable instruments.
There are certain differences between the requirements for
additional disclosures.
In terms of the sub-classification, IFRS for SMEs requires
disclosure related to trade and other payables. This must be
analysed into trade suppliers, amounts due to related parties,
deferred income and accruals.
IFRS for SMEs has no concept of puttable instruments. This is
discussed in further detail in Chapter three, on financial
instruments. It is possible that the entity could apply the financial
instruments requirements of puttable instruments contained in
full IFRS as a policy choice.
12 ª CHAPTER ONE ª Preparation and presentation of financial statements
Section 5: Statement of comprehensive income and income statement
IFRS for SMEs
Section 5 Statement of Comprehensive Income and
Income Statement
IFRS
IAS 1 Presentation of Financial Statements
Impact assessment
A single-statement of total comprehensive income or two
statements comprising an income statement and a statement of
comprehensive income can be presented. Additional line items/
sub-totals may be presented if relevant.
A single-statement of total comprehensive income or two
statements comprising an income statement and a statement of
comprehensive income can be presented. Additional line items/
sub-totals may be presented, if relevant.
Although set out differently, the requirements of both bases of
accounting should provide similar results for the presentation of
the statement of comprehensive income (or income statement,
if presented).
The standard also provides a list of minimum line items in the
statements.
IAS 1 prescribes the minimum line items that need to be
disclosed in a statement of comprehensive income.
Furthermore, disclosure is required in respect of the noncontrolling interest in profit and loss and total comprehensive
income.
In addition, non-controlling interests in profit and loss and total
comprehensive income need to be disclosed.
Presentation of total comprehensive income
No item may be described as extraordinary.
No item may be disclosed as extraordinary.
Other comprehensive income
There are three types of other comprehensive income:
• Some gains and losses on foreign operations
• Some actuarial gains and losses
• Some changes in fair values of hedging instruments.
Other comprehensive income comprises items of income and
expense that are not recognised in profit or loss (including
revaluation surpluses, actuarial gains and losses, gains and
losses on foreign operations, gains and losses on available
for sale financial assets and gains and gains or losses on cash
flow hedges).
There is a potential mismatch between IFRS for SMEs and full
IFRS in respect of other comprehensive income, as the definition
implies that there are only three items of other comprehensive
income permitted. However, there may be other types of other
comprehensive income that will need to be considered, for
example, the available for sale reserve if the SME elects to follow
full IFRS for financial instruments.
Disclosures are required in respect of the taxation effects and any
reclassification adjustments relating to components of other
Additional disclosures with respect to taxation effects have been
comprehensive income.
removed from IFRS for SMEs.
Analysis of expenses
An entity may present an analysis of expenses based on the
function or nature of the expenses. The decision is based on
which methodology provides greater reliability and relevance.
An entity may present an analysis of expenses based on the
function or nature of the expenses. The decision is based on
which methodology provides greater reliability and relevance.
No difference is expected in the application of these
requirements.
Material expenses, whether by nature or amount, must be
separately disclosed.
Preparation and presentation of financial statements ª CHAPTER ONE ª 13
Section 6: Statement of changes in equity and statement of income and retained earnings
IFRS for SMEs
Section 6 Statement of Changes in Equity and
Statement of Income and Retained Earnings
IFRS
IAS 1 Presentation of Financial Statements
Impact assessment
The statement of changes in equity must show:
The statement of changes in equity must show:
• Total comprehensive income analysed between owners of the
parent and non-controlling interests
• For each component of equity, the effects of retrospective
restatement, profit or loss, items of other comprehensive
income, and any investments by, and dividends and other
distributions to, owners
• Changes in ownership interests in subsidiaries that do not
result in a loss of control.
• Total comprehensive income analysed between owners of the
parent and non-controlling interests
• For each component of equity, the effects of retrospective
restatement, profit or loss, items of other comprehensive
income, and any investments by, and dividends and other
distributions to, owners
• Changes in ownership interests in subsidiaries that do not
result in a loss of control.
Dividends per share may be presented with this statement or in
the notes to the financial statements.
No differences are expected in the presentation of the statement
of changes in equity, other than for dividends per share.
Information to be presented
Statement of income and retained earnings
A statement of income and retained income may be presented in
place of the statement of comprehensive income and statement
of changes in equity, if the only changes to equity comprise profit
or loss, payment of dividends, corrections of prior year errors
and changes in accounting policy.
Not applicable.
If the statement of income and retained earnings is presented, it
must include:
• Retained earnings at the beginning of the period
• Dividends declared during the period
• Restatements of retained earnings for corrections or errors
and changes in accounting policy
• Retained earnings at the end of the period.
14 ª CHAPTER ONE ª Preparation and presentation of financial statements
This new statement was included in IFRS for SMEs in order to
assist entities where the only changes in equity are effectively
in the retained income component of equity. Where this is the
case, the standard combines the statement of comprehensive
income (including income statement) with the statement of
changes in equity.
Any SME that applies this will present a statement that is not
permitted under full IFRS.
Section 7: Statement of cash flows
IFRS for SMEs
Section 7 Statement of Cash Flows
IFRS
IAS 7 Statement of Cash Flows
Impact assessment
Cash equivalents
Cash equivalents are short-term, highly liquid investments held to Cash equivalents are held for meeting short-term cash
meet short-term cash commitments rather than for investment
commitments rather than for investment or other purposes. For
or other purposes.
an investment to qualify as a cash equivalent, it must be readily
convertible to a known amount of cash and be subject to an
Bank overdrafts may be included when repayable on demand and
insignificant risk of changes in value.
are an integral part of the entity’s cash management.
Overdrafts that are repayable on demand and form an integral
part of an entity’s cash management are included as a
component of cash and cash equivalents.
Generally the concepts of cash equivalents are similar, however
full IFRS includes a requirement that there is insignificant risk of
changes in value. Therefore, under IFRS for SMEs, there is the
possibility that certain marketable securities may meet the
definition of a cash equivalent, but would fail under full IFRS.
However, in practice differences are expected to be rare.
Statement of cash flows
Cash flows are presented as either operating, investing or
financing cash flows. A list of examples is provided for each of
these classifications.
Cash flows are presented as either operating, investing or
financing cash flows. A list of examples is provided for each of
these classifications.
No differences are expected in terms of classification of
cash flows.
Cash flows from operating activities may be presented using the
indirect or direct methods.
No differences are expected in the presentation of operating
cash flows.
Major classes of gross cash receipts and cash payments must be
disclosed, other than when a net basis of presentation is
permitted. The standard provides the situations where a net basis
of presentation would be acceptable.
IFRS for SMEs may be more onerous on preparers in respect of
cash flows from investing and financing cash flows. The benefit of
net presentation of certain cash flows under full IFRS has not
been extended to SMEs.
The aggregate cash flows on the acquisition or disposal of a
business must be disclosed separately.
Some relief is provided in respect of the disclosures relating to
the acquisition or disposal of subsidiaries and business units.
Cash flows from operating activities
Cash flows from operating activities may be presented using the
indirect or direct methods.
Cash flows from investing and financing activities
Major classes of gross cash receipts and cash payments must be
disclosed.
The aggregate cash flows on the acquisition or disposal of a
business must be disclosed separately.
Preparation and presentation of financial statements ª CHAPTER ONE ª 15
Section 7: Statement of cash flows continued
IFRS for SMEs
Section 7 Statement of Cash Flows
IFRS
IAS 7 Statement of Cash Flows
Foreign currency cash flows
Foreign currency cash flows
Cash flows from transactions in a foreign currency are translated
into the functional currency at the exchange rate at the date of
the cash flow.
Cash flows from transactions in a foreign currency are translated
into the functional currency at the exchange rate at the date of
the cash flow.
Cash flows in a foreign subsidiary are translated at rates between
the functional currency and foreign currency at the date of the
cash flow.
Cash flows in a foreign subsidiary are translated at rates between
the functional currency and foreign currency at the date of the
cash flow.
Interest and dividends
Interest and dividends
Cash flows from interest and dividends received or paid are
presented separately. These are classified consistently from
period to period as operating, investing or financing activities.
Cash flows from interest and dividends received or paid are
presented separately. These are classified consistently from
period to period as operating, investing or financing activities.
Income tax
Income tax
Cash flows arising from income tax are presented separately.
These are classified as cash flows from operating activities unless
they can be specifically identified with financing and investing
activities.
Cash flows arising from income tax are presented separately.
These are classified as cash flows from operating activities unless
they can be specifically identified with financing and investing
activities.
Impact assessment
No differences are expected in respect of these specific types of
cash flows.
Non-cash transactions
Any investing and financing transactions that do not require the
use of cash or cash equivalents are excluded from the statement
of cash flows.
Any investing and financing transactions that do not require the
use of cash or cash equivalents are excluded from the statement
of cash flows.
No differences are expected in respect of non-cash transactions.
An entity is required to disclose the components of cash and cash
equivalents and reconcile the amounts in the cash flow to the
equivalent items in the statement of financial position.
Other than the disclosure relief on the reconciliation, there
should be no difference between the disclosure of cash and cash
equivalents.
Any cash or cash equivalents not available to the group
(together with a commentary by management) must be
disclosed.
No differences are expected.
Components of cash and cash equivalent
An entity is required to disclose the components of cash and cash
equivalents and reconcile the amounts in the cash flow to the
equivalent items in the statement of financial position. No
reconciliation is required if cash and cash equivalents are
presented as a single similarly described item in the statement of
financial position.
Other disclosures
Any cash or cash equivalents not available to the group
(together with a commentary by management) must be
disclosed.
16 ª CHAPTER ONE ª Preparation and presentation of financial statements
Section 8: Notes to the financial statements
IFRS for SMEs
Section 8 Notes to the Financial Statements
IFRS
IAS 1 Presentation of Financial Statements
Impact assessment
The notes must:
The notes must:
• Present information about the basis of preparation of the
financial statements and the specific accounting policies used
• Disclose the information required by other sections of the
standard
• Provide any other relevant information necessary to
understand the financial statements.
• Present information about the basis of preparation of the
financial statements and the specific accounting policies used
• Disclose the information required by other IFRS
• Provide any other relevant information necessary to
understand the financial statements.
There is no difference in respect of the presentation of notes. The
primary benefit to SMEs will be that the quantum of disclosures
required by other sections of the standard will reduce the overall
amount of disclosable items.
Structure of the notes
Notes should be presented on a systematic basis.
Notes should be presented on a systematic basis.
Accounting policies
Disclosure in the summary of significant accounting policies
includes:
Disclosure in the summary of significant accounting policies
includes:
• The measurement basis (or bases) used in preparing the
financial statements
• The other accounting policies used that are relevant to an
understanding of the financial statements.
• The measurement basis (or bases) used in preparing the
financial statements
• The other accounting policies used that are relevant to an
understanding of the financial statements.
Disclosure is also required in respect of significant judgments and
major sources of estimation uncertainty.
Disclosure is also required in respect of significant judgments and
major sources of estimation uncertainty.
IFRS provides greater guidance in respect of these specific
disclosures. However, this should not give rise to any particular
differences in respect of these disclosures.
Preparation and presentation of financial statements ª CHAPTER ONE ª 17
Section 10: Selection and application of accounting policies
IFRS for SMEs
Section 10 Accounting Policies, Estimates and Errors
IFRS
IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors
Impact assessment
Where transactions, events and conditions are specifically dealt
with, the standard must be applied.
Where transactions, events and conditions are specifically dealt
with in IFRS, the relevant standard must be applied.
In the absence of a section that applies, judgment is used to
develop a policy that is relevant and reliable.
In the absence of a section that applies, judgment is used to
develop a policy that is relevant and reliable.
In making this judgment, reference is made to:
In making this judgment, reference is made to:
The selection of accounting policies that are not covered by
IFRS for SMEs follows a similar hierarchy to full IFRS. However,
the need to refer to full IFRS is not mandatory. The result may
be that an SME could select policies that are not be permitted
under full IFRS.
• Sections of IFRS for SMEs that deal with similar or related
issues
• The definitions, recognition and measurement concepts in
section 2.
• IFRSs that deal with similar or related issues
• The definitions, recognition and measurement concepts in the
Framework.
Selection of accounting policies
Management may consider full IFRS that deal with similar or
related issues.
Management may also consider recent pronouncements of other
standard setters (accounting literature or industry practice) that
use a similar conceptual framework.
Accounting policies must be applied consistently for similar
transactions, events or conditions, unless a section specifies
otherwise.
Accounting policies must be applied consistently for similar
transactions, events or conditions, unless IFRS specifies
otherwise.
This could create a significant difference between financial
statements prepared under IFRS for SMEs and full IFRS.
Changes in accounting policy
Changes in accounting policy may only be made:
Changes in accounting policy may only be made:
• When changes are made to the standard
or
• This results in more reliable and relevant information.
• When changes are made to an IFRS
or
• This results in more reliable and relevant information.
Changes in accounting policy must be applied:
Changes in accounting policy must be applied:
• As per the transitional provisions of changes to this standard
• As per the transitional provisions of changes to IAS 39, if an
entity has elected to follow it
• Where there are no transitional provisions on a retrospective
basis.
• As per the transitional provisions of changes to this standard
(or IAS 39)
or
• Where there are no transitional provisions on a retrospective
basis.
A retrospective application is applied to the earliest period
presented and each comparative period as if the policy had
always applied. Where it is impracticable to determine the period
specific effect, the entity must apply the change in policy to the
earliest period that it is practicable.
A retrospective application is applied to the earliest period
presented and each comparative period as if the policy had
always applied. Where it is impracticable to determine the period
specific effect, the entity must apply the change in policy to
the earliest period that it is practicable. When it is impracticable
to determine the cumulative effect, the entity will apply the
change in accounting policy prospectively from the date that it
is practicable.
18 ª CHAPTER ONE ª Preparation and presentation of financial statements
Applying a change in policy is generally similar under both
accounting bases.
Section 10: Selection and application of accounting policies continued
IFRS for SMEs
Section 10 Accounting Policies, Estimates and Errors
IFRS
IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors
Impact assessment
Changes in accounting estimates are applied prospectively by
including in profit or loss, the effect of the change in:
Changes in accounting estimates are applied prospectively by
including in profit or loss, the effect of the change in:
There is no difference in the application of a change in estimate
in the financial statements under full IFRS and IFRS for SMEs.
• The period of the change, if it is the only period affected
or
• The period of the change and subsequent periods, if the
change affects both.
• The period of the change, if it is the only period affected
or
• The period of the change and subsequent periods, if the
change affects both.
Changes in accounting estimates
Correction of prior period errors
Errors are corrected, to the extent practicable, on a retrospective
basis by restating the comparative amounts for prior periods
presented when the error occurred. If the error occurred before
the earliest period presented, opening balances of the affected
assets, liabilities and equity items are restated.
Errors are corrected, to the extent practicable, on a retrospective
basis by restating the comparative amounts for prior periods
presented when the error occurred. If the error occurred before
the earliest period presented, opening balances of the affected
assets, liabilities and equity items are restated.
Where it is impracticable to determine the period specific effects
of an error, the entity restates the opening balance of assets,
liabilities and equity for the earliest period that it is practicable.
Where it is impracticable to determine the period specific effects
of an error, the entity will restate the opening balance of assets,
liabilities and equity for the earliest period that it is practicable.
When it is impracticable to determine the cumulative effect, the
entity will restate the comparative information prospectively
from the date that it is practicable.
Full IFRS provides additional relief in respect of retrospective
application of errors when it is impracticable to establish the
cumulative effect of an error.
Other than this difference, errors should be accounted for on a
similar basis.
Preparation and presentation of financial statements ª CHAPTER ONE ª 19
Section 32: Events after the end of the reporting period
IFRS for SMEs
Section 32 Events after the End of the Reporting
Period
IFRS
IAS 10 Events after the Reporting Period
Impact assessment
Events after the end of the reporting period are classified as:
Events after the end of the reporting period are classified as:
• Adjusting events when they provide evidence of a condition
that existed at the end of the reporting period
• Non-adjusting events when they are indicative of conditions
that arose after the end of the reporting period.
• Adjusting events when they provide evidence of a condition
that existed at the end of the reporting period
• Non-adjusting events when they are indicative of conditions
that arose after the end of the reporting period.
No differences are expected in the classification of adjusting and
non-adjusting events after the end of the reporting period.
Events after the end of the reporting period would include all
events up to the date the financial statements are authorised
for issue.
Events after the end of the reporting period would include all
events up to the date the financial statements are authorised
for issue.
Definition
Recognition and measurement
An entity must adjust the amounts recognised in its financial
statements, including related disclosures, to reflect adjusting
events after the end of the reporting period.
An entity must adjust the amounts recognised in its financial
statements, including related disclosures, to reflect adjusting
events after the end of the reporting period.
An entity must not adjust the amounts recognised in its financial
statements to reflect non-adjusting events after the end of the
reporting period.
An entity must not adjust the amounts recognised in its financial
statements to reflect non-adjusting events after the end of the
reporting period.
No differences are expected in the treatment of adjusting and
non-adjusting events.
Dividends
If an entity declares dividends to holders of its equity instruments
after the end of the reporting period, the entity must not
recognise those dividends as a liability at the end of the reporting
period. However, the amount may be presented as a segregated
component of retained earnings.
If an entity declares dividends to holders of equity instruments
after the reporting period, the entity must not recognise those
dividends as a liability at the end of the reporting period.
20 ª CHAPTER ONE ª Preparation and presentation of financial statements
Although it has no effect on overall balances, IFRS for SMEs
allows for the segregation of retained earnings in respect of
dividends declared after the end of the reporting period (albeit
that they are not recognised). Unless properly disclosed, this
may create confusion between recognised and non-recognised
dividends in the statement of changes in equity (or statement of
changes in income and retained income).
Section 33: Related party disclosures
IFRS for SMEs
Section 33 Related Party Disclosures
IFRS
IAS 24 Related Party Disclosures
Impact assessment
The standard must be applied in identifying:
No differences are expected in scope.
Scope
This section requires entities to include in its financial statements
the disclosures necessary to draw attention to the possibility that
its financial position and profit or loss have been affected by the
existence of related parties and by transactions and outstanding
balances with such parties.
a)
b)
c)
d)
Related party relationships and transactions
Outstanding balances between an entity and its related parties
Circumstances in which disclosure of these items is required
Disclosures to be made about those items.
Defnition
A related party is a person or entity that is related to the entity
preparing its financial statements.
a) A person or close member of that person’s family is related if
that person:
• Is a member of the key management personnel
• Has control over the entity
or
• Has joint control or significant influence over the entity.
b) An entity is related to a reporting entity if any of the following
apply:
• The entity and reporting entity are members of the same
group
• Either entity is an associate or joint venture of the other
• Both entities are joint ventures of a third entity
• Either entity is a joint venture of a third entity and the
other entity is an associate of the third entity
• The entity is a post-employment benefit plan for the benefit
of employees of the entity or any related entity
• The entity is controlled or jointly controlled by a person
identified in (a)
• A person identified in (a) (i) has significant voting power
• A person identified in (a) (ii) has significant influence
• A person has both significant influence and joint control
• A member of the key management personnel has control
or joint control over the reporting entity.
A party is related to an entity if:
a) Directly, or indirectly, the party:
• Controls, is controlled by, or is under common control
with the entity
• Has significant influence
or
• Has joint control
b) The party is an associate of the entity
c) The party is a joint venture in which the entity is a venturer
d) The party is a member of the key management personnel
e) The party is a close member of the family in (a) or (d) above
f) The party is an entity that is controlled, jointly controlled or
significantly influenced by an individual in (d) or (e)
g) The party is a post-employment benefit plan for the benefit of
employees of the entity or any related entity.
No differences are expected in the identification of related
parties.
Preparation and presentation of financial statements ª CHAPTER ONE ª 21
Section 33: Related party disclosures continued
IFRS for SMEs
Section 33 Related Party Disclosures
IFRS
IAS 24 Related Party Disclosures
Impact assessment
Relationships between a parent and its subsidiaries must be
disclosed irrespective of whether there are any related party
transactions.
Relationships between a parent and its subsidiaries must be
disclosed irrespective of whether there are any related party
transactions.
No differences are expected in the disclosure of subsidiary
relationships.
Entities must disclose the name of the parent and the ultimate
controlling party.
Entities must disclose the name of the parent and the ultimate
controlling party.
Subsidiary relationships
Key management personnel compensation
An entity must disclose key management personnel
compensation in total.
An entity must disclose key management personnel
compensation in total and for each of the following categories:
a)
b)
c)
d)
e)
Short-term employee benefits
Post-employment benefits
Other long-term benefits
Termination benefits
Share-based payment.
The disclosure requirements for SMEs are significantly less
onerous as there is no requirement to further analyse the total
compensation for key management personnel.
Disclosures
At a minimum, entities must disclose the following regarding
related party transactions:
At a minimum, entities must disclose the following regarding
related party transactions:
a) The amount of the transactions
b) The amount of outstanding balances including:
• Their terms and conditions
• Details of any guarantees
c) Provisions for uncollectible receivables
d) The expense recognised in the period for bad or doubtful
debts.
a) The amount of the transactions
b) The amount of outstanding balances including:
• Their terms and conditions
• Details of any guarantees
c) Provisions for uncollectible receivables
d) The expense recognised in the period for bad or doubtful
debts.
22 ª CHAPTER ONE ª Preparation and presentation of financial statements
No differences are expected in the minimum disclosure
requirements.
Section 33: Related party disclosures continued
IFRS for SMEs
Section 33 Related Party Disclosures
IFRS
IAS 24 Related Party Disclosures
Impact assessment
The above disclosures must be made separately for each of the
following categories:
The above disclosures must be made separately for each of the
following categories:
The related party transactions require less disaggregation for
SMEs than under full IFRS, which may reduce the effort required.
a) Entities with control, joint control or significant influence over
the entity
b) Entities over which the entity has control, joint control or
significant influence
c) Key management personnel
d) Other related parties.
a) The parent
b) Entities with joint control or significant influence
over the entity
c) Subsidiaries
d) Associates
e) Joint ventures in which the entity is a venturer
f) Key management personnel
g) Other related parties.
An entity is exempt from the disclosure requirements above in
relation to:
IAS 24 (as amended in November 2009) provides a similar
exemption for state controlled entities. Although the above
disclosures do not need to be made, the following must be
disclosed:
a) A state that has control, joint control or significant influence
over the entity
b) Another entity that is a related party because the state has
control, joint control or significant influence over both parties.
The disclosure requirements for SMEs are less onerous as there
is no disclosure required in relation to state controlled entities.
a) The name of the government and the nature of its relationship
with the reporting entity
b) The following in sufficient detail to allow users to understand
the effect of the transactions:
• The nature and amount of each individually significant
transaction
• For other transactions that are collectively significant, a
qualitative or quantitative indication of their extent.
Preparation and presentation of financial statements ª CHAPTER ONE ª 23
Section 31: Hyperinflation
IFRS for SMEs
Section 31 Hyperinflation
IFRS
IAS 29 Financial Reporting in Hyperinflationary
Economies
Impact assessment
Applies to the financial statements of any entity whose functional
currency is the currency of a hyperinflationary economy.
There is no difference in scope between IFRS for SMEs and
full IFRS.
The standard does not establish an absolute rate at which
hyperinflation is deemed to arise. Hyperinflation is indicated by
characteristics of the economic environment of a country. The
standard gives a number of indicators of hyperinflation, which
are identical to those included in IFRS for SMEs.
There is no difference in the judgment of a hyperinflationary
economy between IFRS for SMEs and full IFRS.
The financial statements of an entity whose functional currency
is the currency of a hyperinflationary economy, whether they are
based on a historical cost approach or a current cost approach,
are stated in terms of the measuring unit current at the end of
the reporting period.
The requirements to restate the financial statements are
the same under IFRS for SMEs and full IFRS.
Scope
Applies to an entity whose functional currency is that of a
hyperinflationary economy.
Indicators of hyperinflation
This section does not establish an absolute rate at which an
economy is deemed hyperinflationary. An entity must make that
judgment by considering all information available, using the given
indicators of hyperinflation.
Restatement of financial statements
All amounts in the financial statements of an entity whose
functional currency is the currency of a hyperinflationary
economy must be restated in terms of the measuring unit current
at the end of the reporting period.
Comparative information for the previous period is also restated
in terms of the measuring unit current at the reporting date.
The restatement requires the use of a general price index that
reflects changes in general purchasing power.
The corresponding figures for the previous period must also be
stated in terms of the measuring unit current at the end of the
reporting period.
The restatement requires the use of a general price index that
reflects changes in general purchasing power.
Gain or loss on net monetary position
An entity must include in profit or loss the gain or loss on the net
monetary position.
The gain or loss on the net monetary position must be included in
profit or loss and separately disclosed.
The amount of gain or loss on monetary items must be disclosed.
24 ª CHAPTER ONE ª Preparation and presentation of financial statements
There is no difference between IFRS for SMEs and full IFRS.
Section 31: Hyperinflation continued
IFRS for SMEs
Section 31 Hyperinflation
IFRS
IAS 29 Financial Reporting in Hyperinflationary
Economies
Impact assessment
When an economy ceases to be hyperinflationary, and an entity
discontinues the preparation and presentation of financial
statements in accordance with this standard, it treats the
amounts expressed in the measuring unit current at the end of
the previous reporting period as the basis for the carrying
amounts in its subsequent financial statements.
There is no difference between IFRS for SMEs and full IFRS.
Economies ceasing to be hyperinflationary
When an economy ceases to be hyperinflationary, and an entity
discontinues the preparation and presentation of financial
statements in accordance with this section, it treats the amounts
expressed in the presentation currency at the end of the previous
reporting period as the basis for the carrying amounts in its
subsequent financial statements.
Preparation and presentation of financial statements ª CHAPTER ONE ª 25
Chapter two
Business combinations and
group financial statements
Executive summary
In this chapter, we consider business combinations and group financial statements and compare the
following sections of the IFRS for SMEs with the relevant standard under full IFRS:
IFRS for SMEs
IFRS
Section 19 Business Combinations and Goodwill
IFRS 3 Business Combinations
Section 9 Consolidated and Separate Financial
Statements
IAS 27 Consolidated and Separate Financial
Statements
SIC 12 Consolidation — Special Purpose Entities
Section 15 Investments in Joint Ventures
IAS 31 Interests in Joint Ventures
Section 14 Investments in Associates
IAS 28 Investments in Associates
Whilst IFRS for SMEs applies a purchase method of accounting for business combinations, there
are a number of differences between the accounting treatment under IFRS for SMEs and IFRS 3
Business Combinations. Perhaps the most significant difference is that goodwill is amortised over
its useful life under IFRS for SMEs. Where this can’t be reliably estimated, a useful life of 10 years
is assumed. This is likely to significantly reduce the work required for preparers as impairment
tests will only be required where there are indicators of impairment. The other key difference
compared to full IFRS is that acquisition costs will be capitalised, resulting in higher goodwill
balances being recorded.
IFRS for SMEs provides preparers with a wider choice of accounting treatment for interests in
jointly controlled entities and associates. Whilst IFRS requires the use of the equity method in the
consolidated accounts (or proportionate consolidation for JCEs), under IFRS for SMEs, entities
can use the cost model, the equity method or the fair value model, which gives entities much
greater flexibility to select a policy most appropriate to their business.
These differences may be significant to some entities that have large group structures or are
highly acquisitive and therefore the different requirements should be considered prior to adopting
IFRS for SMEs.
Business combinations and group financial statements ª CHAPTER TWO ª 27
Section 19: Business combinations and goodwill
IFRS for SMEs
Section 19 Business Combinations and Goodwill
IFRS
IFRS 3 Business Combinations
Impact assessment
This section is applicable to all business combinations, as defined
in the standard. Furthermore, the section also addresses
accounting for goodwill at the time of the business combination
and subsequently.
The standard applies to all transactions or other events that meet
the definition of a business combination, as defined in the
standard. (While not specifically mentioned in the scope of the
standard, it also addresses accounting for goodwill.)
This section specifically excludes combinations of entities or
businesses under common control, the formation of joint
ventures and the acquisition of a group of assets that does not
constitute a business.
The standard specifically excludes combinations of entities or
businesses under common control, the formation of joint
ventures and the acquisition of an asset or group of assets that
does not constitute a business.
The scope of the standards is essentially the same except that
IFRS 3 specifically excludes acquisitions of single assets.
However, such assets would generally not meet the definition of a
business in IFRS for SMEs, and therefore their acquisition would
not constitute a business combination.
Scope
Definitions
A business combination is the bringing together of separate
entities or businesses into one reporting entity.
A business is an integrated set of activities and assets conducted
and managed for the purpose of providing a return to investors
or lower costs or other economic benefits directly and
proportionately to policyholders or participants. Furthermore, a
business generally consists of inputs, processes applied to those
inputs and resulting outputs that are or will be used to generate
revenues. If goodwill is present in a transferred set of activities or
assets, the transferred set is presumed to be a business.
A business combination is transaction or other event in which an
acquirer obtains control of one or more businesses. The
definition also includes transactions sometimes referred to as
‘true mergers’ or ‘mergers of equals’.
A business is an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of
providing a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners,
members or participants.
28 ª CHAPTER TWO ª Business combinations and group financial statements
The definition of a business combination in IFRS for SMEs differs
from that in IFRS. By referring to obtaining control IFRS has a
narrower scope than IFRS for SMEs, which refers more broadly to
the bringing together of entities or businesses. However, this
impact is modified by differences in the definition of a business.
The definition of a business in IFRS is similar to that in IFRS for
SMEs. The major difference is the reference in IFRS to the assets
or activities being capable of being conducted or managed for
the purpose of providing a return. Furthermore, IFRS for SMEs
indicates that a business generally consists of inputs, processes
and outputs, while IFRS does not require outputs to be present
for an integrated set of assets and activities to be a business.
Therefore, IFRS has a broader definition of a business which, all
else equal, might be expected to cause more transactions to be
treated as business combinations than would be the case under
IFRS for SMEs. For instance, an integrated set of activities at the
development stage that has not commenced could be a business
under IFRS, but may not under IFRS for SMEs.
Section 19: Business combinations and goodwill continued
IFRS for SMEs
Section 19 Business Combinations and Goodwill
IFRS
IFRS 3 Business Combinations
Impact assessment
All business combinations are accounted for using the purchase
method.
All business combinations are accounted for using the acquisition
method.
This method involves identifying the acquirer, measuring the cost
of the combination and allocating that cost to the assets acquired
and liabilities and provisions for contingent liabilities assumed.
This method involves identifying the acquirer, determining the
acquisition date, recognising and measuring the identifiable
assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree and recognising and measuring goodwill
or a gain from a bargain purchase.
The method applied under IFRS for SMEs uses a cost-based
approach whereby the cost of the acquired entity is allocated
to the assets acquired and liabilities (and provisions for
contingent liabilities) assumed. In contrast, IFRS adopts a
fair value approach.
Method of accounting
Key features of these methods are discussed further below.
Identifying the acquirer
The acquirer is the combining entity that obtains control of the
other combining entities or businesses.
The acquirer is the entity that obtains control of the acquiree.
There is no practical difference between IFRS for SMEs and IFRS.
The definitions of control, and the concept upon which
identification of the acquirer is based, are the same in
IFRS for SMEs and IFRS.
Consequently, reverse acquisition accounting may be required
under IFRS for SMEs, similar to IFRS.
Cost of a business combination
The cost of a business combination is the aggregate of:
• The fair values of the assets given, liabilities incurred or
assumed, and equity instruments issued by the acquirer
plus
• Any costs directly attributable to the business combination.
The cost of a business combination is not separately defined.
However, a component of the measurement of any goodwill or
gain from a bargain purchase is the consideration transferred,
which is calculated as the sum of the fair values of the assets
transferred by the acquirer, the liabilities incurred by the acquirer
to former owners of the acquiree and the equity interests issued
by the acquirer.
IFRS for SMEs differs from IFRS in that it includes directly
attributable costs as part of the cost of the combination, which in
turn results in these costs being included in the calculation of the
amount of any goodwill (or negative goodwill/discount on
acquisition/gain).
IFRS requires that these costs be accounted for separately from
the business combination, as they do not generally represent
assets of the acquirer would be expensed in the period they are
incurred and the related services received. As such, under IFRS
these costs do not impact the amount of goodwill (or negative
goodwill) calculated on acquisition date. All else being equal,
a higher amount for goodwill would be recorded under
IFRS for SMEs than under IFRS.
Business combinations and group financial statements ª CHAPTER TWO ª 29
Section 19: Business combinations and goodwill continued
IFRS for SMEs
Section 19 Business Combinations and Goodwill
IFRS
IFRS 3 Business Combinations
Impact assessment
The acquirer recognises the acquisition-date fair value of any
contingent consideration as part of the consideration transferred
in exchange for the acquiree.
Subsequent changes in the amount recognised for contingent
consideration are treated as adjustments to the consideration
transferred and are reflected in the carrying amount of goodwill
under IFRS for SMEs.
Contingent consideration
When a business combination agreement provides for an
adjustment to the cost of the business combination contingent on
future events, the acquirer includes the estimated amount of the
adjustment in the cost of the combination at the acquisition date
if the adjustment is probable and can be measured reliably.
If the potential adjustment is not recognised at acquisition date,
but subsequently becomes probable and can be measured
reliably, the additional consideration is treated as an adjustment
to the cost of the combination.
The classification of a contingent consideration obligation as
either a liability or equity is based on the definitions of an equity
instrument and a financial liability in IAS 32 or other applicable
accounting standards.
After initial recognition, changes in the fair value of contingent
consideration resulting from events after the acquisition date are
accounted for as follows:
In contrast, under IFRS, any post acquisition changes in the fair
value of contingent consideration that is a liability are recognised
in profit or loss or in other comprehensive income, while
contingent consideration that is equity is not remeasured
subsequent to acquisition date.
• Contingent consideration classified as equity is not
subsequently remeasured (consistent with the accounting for
equity instruments generally) and its subsequent settlement
is accounted for within equity
• Contingent consideration classified as a liability that:
• Is a financial instrument and within the scope of IAS 39, is
remeasured at fair value, with any resulting gain or loss
recognised either in profit or loss or in other
comprehensive income in accordance with IAS 39
• Is not within the scope of IAS 39 and is accounted for in
accordance with IAS 37 or other standards as appropriate.
Allocating the cost of a business combination
The acquiree’s identifiable assets and liabilities and any
The identifiable assets acquired and liabilities assumed of the
contingent liabilities that can be measured reliably are recognised acquiree are recognised as of the acquisition date, separately
at their acquisition date fair values.
from goodwill and measured at fair value as at that date.
Any difference between the cost of the business combination and
the acquirer’s interest in the net fair value of the identifiable
assets, liabilities and contingent liabilities must be accounted for
as goodwill (or negative goodwill).
30 ª CHAPTER TWO ª Business combinations and group financial statements
Both IFRS for SMEs and IFRS require recognition of assets
and liabilities at fair value. However, IFRS includes some specific
exemptions, for example, deferred taxes measured under IAS 12
Income Taxes, pension assets and liabilities measured under
IAS 19 Employee Benefits.
The impact of differences in the recognition criteria under the
two requirements is discussed below.
Section 19: Business combinations and goodwill continued
IFRS for SMEs
Section 19 Business Combinations and Goodwill
IFRS
IFRS 3 Business Combinations
Impact assessment
To qualify for recognition, an item acquired or assumed must be:
With the two exceptions noted below, the recognition criteria
under IFRS and IFRS for SMEs are substantially the same.
Recognition of assets and liabilities
The following criteria must be satisfied for the acquirer to
recognise the acquiree’s identifiable assets and liabilities and any
provisions for contingent liabilities at the acquisition date:
• Assets other than an intangible asset — the future economic
benefits must be probable and the fair value can be measured
reliably
• Liability other than a provision for contingent liability — the
outflow of resources must be probable and the fair value can
be measured reliably
• Intangible asset or provision for contingent liability — the fair
value can be measured reliably.
• An asset or liability at the acquisition date (i.e., meet the
definitions in the Framework)
• Part of the business acquired (the acquiree) rather than the
result of a separate transaction.
• Intangible assets — under IFRS there is no requirement to be
able to measure reliably the fair value of such assets. Thus,
under IFRS intangibles are recognised whenever they can be
separately identified (i.e., they are either separable or arise
from contractual or other legal rights).
• Contingent liabilities — under IFRS a contingent liability must
meet the definition of a liability (i.e., must be a present
obligation arising from a past event that can be reliably
measured) for it to be recognised. As such, a contingent
liability that represents a possible obligation the existence of
which will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events are not
recognised under IFRS. There is no such restriction on the
recognition of contingent liabilities under IFRS for SMEs.
IFRS for SMEs does not include guidance for the subsequent
recognition of tax losses not recognised at acquisition date.
Provisional accounting
Retrospective adjustments to provisional amounts recognised in
initial accounting for a business combination may be made up to
12 months after the acquisition date.
This time limit does not apply to adjustments to the cost of the
combination contingent on future events which becomes
probable and can be reliably measured subsequent to acquisition
date. (See discussion under Contingent consideration on
page 30.)
Retrospective adjustments to provisional amounts recognised in
initial accounting for a business combination may be made during
the measurement period, which is a period up to a maximum of
12 months after the acquisition date, where new information is
obtained regarding facts and circumstances that existed at
acquisition date. The measurement period ends as soon as the
acquirer receives the information it was seeking or learns that
further information is not available.
Under IFRS, it is possible that the period during which
adjustments to provisional accounting may be made would be
less than 12 months if the required new information is obtained,
or if it is determined that further information is not available
before the expiration of the maximum 12 months allowed. There
is no such limitation under IFRS for SMEs.
Business combinations and group financial statements ª CHAPTER TWO ª 31
Section 19: Business combinations and goodwill continued
IFRS for SMEs
Section 19 Business Combinations and Goodwill
IFRS
IFRS 3 Business Combinations
Impact assessment
IFRS requires any NCI in an acquiree to be recognised, but
provides a choice of two methods for measuring NCI arising in
a business combination:
Under IFRS, Option 2 for the measurement of NCI is effectively
equivalent to the requirements for the measurement of NCI
under IFRS for SMEs. Adoption of Option 1 for the measurement
of NCI under IFRS is likely to result in recognition of a higher
amount for NCI (and, consequently, a higher amount for
goodwill) than would result under Option 2 and the requirements
of IFRS for SMEs.
Non-controlling interests
Where the acquirer obtains less than a 100% interest in the
acquiree, a non-controlling interest (NCI) in the acquiree is
recognised at the NCI’s proportion of the net identifiable assets,
liabilities and provisions for contingent liabilities of the acquiree
at their attributed fair values at the date of acquisition; no
amount is included for any goodwill relating to the NCI.
• Option 1, to measure the non-controlling interest at its
acquisition-date fair value
• Option 2, to measure the non-controlling interest at the
proportionate share of the value of net identifiable assets
acquired.
The choice of method is made for each business combination
on a transaction-by-transaction basis, rather than being a
policy choice.
Definition of goodwill
Goodwill is defined as ‘future economic benefits arising from
other assets that are not capable of being individually identified
and separately recognised.’
Goodwill is defined as ‘an asset representing the future economic
benefits arising from other assets acquired in a business
combination that are not individually identified and separately
recognised.’
32 ª CHAPTER TWO ª Business combinations and group financial statements
There is no practical difference between the definitions of
goodwill under IFRS for SMEs and IFRS.
Section 19: Business combinations and goodwill continued
IFRS for SMEs
Section 19 Business Combinations and Goodwill
IFRS
IFRS 3 Business Combinations
Impact assessment
Measurement of goodwill
Goodwill is initially measured at cost, being the excess of the cost The measurement of goodwill at the acquisition date is computed
of the business combination over the acquirer’s interest in the net as the excess of (a) over (b) below:
fair value of the identifiable assets, liabilities and contingent
a) The aggregate of:
liabilities recognised.
• The consideration transferred (generally measured at
acquisition-date fair value)
After initial recognition, goodwill is measured at cost less
• The amount of any non-controlling interest in the
accumulated amortisation and accumulated impairment losses.
acquiree
Goodwill is amortised in accordance with the principles of
• The acquisition-date fair value of the acquirer’s previously
amortisation of intangible assets in Section 18. If a reliable
held equity interest in the acquiree
estimate of the useful life of goodwill cannot be made the life is
b) The net of the acquisition-date fair values (or other amounts
presumed to be 10 years. Detailed requirements in relation to
recognised in accordance with the requirements of the
standard) of the identifiable assets acquired and the liabilities
impairment testing of goodwill are contained in Section 27. This
assumed.
includes the requirement that the acquirer test it for impairment
where there is an indication that it may be impaired.
Goodwill acquired in a business combination is not amortised.
The acquirer measures goodwill acquired in a business
combination at the amount recognised at the acquisition date
less any accumulated impairment losses. Detailed requirements
in relation to the subsequent accounting for goodwill are dealt
with in IAS 36 Impairment of Assets. This includes the
requirement that the acquirer has to test it for impairment
annually, or more frequently if events or changes in
circumstances indicate that it might be impaired.
Under both IFRS for SMEs and IFRS, goodwill is measured as a
residual. However, the computations differ due to the focus in
IFRS on measuring the components of the business combination
at their acquisition date fair values, while IFRS for SMEs adopts a
cost-based approach.
IFRS for SMEs differs from IFRS by requiring that goodwill be
amortised over its useful life, or if the useful life cannot be
reliably measured, over 10 years. In addition, it must be tested
for impairment where an indicator of possible impairment exists.
In contrast, IFRS prohibits amortisation of goodwill, but requires
that it be impairment tested at least annually.
Based on these differing requirements, significantly differing
carrying amounts for goodwill might be expected to arise under
IFRS for SMEs and IFRS in post-combination periods.
Business combinations and group financial statements ª CHAPTER TWO ª 33
Section 19: Business combinations and goodwill continued
IFRS for SMEs
Section 19 Business Combinations and Goodwill
IFRS
IFRS 3 Business Combinations
Impact assessment
A bargain purchase arises when the net fair value of the
identifiable assets and liabilities exceeds the cost of the
combination.
The substance of the requirements in relation to recognition of
an excess/gain (negative goodwill) on a bargain purchase is the
same under both IFRS for SMEs and IFRS.
Bargain purchase
An excess arises where the acquirer’s interest in the net fair value
of the acquiree’s identifiable assets, liabilities and provisions for
contingent liabilities exceeds the cost of the combination. The
standard recognises that this is sometimes referred to as
‘negative goodwill’.
Where such an excess arises, the acquirer must:
• Reassess the identification and measurement of the acquiree’s
assets, liabilities and provisions for contingent liabilities and
the measurement of the cost of the combination
• Recognise immediately in profit or loss any excess remaining
after that reassessment.
Before recognising a gain on a bargain purchase, the acquirer
should reassess whether it has correctly identified all of the
assets acquired and all of the liabilities assumed and recognises
any additional assets or liabilities that are identified in that
review. The acquirer then reviews the procedures used to
measure the amounts recognised at the acquisition date for all of
the following:
a) The identifiable assets acquired and liabilities assumed
b) The non-controlling interest in the acquiree, if any
c) For a business combination achieved in stages, the acquirer’s
previously held equity interest in the acquiree
d) The consideration transferred.
The objective of the review is to ensure that the measurements
appropriately reflect consideration of all available information as
of the acquisition date.
Having undertaken that review (and made any necessary
revisions), if an excess remains, a gain is recognised in profit or
loss on the acquisition date.
34 ª CHAPTER TWO ª Business combinations and group financial statements
Section 9: Consolidated and separate financial statements
IFRS for SMEs
Section 9 Consolidated and Separate Financial
Statements
IFRS
IAS 27 Consolidated and Separate Financial
Statements
SIC 12 Consolidation — Special Purpose Entities
Impact assessment
This section defines the circumstances in which an entity
presents consolidated financial statements and the procedures
for preparing those statements.
This standard must be applied in the preparation and
presentation of consolidated financial statements for a group
of entities under the control of a parent.
IFRS for SMEs and IFRS have a similar scope for consolidated
financial statements.
It also includes guidance on separate financial statements and
combined financial statements.
A parent (see discussion of exemptions in the next row), must
present consolidated financial statements in which it consolidates
its investments in subsidiaries in accordance with this standard.
Scope
Except as permitted or required by paragraph 9.3 (see
discussion of exemptions), a parent entity must present
consolidated financial statements in which it consolidates its
investments in subsidiaries in accordance with this IFRS.
Consolidated financial statements shall include all subsidiaries of
the parent.
IFRS for SMEs permits combined financial statements to be
prepared. Combined financial statements may include entities
outside the group or be created from selected entities within the
group provided they are under common control. Combined
financial statements are not addressed in IFRS.
Consolidated financial statements shall include all subsidiaries
of the parent.
Business combinations and group financial statements ª CHAPTER TWO ª 35
Section 9: Consolidated and separate financial statements continued
IFRS for SMEs
Section 9 Consolidated and Separate Financial
Statements
IFRS
IAS 27 Consolidated and Separate Financial
Statements
SIC 12 Consolidation — Special Purpose Entities
Impact assessment
A parent need not present consolidated financial statements if
and only if:
Similar exemptions under IFRS for SMEs and IFRS (taking into
account that entities that have their securities listed cannot use
IFRS for SMEs).
Exemption from preparing consolidated financial statements
A parent need not present consolidated financial statements if:
• Both of the following conditions are met:
• The parent is itself a subsidiary
and
• Its ultimate parent (or any intermediate parent) produces
consolidated general purpose financial statements that
comply with full IFRS or with this IFRS or
• It has no subsidiaries other than one that was acquired with
the intention of selling or disposing of it within one year. A
parent accounts for such a subsidiary:
• At fair value with changes in fair value recognised in
profit or loss, if the fair value of the shares can be
measured reliably
or
• Otherwise at cost less impairment.
a) The parent is itself a wholly-owned subsidiary, or is a partiallyowned subsidiary of another entity and its other owners,
including those not otherwise entitled to vote, have been
informed about, and do not object to, the parent not
presenting consolidated financial statements
b) The parent’s debt or equity instruments are not traded in a
public market (a domestic or foreign stock exchange or an
over-the-counter market, including local and regional markets)
c) The parent did not file, nor is it in the process of filing, its
financial statements with a securities commission or other
regulatory organisation for the purpose of issuing any class of
instruments in a public market
d) The ultimate or any intermediate parent of the parent
produces consolidated financial statements available for public
use that comply with IFRS.
36 ª CHAPTER TWO ª Business combinations and group financial statements
Specific differences include:
• IFRS for SMEs does not require partly-owned parents to seek
permission of other shareholders for the exemption
• The exemption from preparing consolidated financial
statements, if the parent already prepares IFRS financial
statements, has been expanded to also include the case where
the parent prepares IFRS for SMEs financial statements
• IFRS for SMEs does not require the consolidated financial
statements of the ultimate parent (or any intermediate
parent) to be made available for public use in order for the
exemption to apply
• IFRS for SMEs permits an additional exemption for a
subsidiary acquired with the intention of selling it within one
year, provided it is the only subsidiary.
Section 9: Consolidated and separate financial statements continued
IFRS for SMEs
Section 9 Consolidated and Separate Financial
Statements
IFRS
IAS 27 Consolidated and Separate Financial
Statements
SIC 12 Consolidation — Special Purpose Entities
Impact assessment
Control is the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities.
Control is the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities.
The definition in IFRS for SMEs and IFRS is the same.
Control is presumed to exist when the parent owns, directly or
indirectly through subsidiaries, more than half of the voting
power of an entity. That presumption may be overcome in
exceptional circumstances if it can be clearly demonstrated that
such ownership does not constitute control. Control also exists
when the parent owns half or less of the voting power of an entity
but it has:
Control is presumed to exist when the parent owns, directly or
indirectly through subsidiaries, more than half of the voting
power of an entity unless, in exceptional circumstances, it can be
clearly demonstrated that such ownership does not constitute
control. Control also exists when the parent owns half or less of
the voting power of an entity when there is:
Definition of control
a) Power over more than half of the voting rights by virtue of an
agreement with other investors
b) Power to govern the financial and operating policies of the
entity under a statute or an agreement
c) Power to appoint or remove the majority of the members of
the board of directors or equivalent governing body and
control of the entity is by that board or body
or
d) Power to cast the majority of votes at meetings of the board
of directors or equivalent governing body and control of the
entity is by that board or body.
a) Power over more than half of the voting rights by virtue of an
agreement with other investors
b) Power to govern the financial and operating policies of the
entity under a statute or an agreement
c) Power to appoint or remove the majority of the members
of the board of directors or equivalent governing body and
control of the entity is by that board or body
or
d) Power to cast the majority of votes at meetings of the board
of directors or equivalent governing body and control of the
entity is by that board or body.
Business combinations and group financial statements ª CHAPTER TWO ª 37
Section 9: Consolidated and separate financial statements continued
IFRS for SMEs
Section 9 Consolidated and Separate Financial
Statements
IFRS
IAS 27 Consolidated and Separate Financial
Statements
SIC 12 Consolidation — Special Purpose Entities
Impact assessment
An SPE must be consolidated when the substance of the
relationship between an entity and the SPE indicates that the
SPE is controlled by that entity.
The conditions in IFRS for SMEs and IFRS are equivalent,
although the wording for delegation of decision-making is
slightly different.
Special purpose entities
An entity may be created to accomplish a narrow objective
(e.g., to effect a lease, undertake research and development
activities or securitise financial assets). Such a special purpose
entity (SPE) may take the form of a corporation, trust,
partnership or unincorporated entity. Often, SPEs are created
with legal arrangements that impose strict requirements over
the operations of the SPE.
An entity must prepare consolidated financial statements that
include the entity and any SPEs that are controlled by that entity.
In addition to the circumstances described in paragraph 9.5
(see definition of control above), the following circumstances
may indicate that an entity controls an SPE (this is not an
exhaustive list):
a) The activities of the SPE are being conducted on behalf of the
entity according to its specific business needs
b) The entity has the ultimate decision-making powers over the
activities of the SPE even if the day-to-day decisions have
been delegated
c) The entity has rights to obtain the majority of the benefits of
the SPE and therefore may be exposed to risks incidental to
the activities of the SPE
d) The entity retains the majority of the residual or ownership
risks related to the SPE or its assets.
In addition to the situations described in IAS 27.13 (see
definition of control above), the following circumstances, for
example, may indicate a relationship in which an entity controls
an SPE and consequently should consolidate the SPE (additional
guidance is provided in the Appendix to SIC 12):
a) In substance, the activities of the SPE are being conducted on
behalf of the entity according to its specific business needs so
that the entity obtains benefits from the SPE’s operation
b) In substance, the entity has the decision-making powers to
obtain the majority of the benefits of the activities of the SPE
or, by setting up an ‘autopilot’ mechanism, the entity has
delegated these decision-making powers
c) In substance, the entity has rights to obtain the majority of the
benefits of the SPE and therefore may be exposed to risks
incident to the activities of the SPE
or
d) In substance, the entity retains the majority of the residual or
ownership risks related to the SPE or its assets in order to
obtain benefits from its activities.
38 ª CHAPTER TWO ª Business combinations and group financial statements
Section 9: Consolidated and separate financial statements continued
IFRS for SMEs
Section 9 Consolidated and Separate Financial
Statements
IFRS
IAS 27 Consolidated and Separate Financial
Statements
SIC 12 Consolidation — Special Purpose Entities
Impact assessment
An entity may own share warrants, share call options, or debt or
equity instruments that are convertible into ordinary shares. The
existence and effect of potential voting rights that are currently
exercisable or convertible are considered when assessing
whether an entity has the power to govern the financial and
operating policies of another entity.
IFRS for SMEs and IFRS have similar requirements.
This section includes consolidation procedures, requirements to
eliminate intra-group balances and the requirement to have
uniform reporting dates and uniform accounting policies.
IFRS for SMEs and full IFRS have the same consolidation
procedures.
Currently exercisable options
Control can also be achieved by having options or convertible
instruments that are currently exercisable, or by having an agent
with the ability to direct the activities for the benefit of the
controlling entity.
Consolidation procedures
This section includes consolidation procedures, requirements to
eliminate intra-group balances and the requirement to have
uniform reporting dates and uniform accounting policies.
Business combinations and group financial statements ª CHAPTER TWO ª 39
Section 9: Consolidated and separate financial statements continued
IFRS for SMEs
Section 9 Consolidated and Separate Financial
Statements
IFRS
IAS 27 Consolidated and Separate Financial
Statements
SIC 12 Consolidation — Special Purpose Entities
Impact assessment
If a parent loses control of a subsidiary, it:
IFRS for SMEs differs from full IFRS in the treatment of the
disposal of subsidiaries. The main differences relate to the
simplifications in the SME standard and so under IFRS for SMEs,
the gain or loss on disposal may differ.
Disposal of subsidiaries
The difference between the proceeds from the disposal of the
subsidiary and its carrying amount as of the date of disposal,
excluding the cumulative amount of any exchange differences
that relate to a foreign subsidiary recognised in equity, in
accordance with Section 30 Foreign Currency Translation, is
recognised in the consolidated statement of comprehensive
income (or the income statement, if presented) as the gain or
loss on the disposal of the subsidiary.
If the parent continues to hold an investment in the entity, it is
accounted for as a financial asset, associate or jointly controlled
entity depending on the nature of the investment. The carrying
amount of the investment at the date it ceases to be a subsidiary
is the cost on initial measurement as a financial asset, associate
or jointly controlled entity.
a) Derecognises the assets (including any goodwill) and liabilities
of the subsidiary at their carrying amounts at the date when
control is lost
b) Derecognises the carrying amount of any non-controlling
interests in the former subsidiary at the date when control is
lost (including any components of other comprehensive
income attributable to them)
c) Recognises:
• The fair value of the consideration received, if any, from
the transaction, event or circumstances that resulted in the
loss of control
• If the transaction that resulted in the loss of control
involves a distribution of shares of the subsidiary to owners
in their capacity as owners, that distribution
d) Recognises any investment retained in the former subsidiary
at its fair value at the date when control is lost
e) Reclassifies to profit or loss, or transfers directly to retained
earnings if required in accordance with other IFRSs, the
amounts identified in paragraph 35
f) Recognises any resulting difference as a gain or loss in profit
or loss attributable to the parent.
If a parent loses control of a subsidiary, the parent must account
for all amounts recognised in other comprehensive income in
relation to that subsidiary on the same basis as would be required
if the parent had directly disposed of the related assets or
liabilities. Therefore, if a gain or loss previously recognised in
other comprehensive income would be reclassified to profit or
loss on the disposal of the related assets or liabilities, the parent
reclassifies the gain or loss from equity to profit or loss (as a
reclassification adjustment) when it loses control of the
subsidiary.
40 ª CHAPTER TWO ª Business combinations and group financial statements
Section 9: Consolidated and separate financial statements continued
IFRS for SMEs
Section 9 Consolidated and Separate Financial
Statements
IFRS
IAS 27 Consolidated and Separate Financial
Statements
SIC 12 Consolidation — Special Purpose Entities
Impact assessment
Non-controlling interests must be presented separately from the
interests of the owners of the parent.
Non-controlling interests must be presented separately from the
interests of the owners of the parent.
There is no difference between IFRS for SMEs and IFRS.
Deficit balances of non-controlling interests are permitted.
Deficit balances of non-controlling interests permitted.
Non-controlling interests
Separate financial statements
If separate financial statements are prepared, a parent, an
investor in an associate or a venturer with an interest in a jointly
controlled entity must account for its investments in subsidiaries,
associates and jointly controlled entities either:
If separate financial statements are prepared, a parent, an
investor in an associate or a venturer with an interest in a jointly
controlled entity must account for its investments in subsidiaries,
associates and jointly controlled entities either:
a) At cost less impairment
or
b) At fair value with changes in fair value recognised in profit or
loss.
a) At cost
or
b) In accordance with IAS 39.
The entity must apply the same accounting policy for all
investments in a single class (subsidiaries, associates or jointly
controlled entities), but it can elect different policies for different
classes.
The entity must apply the same accounting policy for each
category of investments.
There are additional requirement in relation to investments
accounted for at cost that are classified as held for sale.
There may be significant differences in accounting for
investments in subsidiaries, associates and jointly controlled
entities.
These differences arise because of the differences in accounting
for financial instruments under IFRS for SMEs and IFRS. In
particular IFRS allows an ‘available for sale’ category where
investments are measured at fair value and movements
recognised in equity (subject to impairment).
For investments accounted for at cost, there may also be
differences as a result of the different impairment requirements
under IFRS and IFRS for SMEs.
Business combinations and group financial statements ª CHAPTER TWO ª 41
Section 15: Investments in joint ventures
IFRS for SMEs
Section 15 Investments in Joint Ventures
IFRS
IAS 31 Interests in Joint Ventures
Impact assessment
The standard applies in accounting for all interests in joint
ventures regardless of the structures or forms under which the
joint venture activities take place. However, the scope excludes
interests in jointly controlled entities held by venture capital
organisations or mutual funds, unit trusts and similar entities
that on initial recognition are designated as at fair value through
profit or loss or classified as held for trading under IAS 39.
Venture capital organisations or mutual funds, unit trusts and
similar entities that hold interests in joint ventures are not
exempted from IFRS for SMEs. However, in practice these types
of entity are less likely to meet the definition of an SME and
therefore often will not be able to apply the standard.
Scope
The section is applicable to accounting for all joint ventures in
consolidated financial statements and in financial statements of
an investor that is not a parent but has an interest in one or more
joint ventures.
Accounting for interests in joint ventures in a venturer’s separate
financial statements is covered in Section 9.
The standard refers to IAS 27 for the requirements on accounting
for interests in joint venture entities in a venturer’s separate
financial statements.
Definitions
A joint venture is a contractual arrangement whereby two or
more parties undertake an economic activity that is subject to
joint control. Joint ventures can take the form of jointly
controlled operations, jointly controlled assets, or jointly
controlled entities.
Joint control is the contractually agreed sharing of control over
an economic activity, and exists only when the strategic, financial
and operating decisions relating to the activity require the
unanimous consent of the parties sharing control (the
venturers).
A joint venture is a contractual arrangement whereby two or
more parties undertake an economic activity that is subject to
joint control.
The standard identifies three broad types of joint venture —
jointly controlled operations, jointly controlled assets, or jointly
controlled entities.
Joint control is the contractually agreed sharing of control over
an economic activity, and exists only when the strategic, financial
and operating decisions relating to the activity require the
unanimous consent of the parties sharing control (the
venturers).
42 ª CHAPTER TWO ª Business combinations and group financial statements
There is no difference between IFRS for SMEs and IFRS.
Section 15: Investments in joint ventures continued
IFRS for SMEs
Section 15 Investments in Joint Ventures
IFRS
IAS 31 Interests in Joint Ventures
Impact assessment
Jointly controlled operations involve the use of the assets and
other resources of the venturers rather than the establishment of
a corporation, partnership or other entity, or a financial structure
that is separate from the venturers themselves. Each venturer
uses its own property, plant and equipment and carries its own
inventories. It also incurs its own expenses and liabilities and raises
its own finance, which represent its own obligations. The joint
venture activities may be carried out by the venturer’s employees
alongside the venturer’s similar activities. The joint venture
agreement usually provides a means by which the revenue from
the sale of the joint product and any expenses incurred in common
are shared among the venturers.
Jointly controlled operations involve the use of the assets and
other resources of the venturers rather than the establishment of
a corporation, partnership or other entity, or a financial structure
that is separate from the venturers themselves. Each venturer
uses its own property, plant and equipment and carries its own
inventories. It also incurs its own expenses and liabilities and raises
its own finance, which represent its own obligations. The joint
venture activities may be carried out by the venturer’s employees
alongside the venturer’s similar activities. The joint venture
agreement usually provides a means by which the revenue from
the sale of the joint product and any expenses incurred in common
are shared among the venturers.
There are no differences between the definition and accounting
requirements in IFRS for SMEs and IFRS.
In respect of its interests in jointly controlled operations, a
venturer must recognise in its financial statements:
In respect of its interests in jointly controlled operations, a
venturer must recognise in its financial statements:
a) The assets that it controls and the liabilities that it incurs
b) The expenses that it incurs and its share of the income that it
earns from the sale of goods or services by the joint venture.
a) The assets that it controls and the liabilities that it incurs
b) The expenses that it incurs and its share of the income that it
earns from the sale of goods or services by the joint venture.
Jointly controlled operations
Business combinations and group financial statements ª CHAPTER TWO ª 43
Section 15: Investments in joint ventures continued
IFRS for SMEs
Section 15 Investments in Joint Ventures
IFRS
IAS 31 Interests in Joint Ventures
Impact assessment
Jointly controlled assets
There are no differences between the definition and accounting
Jointly controlled assets involve the joint control, and often the
requirements in IFRS for SMEs and IFRS.
joint ownership, by the venturers of one or more assets
contributed to, or acquired for the purpose of the joint venture
and dedicated to the purposes of the joint venture. The assets are
used to obtain benefits for the venturers. Each venturer may take
A venturer must recognise in its financial statements:
a share of the output from the assets and each bears an agreed
a) Its share of the jointly controlled assets, classified according to share of the expenses incurred.
the nature of the assets
A venturer must recognise in its financial statements:
b) Any liabilities that it has incurred
Jointly controlled assets involve the joint control, and often the
joint ownership, by the venturers of one or more assets
contributed to, or acquired for the purpose of the joint venture
and dedicated to the purposes of the joint venture.
c) Its share of any liabilities incurred jointly with the other
venturers in relation to the joint venture
d) Any income from the sale or use of its share of the output of
the joint venture, together with its share of any expenses
incurred by the joint venture
e) Any expenses that it has incurred in respect of its interest in
the joint venture.
a) Its share of the jointly controlled assets, classified according to
the nature of the assets
b) Any liabilities that it has incurred
c) Its share of any liabilities incurred jointly with the other
venturers in relation to the joint venture
d) Any income from the sale or use of its share of the output of
the joint venture, together with its share of any expenses
incurred by the joint venture
e) Any expenses that it has incurred in respect of its interest in
the joint venture.
Definition of jointly controlled entities
A jointly controlled entity is a joint venture that involves the
establishment of a corporation, partnership or other entity in
which each venturer has an interest. The entity operates in the
same way as other entities, except that a contractual
arrangement between the venturers establishes joint control over
the economic activity of the entity.
There are no differences between the definition in IFRS for SMEs
A jointly controlled entity is a joint venture that involves the
and IFRS.
establishment of a corporation, partnership or other entity in
which each venturer has an interest. The entity operates in the
same way as other entities, except that a contractual
arrangement between the venturers establishes joint control over
the economic activity of the entity.
44 ª CHAPTER TWO ª Business combinations and group financial statements
Section 15: Investments in joint ventures continued
IFRS for SMEs
Section 15 Investments in Joint Ventures
IFRS
IAS 31 Interests in Joint Ventures
Impact assessment
Measurement of jointly controlled entities
A venturer must account for all of its interests in jointly controlled A venturer must account for all of its interests in jointly controlled IFRS for SMEs differs from IFRS in that it permits jointly
controlled entities to be accounted for using the cost model
entities using one of the following:
entities using one of the following:
(provided a published price quotation is not available) and allows
• Proportionate consolidation (the financial statements of the
• The cost model (investment is measured at cost less any
use of the fair value model, neither of which is available under
venturer include its share of the assets that it controls jointly
accumulated impairment losses). This model may not be used
IFRS. Furthermore, use of proportionate consolidation to account
and of the liabilities for which it is jointly responsible, and its
for investments for which there is a published price quotation,
share of the income and expenses of the jointly controlled
in which case the fair value model must be applied
for jointly controlled entities is permitted by IFRS but is not an
entity)
available option under IFRS for SMEs.
• The equity method (investment is measured using the
• The equity method (investment is measured using the
method as applied to associates and outlined in
As IFRS for SMEs does not contain requirements relating to
method applied to associates as outlined in IAS 28).
Section 14)
assets classified as held for sale, there are no provisions in the
• The fair value model (investment is initially measured at
Interests in jointly controlled entities that are classified as held
standard relating to interests in jointly controlled entities
transaction price and subsequently remeasured to fair value
for sale are accounted for as such in accordance with IFRS 5.
classified as held for sale (such as cessation of the use of equity
at each reporting date, with changes in fair value recognised
in profit or loss). Cost model may be applied to investments
accounting). Therefore, the statement of financial position for an
for which it is impracticable to measure fair value without
SME may differ significantly to that of an entity reporting under
undue cost or effort.
full IFRS.
Business combinations and group financial statements ª CHAPTER TWO ª 45
Section 15: Investments in joint ventures continued
IFRS for SMEs
Section 15 Investments in Joint Ventures
IFRS
IAS 31 Interests in Joint Ventures
Impact assessment
When a venturer contributes or sells assets to a joint venture,
IFRS requires that the recognition of any gain or loss should
reflect the substance of the transaction. While the assets are
retained by the joint venture, and provided that the venturer has
transferred the significant risks and rewards of ownership, the
venturer should recognise only that portion of the gain or loss
which is attributable to the interests of the other venturers.
However, the venturer should recognise the full amount of any
loss when the contribution or sale provides evidence of a
reduction in the net realisable value of current assets or an
impairment loss.
There are no differences between the requirements in IFRS for
SMEs and IFRS, after allowing for the terminology differences.
IFRS for SMEs defines the term ‘impairment’ to include
inventories rather than using the separate terminology of ‘net
realisable value of current assets’.
Transactions between a venturer and joint venture
When a venturer contributes or sells assets to a joint venture,
IFRS for SMEs requires that the recognition of any gain or loss
should reflect the substance of the transaction. While the assets
are retained by the joint venture, and provided that the venturer
has transferred the significant risks and rewards of ownership,
the venturer should recognise only that portion of the gain or
loss which is attributable to the interests of the other venturers.
However, the venturer should recognise the full amount of any
loss when the contribution or sale provides evidence of an
impairment loss.
When a venturer purchases assets from a joint venture, the
venturer must not recognise its share of the profits of the joint
venture from the transaction until it resells the assets to an
unrelated third party. A venturer recognises its share of the
losses resulting from these transactions in the same way as
profits, except that losses should be recognised immediately
when they represent an impairment loss.
When a venturer purchases assets from a joint venture, the
venturer must not recognise its share of the profits of the joint
venture from the transaction until it resells the assets to an
unrelated third party. A venturer recognises its share of the
losses resulting from these transactions in the same way as
profits, except that losses should be recognised immediately
when they represent a reduction in the net realisable value of
current assets or an impairment loss.
Where non-monetary assets are contributed to a jointly
controlled entity, the additional guidance in SIC-13 Jointly
Controlled Entities — Non-Monetary Contributions by Venturers
must also be considered.
46 ª CHAPTER TWO ª Business combinations and group financial statements
Section 14: Investments in associates
IFRS for SMEs
Section 14 Investments in Associates
IFRS
IAS 28 Investments in Associates
Impact assessment
The standard applies to accounting for investments in associates.
However, the scope excludes investments in associates held by
venture capital organisations or mutual funds, unit trusts and
similar entities that on initial recognition are designated as at fair
value through profit or loss or classified as held for trading under
IAS 39.
Venture capital organisations or mutual funds, unit trusts and
similar entities that hold investments in associates are not
exempted from IFRS for SMEs. However, in practice these types
of entity are less likely to meet the definition of an SME and
therefore often will not be able to apply the standard.
Scope
The section is applicable to accounting for associates in
consolidated financial statements and in financial statements of
an investor that is not a parent, but has an interest in one or
more associates.
Accounting for interests in associates in an investor’s separate
financial statements is covered in Section 9.
The standard refers to IAS 27 for the requirements on accounting
for investments in associates in an investor’s separate financial
statements.
Definitions
An associate is an entity, including an unincorporated entity such
as a partnership, over which an investor has significant influence
and that is neither a subsidiary nor an interest in a joint venture.
An associate is an entity, including an unincorporated entity such
as a partnership, over which an investor has significant influence
and that is neither a subsidiary nor an interest in a joint venture.
Significant influence is the power to participate in the financial
and operating decisions of the associate, but is not control or
joint control over those policies.
Significant influence is the power to participate in the financial
and operating decisions of the associate, but is not control or
joint control over those policies.
Significant influence is presumed where an investor holds
20 per cent or more of the voting power of the associate, unless
it can be clearly demonstrated that this is not the case.
Significant influence is presumed where an investor holds
20 per cent or more of the voting power of the associate,
unless it can be clearly demonstrated that this is not the case.
There are no differences between the definitions in IFRS for SMEs
and IFRS.
Business combinations and group financial statements ª CHAPTER TWO ª 47
Section 14: Investments in associates continued
IFRS for SMEs
Section 14 Investments in Associates
IFRS
IAS 28 Investments in Associates
Impact assessment
An investor accounts for all of its investments in associates using
the equity method. Investments in associates that are classified
as held for sale are accounted for as such in accordance with
IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations.
IFRS for SMEs differs from IFRS in that it permits associates to be
accounted for using the cost model (provided a published price
quotation is not available) and allows use of the fair value model,
neither of which is available under IFRS. There is no effective
difference between the equity method as described under IFRS
for SMEs and IFRS (however, see discussion of application of the
equity method below).
Measurement
An investor must account for all of its investments in associates
using one of the following:
• The cost model (investment is measured at cost less any
accumulated impairment losses). This model may not be used
for investments for which there is a published price quotation,
in which case the fair value model must be applied.
• The equity method (investment is initially measured at
transaction price and subsequently adjusted to reflect the
investor’s share of profit or loss and other comprehensive
income of the associate).
• The fair value model (investment is initially measured at
transaction price and subsequently remeasured to fair value
at each reporting date, with changes in fair value recognised
in profit or loss). Cost model may be applied to investments
for which it is impracticable to measure fair value without
undue cost or effort.
The equity method requires that the investment is initially
recognised at cost and adjusted thereafter for the postacquisition change in the investor’s share of the net assets of
the investee. The profit or loss of the investor includes the
investor’s share of the profit or loss of the investee.
As IFRS for SMEs does not contain requirements relating to assets
classified as held for sale, there are no provisions in the standard
relating to investments in associates classified as held for sale
(such as cessation of the use of equity accounting). Also, the
additional exemptions to the use of the equity method provided
in IAS 28 are not included in IFRS for SMEs.
Equity method — adjustments to the carrying amounts
The carrying amount of the investment is reduced for distributions
received from the associate and adjusted due to changes in equity
resulting from items of other comprehensive income.
There is no difference between IFRS for SMEs and IFRS.
Potential voting rights are considered when deciding whether
significant influence exists. However, share of profit or loss and
changes in associate’s equity are measured based on present
ownership interest.
There is no difference between IFRS for SMEs and IFRS.
Any difference between the cost of acquisition and the investor’s
share of net identifiable assets of the associate is accounted for
as goodwill or discount on acquisition.
Any difference between the cost of acquisition and the investor’s
share of net identifiable assets of the associate is accounted for
as goodwill or discount on acquisition.
The investor’s share of an associate’s profits or losses is adjusted
to account for any additional depreciation/amortisation on the
basis of the excess of their fair values over carrying amounts at
acquisition of the investment.
The investor’s share of an associate’s profits or losses is adjusted
to account for any additional depreciation/amortisation on the
basis of the excess of their fair values over carrying amounts at
acquisition of the investment.
While the requirements of IFRS for SMEs and IFRS are the same,
the subsequent accounting for goodwill differs as detailed in
Section 19. In particular, IFRS for SMEs requires implicit goodwill
to be amortised over its useful life (or 10 years if the useful life
cannot be reliably estimated). This amortisation is included in
the calculation of the investor’s share of profits or losses of the
associate under IFRS for SMEs.
The carrying amount of the investment is reduced for distributions
received from the associate and adjusted due to changes in equity
resulting from items of other comprehensive income.
Equity method — potential voting rights
Potential voting rights are considered when deciding whether
significant influence exists. However, share of profit or loss and
changes in associate’s equity are measured based on present
ownership interest.
Equity method — implicit goodwill and fair value adjustments
48 ª CHAPTER TWO ª Business combinations and group financial statements
Section 14: Investments in associates continued
IFRS for SMEs
Section 14 Investments in Associates
IFRS
IAS 28 Investments in Associates
Impact assessment
The entire carrying amount of an investment in an associate is
tested for impairment when there is an indication it may be
impaired (i.e., including any goodwill, which is not separately
impairment tested).
While the requirements of IFRS for SMEs and IFRS are the same,
the requirements relating to impairment testing differ as detailed
in Section 27. In particular, for investments in associates, IFRS
requires reference to impairment indicators in IAS 39, but
impairment testing to be carried out in accordance with IAS 36.
IFRS for SMEs requires the application of the general impairment
indicators in section 27.
Unrealised profits and losses arising from both upstream and
downstream transactions are eliminated to the extent of the
investor’s interest in the associate.
There are no differences between the requirements under
IFRS for SMEs and IFRS.
Requires use of the most recent available financial statements of
the associate, and where the associate’s and investor’s reporting
period ends differ, the associate must prepare financial
statements as of the same date as the investor’s financial
statements, unless impracticable.
IFRS for SMEs is less restrictive than IFRS in relation to the
financial statements of the associate that must be used to apply
equity accounting. IFRS applies a strict maximum of three
months difference in reporting dates which does not apply in
IFRS for SMEs. Both IFRS for SMEs and IFRS provide an
impracticability exception, which in both cases requires
adjustments for significant transactions and events to be made to
the associate’s financial statements.
Equity method — impairment
The entire carrying amount of an investment in an associate is
tested for impairment when there is an indication it may be
impaired (i.e., including any goodwill, which is not separately
impairment tested).
Equity method — investor transactions with associates
Unrealised profits and losses arising from both upstream and
downstream transactions are eliminated to the extent of the
investor’s interest in the associate.
Equity method — date of associate’s financial statements
Requires use of financial statements of the associate as of the
same date as those of the investor, unless it is impracticable
to do so.
If it is impracticable, the investor must use the most recent
available financial statements of the associate adjusted for
significant transactions or events between the accounting
period ends.
Where the associate’s financial statements are prepared as of a
different date to the investor, the associate’s statements are
adjusted for significant transactions or events between the
accounting period ends. In any case, the difference between the
reporting period ends may be no longer than three months, and
the length of the reporting periods and any difference between
the ends of the reporting periods must be the same from period
to period.
Equity method — accounting policies
If the associate’s accounting policies differ from those of the
investor, the investor must adjust the associate’s policies to
reflect the investor’s policies unless impracticable.
If the associate’s accounting policies differ from those of the
investor for like transactions and events, adjustments must be
made to the associate’s policies to conform to the investor’s
policies.
IFRS for SMEs provides an impracticability exemption to the
requirement to conform an associate’s policies to those of the
investor, which is not included in IFRS. However, use of this
exemption by SMEs is expected to be rare.
Business combinations and group financial statements ª CHAPTER TWO ª 49
Section 14: Investments in associates continued
IFRS for SMEs
Section 14 Investments in Associates
IFRS
IAS 28 Investments in Associates
Impact assessment
If an investor’s share of losses of an associate equals or exceeds
its interest in the associate, the investor discontinues recognising
its share of further losses. The interest in the associate is the
carrying amount of the investment under the equity method plus
any long-term interests that, in substance, form part of the
investor’s net investment in the associate. Losses recognised
under the equity method in excess of the investor’s investment in
ordinary shares are applied to the other components of the
investor’s interest in an associate in the reverse order of their
seniority.
IFRS for SMEs does not refer to inclusion in the investor’s interest
in the associate of long-term interests that in substance are part
of the net investment in the associate.
Equity method — losses in excesses of investment
If an investor’s share of losses of an associate equals or exceeds
the carrying amount of its investment in the associate, the
investor must discontinue recognising its share of further losses.
After the investor’s interest is reduced to zero, the investor must
recognise additional losses by a provision (see Section 21) only
to the extent that the investor has incurred legal or constructive
obligations or has made payments on behalf of the associate. If
the associate subsequently reports profits, the investor must
resume recognising its share of those profits only after its share
of the profits equals the share of losses not recognised.
After the investor’s interest is reduced to zero, additional losses
are provided for, and a liability is recognised, only to the extent
that the investor has incurred legal or constructive obligations or
made payments on behalf of the associate. If the associate
subsequently reports profits, the investor resumes recognising its
share of those profits only after its share of the profits equals the
share of losses not recognised.
50 ª CHAPTER TWO ª Business combinations and group financial statements
Section 14: Investments in associates continued
IFRS for SMEs
Section 14 Investments in Associates
IFRS
IAS 28 Investments in Associates
Impact assessment
An investor must cease using the equity method from the date
that significant influence ceases.
An investor must discontinue use of the equity method from the
date it ceases to have significant influence.
If the associate becomes a subsidiary or joint venture, the
investor remeasures its previously held equity interest to fair
value and recognises any resulting gain or loss in profit or loss.
On loss of significant influence, the investor must measure at fair
value any investment the investor retains in the former associate.
The investor must recognise in profit or loss any difference
between:
IFRS for SMEs distinguishes losses of significant influence due to
partial disposal of investments and those which arise for other
reasons. In the latter case the investment is not remeasured to
fair value. IFRS makes no such distinction, requiring
remeasurement of the investment to fair value on loss of
significant influence irrespective of the reason it arises.
Discontinuing the equity method
If an investor loses significant influence over an associate as a
result of a full or partial disposal, it must derecognise that
associate and recognise in profit or loss the difference between:
• The sum of the proceeds received plus the fair value of any
retained interest
• The carrying amount of the investment in the associate at the
date significant influence is lost.
Thereafter, the investor accounts for any retained interest as a
financial asset using Section 11 and Section 12, as appropriate.
If an investor loses significant influence for reasons other than a
partial disposal of its investment, the investor regards the
carrying amount of the investment at that date as a new cost
basis and accounts for the investment using Sections 11 and 12,
as appropriate.
• The fair value of any retained investment and any proceeds
from disposing of the part interest in the associate
• The carrying amount of the investment at the date when
significant influence is lost.
If the associate becomes a subsidiary or joint venture, the
investment is accounted for in accordance with IAS 27 or
IAS 31, respectively. Otherwise the investment is accounted for
in accordance with IAS 39 and the fair value of the investment at
the date when it ceases to be an associate is regarded as its fair
value on initial recognition as a financial asset.
Classification
Investments in associates are classified as non-current assets.
Investments in associates are classified as non-current assets.
There are no differences between the classification under IFRS
for SMEs and IFRS.
Business combinations and group financial statements ª CHAPTER TWO ª 51
Chapter three
Elements of the
statement of financial position
Executive summary
In this chapter, we consider the elements that make up the statement of financial position and compare
the following sections of the IFRS for SMEs with the relevant standard under full IFRS:
IFRS for SMEs
IFRS
Section 17 Property, Plant and Equipment
IAS 16 Property, Plant and Equipment
Section 16 Investment Property
IAS 40 Investment Property
Section 18 Intangible Assets other than
Goodwill
IAS 38 Intangible Assets
Section 20 Leases
IAS 17 Leases
Section 27 Impairment of Assets
IAS 36 Impairment of Assets
Section 13 Inventories
IAS 2 Inventories
Section 29 Income Tax
IAS 12 Income Taxes
Section 22 Liabilities and Equity
IAS 32 Financial Instruments: Presentation
Section 11 Basic Financial Instruments
Section 12 Other Financial Instruments Issues
IAS 39 Financial Instruments: Recognition and
Measurement
Section 26 Share-based Payment
IFRS 2 Share-based Payment
Section 21 Provisions and Contingencies
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets
Section 28 Employee Benefits
IAS 19 Employee Benefits
Section 34 Specialised Activities
IAS 41 Agriculture
IFRS 6 Exploration for and Evaluation of Mineral
Resources
IFRIC 12 Service Concession Arrangements
There are a number of differences in the accounting treatment of items in the statement of
financial position. The key differences are as follows:
• Property, Plant and Equipment — there is no option to use a revaluation model.
• Investment Property — must be measured at fair value unless fair value cannot be measured
reliably without undue cost or effort.
• Intangible Assets — all internally generated intangibles, including research and development
costs, must be expensed, which may be a significant issue for some entities. All intangible
assets must be amortised and the useful life is presumed to be 10 years if it cannot be
measured reliably.
• Income Tax — whilst the temporary differences approach remains, there are different
definitions which may impact the recognition of deferred tax. The recognition and
measurement of uncertain tax positions brings in new requirements, not dealt with under IFRS.
Entities may find these new requirements difficult to apply in practice and interpretative issues
may arise.
• Financial Instruments — IFRS for SMEs gives entities the choice of applying the requirements of
the standard or applying IAS 39 Financial Instruments: Recognition and Measurement to the
recognition and measurement of financial instruments. In some cases there are significantly
different treatments that entities will need to consider before deciding to adopt IFRS for SMEs.
• Share-based Payments — the fair value of share in equity-settled share-based payment
arrangements can be measured using the directors’ best estimate of fair value if observable
market prices are not available, which may make valuation easier for SMEs.
• Employee Benefits — entities cannot use the corridor approach. All actuarial gains and losses
must be recognised in full either through profit and loss or through other comprehensive
income. The requirements regarding the valuation of defined benefit plans are less onerous,
which may reduce the compliance costs for some SMEs.
Elements of statement of financial position ª CHAPTER THREE ª 53
Section 35:
17: Transition
Property, plant
equipment
Section
to theand
IFRS
for SMEs
IFRS for SMEs
Section 17 Property, Plant and Equipment
IFRS
IAS 16 Property, Plant and Equipment
Impact assessment
This standard must be applied in accounting for property, plant
and equipment except when another standard requires or
permits a different accounting treatment.
There is no difference between IFRS for SMEs and IFRS.
Property, plant and equipment are tangible assets that are:
Property, plant and equipment are tangible items that are:
There is no difference between IFRS for SMEs and IFRS.
a) Held for use in the production or supply of goods or services,
for rental to others, or for administrative purposes
b) Expected to be used during more than one period.
a) Held for use in the production or supply of goods or services,
for rental to others, or for administrative purposes
b) Expected to be used during more than one period.
Scope
This section applies to accounting for property, plant and
equipment and investment property whose fair value cannot be
measured reliably without undue cost or effort. Section 16
Investment Property applies to investment property for which fair
value can be measured reliably without undue cost or effort.
Definition
Recognition
An entity recognises the cost of an item of property, plant and
equipment as an asset if, and only if:
The cost of an item of property, plant and equipment is
recognised as an asset if, and only if:
a) It is probable that future economic benefits associated with
the item will flow to the entity
b) The cost of the item can be measured reliably.
a) It is probable that future economic benefits associated with
the item will flow to the entity
b) The cost of the item can be measured reliably.
There is no difference between IFRS for SMEs and IFRS.
Initial measurement
An entity measures an item of property, plant and equipment at
initial recognition at its cost. Cost includes:
a) Its purchase price
b) Any costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of
operating in the manner intended by management
c) The initial estimate of the costs of dismantling and removing
the item and restoring the site on which it is located.
Borrowing costs do not form part of the cost of an item of
property, plant and equipment.
An item of property, plant and equipment that qualifies for
recognition as an asset is measured at its cost. The cost
comprises:
a) Its purchase price
b) Any costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of
operating in the manner intended by management
c) The initial estimate of the costs of dismantling and removing
the item and restoring the site on which it is located.
54 ª CHAPTER THREE ª Elements of statement of financial position
There are no differences between IFRS and IFRS for SMEs, except
for borrowing costs, which are capitalised under full IFRS if they
are directly attributable to the acquisition, construction or
production of a qualifying asset.
Section 17: Property, plant and equipment continued
IFRS for SMEs
Section 17 Property, Plant and Equipment
IFRS
IAS 16 Property, Plant and Equipment
Impact assessment
Property, plant and equipment may be valued using either:
a) The cost model (cost less accumulated amortisation and
impairment losses)
or
b) The revaluation model (revalued amount less accumulated
amortisation and impairment losses).
IFRS for SMEs differs from IFRS in that it does not permit the
application of the revaluation model to property, plant and
equipment
Subsequent measurement
An entity must measure all items of property, plant and
equipment after initial recognition at cost less any accumulated
depreciation and any accumulated impairment losses.
An entity must apply that policy to an entire class of property,
plant and equipment.
The depreciable amount of an asset must be allocated on a
systematic basis over its useful life.
The depreciable amount of an asset must be allocated on a
systematic basis over its useful life.
There are no differences between IFRS and IFRS for SMEs.
Factors such as a change in how an asset is used, significant
unexpected wear and tear, technological advancement and
changes in market prices may indicate that the residual value or
useful life of an asset has changed since the most recent annual
reporting date. If such indicators are present, an entity must
review its previous estimates and, if current expectations differ,
amend the residual value, depreciation method or useful life.
The residual value and the useful life of an asset must be
reviewed at least at each financial year-end.
IFRS for SMEs states that the residual value should be reviewed
only if there are indicators that it has changed since the most
recent annual reporting date. Under full IFRS, the review should
be made at each financial year-end.
If the major components of an item of property, plant and
equipment have significantly different patterns of consumption
of economic benefits, an entity must allocate the initial cost of
the asset to its major components and depreciate each such
component separately over its useful life. Other assets must be
depreciated over their useful lives as a single asset.
Each part of an item of property, plant and equipment with a cost
that is significant in relation to the total cost of the item must be
depreciated separately. A significant part of an item of property,
plant and equipment may have a useful life and a depreciation
method that are the same as the useful life and the depreciation
method of another significant part of that same item. Such parts
may be grouped in determining the depreciation charge.
There are no differences between IFRS and IFRS for SMEs.
Elements of statement of financial position ª CHAPTER THREE ª 55
Section 17: Property, plant and equipment continued
IFRS for SMEs
Section 17 Property, Plant and Equipment
IFRS
IAS 16 Property, Plant and Equipment
Impact assessment
An entity must select a depreciation method that reflects the
pattern in which it expects to consume the asset’s future economic
benefits. The possible depreciation methods include the straightline method, the diminishing balance method and a method based
on usage such as the units of production method. If there is an
indication that there has been a significant change since the last
annual reporting date in the pattern of expected consumption, the
entity must review its present depreciation method and, if current
expectations differ, change the depreciation method to reflect the
new pattern.
The depreciation method used must reflect the pattern in which
the asset’s future economic benefits are expected to be
consumed by the entity.
There are no differences between IFRS and IFRS for SMEs, except
that a review of the depreciation method for IFRS for SMEs is
only required if there is an indication that it has changed. Under
IFRS, the depreciation method must be reviewed at least at each
financial year-end.
A variety of depreciation methods can be used such as the
straight line method, the diminishing balance method and the
units of production method. The depreciation method applied to
an asset must be reviewed at least at each financial year-end
and, if there has been a significant change in the expected
pattern of consumption, the method must be changed to reflect
the changed pattern.
Derecognition
An entity must derecognise an item of property, plant and
equipment:
The carrying amount of an item of property, plant and equipment
must be derecognised:
a) On disposal
or
b) When no future economic benefits are expected from its use
or disposal.
a) On disposal
or
b) When no future economic benefits are expected from its use
or disposal.
An entity must recognise the gain or loss on the derecognition of
an item of property, plant and equipment in profit or loss when
the item is derecognised. The entity must not classify such gains
as revenue.
The gain or loss arising from the derecognition of an item of
property, plant and equipment must be included in profit or loss
when the item is derecognised. Gains must not be classified as
revenue.
56 ª CHAPTER THREE ª Elements of statement of financial position
IFRS contains some additional guidance on the gain or loss on
disposal. However, the same result would be achieved when
applying IFRS for SMEs.
Section 16: Investment property ection 35: Transition topthe IFRS for SMEs
IFRS for SMEs
Section 16 Investment Property
IFRS
IAS 40 Investment Property
Impact assessment
This standard must be applied in the recognition, measurement
and disclosure of investment property.
IFRS for SMEs explicitly excludes investment property where its
fair value cannot be measured reliably without undue cost or
effort. Management judgment will be required to determine what
is meant by undue cost or effort.
Investment property is property (land or a building, or part of a
building, or both) held by the owner or by the lessee under a
finance lease to earn rentals or for capital appreciation or both.
There is no difference in definition between IFRS for SMEs
and IFRS.
An entity must measure investment property at its cost at
initial recognition.
An investment property must be measured initially at its cost.
Transaction costs are included in the initial measurement.
The cost of a purchased investment property comprises its
purchase price and any directly attributable expenditure such
as legal and brokerage fees, property transfer taxes and other
transaction costs. If payment is deferred beyond normal credit
terms, the cost is the present value of all future payments. An
entity must determine the cost of a self-constructed investment
property in accordance with Section 17 Property, Plant and
Equipment.
The cost of a purchased investment property comprises its
purchase price and any directly attributable expenditure.
Directly attributable expenditure includes, for example,
professional fees for legal services, property transfer taxes
and other transaction costs.
There are no differences between IFRS and IFRS for SMEs,
except for borrowing costs, which are capitalised under IFRS if
they are directly attributable to the acquisition, construction or
production of a qualifying asset.
Scope
This section applies to accounting for investments in land or
buildings that meet the definition of investment property.
Only investment property whose fair value can be measured
reliably without undue cost or effort on an ongoing basis is
accounted for in accordance with this section. All other
investment property is accounted for as property, plant and
equipment in accordance with Section 17 Property, Plant
and Equipment.
Definition
Investment property is property (land or a building, or part of a
building, or both) held by the owner or by the lessee under a
finance lease to earn rentals or for capital appreciation or both.
Initial measurement
Elements of statement of financial position ª CHAPTER THREE ª 57
Section 16: Investment property continued
IFRS for SMEs
Section 16 Investment Property
IFRS
IAS 40 Investment Property
Impact assessment
Subsequent measurement
Investment property whose fair value can be measured reliably
Investment property may be carried at either:
without undue cost or effort must be measured at fair value at
• Cost less accumulated amortisation and impairment losses or
each reporting date with changes in fair value recognised in profit
• Revalued amount less accumulated amortisation and
or loss. If a property interest held under a lease is classified as
impairment losses.
investment property, the item accounted for at fair value is that
interest and not the underlying property. An entity accounts for
all other investment property as property, plant and equipment
using the cost depreciation impairment model in Section 17.
IFRS for SMEs differs from IFRS in that it requires the use of the
fair value model, where fair value can be measured reliably
without undue cost or effort.
Transfers
An entity must transfer a property to, or from, investment
property only when the property first meets, or ceases to meet,
the definition of investment property.
Transfers to, or from, investment property must be made when,
and only when, there is a change in use.
58 ª CHAPTER THREE ª Elements of statement of financial position
IFRS contains some additional guidance when a property can be
transferred. However, the same result would be achieved when
applying IFRS for SMEs.
Section 18: Intangible assets other than goodwill
IFRS for SMEs
Section 18 Intangible Assets other than Goodwill
IFRS
IAS 38 Intangible Assets
Impact assessment
The standard applies to all intangibles other than those within
the scope of another standard, financial instruments, exploration
and evaluation assets and expenditure on the development and
extraction of minerals, oil, natural gas and similar nonregenerative resources.
IFRS explicitly excludes all intangible assets that are dealt with
under other standards. This would be a natural presumption in
Section 18 as other intangible assets, such as lease rights, etc.,
have their own applicable sections.
An intangible asset is an identifiable non-monetary asset without
physical substance. Identifiablility arises when the asset is
separable or arises from contractual or other legal rights.
There is no difference in definition between IFRS for SMEs
and IFRS.
An intangible asset is recognised if, and only if, it is probable
that there are expected future benefits and cost that can be
reliable measured.
A significant difference exists between IFRS and IFRS for SMEs
in that the latter does not allow for any internally generated
intangible assets to be capitalised to the balance sheet.
Scope
This section is applicable to all intangible assets other than
goodwill and intangible assets held for sale in the ordinary course
of business. Furthermore, the scope excludes financial assets and
mineral rights and mineral reserves.
One difference, for those entities in the oil and mining sectors, is
the inclusion of exploration and evaluation intangible assets
within the scope of Section 18.
Definition of an intangible asset
An intangible asset is an identifiable non-monetary asset without
physical substance. Identifiablility arises when the asset is
separable or arises from contractual or other legal rights.
Recognition
An entity may recognise an intangible asset if it is probable that
there are expected future economic benefits, a reliably
measurable cost/value and it does not result from expenditure
incurred internally on an intangible asset.
This could particularly affect companies that operate in sectors
where numerous intangible assets are generated — such as the
pharmaceutical industry.
Initial measurement
Initial measurement is dependant on the manner in which the
intangible asset is acquired:
Initial measurement is dependant on the manner in which the
intangible asset is acquired:
•
•
•
•
• Separate acquisition — at cost
• Business combination — at fair value at the acquisition date
• Government grant — at the fair value of the grant or at the
nominal amount
• Exchange of assets — at the fair value of the asset or cost
when the transaction lacks commercial substance or fair
values cannot be reliably measured.
Separate acquisition — at cost
Business combination — at fair value at the acquisition date
Government grant — at the fair value of the grant
Exchange of assets — at the fair value of the asset or cost
when the transaction lacks commercial substance or fair
values cannot be reliably measured.
IFRS for SMEs differs from IFRS in respect of the initial
measurement of intangible assets acquired by way of a
government grant as under IFRS for SMEs, such assets must be
measured at fair value.
Elements of statement of financial position ª CHAPTER THREE ª 59
Section 18: Intangible assets other than goodwill continued
IFRS for SMEs
Section 18 Intangible Assets other than Goodwill
IFRS
IAS 38 Intangible Assets
Impact assessment
Intangible assets may be carried at either:
IFRS for SMEs differs for IFRS in that it does not permit the
application of the revaluation model to intangible assets.
Subsequent measurement
Intangible assets are measured at cost less accumulated
amortisation and impairment losses.
• Cost less accumulated amortisation and impairment losses
or
• Revalued amount less accumulated amortisation and
impairment losses.
Amortisation
Intangible assets must be amortised over there useful lives. If the
useful life is not determinable then it is presumed to be 10 years.
The depreciable amount is allocated over the life of the asset that
reflects the pattern in which the asset’s future economic benefits
are expected to be consumed. If the pattern cannot be reliably
determined, then the straight-line method is utilised.
Intangible assets must be assessed as to whether they have a
finite or an indefinite life. Intangible assets with finite lives are
amortised over their useful lives. Those with an indefinite life is
not amortised and subject to an annual impairment test.
IFRS for SMEs differs from IFRS in that it does not permit
intangible assets to be classified as an asset with an indefinite
life. A useful life is required to be established for all intangible
assets, or it is assumed to be 10 years.
The depreciable amount is allocated over the life of the asset
that reflects the pattern in which the asset’s future economic
benefits are expected to be consumed. If the pattern cannot be
reliably determined, then the straight-line method is utilised.
There is no difference between IFRS for SMEs and IFRS.
Residual values are permitted if there is a commitment by a third
party to purchase the asset, or there is an active market and
residual value can be determined by reference to this market and
the market is expected to be in existence at the end of the asset’s
useful life.
There is no difference between IFRS for SMEs and IFRS.
The entity will review at each reporting date whether there has
been a change in useful life, residual amount or amortisation
method. If there is an indicator, this will be adjusted as a change
in estimate.
IFRS for SMEs differs from IFRS in that there is no requirement
to review amortisation method, useful life and residual values at
each reporting date.
An intangible asset is derecognised on disposal, or when there
are no future benefits expected from its use or disposal. The gain
or loss on disposal is determined as the difference between
carrying value and the net disposal proceeds and is recognised in
profit or loss.
IFRS contains some additional guidance on the gain or loss on
disposal. However, the same result would be achieved when
applying IFRS for SMEs.
Residual values
Residual values are permitted if there is a commitment by a third
party to purchase the asset, or there is an active market and
residual value can be determined by reference to this market and
the market is expected to be in existence at the end of the asset’s
useful life.
Review of amortisation
The entity will consider at each reporting date whether there are
any indicators that there has been a change in useful life, residual
amount or amortisation method. If there is an indicator, this will
be adjusted as a change in estimate.
Derecognition
An intangible asset is derecognised on disposal, or when there
are no future benefits expected from its use or disposal.
60 ª CHAPTER THREE ª Elements of statement of financial position
35: Transition
to the IFRS for SMEs
Section 20:
Leases
IFRS for SMEs
Section 20 Leases
IFRS
IAS 17 Leases
Impact assessment
Applies to all leases other than:
The standard applies to all leases other than:
• Leases to explore for or use minerals, oil, natural gas and
similar non-regenerative resources
• Licensing agreements for such items as motion picture films,
video recordings, plays, manuscripts, patents and copyrights
• Measurement of property held by lessees for investment
property and by lessors under operating leases
• Measurement of biological assets by lessees under finance
leases and by lessors under operating leases
• Leases that could lead to a loss as a result of contractual
terms unrelated to changes in the price of the leased asset,
changes in foreign exchange rates, or default by one of the
counterparties
• Onerous operating leases.
• Those to explore for or use minerals, oil, natural gas and
similar non-regenerative resources
• Licensing agreements for such items as motion picture films,
video recordings, plays, manuscripts, patents and copyrights
• Measurement of property held by lessees for investment
property and by lessors under operating leases
• Measurement of biological assets by lessees under finance
leases and by lessors under operating leases.
Although the wording of the scope of IFRS for SMEs differs
from full IFRS, in practice it generally applies to the same leases.
The standards do not apply to agreements that are contracts for
services that do not transfer the right to use assets from one
contracting party to the other.
Scope
Definitions
A lease is an agreement that transfers the right to use assets in
return for payment. A finance lease transfers substantially all the
risks and rewards incidental to ownership and an operating lease
does not transfer substantially all the risks and rewards incidental
to ownership.
A lease is is an agreement that transfers the right to use assets in
return for payment. A finance lease transfers substantially all the
risks and rewards incidental to ownership of an asset. An
operating lease is a lease other than a finance lease.
There are only minor explanatory differences between
IFRS for SMEs and IFRS.
A lease is classified as a finance lease if it transfers substantially
all the risks and rewards incidental to ownership. A lease is
classified as an operating lease if it does not transfer
substantially all the risks and rewards incidental to ownership.
There is no difference between IFRS for SMEs and IFRS.
Recognition
Leases are classified as either finance leases or operating leases
at inception based on whether substantially all of the risks and
rewards incidental to ownership of the leased asset have been
transferred from the lessor to the lessee. Indicators are also used
to determine classification.
Manufacturer or dealer lessors offer customers a choice to either
buy or lease an asset which gives rise to two types of income,
profit or loss from the sale of the leased asset and finance
income over the lease term.
Lessees recognise the rights of use and obligations under finance
leases as assets and liabilities in the statement of financial position
and lease payments under operating leases as an expense.
IFRS includes additional guidance on finance leases for
manufacturer or dealer lessors.
Manufacturer or dealer lessors offer customers a choice to either
buy or lease an asset which gives rise to two types of income,
profit or loss from the sale of the leased asset and finance
income over the lease term.
Lessees recognise finance leases as assets and liabilities in the
statement of financial position and payments under an operating
lease as an expense.
Elements of statement of financial position ª CHAPTER THREE ª 61
Section 20: Leases continued
IFRS for SMEs
Section 20 Leases
IFRS
IAS 17 Leases
Impact assessment
Finance leases are initially measured at amounts equal to the fair
value of the leased property or, if lower, the present value of
minimum lease payments.
There is no difference between IFRS for SMEs and IFRS.
Initial measurement
Lessees — finance leases:
Finance leases are initially measured at amounts equal to the fair
value of the leased property or, if lower, the present value of
minimum lease payments.
Lessees — operating leases:
Operating leases are expensed on a straight-line basis or another Operating lease payments are expensed on a straight line basis
basis that represents the use of the asset, unless payments to the over the lease term unless another systematic basis is more
lessor increase with expected inflation in which case the
representative of the use of the asset.
payments are expensed when payable.
IFRS for SMEs includes additional guidance on the treatment of
an operating lease by a lessee, where payments payable to the
lessor are structured to increase with inflation.
Lessors — finance leases:
Leases are presented as receivables at amounts equal to the net
investment in the lease, which is the gross investment discounted
at the interest rate implicit in the lease.
Lessors recognise assets under a finance lease in statement of
financial position as a receivable equal to net investment in lease.
There is no difference between IFRS for SMEs and IFRS.
Lessors present assets subject to operating leases in the
statement of financial position according to the nature of the
asset. Lease income from operating leases is recognised on a
straight-line basis over the lease term, unless another systematic
basis is more representative.
IFRS for SMEs allows recognition of structured payments relating
to inflation.
Lessors — operating leases:
Lessors present assets subject to operating leases in the
statement of financial position according to the nature of the
asset.
Lease income from operating leases is recognised on a straightline basis or another basis that represents the benefit from the
asset, unless payments to the lessor increase with expected
inflation, in which case the payments are recognised as income
when payable.
Depreciation policy is consistent with lessor’s normal
depreciation policy for similar assets.
Depreciation is recognised on the same basis as for similar
assets.
Initial direct costs incurred by lessors in arranging leases are
added to carrying amount of leased asset and expensed over
lease term on same basis as lease income.
Initial direct costs incurred by lessors in arranging leases are
added to the carrying amount of the leased asset and expensed
over the lease term on same basis as the lease income.
Manufacturer or dealer lessor does not recognise any selling
profit on entering into an operating lease because it is not the
equivalent of a sale.
A manufacturer or dealer does not recognise selling profit on
entering into an agreement, this is not equivalent to a sale.
62 ª CHAPTER THREE ª Elements of statement of financial position
Section 20: Leases continued
IFRS for SMEs
Section 20 Leases
IFRS
IAS 17 Leases
Impact assessment
If a sale and leaseback transaction results in finance lease, the
excess of sale proceeds over carrying amount is deferred and
amortised over the lease term by the seller/lessee.
There is no difference between IFRS for SMEs and IFRS.
If a sale and leaseback results in an operating lease and the
transaction was at fair value, profit or loss is recognised
immediately. If the sales price is below fair value, profit or loss is
recognised immediately unless compensated for by future below
market price payments, which are deferred and amortised. If the
sale price was in excess of the fair value, the excess is deferred
and amortised.
There is no difference between IFRS for SMEs and IFRS.
Minimum lease payments are apportioned between finance
charges and reduction of the liability using the effective interest
method.
Minimum lease payments are apportioned between finance
charges and reduction of liability allocated to produce a constant
periodic rate of interest.
There is no difference between IFRS for SMEs and IFRS.
An asset is depreciated over the shorter of the lease term and
the useful life of the asset.
An asset is depreciated over the shorter of the lease term and
the useful life of the asset.
Sale and leaseback — finance leases:
If the leaseback is a finance lease, the seller/lessee defers any
gain and amortises it over the lease term.
Sale and leaseback — operating leases:
If a leaseback is an operating lease and the sale takes place at or
in excess of fair value, profit or loss is recognised immediately.
When the sale price is below fair value, profit or loss is recognised
immediately, except if compensated for by future below market
price payments, which are deferred and amortised. If the sale
price was in excess of fair value, the excess is deferred and
amortised over the period the asset is expected to be used.
Subsequent measurement
Lessees — finance leases:
Lessors — finance leases:
Finance income reflects a constant rate of return on net
investment. Payments are applied against the gross investment
to reduce both the principal and unearned finance income.
Finance income is allocated over lease term reflecting constant
periodic rate of return on lessor’s net investment.
There is no difference between IFRS for SMEs and IFRS.
Lease classification is made at inception of the lease. If at any
time the lessee and lessor agree to change the provisions of
lease, other than changes in circumstances or estimates, the
revised agreement is regarded as new agreement over its term.
There is no difference between IFRS for SMEs and IFRS.
Derecognition
Leases are classified at inception of the lease and this is not
changed during the term unless there is agreement between the
lessee and lessor, in which case the classification is re-evaluated.
Elements of statement of financial position ª CHAPTER THREE ª 63
Section 27: Impairment of assets
IFRS for SMEs
Section 27 Impairment of Assets
IFRS
IAS 36 Impairment of Assets
Impact assessment
Applies in accounting for the impairment of all assets other than:
Applies in accounting for the impairment of all assets other than:
•
•
•
•
•
•
•
•
•
•
•
•
•
Although the wording of the scope requirements differs, in
practice there is no difference between IFRS for SMEs and IFRS.
Scope
Deferred tax assets
Assets arising from employee benefits
Financial assets
Investment property measured at fair value
Biological assets.
Deferred tax assets
Assets arising from employee benefits
Financial assets
Investment property measured at fair value
Biological assets
Inventories
Assets arising from construction contracts
Deferred acquisition costs and intangible assets arising
from an insurer’s contractual rights
• Non-current assets classified as held for sale.
General principles
If, and only if, the recoverable amount of an asset is less than its
carrying amount, the entity must reduce the carrying amount of
the asset to its recoverable amount. The recoverable amount of
an asset or a cash generating unit is the higher of its fair value
less costs to sell and its value in use.
An asset is impaired when its carrying amount exceeds its
recoverable amount. The recoverable amount of an asset or a
cash generating unit is the higher of its fair value less costs to sell
and its value in use.
There is no difference between IFRS for SMEs and IFRS.
An entity must recognise an impairment loss immediately in
profit or loss.
An impairment loss must be recognised immediately in profit or
loss, unless the asset is carried at revalued amount in accordance
with another standard. Any impairment loss of a revalued asset
must be treated as a revaluation decrease in accordance with
that other standard.
IFRS for SMEs differs from IFRS in that it does not permit the
application of revaluation models and therefore all losses are
immediately recognised in profit or loss.
64 ª CHAPTER THREE ª Elements of statement of financial position
Section 27: Impairment of assets continued
IFRS for SMEs
Section 27 Impairment of Assets
IFRS
IAS 36 Impairment of Assets
Impact assessment
An entity must assess at each reporting date whether there is
any indication that an asset may be impaired. If any such
indication exists, the entity must estimate the recoverable
amount of the asset. If there is no indication of impairment, it is
not necessary to estimate the recoverable amount.
An entity must assess at the end of each reporting period
whether there is any indication that an asset may be impaired.
If any such indication exists, the entity must estimate the
recoverable amount of the asset. Irrespective of whether there is
any indication of impairment, an entity must also:
IFRS for SMEs differs from IFRS in that it does not require an
annual impairment test for intangible assets and goodwill.
Instead these assets are tested for impairment only if there are
indicators that an impairment may exist.
In assessing whether there is any indication that an asset may be
impaired, an entity must consider, as a minimum, external and
internal sources of information.
a) Test an intangible asset with an indefinite useful life or an
intangible asset not yet available for use for impairment
annually by comparing its carrying amount with its
recoverable amount
b) Test goodwill acquired in a business combination for
impairment annually.
Indicators of impairment
There is no difference between IFRS for SMEs and IFRS.
In assessing whether there is any indication that an asset may be
impaired, an entity must consider, as a minimum, external and
internal sources of information.
Fair value less costs to sell
Fair value less costs to sell is the amount obtainable from the sale
of an asset less the costs of disposal. The best evidence of the
fair value less costs to sell is a price in a binding sale agreement
in an arm’s length transaction, or a market price in an active
market. If there is no binding sale agreement or active market for
an asset, fair value less costs to sell is based on the best
information available to reflect the amount that an entity could
obtain, at the reporting date, from the disposal of the asset after
deducting the costs of disposal.
The best evidence of an asset’s fair value less costs to sell is a
price in a binding sale agreement in an arm’s length transaction,
adjusted for incremental costs that would be directly attributable
to the disposal of the asset. If there is no binding sale agreement
but an asset is traded in an active market, fair value less costs to
sell is the asset’s market price less the costs of disposal.
There is no difference between IFRS for SMEs and IFRS.
Value in use is the present value of the future cash flows
expected to be derived from an asset or cash generating unit.
There is no difference between IFRS for SMEs and IFRS.
Value in use
Value in use is the present value of the future cash flows
expected to be derived from an asset.
Elements of statement of financial position ª CHAPTER THREE ª 65
Section 27: Impairment of assets continued
IFRS for SMEs
Section 27 Impairment of Assets
IFRS
IAS 36 Impairment of Assets
Impact assessment
Goodwill acquired in a business combination is allocated to each
of the acquirer’s cash-generating units that is expected to benefit
from the synergies of the combination.
There is no difference between IFRS for SMEs and IFRS.
Goodwill impairment
Goodwill acquired in a business combination must be allocated to
each of the acquirer’s cash-generating units that is expected to
benefit from the synergies of the combination.
If goodwill cannot be allocated to individual cash-generating units Each unit or group of units to which the goodwill is so allocated
on a non-arbitrary basis, then for the purposes of testing goodwill must:
the entity tests the impairment of goodwill by determining the
a) Represent the lowest level within the entity at which the
recoverable amount of:
goodwill is monitored for internal management purposes
b)
Not be larger than an operating segment determined in
a) The acquired entity in its entirety
accordance
with IFRS 8 Operating Segments.
or
b) The entire group of entities.
An impairment loss recognised for goodwill must not be reversed
in a subsequent period.
An impairment loss recognised for goodwill must not be reversed
in a subsequent period.
If the estimated recoverable amount of the cash-generating unit
exceeds its carrying amount, that excess is a reversal of an
impairment loss. The entity must allocate the amount of that
reversal to the assets of the unit, except for goodwill, pro rata
with the carrying amounts of those assets, subject to some
limitations.
A reversal of an impairment loss for a cash generating unit must
be allocated to the assets of the unit, except for goodwill, pro rata
with the carrying amounts of those assets.
66 ª CHAPTER THREE ª Elements of statement of financial position
IFRS contains some additional guidance and distinction on
reversal of impairment losses. However, the same result would be
achieved when applying IFRS for SMEs.
Section 13: Inventories
IFRS for SMEs
Section 13 Inventories
IFRS
IAS 2 Inventories
Impact assessment
The section applies to all inventories except work in progress
arising under construction contracts, financial instruments,
biological assets related to agricultural activity and agricultural
produce at the point of harvest.
The standard applies to all inventories except work in progress
arising under construction contract, financial instruments,
biological assets related to agricultural activity and agricultural
produce at the point of harvest.
There is no difference between IFRS for SMEs and IFRS.
The section does not apply to the measurement of inventories
held by producers of agricultural and forest products, and
commodity brokers and dealers to the extent that their
inventories are measured at fair value less costs to sell through
profit and loss.
The section does not apply to the measurement of inventories
held by producers of agricultural and forest products, and
commodity brokers and dealers to the extent that their
inventories are measured at fair value less costs to sell through
profit and loss.
Scope
Definition
Inventories are assets:
a) Held for sale in the ordinary course of business
b) In the process of production for such sale
or
c) In the form of materials or supplies to be consumed in the
production process or in the rendering of services.
Inventories are assets:
a) Held for sale in the ordinary course of business
b) In the process of production for such sale
or
c) In the form of materials or supplies to be consumed in the
production process or in the rendering of services.
There is no difference between IFRS for SMEs and IFRS.
Lower of cost and net realisable value. Net realisable value is the
estimated selling price less costs of completion and costs
necessary to make the sale.
Although there are some differences in wording, in substance,
there is no difference between IFRS for SMEs and IFRS.
All costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and
condition.
There is no difference between IFRS for SMEs and IFRS.
Measurement
Lower of cost and estimated selling price less costs to complete
and sell.
Cost of inventories
All costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and
condition.
Both IFRS for SMEs and IAS 2 include further descriptions of
what is included in costs of purchase, costs of conversion and
other costs.
Elements of statement of financial position ª CHAPTER THREE ª 67
Section 13: Inventories continued
IFRS for SMEs
Section 13 Inventories
IFRS
IAS 2 Inventories
Impact assessment
Standard cost method, the retail method or most recent purchase Standard cost method, the retail method or most recent purchase There is no difference between IFRS for SMEs and IFRS.
price for measuring the cost of inventories if the result
price for measuring the cost of inventories if the result
approximates cost.
approximates cost.
First-in, first-out (FIFO) or weighted average cost formula.
First-in, first-out (FIFO) or weighted average cost formula.
The same cost formula must be used for all inventories having a
similar nature and use.
The same cost formula must be used for all inventories having a
similar nature and use.
Different cost formulas may be justified if the inventories are of
different nature or use.
Different cost formulas may be justified if the inventories are of
different nature or use.
The last-in, first-out method (LIFO) is not permitted.
The last-in, first-out method (LIFO) is not permitted.
Impairment
Assess at the end of each reporting period whether any
inventories are impaired, i.e., the carrying amount is not fully
recoverable (e.g., because of damage, obsolescence or declining
selling prices). If inventory is impaired, it is measure at its selling
price less costs to complete and sell. The impairment loss is
recognised in profit or loss.
If inventories are damaged, have become wholly or partially
obsolete, or selling prices have declined, the inventories are
written down to net realisable value.
IFRS contains some additional guidance on the estimates of net
realisable value. However, the same result would be achieved
when applying IFRS for SMEs.
A reversal of a prior impairment in some circumstances is
required.
A reversal of a prior impairment in some circumstances is
required.
Derecognition
When inventories are sold, the entity must recognise the carrying
amount of those inventories as an expense in the period in which
the related revenue is recognised.
When inventories are sold, the entity must recognise the carrying
amount of those inventories as an expense in the period in which
the related revenue is recognised.
68 ª CHAPTER THREE ª Elements of statement of financial position
There is no difference between IFRS for SMEs and IFRS.
Section 29: Income taxes
IFRS for SMEs
Section 29 Income Tax
IFRS
IAS 12 Income Taxes
Impact assessment
The standard applies to accounting for income taxes, which
include all domestic and foreign taxes that are based on taxable
profits. It also includes taxes such as withholding taxes which
are payable by the subsidiary, associate or joint venture on
distributions to the reporting entity.
There is no difference between IFRS for SMEs and IFRS with
respect to scope.
Scope
Income tax includes all domestic and foreign taxes that are based
on taxable profit. It also includes taxes payable by a subsidiary,
associate or joint venture on distributions to the reporting entity.
Taxes that are not income taxes (such as value-added taxes)
are accounted for according to the accounting standards
governing the balance sheet or income statement item they
are contained in.
Tax base
The tax base of an asset is determined by the tax consequences
that would arise if it were recovered for its carrying amount
through sale at the reporting date.
The tax base of a liability is determined by the tax consequences
that would arise if it were settled for its carrying amount at the
reporting date.
The tax base of an asset or is the amount that will be deductible
for tax purposes against any taxable economic benefits that
will flow to an entity when it recovers the carrying amount of
the asset.
IFRS for SMEs eliminates management intent from the
determination of the tax base since it is determined assuming
an entity sells or settles all its assets and liabilities at each
reporting date.
The tax base of a liability is its carrying amount, less any amount
that will be deductible for tax purposes in respect of that liability
in future periods.
This may cause practical difficulties for preparers as more work
may be required to calculate the tax base as hypothetical tax
calculations will need to be done to determine the tax base.
An entity’s expectation as to the manner in which it will recover
the carrying amount of an asset or settle the carrying amount
of a liability can affect the tax base. For example, if an entity
were to pay a different amount of tax depending on whether an
asset is consumed in the business or sold, the entity measures
deferred tax according to the expected method of realisation.
This effectively makes deferred tax under IAS 12 a function of
management’s intent.
Elements of statement of financial position ª CHAPTER THREE ª 69
Section 29: Income taxes continued
IFRS for SMEs
Section 29 Income Tax
IFRS
IAS 12 Income Taxes
Impact assessment
A deferred tax asset must be recognised for all deductible
temporary differences to the extent that it is probable that
taxable profit will be available against which the deductible
temporary difference can be utilised.
Deferred tax assets that were previously not recorded under
IAS 12 will now have to be recorded under IFRS for SMEs with
offsetting valuation allowances. For SMEs, this will require
additional tracking and documentation for each deferred tax
asset and its related valuation allowances when compared
with IAS 12.
Recognition of deferred tax assets
Deferred tax assets must be recognised for all temporary
differences that are expected to reduce taxable profit in the
future as a total amount.
An entity must recognise a valuation allowance against deferred
tax assets so that the net carrying amount equals the highest
amount that is more likely than not to be recovered based on
current or future taxable profit.
An entity must review the net carrying amount of a deferred tax
asset at each reporting date and adjust the valuation allowance
to reflect the current assessment of future taxable profits.
Such adjustment is recognised in profit or loss, except that
an adjustment attributable to an item of income or expense
recognised in accordance with this IFRS as other comprehensive
income is recognised in other comprehensive income.
IAS 12 also requires an entity to reassess the recognition of
deferred tax assets and recognise previously unrecognised
deferred tax assets at each balance sheet date to the extent it
has become probable tht the asset will be recovered.
A deferred tax asset is not reported gross, less a valuation
allowance, but as an amount representing the ‘amount of income
taxes recoverable in future periods in respect of deductible
temporary differences, the carry forward of unused tax losses
and the carry forward of unused tax credits.’
Movements in deferred tax assets are recognised in profit or loss,
unless the tax relates to items outside profit or loss.
Uncertain tax positions
An entity must measure current and deferred tax assets and
liabilities using the probability-weighted average amount of all
the possible outcomes, assuming that the tax authorities will
review the amounts reported and have full knowledge of all
relevant information.
Changes in the probability-weighted average amount of all
possible outcomes must be based on new information, not a new
interpretation by the entity of previously available information.
There is no probability threshold applied to the recognition of an
uncertain tax position — implying an entity needs to review and
measure all its uncertain tax positions. It also does not define
how, or at what level of detail, or unit of account, a tax position
is to be analysed.
IAS 12 currently does not explicitly address the recognition and
measurement of uncertain tax positions. IAS 12 indicates that
tax assets and liabilities should be measured at the amount
expected to be paid. However, it notes that, while IAS 37
Provisions, Contingent Liabilities and Contingent Assets generally
excludes income taxes from its scope, its principles are relevant
to the disclosure of tax-related contingent assets and contingent
liabilities, such as unresolved disputes with taxing authorities.
The requirements of IFRS for SMEs for the measurement of
uncertain tax positions apply to current and deferred taxes alike,
since an uncertain tax position may not simply affect the amount
of current tax payable or receivable. For example, where an entity
has claimed a deduction for an item in its tax return which is
subject to uncertainty, the uncertainty may determine not only
the measurement of current tax, but also that of the tax basis of
any associated asset or liability and, therefore, deferred tax.
Since there is no direct guidance on this topic in IAS 12, there
are some variations on how entities currently account for
uncertain tax positions in practice.
The uncertain tax positions requirements of IFRS for SMEs will
have far-reaching data gathering, documentation and support
implications for an entity and could potentially affect its dealings
with tax authorities worldwide.
Some adopt a one-step approach which recognises all uncertain
tax positions at an expected value. Others adopt a two-step
approach which recognises only those uncertain tax positions
that are considered more likely than not to result in a cash
outflow.
70 ª CHAPTER THREE ª Elements of statement of financial position
SMEs will require significant effort (compared to users of
IAS 12) to identify, document, measure and disclose their
uncertain tax positions following these explicit requirements.
Section 29: Income taxes continued
IFRS for SMEs
Section 29 Income Tax
IFRS
IAS 12 Income Taxes
Impact assessment
IAS 12 requires current tax and deferred tax to be charged or
credited in other comprehensive income (OCI) or directly in
equity if the tax relates to items that were credited or charged,
whether in the current or previous period, in OCI or directly in
equity. Subsequent changes to those amounts are also allocated
to OCI or equity as applicable.
Although IFRS for SMEs has the same approach to backward
tracing, the wording is not exactly the same as that contained in
IAS 12. It remains to be seen if any variations in practice develop
in this regard over time.
IAS 12 currently requires a deferred tax asset or liability to be
recognised for all deductible or taxable temporary differences,
except for:
IFRS for SMEs does not describe how to account for temporary
differences on the initial recognition of items that are not
goodwill. Therefore, entities will need to develop an accounting
policy to deal with these differences.
Backward tracing
An entity must recognise tax expense in the same component of
total comprehensive income or equity as the transaction or other
event that resulted in the tax expense.
Initial recognition exemption
An entity must not recognise a deferred tax liability for a
temporary difference associated with the initial recognition
of goodwill.
• A deferred tax liability arising from the initial recognition
of goodwill
or
• A deferred tax asset or liability arising from the initial
recognition of an asset or liability in a transaction which is not
a business combination and at the time of the transaction
affects neither accounting profit nor taxable profit or loss.
This rule is generally referred to as the initial recognition
exception or ‘IRE’.
Elements of statement of financial position ª CHAPTER THREE ª 71
Section 29: Income taxes continued
IFRS for SMEs
Section 29 Income Tax
IFRS
IAS 12 Income Taxes
Impact assessment
IAS 12 currently requires an entity to recognise a deferred tax
liability for all taxable temporary differences associated with
investments ‘in subsidiaries, branches and associates and
interests in joint ventures’ except to the extent that both of the
following conditions are satisfied:
By limiting the exception to ‘foreign’ subsidiaries, branches,
associates and joint ventures, IFRS for SMEs will involve more
work because deferred taxes will now have to be calculated on
investments in many domestic entities in the group, that may
not be required under IAS 12.
Investments
An entity must not recognise a deferred tax asset or liability for
temporary differences associated with unremitted earnings from
foreign subsidiaries, branches, associates and joint ventures to
the extent that the investment is essentially permanent in nature,
unless it is apparent that the temporary difference will reverse in
the foreseeable future.
a) The parent, investor or venturer is able to control the timing
of the reversal of the temporary difference
b) It is probable that the temporary difference will not reverse in
the foreseeable future. A deferred tax asset for all deductible
temporary differences arising from investments in
subsidiaries, branches and associates and interests in joint
ventures, is not recorded, except to the extent that, and only
to the extent that, it is probable that:
• The temporary difference will reverse in the foreseeable
future
• Taxable profit will be available against which the temporary
difference can be utilised.
Classification
When an entity presents current and non-current assets, and
current and non-current liabilities, as separate classifications in
its statement of financial position, it must not classify any
deferred tax assets (liabilities) as current assets (liabilities).
IAS 12 follows the requirements of IAS 1 Presentation of
Financial Statements which requires all deferred tax assets and
liabilities to be classified as non-current, regardless of the
classification of the underlying asset and liability giving rise to
the temporary difference.
72 ª CHAPTER THREE ª Elements of statement of financial position
There is no difference between IFRS for SMEs and IFRS.
Section 29: Income taxes continued
IFRS for SMEs
Section 29 Income Tax
IFRS
IAS 12 Income Taxes
Impact assessment
An entity must measure tax assets and liabilities using the tax
rate applicable to undistributed profits.
There is no difference between IFRS for SMEs and IFRS.
Applicable tax rate
An entity must measure current and deferred taxes at the tax
rate applicable to undistributed profits until the entity recognises
a liability to pay a dividend. When the entity recognises a liability
to pay a dividend, it must recognise the resulting current or
deferred tax liability (asset) and the related tax expense
(income).
Deferred taxes are measured based on the tax rates and tax laws
that are enacted or substantively enacted at the reporting date.
An entity must measure a deferred tax liability (asset) using the
tax rates and laws that have been enacted or substantively
enacted by the reporting date.
Disclosures
IFRS for SMEs does not contain all the disclosures currently
contained in IAS 12, yet introduces some new disclosures not
currently in IAS 12, including:
• The effect on deferred tax expense arising from a change in
the effect of the possible outcomes of a review by the tax
authorities
• Adjustments to deferred tax expense arising from a change in
the tax status of the entity or its shareholders (it is notable
that IFRS for SMEs doesn’t provide guidance on when or how
to recognise the effect of the change in status, but requires
disclosure of the effect)
• Any change in the valuation allowance
• An explanation of the significant differences in amounts
presented in the statement of comprehensive income and
amounts reported to tax authorities.
IAS 12 has a number of specific disclosure requirements.
IFRS for SMEs may have more onerous disclosure requirements
than IAS 12, particularly for uncertain tax positions. Entities will
need to consider the information required to fulfil those
requirements.
Elements of statement of financial position ª CHAPTER THREE ª 73
Section 22: Liabilities and equity
IFRS for SMEs
Section 22 Liabilities and Equity
IFRS
IAS 32 Financial Instruments: Presentation
Impact assessment
The standard applies to all financial instruments. The scope
however does not extend (in brief) to:
Although the wording of the scoping section differs to full IFRS, in
most cases for the types of financial instruments that SMEs have,
the scope will be principally in line with full IFRS.
Scope
The section establishes classification of financial instruments as
either liabilities or equity and addresses accounting for equity
instruments issued to individuals as investors in equity
instruments.
• Interests in subsidiaries, associates or joint ventures
• Employers’ rights and obligations under employee benefit
plans
Furthermore, the scope is applied when classifying all types of
•
Insurance contracts and financial instruments with
financial instruments except:
discretionary participation features within IFRS 4
• Interests in subsidiaries, associates and joint ventures
• Contracts and obligations under share-based payment
• Employers’ rights and obligations under employee benefit
transactions to which IFRS 2 applies, except:
plans
• Contracts for non-financial items that can be settled net
• Contracts for contingent consideration in a business
and are not part of the entity’s normal purchase, sale or
combination
usage requirements
• Financial instruments, contracts and obligations under
• Treasury shares purchased in connection with employee
share-based transactions except application to treasury shares
share plans.
purchased, sold, issued or cancelled in connection with
employee share option plans, employee share purchase plans
and all other share-based payment arrangements.
74 ª CHAPTER THREE ª Elements of statement of financial position
While IFRS for SMEs does not exclude insurance liabilities in this
section of the standard, they are excluded in the section dealing
with the measurement of financial instruments.
Unlike IAS 32, IFRS for SMEs provides no application guidance
when applying this section of the standard.
Section 22: Liabilities and equity continued
IFRS for SMEs
Section 22 Liabilities and Equity
IFRS
IAS 32 Financial Instruments: Presentation
Impact assessment
A financial liability is any liability that is:
Under IFRS for SMEs, definitions of financial instrument and a
financial liability are contained in the appendix to the standard.
A user of the standard would refer to these definitions when
applying this section to financial instruments.
Definitions
The appendix to IFRS for SMEs contains the definition of a
financial liability as any liability that is:
a) A contractual obligation:
• To deliver cash or another financial asset
a) A contractual obligation:
or
• To deliver cash or another financial asset
• To exchange financial assets or financial liabilities
or
under unfavourable conditions
• To exchange financial assets or financial liabilities
or
under unfavourable conditions
b) A contract that will or may be settled in the entity’s own equity
or
instruments and is:
b) A contract that will or may be settled in the entity’s own equity
• A non-derivative for which the entity is or may be
instruments and:
obliged to deliver a variable number of the entity’s
• The entity is or may be obliged to deliver a variable number
own equity instruments
of its own equity instruments
or
or
• A derivative that will or may be settled other than by the
• Will or may be settled other than by the exchange of a fixed
exchange of a fixed amount of cash or another financial
amount of cash or another financial asset for a fixed
asset for a fixed number of the entity’s own equity
number of the entity’s own equity instruments. For this
instruments. For this purpose the entity’s own equity
purpose, the entity’s own equity instruments do not include
instruments do not include puttable financial instruments
instruments that are contracts for the future receipt or
and instruments that impose on the entity an obligation to
delivery of the entity’s own equity instruments.
deliver a pro rata share of the net assets on liquidation, or
Equity is the residual interest in the assets of an entity after
instruments that are contracts for the future receipt or
deducting all of its liabilities.
delivery of the entity’s own equity instruments.
Financial liabilities definitions are similar, with the only essential
difference being puttable financial instruments. These are dealt
with later in the financial instruments sections in IFRS for SMEs.
An equity instrument is not defined. However, the generic
definition of equity is provided and it is assumed that equity
instruments would be included.
An equity instrument is any contract that evidences a residual
interest in the assets of an entity after deducting all of its
liabilities.
Elements of statement of financial position ª CHAPTER THREE ª 75
Section 22: Liabilities and equity continued
IFRS for SMEs
Section 22 Liabilities and Equity
IFRS
IAS 32 Financial Instruments: Presentation
Impact assessment
Equity is the residual interest in the assets of an entity after
deducting all its liabilities. 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.
IAS 32 provides the principle that the issuer of a financial
instrument classifies the instrument, or its component parts, on
initial recognition as a financial liability, a financial asset or an
equity instrument in accordance with the substance of the
contractual arrangement and the definitions.
Some financial instruments that meet the definition of a liability
are classified as equity because they represent the residual
interest in the net assets of the entity:
Some financial instruments that meet the definition of a liability
are classified as equity because they represent the residual
interest in the net assets of the entity:
Overall IFRS for SMEs tries to provide similar concepts to those
that are provided in full IFRS. However, very little guidance is
provided in IFRS for SMEs. This may result in different
interpretations of the standard and the manner in which its
definitions being applied. Hence, similar instruments may be
presented differently by SME reporting entities.
a) A puttable instrument that gives holder right to sell back to
issuer or is automatically repurchased by issuer on occurrence
of uncertain future event, death or retirement
b) Instruments subordinated to all other classes classified as
equity if obligation to deliver share of net assets only on
liquidation
c) Members’ shares in co-operative entities (and similar) are
equity if the entity has an unconditional right to refuse
redemption, or redemption is unconditionally prohibited by
local law, regulation or the entity’s governing charter.
a) A puttable instrument that gives holder right to sell back to
issuer or is automatically repurchased by issuer on occurrence
of uncertain future event, death or retirement
b) Instruments subordinated to all other classes classified as
equity if obligation to deliver share of net assets only on
liquidation.
Classification as a liability or equity
IFRIC 2 deals with members’ shares in co-operative entities (and
similar) and concludes that these are equity instruments if it
meets the requirements of puttable financial instruments; or if
the entity has an unconditional right to refuse redemption, or
redemption is unconditionally prohibited by local law, regulation
or the entity’s governing charter.
Others issues that IAS 32 considers include:
• Reclassification of puttable instruments
• Contractual obligations to deliver cash
• Settlement in the equity own’s equity
• Contingent settlement provisions
• Settlement options.
76 ª CHAPTER THREE ª Elements of statement of financial position
Section 22: Liabilities and equity continued
IFRS for SMEs
Section 22 Liabilities and Equity
IFRS
IAS 32 Financial Instruments: Presentation
Impact assessment
If an entity reacquires its own equity instruments, these
instruments (treasury shares) are deducted from equity.
No gain or loss is recognised in profit or loss on the purchase,
sale, issue or cancellation of an entity’s own equity instruments.
IFRS for SMEs provides greater detail in respect of transactions
with holders of equity instruments. The requirements of the
standard are similar to those that are required under full IFRS
and no particular difference in application is expected. Options
and warrants are, however, dealt with in greater detail in IAS 32
in its Illustrative Examples. This form of application guidance is
missing in IFRS for SMEs and hence may allow different
interpretations to be applied when accounting for these types of
financial instruments.
When convertible debt or similar compound financial instruments
are issued, proceeds are allocated between liability and equity
components. The basis of allocation is to value the liability on the
same basis as a similar liability without the equity component and
the residual to the equity instrument.
The issuer of a non-derivative financial instrument must evaluate
the terms of the financial instrument to determine whether it
contains both a liability and an equity component. Such
components are classified separately as financial liabilities,
financial assets or equity instruments.
No differences exist in concept between full IFRS and
IFRS for SMEs. Again, the lack of application guidance in
IFRS for SMEs may, however, allow different interpretations
to be applied.
Allocations are not revised in subsequent periods.
Classification of the liability and equity components of a
convertible instrument is not revised.
Equity transactions
An entity recognises the issue of shares or other equity
instruments as equity (including sale of options, rights and
warrants) when the other party is obliged to provide cash or
other resources in exchange for the instruments.
The entity measure these instruments at the fair value of cash or
resources received or receivable, net of any transaction costs
(net of any tax benefit).
Presentation in statement of financial position is determined by
applicable laws of the jurisdiction.
Capitalisation issues, bonus issues and share splits that are
performed on a pro rata basis do not change equity. Equity
would, however, be reclassified in such instances in terms of
applicable laws.
Where treasury shares are reacquired, the entity deducts the fair
value of the consideration given from equity — no gain or loss is
recognised in profit or loss.
Convertible debt
The entity then recognises the difference between liability
component and the principal amount payable on maturity using
effective interest method. The appendix to this section illustrates
the principles.
Equity instruments are instruments that evidence a residual
interest in the net assets of an entity. Therefore, the equity
component is assigned the residual amount after deducting from
the fair value of the instrument as a whole the amount separately
determined for the liability component.
Elements of statement of financial position ª CHAPTER THREE ª 77
Section 22: Liabilities and equity continued
IFRS for SMEs
Section 22 Liabilities and Equity
IFRS
IAS 32 Financial Instruments: Presentation
Impact assessment
Interest, dividends, losses and gains relating to a financial
instrument or a component that is a financial liability are
recognised as income or expense in profit or loss. Distributions to
holders of an equity instrument are recognised directly in equity,
net of any related income tax benefit.
Full IFRS required an interpretation (IFRIC 17) for distributions
of non-cash assets. This guidance has been incorporated into the
IFRS for SMEs. The major difference between IFRIC 17 and the
IFRS for SMEs requirements is that IFRIC 17 scopes out entities
under control. As these transactions often occur when a group of
commonly controlled entities are reorganised, IFRS for SMEs may
be more prescriptive than full IFRS in this regard.
In consolidated financial statements, a non-controlling interest in
the net assets of a subsidiary is presented in equity, separately
from the equity of the owners of the parent.
IFRS for SMEs has aligned itself to the principles that are
contained in IAS 27 (revised 2008) — see excerpts in IFRS
column. After the effective date of the revised IAS 27,
differences between IFRS for SMEs and full IFRS should be
minimal.
Distributions to owners
An entity reduces equity for amounts of distributions to owners.
When non-cash assets are to be distributed, a liability is
recognised. The liability is stated at fair value at the end of each
reporting period and at date of settlement. Changes are
recognised in equity as adjustments to the amount of the
distribution.
Non-controlling interests
In consolidated financial statements, a non-controlling interest in
the net assets of a subsidiary is included in equity.
An entity treats changes in controlling interest in a subsidiary
that does not result in a loss of control, as transactions with
equity holders in their capacity as shareholders. Any differences
between the consideration paid or received and the fair value is
recognised in equity. No gains or losses are recognised on such
transactions.
Changes in a parent’s ownership interest in a subsidiary that do
not result in a loss of control are accounted for as equity
transactions.
78 ª CHAPTER THREE ª Elements of statement of financial position
Section 11: Basic financial instruments and Section 12: Other financial instrument issues
IFRS for SMEs
Section 11 Basic Financial Instruments
Section 12 Other Financial Instrument Issues
IFRS
IAS 39 Financial Instruments: Recognition
and Measurement
Impact assessment
An entity will comply with the provisions of IAS 32 Financial
Instruments: Presentation and IAS 39 Financial Instruments:
Recognition and Measurement and make disclosures in terms of
IFRS 7 Financial Instruments: Disclosures.
This is the only direct link that is created between IFRS for SMEs
and full IFRS. If the choice to follow IAS 39 is adopted, the
provisions of IAS 32 are not taken into account as IFRS for SMEs
has its own section that considers debt and equity instruments
issued. This may create some conflict with IAS 39.
Accounting policy
An entity makes a policy choice to either:
• Comply with Section 11 Basic Financial Instruments
and Section 12 Other Financial Instruments Issues of
IFRS for SMEs
or
• Use the recognition and measurement provisions of
IAS 39 Financial Instruments: Recognition and Measurement
and apply the disclosure requirements of IFRS for SMEs.
Relief is provided to SMEs, as the onerous disclosures of IFRS 7
are not required. An SME would make its financial instrument
disclosures in terms of this standard.
Looking forward, the issue of IFRS 9 will eventually cause the
withdrawal of IAS 39. IFRS for SMEs currently does not cater for
an early adoption of IFRS 9 or the withdrawal of IAS 39.
Presumably, consequential adjustments to the standard will be
required when the current IFRS 9 project is completed.
Elements of statement of financial position ª CHAPTER THREE ª 79
Section 11: Basic financial instruments and Section 12: Other financial instrument issues continued
IFRS for SMEs
Section 11 Basic Financial Instruments
Section 12 Other Financial Instrument Issues
IFRS
IAS 39 Financial Instruments: Recognition
and Measurement
Impact assessment
Section 11 applies to all basic financial instruments except for:
IAS 39 is applied to all financial instruments except:
• Investments in subsidiaries associates and joint ventures
• Instruments that meet the definition of the entity’s own equity
• Leases (other than derecognition of lease receivables)
and
• Employers’ rights and obligations under employee plans.
• Interests in subsidiaries, associates and joint ventures
• Rights and obligations under leases (with certain exceptions)
• Employers’ rights and obligations under employee benefit
plans
• Own equity instruments
• Rights and obligations arising under an insurance
contract(with certain exceptions)
• Forward contracts between an acquirer and shareholder that
will result in a future business combination
• Loan commitments other than those included in the standard
• Financial instruments, contracts and obligations under
share-based payment transactions
• Rights to reimbursement of a provision.
While the scoping provisions are similar, there are differences
between the two standards. Share-based contracts are scoped
out of IAS 39, but included within the scope of IFRS for SMEs.
Furthermore, there are issues that are scoped out of IFRS for
SMEs Section 12 which are not dealt with elsewhere in the
standard (e.g., insurance contracts), as would be the case under
full IFRS.
Scope
Section 12 applies to all financial instruments except for:
• Basic financial instruments in Section 11
• Interests in subsidiaries, associates and joint ventures
• Employers’ rights and obligations under employee benefit
plans
• Rights under insurance contracts (with certain exceptions)
• Own equity instruments
• Leases (with certain exceptions)
• Contracts for contingent consideration in a business
combination.
The standard is applied to contracts to buy or sell a non-financial
item that can be settled net, as if the contracts were financial
instruments, with the exception of contracts that were entered
Contracts to buy and sell a non-financial item are also excluded
into (and continue to be held) for the purpose of the entity’s
unless they impose risks not typical of such contracts. In addition, expected purchase, sale or usage requirements.
if contracts to buy or sell a non-financial item can be net settled
they are included in Section 12, except those that are held for
normal purchase, sale and usage requirements.
80 ª CHAPTER THREE ª Elements of statement of financial position
Section 11: Basic financial instruments and Section 12: Other financial instrument issues continued
IFRS for SMEs
Section 11 Basic Financial Instruments
Section 12 Other Financial Instrument Issues
IFRS
IAS 39 Financial Instruments: Recognition
and Measurement
Impact assessment
An embedded derivative is separated from the host contract and
accounted for as a derivative under IAS 39 if:
Under IAS 39, the separation of an embedded derivative could
have allowed the host to be accounted for at amortised cost
and the derivative at fair value. No bifurcation is permitted
in IFRS for SMEs. Such hybrid instruments would be carried at
fair value.
Embedded derivatives
There is no concept of embedded derivatives under
IFRS for SMEs.
a) The economic characteristics and risks of the embedded
derivative are not closely related to those of the host
b) A separate instrument with the same terms would meet
the definition of a derivative
and
c) The hybrid is not measured at fair value through profit
or loss.
Classification
The following are basic financial instruments for the purposes of
Section 11:
IAS 39 requires that financial instruments be classified into the
following groups.
• Cash
• A debt instrument that satisfies specific criteria
• A commitment to receive a loan that
• Cannot be settled net in cash
and
• When the commitment is executed, is expected to
meet the conditions of a debt instrument above
• An investment in non-convertible preference shares
and non-puttable ordinary shares or preference shares.
Financial assets are grouped as:
Other financial instruments would include all other financial
instruments that are within the scope of Section 12 but not
within the scope of Section 11.
• Fair value through profit and loss
• Loans and receivables
• Held to maturity
and
• Available for sale.
The approach taken by IFRS for SMEs is significantly different
to that contained in IAS 39. As all accounting is based on the
classification of the instrument, the two standards diverge at this
point, although ultimately, the measurement of the instrument
may result in the same amount in the financial statements.
Reclassification was introduced into IAS 39 during 2008 in
response to the global financial crisis and is not considered
under IFRS for SMEs.
Financial liabilities are grouped as:
• Fair value through profit and loss
• Other liabilities.
Specific guidance is also provided as to when an entity may
reclassify financial instruments between categories.
Elements of statement of financial position ª CHAPTER THREE ª 81
Section 11: Basic financial instruments and Section 12: Other financial instrument issues continued
IFRS for SMEs
Section 11 Basic Financial Instruments
Section 12 Other Financial Instrument Issues
IFRS
IAS 39 Financial Instruments: Recognition
and Measurement
Impact assessment
An entity recognises a financial instrument when the entity
becomes a party to the contractual provisions of the instrument.
There is no difference in recognition between IFRS for SMEs
and full IFRS.
When a financial instrument is recognised initially, an entity
measures it at its fair value plus, in the case of a financial asset
or financial liability not at fair value through profit or loss,
If the contract constitutes a financing arrangement it is measured
transaction costs that are directly attributable to the acquisition
at the present value of future payments discounted at a market
or issue of the financial asset or financial liability.
rate of interest for a similar instrument (this is not applicable to
assets and liabilities classified as current, unless they incorporate
a finance arrangement).
There are differences in the initial measurement of financial
instruments.
Recognition
Basic and other financial assets and liabilities are recognised
when the entity becomes a party to the contracts.
Initial measurement
Basic financial instruments are measured at their transaction
price including transactions costs.
If interest is not at a market rate, the fair value would be future
payments discounted at a market rate of interest.
Other financial instruments are initially measured at fair
value, which is usually their transaction price. This will
exclude transaction costs.
82 ª CHAPTER THREE ª Elements of statement of financial position
IFRS for SMEs has simplified the initial measurement for basic
financial insruments by basing it on the transaction price.
IFRS for SMEs recognises that financing arrangements need to
be taken into account. The issue of low interest rate loans will be
particularly important for intra-group loans, which are often
carried at cost under non-IFRS GAAPs.
Full IFRS considers transaction price as a proxy for fair value, and
if necessary, adjusts this price. This introduces the concepts of
Day-1 gains/losses. Other financial instruments would be
measured on the same basis by IFRS for SMEs. It should be noted
that the IFRS for SME standard does not consider Day-1 gains
and losses and hence an IFRS for SMEs reporter would have to
develop an accounting policy to deal with these items.
Section 11: Basic financial instruments and Section 12: Other financial instrument issues continued
IFRS for SMEs
Section 11 Basic Financial Instruments
Section 12 Other Financial Instrument Issues
IFRS
IAS 39 Financial Instruments: Recognition
and Measurement
Impact assessment
After initial recognition, an entity measures financial assets at
their fair values, excluding transaction costs, except for the
following financial assets:
The two basic forms of measurement, fair value and amortised
cost at the effective interest rates are used by both standards.
Subsequent measurement
For basic financial instruments, at the end of each reporting
period:
• Debt instruments are measured at amortised cost using the
effective interest rate
• Commitments to receive a loan are measured at cost less
impairment
• Investments in non-convertible preference shares and
non-puttable ordinary, and preference shares that are
publically traded or their fair value can otherwise be reliably
measured, are measured at fair value through profit and loss
if a public market exists, otherwise at cost less impairment.
All other financial instruments are measured at fair value at
reporting date. The only exception are equity instruments
(and related contracts that would result in delivery of such
instruments) that are not publically traded and whose fair
value cannot be reliably determined are measured at cost
less impairment.
• Loans and receivables and held-to-maturity investments are
measured at amortised cost using the effective interest
method
• Investments in equity instruments (and related derivatives)
that do not have a quoted market price in an active market
and whose fair value cannot be reliably measured are
measured at cost.
Application of these methodologies is based on the financial
instruments classification. The instrument may be carried at the
same/similar amount only if the measurement requirements of
the classifications selected under the two frameworks coincide.
After initial recognition, an entity measures all financial liabilities
at amortised cost using the effective interest method, except for:
• Financial liabilities at fair value through profit or loss that are
measured at fair value
• Financial liabilities that arise when a transfer of a financial
asset does not qualify for derecognition, financial guarantee
contracts, commitments to provide a loan at a below-market
interest rate all have their own particular requirements for
subsequent measurement.
Amortised cost
The effective interest method is used to calculate the amortised
cost of a financial asset or a financial liability and to allocate the
interest income or interest expense over the relevant period.
The effective interest method is used to calculate the amortised
cost of a financial asset or a financial liability and to allocate the
interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts
estimated future cash payments or receipts through the expected
life of the financial instrument or, when appropriate, a shorter
period, to the carrying amount of the financial asset or financial
liability. When calculating the effective interest rate future credit
losses are excluded. Fees, transaction costs and other premiums
or discounts are amortised over the life of the instrument (or
shorter if they relate to a shorter period).
The effective interest rate is the rate that exactly discounts
estimated future cash payments or receipts through the expected
life of the financial instrument or, when appropriate, a shorter
period to the net carrying amount of the financial asset or
financial liability. When calculating the effective interest rate, an
entity estimates cash flows considering all contractual terms of
the financial instrument (for example, pre-payment, call and
similar options), but does not consider future credit losses. The
calculation includes all fees and points paid or received that are
an integral part of the effective interest rate, transaction costs
and all other premiums or discounts.
Both frameworks have a similar definition of the effective
interest rate methodology. Both methodologies also deal with
changes in estimates on a similar basis. No differences are
expected on the application of this methodology.
Elements of statement of financial position ª CHAPTER THREE ª 83
Section 11: Basic financial instruments and Section 12: Other financial instrument issues continued
IFRS for SMEs
Section 11 Basic Financial Instruments
Section 12 Other Financial Instrument Issues
IFRS
IAS 39 Financial Instruments: Recognition
and Measurement
Impact assessment
An entity assesses at the end of each reporting period whether
there is any objective evidence that a financial asset or group of
financial assets is impaired. If any such evidence exists, the entity
applies the specific provisions for financial assets carried at
amortised cost, for financial assets carried at cost or for
available-for-sale financial assets to determine the amount of
any impairment loss.
Both frameworks contain similar provisions for impairments
and apply an incurred loss model to impairments. That is,
impairments are triggered by the occurrence of loss events.
Impairment of basic financial instruments
At each reporting date, an assessment is made as to whether
there is objective evidence of a possible impairment. The
standard provides examples of possible loss events.
The impairment loss of basic financial instruments at amortised
cost is the difference between carrying value and the revised
cash flows discounted at the original effective interest rate.
The impairment of basic financial instruments at cost less
impairment is the difference between the carrying value and
best estimate of the amount that would be received if the asset
were sold at the reporting date.
Reversal of impairments on basic financial instruments is
permitted.
Impairment of other financial instruments
For instruments carried at amortised cost, the amount of the
loss is measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows
discounted at the financial asset’s original effective interest rate.
Reversals of impairments are permitted if specific criteria are met.
IAS 39 is clear that future credit loss events are not taken
into account when estimating future cash flows. However,
IFRS for SMEs does not consider this point. As this is an
incurred loss model IFRS for SMEs should also ignore future
loss events when calculating an impairment loss.
Reversals of impairments of available-for-sale equity instruments
is not permitted.
Other financial instruments carried at cost less impairment
are impaired on the same basis as basic financial instruments
measured in the same manner.
Fair value
The standard makes use of a fair value hierarchy. This is quoted
prices in an active market, prices in recent transactions for the
identical assets (adjusted if necessary), and use of a valuation
technique (that reflects how the market would expect to price
the asset and the inputs reasonably represent market
expectations).
Fair value, where there is no active market, is only considered
reliable if the variability in the range of fair values is not
significant and the probabilities of various estimates can be
reasonably assessed.
Section 12 states that the fair value of a liability cannot be
below the amount in a demand feature discounted to the
reporting date.
IAS 39 contains application guidance on the determination of
fair value. Likewise, this standard also makes use of a fair value
hierarchy. This makes use of quoted prices in an active market,
prices in recent transactions for the identical assets (adjusted)
and the use of valuation techniques.
Fair value, where there is no active market, is only considered
reliable if the variability in the range of fair values is not
significant and the probabilities of various estimates can be
reasonably assessed.
IAS 39 also contains provisions that the fair value of a liability
cannot be less than the instruments demand feature, discounted
to the reporting date.
84 ª CHAPTER THREE ª Elements of statement of financial position
There are no differences of principle between the two
frameworks on the determination of fair value.
However, IAS 39 provides considerable application guidance on
the issue. The determination of fair value can be difficult for
reporting entities and entities applying IFRS for SMEs may have
to develop their own policies in light of the minimal application
guidance provided.
Section 11: Basic financial instruments and Section 12: Other financial instrument issues continued
IFRS for SMEs
Section 11 Basic Financial Instruments
Section 12 Other Financial Instrument Issues
IFRS
IAS 39 Financial Instruments: Recognition
and Measurement
Impact assessment
An entity derecognises a financial asset when:
An entity derecognises a financial asset when:
• The contractual rights to the cash flows from the financial
asset expire or are settled
• The entity transfers to another party substantially all of the
risks and rewards of ownership of the financial asset
• The entity, despite having retained some significant risks and
rewards of ownership, has transferred control of the asset to
another party and the other party has the practical ability to
sell the asset in its entirety to an unrelated third party.
• The contractual rights to the cash flows expire
• It transfers the financial asset in a manner that allows
for derecognition.
Both frameworks retain the same risks and rewards principles for
the purposes of derecognition of financial assets. No differences
would be expected between the frameworks.
Derecognition
The entity derecognises a financial liability when extinguished.
When an asset is transferred:
• It is derecognised if the entity transfers substantially all the
risks and rewards of ownership
• It continues to be recognised if the entity retains substantially
all the risks and rewards of ownership
• If the entity neither transfers nor retains substantially all the
risks and rewards of ownership, the entity derecognises the
financial asset (and separately recognises any rights and
obligations). Alternatively the asset is not derecognised if
the entity continues to retained control.
IAS 39 provides additional guidance on derecognition. In
the absence of further guidance, entities reporting under
IFRS for SMEs may need to consider how the requirements
will be applied in practice.
An entity derecognises a financial liability when it is extinguished.
Hedge accounting
To qualify for hedge accounting, an entity must meet the
following conditions:
To qualify for hedge accounting, an entity must meet the
following conditions:
• The entity designates and documents the hedging
relationship, clearly identifying the risk being hedged,
the hedged item and hedging instrument
• The hedged risk is one of the specified risks in the standard
(see below)
• The hedging instrument is as specified in the standard (see
below)
• The entity expects the hedge to be highly effective.
• At inception of the hedge there is formal designation and
documentation of the hedging relationship, the entity’s risk
management objective and strategy for the hedge
• The hedge is expected to be highly effective
• For cash flow hedges, a forecast transaction is highly probable
• The effectiveness can be reliably measured
• The hedge is assessed on an ongoing basis and `determined
to have been actually effective.
IFRS for SMEs has similar requirements to full IFRS regarding the
need to document and designate the hedging relationship.
However, the requirements under IFRS for SMEs are less onerous,
although as explained below, SMEs are more restricted in the
circumstances in which they can apply hedge accounting.
Elements of statement of financial position ª CHAPTER THREE ª 85
Section 11: Basic financial instruments and Section 12: Other financial instrument issues continued
IFRS for SMEs
Section 11 Basic Financial Instruments
Section 12 Other Financial Instrument Issues
IFRS
IAS 39 Financial Instruments: Recognition
and Measurement
Impact assessment
IAS 39 permits the following hedge relationships:
IFRS for SMEs restricts the ability for an entity to use hedge
accounting to the four identified risks in the standard.
Hedged risks
IFRS for SMEs only permits hedge accounting when the hedged
risk is one of the following risks:
• Interest rate risk of a debt instrument measured at
amortised cost
• Foreign exchange or interest rate risk in a firm commitment
or a highly probable forecast transaction
• Price risk of a commodity that it holds or in a firm
commitment or highly probable forecast transaction to
purchase or sell a commodity
• Foreign exchange risk in a net investment in a foreign
operation.
• Fair value hedge: a hedge of the exposure to changes in fair
value of a recognised asset or liability or an unrecognised firm
commitment, which is attributable to a particular risk and
could affect profit or loss
• Cash flow hedge: a hedge of the exposure to variability in cash
flows that:
• Is attributable to a particular risk associated with
a recognised asset or liability or a highly probable
forecast transaction
and
• Could affect profit or loss
• Hedge of a net investment in a foreign operation as defined
in IAS 21.
Hedging instrument
The Hedge accounting is only permitted if the hedging
instrument meets all of the following:
• It is an interest rate swap, a foreign currency swap, a foreign
currency forward exchange contract or a commodity forward
exchange contract that is expected to be highly effective
• It involves a party external to the reporting entity
• Its notional amount equals the designated amount of the
hedged item
• It has a specified maturity date not later than:
• The maturity of the hedged item
• The expected settlement of the commodity commitment
• The occurrence of the highly probable forecast transaction
• It has no prepayment of early termination or extension
features.
IAS 30 does not restrict the circumstances in which a derivative
may be a hedging instrument, except for some written options. A
non-derivative financial instrument can only be designated as a
hedge of a foreign currency risk.
Only instruments that involve a party external to the reporting
entity can be designated as hedging instruments.
86 ª CHAPTER THREE ª Elements of statement of financial position
IFRS for SMEs is much more restrictive concerning what can be
designated as a hedging instrument.
Section 11: Basic financial instruments and Section 12: Other financial instrument issues continued
IFRS for SMEs
Section 11 Basic Financial Instruments
Section 12 Other Financial Instrument Issues
IFRS
IAS 39 Financial Instruments: Recognition
and Measurement
Impact assessment
Hedge of a fixed interest rate risk
If the hedged risk is the exposure to a fixed interest rate risk of a
debt instrument measured at amortised cost or a commodity
price risk, the entity:
IAS 39 has difference definitions for the types of hedge. However, Hedges of a fixed interest rate risk are treated in a similar way to
most hedges of fixed interest rate risk would be fair value hedges. fair value hedges under full IFRS.
Fair value hedges are accounted for as follows:
• Recognises the hedging instrument as an asset or liability and
changes in the fair value are recognised in profit or loss
• Recognises the change in fair value of the hedged item in
profit or loss and as an adjustment to its carrying amount.
• The gain or loss on remeasuring the hedging instrument at
fair value is recognised in profit or loss
• The gain or loss on the hedged item is adjusted against its
carrying amount and recognised in profit or loss.
Hedge of a variable interest rate risk
If the hedged risk is:
• The variable interest rate risk in a debt instrument at
amortised cost
• The foreign exchange risk in a firm commitment or highly
probable forecast transaction
• The commodity price risk in a firm commitment or highly
probable forecast transaction
• The foreign exchange risk in a net investment in a foreign
operation
Most hedges of a variable interest rate risk would be cash flow
hedges under full IFRS. Cash flow hedges are accounted for as
follows:
Hedges of a variable interest rate risk are treated in a similar way
to cash flow hedges under full IFRS.
• The effective portion of the gain or loss on the hedging
instrument is recognised in other comprehensive income
• The ineffective portion is recognised in profit or loss.
the entity recognises the effective portion of the change in fair
value of the hedging instrument in other comprehensive income.
Any ineffectiveness is recognised in profit or loss. The gain or
loss is reclassified to profit or loss when the hedged item is
recognised in profit or loss or the hedging relationship ends.
Discontinuing hedge accounting
Hedge accounting is discontinued when:
Hedge accounting is discontinued when:
• The hedging instrument expires or is sold
• The hedge no longer meets the conditions for hedge
accounting
• In the hedge of a forecast transaction, when the transaction is
no longer highly probable
• The entity revokes the designation.
• The hedging instrument expires or is sold
• The hedge no longer meets the conditions for hedge
accounting
• In the hedge of a forecast transaction, when the transaction is
no longer highly probable
The criteria for discontinuing hedge accounting are the same
under both IFRS for SMEs and full IFRS.
• The entity revokes the designation.
Elements of statement of financial position ª CHAPTER THREE ª 87
Section 26: Share-based payments
IFRS for SMEs
Section 26 Share-based Payment
IFRS
IFRS 2 Share-based Payment
Impact assessment
This IFRS applies to all share-based payment transactions for the
acquisition of goods and services, whether or not the entity can
identify specifically some or all of the goods or services received.
These include equity-settled, cash-settled and transactions that
provide for settlement either by cash or equity instruments.
While both IFRS for SMEs and full IFRS deal with the acquisition
of goods and services by an entity by means of a share-based
payment arrangement, the scope of the frameworks are
different. The principle difference is that IFRS 2 specifically
includes within its scope those transactions settled by another
group entity (or shareholder). Under IFRS for SMEs it is
voluntary to account for an award made by the parent entity.
Scope
This section specifies the accounting for all share-based payment
transactions for the acquisition of goods or services, including
those that are equity-settled and those that are cash-settled or a
choice of either equity or cash.
Where an award is granted by a parent entity to the employees
of a subsidiary and the parent presents consolidated financial
statements using either the IFRS for SMEs or full IFRS, the
subsidiary may recognise and measure the share-based payment
expense based on a reasonable allocation of the expense
recognised for the group.
A share-based payment transaction may be settled by another
group entity (or a shareholder of any group entity) on behalf of
the entity receiving or acquiring the goods or services.
In some jurisdictions, equity investors are able to acquire equity
without providing goods or services that can be specifically
identified (or at less than fair value of the equity granted).
These are treated as equity-settled share-based payment
transactions within the scope of this section.
88 ª CHAPTER THREE ª Elements of statement of financial position
Hence, the treatment of group share-based payment
arrangements will be different under full IFRS compared to
IFRS for SMEs.
Section 26: Share-based payments continued
IFRS for SMEs
Section 26 Share-based Payment
IFRS
IFRS 2 Share-based Payment
Impact assessment
The entity recognises the goods or services received or acquired
in a share-based payment transaction when it obtains the goods
or as the services are received.
The goods or services received or acquired in a share-based
payment transaction are recognised when the entity obtains the
goods or receives the services.
There is no difference in the general recognition principles of the
frameworks.
The entity recognises a corresponding increase in equity if the
goods or services were received in an equity-settled share-based
payment transaction, or a liability if the goods or services were
acquired in a cash-settled share-based payment transaction.
The entity also recognises a corresponding increase in equity
if the goods or services were received in an equity-settled
share-based payment transaction, or a liability if the goods or
services were acquired in a cash-settled share-based payment
transaction.
Recognition
When the goods or services received do not qualify for
recognition as an asset, the entity recognises an expense.
When the goods or services received do not qualify for
recognition as assets they are recognised as an expense.
Recognition of vesting conditions
IFRS for SMEs only considers vesting in the context of employees. If the equity instruments granted do not vest until the
counterparty completes a specified period of service, the entity
The principle applied is that if the share-based payments do not
shall presume that the services will be received in the future,
vest until the completion of a specified period of service, the
during the vesting period.
entity presumes the services rendered by the counterparty will
be received during the vesting period. Hence, the entity
recognises the share-based payment for those services received
during the vesting period.
Although only given in the context of employees, the principles
of recognition where there are vesting conditions is the same
under both frameworks.
Elements of statement of financial position ª CHAPTER THREE ª 89
Section 26: Share-based payments continued
IFRS for SMEs
Section 26 Share-based Payment
IFRS
IFRS 2 Share-based Payment
Impact assessment
For equity-settled share-based payment transactions, the entity
measures the goods or services received and the corresponding
increase in equity at the fair value of the goods or services
received. If the entity cannot estimate reliably the fair value of
the goods or services received, the entity measures the
transaction by reference to the fair value of the equity
instruments granted.
The general measurement principles are the same between both
frameworks other than when there is optionality in the manner
of settlement.
Measurement
For equity-settled share-based payment transactions, the entity
measures the goods or services received and the corresponding
increase in equity at the fair value of the goods or services
received. If this fair value cannot be estimated reliably (includes
employee transactions), the entity measures the transaction by
reference to the fair value of the equity instruments granted.
The fair value of the equity instruments is measured at grant
date. The standard differentiates between a market vesting
condition and a non-market vesting condition for the purposes of
measurement. Non-market vesting conditions are not taken into
account to determine the fair value of the award. These
conditions are used to determine the number of shares that are
expected to vest. Market vesting conditions are used to
determine the value of the award at grant date.
For cash-settled share-based payment transactions, the entity
measures the goods or services acquired and the liability incurred
at the fair value of the liability. Until the liability is settled, the
entity remeasures the fair value of the liability, with any changes
in fair value recognised in profit or loss for the period.
For share-based transactions in which either the entity or the
counterparty has the choice of whether settlement is in cash or
equity instruments, the entity accounts for that transaction as a
cash-settled share-based payment transaction if the entity has
incurred a liability. The transaction is accounted for as an
equity-settled share-based payment transaction if the entity has
a past practice of settling in shares or the option to receive cash
has no commercial substance.
The fair value of equity instruments issued in transactions with
employees is measured at grant date. The standard differentiates
between a market vesting condition and a non-market vesting
condition for the purposes of measurement. Non-market vesting
conditions are not taken into account to determine the fair value
of the award. These conditions are used to determine the number
of shares that are expected to vest. Market vesting conditions are
used to determine the value of the award at grant date.
For cash-settled share-based payment transactions, the entity
measures the goods or services acquired and the liability incurred
at the fair value of the liability. Until the liability is settled, the
entity remeasures the fair value of the liability at the end of each
reporting period and at the date of settlement, with any changes
in fair value recognised in profit or loss for the period.
For share-based transactions in which either the entity or the
counterparty has the choice of whether settlement is in cash or
equity instruments, the entity accounts for that transaction as a
cash-settled share-based payment transaction if the entity has
incurred a liability. The transaction is accounted for as an
equity-settled share-based payment transaction if no such
liability has been incurred.
90 ª CHAPTER THREE ª Elements of statement of financial position
Although both frameworks default for classification in these
instances as being cash settled, the criteria for classifying a
transaction as equity settled differ between the standards.
Section 26: Share-based payments continued
IFRS for SMEs
Section 26 Share-based Payment
IFRS
IFRS 2 Share-based Payment
Impact assessment
An entity measures the fair value of equity instruments granted
at the measurement date, based on market prices if available,
taking into account the terms and conditions of the grant. If
market prices are not available, an entity estimates the fair value
of the equity instruments granted using a valuation technique to
derive an estimate of the price of the equity instruments in an
arm’s length transaction between knowledgeable, willing parties.
While both frameworks require measurement of the equity
instruments at fair value, IFRS for SMEs allows the use of a
directors’ valuation when the fair value is not observable.
However, it is not clear under what circumstances determining an
entity specific value will be deemed impracticable. Therefore in
practice, the determination of an appropriate methodology may
well result in a fair value similar to that under full IFRS.
An entity recognises, as a minimum, the services received
measured at the grant date fair value of the equity instruments
granted, unless those equity instruments do not vest because of
failure to satisfy a vesting condition. The effects of any
modifications to the terms and conditions on which the equity
instruments were granted, that increases the total fair value of
the share-based payment arrangement or are otherwise
beneficial to the employee, are recognised by the entity.
The general principles of modification and cancellation are
similar in both frameworks. No differences would be expected in
the application of this section.
Fair value of equity instruments
IFRS for SMEs uses a hierarchy to determine the fair value of
shares issued based on:
• Observable market prices
• If unobservable, entity specific observable market data, such
as a recent transaction in the instruments or a recent
independent valuation of the entity
• If the fair value is not observable and obtaining entity specific
market data is impracticable, the directors should use their
judgment to apply the most appropriate valuation
methodology.
Modifications and cancellations
If an entity modifies the award to the employee, the modification
is accounted for as follows:
• If the modification results in an increase in fair value of the
award at modification date, the incremental increase in fair
value is included in the measurement of the amount
recognised for services received over the period from the
modification date to vesting date
• If the modification does not result in an incremental increase
in fair value at the date of the modification, the modification is
ignored.
The cancellation or settlement of an award is accounted for as an
acceleration of the remaining vesting periods.
An entity accounts for a cancellation or settlement as an
acceleration of the vesting period.
Elements of statement of financial position ª CHAPTER THREE ª 91
Section 21: Provisions and contingencies
IFRS for SMEs
Section 21 Provisions and Contingencies
IFRS
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets
Impact assessment
The standard applies to all provisions contingent liabilities and
contingent assets, other than those from executory contracts
unless onerous, and those covered by another standard, such as
construction contracts, income taxes, leases, employee benefits
and insurance contracts.
There are only minor explanatory differences between
IFRS for SMEs and full IFRS.
A provision is a liability of uncertain timing or amount.
There is no difference between IFRS for SMEs and IFRS.
Scope
This section applies to all provisions, contingent liabilities and
contingent assets other than those relating to construction
contracts, executory contracts unless they are onerous,
employee benefit obligations, income tax and leases.
Definitions
A provision is a liability of uncertain timing or amount.
A liability is a present obligation of the entity arising from past
A liability is a present obligation of the entity arising from past
events, the settlement of which is expected to result in an outflow events, the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits.
from the entity of resources embodying economic benefits.
Recognition
An entity recognises a provision only when it has an obligation
at the reporting date as a result of a past event; it is probable
(i.e., more likely than not) that the entity will be required to
transfer economic benefits in settlement and the amount of
the obligation can be estimated reliably.
An entity recognises a provision only when it has a present
obligation (legal or constructive) as a result of a past event; it is
probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and a reliable
estimate can be made of the amount of the obligation.
There are only minor explanatory differences between
IFRS for SMEs and IFRS.
Initial measurement
An entity measures a provision at the best estimate of the
amount required to settle the obligation at the reporting date,
which is the amount it would rationally pay to settle the
obligation at the end of the reporting period or to transfer it to a
third party at that time.
The amount recognised as a provision is the best estimate of the There is no difference between IFRS for SMEs and IFRS.
expenditure required to settle the present obligation at the end of
the reporting period, which is the amount that it would rationally
pay to settle the obligation at the end of the reporting period or
to transfer it to a third party at that time.
When the effect of the time value of money is material, the
amount of a provision is the present value of the amount
expected to be required to settle the obligation at a pre-tax
discount rate that reflects current market assessments of time
value of money.
Where the effect of the time value of money is material, the
amount of provision is the present value of expenditures
expected to be required to settle the obligation at a pre-tax
discount rate that reflects current market assessments of time
value of money and risks specific to liability.
92 ª CHAPTER THREE ª Elements of statement of financial position
Section 21: Provisions and contingencies continued
IFRS for SMEs
Section 21 Provisions and Contingencies
IFRS
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets
Impact assessment
An entity reviews provisions at each reporting date and adjusts to
reflect the current best estimate of the amount required to settle
the obligation. The unwinding of the discount is recognised as
finance cost in profit or loss in the period in which it arises.
Provisions shall be reviewed at the end of each reporting date
and adjusted to reflect the current best estimate of the provision.
Where discounting is used, the increase in each period to reflect
the passage of time is recognised as borrowing cost.
There is no difference between IFRS for SMEs and IFRS.
A provision is only used for expenditures for which it was
originally recognised.
A provision is only used for expenditures for which it was
originally recognised.
Subsequent measurement
Contingent liabilities
A contingent liability is either a possible but uncertain obligation
that is not recognised because it fails to meet either the
probability that economic benefits will transfer or the amount
cannot be reliably estimated.
A contingent liability is either a possible but uncertain obligation
that is not recognised because it fails to meet either the
probability that economic benefits will transfer, or the amount
cannot reliably be estimated.
Contingent liabilities are not recognised except for those of the
acquiree in a business combination. Contingent liabilities are
disclosed unless the possibility of payment is remote.
Contingent liabilities are disclosed unless the possibility of
outflow of resources is remote.
There is no difference between IFRS for SMEs and IFRS in the
definition of contingent liabilities.
The treatment of contingent liabilities in a business combination
is different under IFRS for SMEs compared to IFRS. This is
explained in more detail in the section on Business Combinations.
Contingent assets
An entity does not recognise a contingent asset. However, when
the inflow of resources is virtually certain, an asset is recognised.
An entity does not recognise a contingent asset. However, when
the inflow of resources is virtually certain, an asset is recognised.
There is no difference between IFRS for SMEs and IFRS.
A provision is derecognised when no more resources are required
settling any obligations.
There are only minor explanatory differences between
IFRS for SMEs and IFRS.
Derecognition
A provision is derecognised when all obligations are settled.
Elements of statement of financial position ª CHAPTER THREE ª 93
Section 28: Employee benefits
IFRS for SMEs
Section 28 Employee Benefits
IFRS
IAS 19 Employee Benefits
Impact assessment
This standard is applied by an employer in accounting for all
employee benefits, except those to which IFRS 2 applies.
There is no difference in scope between IFRS for SMEs and IFRS.
An entity recognises the cost of all employee benefits to which its
employees have become entitled during the reporting period:
IAS 19 Employee Benefits considers the following types of
employee benefit separately:
The differences are considered in more detail below.
• As a liability, after deducting amounts that have been paid
either directly to the employees or as a contribution to an
employee benefit fund. An entity recognises any asset to the
extent that the pre-payment will lead to a reduction in future
payments or a cash refund
• As an expense, unless another section requires the cost to be
recognised as part of an asset.
•
•
•
•
Scope
Employee benefits are all forms of consideration given by an
entity in exchange for service rendered by employees, including
directors and management. This section applies to all employee
benefits, except for share-based payment transactions.
Recognition
Short-term employee benefits
Post-employment benefits
Other long-term employee benefits
Termination benefits.
Short-term employee benefits
When an employee has rendered service to an entity during the
reporting period, the entity recognises these in terms of the
general principle. These benefits are measured at the
undiscounted amount of the benefits expected to be paid.
When an employee has rendered service to an entity during an
accounting period, the entity recognises the undiscounted
amount of short-term employee benefits as a liability (accrued
expense), after deducting any amount already paid. An asset is
recognised to the extent that the prepayment will lead to a
reduction in future payments or a cash refund. An expense is
recognised, unless another standard requires or permits the cost
as part of the cost of an asset.
94 ª CHAPTER THREE ª Elements of statement of financial position
No differences exist in the recognition and measurement of
short-term benefits. The examples of compensated absences and
profit share bonuses are the same under both frameworks.
Section 28: Employee benefits continued
IFRS for SMEs
Section 28 Employee Benefits
IFRS
IAS 19 Employee Benefits
Impact assessment
Post-employment benefit plans are classified as either defined
contribution plans or defined benefit plans, depending on the
economic substance of the plan as derived from its principal
terms and conditions.
There is no difference in the classification of post retirement
plans under the two frameworks.
Post-employment benefit plans
Post-employment benefit plans are classified as either defined
contribution plans or defined benefit plans.
Defined contribution plans are post-employment benefit plans
under which an entity pays fixed contributions into a separate
entity and has no obligation to pay further contributions.
Defined benefit plans are post-employment benefit plans other
than defined contribution plans.
Multi-employer plans and state plans are classified as defined
contribution plans or defined benefit plans based on the terms of
the plan. However, if sufficient information is not available to use
defined benefit accounting for a multi-employer plan that is a
defined benefit plan, an entity accounts for the plan as if it was a
defined contribution plan.
Under defined contribution plans the entity’s obligation is limited
to the amount that it agrees to contribute to the fund.
Defined benefit plans are post-employment benefit plans other
than defined contribution plans.
An entity classifies a multi-employer plan as a defined contribution
plan or a defined benefit plan under the terms of the plan.
When sufficient information is not available to use defined
benefit accounting for a multi-employer plan that is a defined
benefit plan, an entity accounts for the plan as if it were a defined
contribution plan.
Defined contribution plans
An entity recognises the contribution payable for a period:
An entity recognises the contribution payable for a period:
• As a liability, after deducting any amount already paid
• As an expense, unless another section requires the cost to be
part of the cost of an asset.
• As a liability, after deducting any amount already paid
• As an expense, unless another section requires the cost to be
part of the cost of an asset.
Other than the provisions for discounting under full IFRS, the
requirements of both frameworks are the same.
Where contributions to a defined contribution plan do not fall due
wholly within 12 months after the end of the period in which the
employees render the related service, they are discounted.
Defined benefit plans
The amount recognised as a defined benefit liability is:
An entity recognises:
• The present value of the defined benefit obligation at the end
of the reporting period less
• Any actuarial gains/losses not recognised
• Any past service cost not yet recognised
• The fair value at the end of the reporting period of plan
assets.
• A liability for its obligations under defined benefit plans net
of plan assets
and
• The net change in that liability during the period as the cost
of its defined benefit plans during the period.
Considerable differences exist in the recognition and the
measurement of post-retirement defined benefit plans.
IFRS for SMEs allows the projected credit unit method to be
simplified if its application would result in undue cost or effort.
This may be of considerable benefit to reporters that use this
standard.
Elements of statement of financial position ª CHAPTER THREE ª 95
Section 28: Employee benefits continued
IFRS for SMEs
Section 28 Employee Benefits
IFRS
IAS 19 Employee Benefits
Impact assessment
An entity measures a defined benefit liability at the net total of
the following amounts:
An asset is measured at the lower of:
The second major difference lies in the recognition of actuarial
gains and losses. Under IFRS for SMEs all actuarial gains and
losses must be recognised in full. However, entities have a choice
of recognising them in profit or loss or in other comprehensive
income.
• The present value of its obligations under defined benefit
plans at the reporting date less
• The fair value at the reporting date of plan assets
An entity recognises a plan surplus as an asset only to the extent
that it is able to recover the surplus either through reduced
contributions in the future or through refunds from the plan.
The present value of an entity’s obligations reflects the
discounted estimated amount of benefit that employees have
earned in return for their service in the current and prior periods.
This requires the entity to determine how much benefit is
attributable to the current and prior periods based on the
plan’s benefit formula and to make actuarial assumptions
about demographic and financial variables.
• The amount above
or
• The total of any cumulative unrecognised net actuarial losses
and past service cost; and the present value of any economic
benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.
An entity recognises the net total of the following amounts in
profit or loss:
•
•
•
•
•
•
Current service cost
Interest cost
The expected return on any plan assets
Actuarial gains and losses recognised in profit and loss
Past service cost
The effect of any curtailments or settlements
and
An entity is required to use the projected unit credit method unless • The effect of the limit on the recognition of the asset.
this would require undue cost or effort, in which case, the entity
An entity determines the present value of its defined benefit
makes the following simplifications:
obligations and the related current service cost and, where
• Ignore estimated future salary increases
applicable, past service cost using the projected unit credit
• Ignore future service of current employees
method.
• Ignore possible in-service mortality of current employees.
Actuarial gains and losses are recognised:
If a defined benefit plan has been introduced or changed in
• In profit or loss using the corridor approach
the current period, the entity increases or decreases its defined
• In profit or loss on a systematic basis faster than the corridor
benefit liability to reflect the change and recognises the
approach
increase or decrease in measuring profit or loss. If a plan has
or
been curtailed or settled the defined benefit obligation is
• In the period in which they occur in other comprehensive
decreased or eliminated and the gain recognised in profit
income.
or loss.
Past service costs are recognised as an expense on a straight-line
Entities must select an accounting policy for recognition of
basis over the average period until the benefits become vested.
actuarial gains and losses. They are recognised in their entirety,
Gains or losses on curtailment or settlement are recognised when
either in profit or loss or in other comprehensive income.
the curtailment or settlement occurs.
Gains or losses on curtailment or settlement are recognised when
the curtailment or settlement occurs.
96 ª CHAPTER THREE ª Elements of statement of financial position
Section 28: Employee benefits continued
IFRS for SMEs
Section 28 Employee Benefits
IFRS
IAS 19 Employee Benefits
Impact assessment
An entity recognises a liability for other long-term employee
benefits measured at:
An entity recognises a liability for other long-term employee
benefits at:
The requirements to recognise a liability are the same under both
frameworks.
• The present value of the benefit obligation at the
reporting date
less
• The fair value at the reporting date of any plan assets.
• The present value of the benefit obligation at the
reporting date
less
• The fair value at the reporting date of any plan assets.
However, IFRS for SMEs does not specify how the defined benefit
obligation is measured. Therefore, it is assumed that a the
projected credit unit method is not required, which leads to a
difference between the two frameworks.
Other long-term employee benefits
The present value of the defined benefit obligation at the end of
the reporting period is measured on the projected credit unit
methodology.
Termination benefits
An entity recognises termination benefits as a liability and an
expense only when the entity is demonstrably committed either:
An entity recognises termination benefits as a liability and an
expense when the entity is demonstrably committed to either:
• To terminate the employment of an employee or group
of employees before the normal retirement date
or
• To provide termination benefits as a result of an offer
made in order to encourage voluntary redundancy.
• Terminate the employment of an employee or group
of employees before the normal retirement date
or
• Provide termination benefits because of an offer made
in order to encourage voluntary redundancy
An entity is demonstrably committed to a termination only when
the entity has a detailed formal plan for the termination and is
without realistic possibility of withdrawal from the plan.
An entity is demonstrably committed to a termination when, the
entity has a detailed formal plan (without realistic possibility of
withdrawal) for the termination. This would include:
The general principles of termination benefits are similar under
both frameworks, other than the greater guidance provided in
determining demonstrable commitment.
• The location, function and approximate number of employees
whose services are to be terminated
• The termination benefits for each job classification or function
and
• The time at which the plan will be implemented.
Elements of statement of financial position ª CHAPTER THREE ª 97
Section 34: Specialised activities — agriculture
IFRS for SMEs
Section 34 Specialised Activities — Agriculture
IFRS
IAS 41 Agriculture
Impact assessment
The standard applies to biological assets, agricultural produce
at the point of harvest and related government grants. This
standard does not apply to land related to agricultural activity
and intangible assets related to agricultural activity.
Although not identical, the scoping paragraphs are sufficiently
similar that an entity will identify similar assets to which the
sub-section and standard are applicable.
Agricultural activity is the management by an entity of the
biological transformation and harvest of biological assets for sale
or for conversion into agricultural produce or into additional
biological assets.
There is no difference between IFRS for SMEs and IFRS on the
three basic definitions.
Scope
The subsection applies to agricultural activity undertaken by
an entity. While the scope deals with biological assets, the
recognition and measurement of agricultural produce at the point
of harvest is also dealt with under recognition and measurement.
Definitions
Agricultural activity is defined as the management by an entity
of the biological transformation of biological assets for sale, into
agricultural produce or into additional biological assets.
Agricultural produce is defined as the harvested product of the
entity’s biological assets.
A biological asset is defined as a living animal or plant.
Agricultural produce is the harvested product of the entity’s
biological assets.
A biological asset is a living animal or plant.
Recognition
An entity may recognise a biological asset or agricultural
produce when:
• The entity controls the asset as a result of past events
• It is probable that future economic benefits associated with
the asset will flow to the entity
and
• The fair value or cost of the asset can be measured reliably
without undue cost or effort.
A biological asset or agricultural produce is recognised when:
• The entity controls the asset as a result of past events
• It is probable that future economic benefits associated with
the asset will flow to the entity
and
• The fair value or cost of the asset can be measured reliably.
98 ª CHAPTER THREE ª Elements of statement of financial position
The only difference between full IFRS and IFRS for SMEs is
the exemption provided in the third criterion, i.e., undue cost
or effort.
Section 34: Specialised activities — agriculture continued
IFRS for SMEs
Section 34 Specialised Activities — Agriculture
IFRS
IAS 41 Agriculture
Impact assessment
A biological asset is measured on initial recognition and at the
end of each reporting period at its fair value less costs to sell,
except in cases where the presumption to establish fair value is
rebutted. In such cases, biological assets are measured at cost
less accumulated depreciation and impairments.
Both standards have similar measurement requirements, albeit
that the cost model may be initiated at possibly a lower threshold
in IFRS for SMEs.
Measurement
An entity measures a biological asset on initial recognition and
at each reporting date at its fair value less costs to sell unless fair
value cannot be reliably measured without undue cost or effort.
Changes in fair value less costs to sell are recognised in profit or
loss.
When the fair value is not readily determinable without undue
Agricultural produce harvested from an entity’s biological assets
cost or effort, the entity applies the cost model and measures the are measured at its fair value less costs to sell at the point of
asset at cost less any accumulated depreciation and impairments. harvest (thereafter they are treated as inventories or under
other applicable standards).
Agricultural produce harvested from an entity’s biological assets
are measured at their fair value less costs to sell at the point
Gains and losses on initial recognition (and subsequent
of harvest under both models (thereafter they are treated as
remeasurement) of biological assets and agricultural produce
inventory).
are recognised in profit and loss.
IFRS for SMEs considers various possible sources of information
that could be used to establish fair value. This is similar to the
guidance provided in IAS 41, although not in as much detail.
Further IFRS for SMEs provides no guidance on costs to sell for
such assets. Although unlikely, this may result in different
carrying values being assigned to assets by the two standards.
Grants
Grants that do not impose future performance conditions are
recognised in income when they are receivable.
Unconditional grants are recognised when they become
receivable.
Grants that do impose future performance conditions are
recognised when the conditions are met.
Conditional grants are recognised when the conditions are met.
All grants are measured at the fair value of the asset receivable.
The grants are measured at the fair value less costs to sell of the
asset receivable.
The recognition of government grants is the same under each
standard. However, there will be differences in measurement if
the costs to sell are significant as these costs are deducted
under full IFRS.
Elements of statement of financial position ª CHAPTER THREE ª 99
Section 34: Specialised activities — extractive industries
IFRS for SMEs
Section 34 Specialised Activities — Extractive
Industries
IFRS
IFRS 6 Exploration for and Evaluation of
Mineral Resources
Impact assessment
An entity that is engaged in the exploration for, evaluation or
extraction of mineral resources accounts for expenditure on
the acquisition or development of tangible or intangible assets
by applying Section 17 Property, Plant and Equipment and
Section 18 Intangible Assets other than Goodwill, respectively.
IFRS 6 specifies the accounting for exploration and evaluation of
mineral resources. It allows entities to develop an accounting
policy for these costs without specifically considering IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors,
which may allow entities to continue recognising assets on
adoption of IFRS that would not otherwise be permitted.
Under IFRS for SMEs, any expenditure that does not meet the
recognition criteria of Section 17 and Section 18 would not be
recognised as an asset. This may cause significant differences to
full IFRS as costs such as exploration and evaluation expenditures
that may not be recognised as assets under these sections will
have to be expensed by SMEs but may be capitalised under
full IFRS.
When an entity has an obligation to dismantle or remove an item,
or to restore the site, such obligations and costs are accounted
for in accordance with Section 17 Property, Plant and Equipment
and Section 21 Provisions and Contingencies.
100 ª CHAPTER THREE ª Elements of statement of financial position
Section 34: Specialised activities — service concession arrangements
IFRS for SMEs
IFRS
Section 34 Specialised Activities — Service Concession IFRIC 12 Service Concession Arrangements
Arrangements
Impact assessment
Scope
A service concession arrangement is an arrangement whereby a
government or other public sector body contracts with a private
operator to develop, operate and maintain the grantor’s
infrastructure assets.
In service concession arrangements the grantor controls or
regulates what services the operator must provide using the
assets, to whom, and at what price and also controls any
significant residual interest in the assets at the end of the term of
the arrangement.
IFRIC 12 applies to public-to-private service concession
arrangements if:
Both frameworks have a similar scope.
a) The grantor controls or regulates what services the
operator must provide with the infrastructure, to whom it
must provide them and at what price
and
b) The grantor controls — through ownership, beneficial
entitlement or otherwise — any significant residual interest in
the infrastructure at the end of the term of the arrangement.
Concession arrangements
The two categories of service concession arrangements are:
• The operator receives a financial asset — an unconditional
contractual right to receive a specified or determinable
amount of cash from the government
• The operator receives an intangible asset — a right to charge
for use of a public sector asset.
Infrastructure within the scope of IFRIC 12 is not recognised
as property, plant and equipment of the operator.
The principle categories of service concession assets are the
same under both frameworks.
The operator recognises a financial asset to the extent that it has
an unconditional contractual right to receive cash or another
financial asset from or at the direction of the grantor.
The operator recognises an intangible asset to the extent that it
receives a right (a licence) to charge users of the public service.
Financial asset model
The operator initially measures the financial asset at its fair
value. Thereafter, it follows Section 11 Basic Financial
Instruments and Section 12 Other Financial Instruments Issues
in accounting for the financial asset.
The amount due from or at the direction of the grantor is
accounted for in accordance with IAS 39 Financial Instruments:
Recognition and Measurement as a loan or receivable, an
available-for-sale financial asset, or if so designated upon initial
recognition, a financial asset at fair value through profit or loss.
The considerable differences exist between Sections 11 and 12
and IAS 39. These are dealt with specifically under financial
instruments.
The consideration is recognised at fair value.
No differences in measurement would be expected in the
intangible asset model, as the requirements of section 18 for
such assets are similar to the requirements of IAS 38.
Intangible asset model
The operator shall initially measure the intangible asset at fair
value. Thereafter, it shall follow Section 18 Intangible Assets
other than Goodwill in accounting for the intangible asset,
measuring it at cost less amortisation and impairment losses.
IAS 38 Intangible Assets applies to the measurement of any
intangible asset recognised and it is measured at cost less
amortisation and impairment losses.
Elements of statement of financial position ª CHAPTER THREE ª 101
Chapter four
Elements of the
statement of comprehensive income
Executive summary
In this chapter, we consider the elements that make up the income statement and statement of
comprehensive income and compare the following sections of the IFRS for SMEs with the relevant
standard under full IFRS:
IFRS for SMEs
IFRS
Section 23 Revenue
IAS 18 Revenue
IAS 11 Construction Contracts
Section 30 Foreign Currency Translation
IAS 21 The Effects of Changes in Foreign
Exchange Rates
Section 25 Borrowing Costs
IAS 23 Borrowing Costs
Section 24 Government Grants
IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance
The principles of revenue recognition and foreign currency translation are the same under
IFRS for SMEs. However, there is generally significantly less guidance in IFRS for SMEs, which may
result in different entities taking different interpretations of the requirements in some cases.
The requirements for borrowing costs are significantly different to full IFRS, as IFRS for SMEs
requires all borrowing costs to be expensed as they are incurred. For some entities, particularly in
the construction industry this may result in significant expenses being recognised in profit or loss.
IFRS for SMEs does not give a choice of accounting policy for government grants, all grants are
measured at fair value and recognised in profit or loss.
Elements of statement of comprehensive income ª CHAPTER FOUR ª 103
Section 23: Revenue
IFRS for SMEs
Section 23 Revenue
IFRS
IAS 18 Revenue
IAS 11 Construction Contracts
Impact assessment
IAS 18 Revenue applies to accounting for revenue arising from
the sale of goods, the rendering of services and the use by others
of entity’s assets that yield interest, royalties and dividends.
The IFRS for SMEs combines rules on revenue recognition and
construction contracts as well as on customer loyalty
programmes and the construction of real estate in one section.
Scope
The section applies in accounting for revenue arising from the
following:
•
•
•
•
The sale of goods
The rendering of services
Construction contracts in which the entity is the contractor
The use by others of entity assets yielding interest, royalties
or dividends.
IAS 11 Construction Contracts applies in accounting for
construction contracts in the financial statements of contractors.
Definition of revenue
Revenue is the gross inflow of economic benefits during the
period arising in the course of the ordinary activities of an entity
when those inflows result in increases in equity, other than
increases relating to contributions from equity participants.
Revenue is the gross inflow of economic benefits during the
period arising in the course of the ordinary activities of an entity
when those inflows result in increases in equity, other than
increases relating to contributions from equity participants.
There is no difference between IFRS for SMEs and IFRS.
A construction contract is a contract specifically negotiated for
the construction of an asset or a combination of assets that are
closely interrelated or interdependent in terms of their design,
technology and function or their ultimate purpose or use.
There is no difference between IFRS for SMEs and IFRS.
It must be probable that the economic benefits associated with
the transaction will flow to the entity and that the revenue and
costs can be measured reliably. Additional recognition criteria to
the different categories as presented below.
There is no difference between IFRS for SMEs and IFRS.
Revenue must be measured at the fair value of the consideration
received or receivable. The amount of revenue arising on a
transaction is usually determined by agreement between the
entity and the buyer or user of the asset. It is measured at the
fair value of the consideration received or receivable taking into
account the amount of any trade discounts and volume rebates
allowed by the entity.
There is no difference between IFRS for SMEs and IFRS.
Definition of a construction contract
A construction contract is a contract specifically negotiated for
the construction of an asset or a combination of assets that are
closely interrelated or interdependent in terms of their design,
technology and function or their ultimate purpose or use.
Recognition
It must be probable that the economic benefits associated with
the transaction will flow to the entity and that the revenue and
costs can be measured reliably. Additional recognition criteria
apply to the different categories as presented below.
Measurement
Revenue must be measured at the fair value of the consideration
received or receivable. The fair value of the consideration
received or receivable takes into account the amount of any trade
discounts, prompt settlement discounts and volume rebates
allowed by the entity.
104 ª CHAPTER FOUR ª Elements of statement of comprehensive income
Section 23: Revenue continued
IFRS for SMEs
Section 23 Revenue
IFRS
IAS 18 Revenue
IAS 11 Construction Contracts
Impact assessment
In addition to the general recognition criteria, an entity must
recognise revenue from the sale of goods when:
In addition to the general recognition criteria, an entity must
recognise revenue from the sale of goods when:
There is no difference between IFRS for SMEs and IFRS.
• The entity has transferred to the buyer the significant risks
and rewards of ownership of the goods
• The entity retains neither continuing managerial involvement
to the degree usually associated with ownership nor effective
control over the goods sold
• The costs incurred or to be incurred in respect of the
transaction can be measured reliably.
• The entity has transferred to the buyer the significant risks
and rewards of ownership of the goods
• The entity retains neither continuing managerial involvement
to the degree usually associated with ownership nor effective
control over the goods sold
• The costs incurred or to be incurred in respect of the
transaction can be measured reliably.
Sale of goods
Rendering of services
When the outcome of a transaction involving the rendering of
services can be estimated reliably, revenue must be recognised
by reference to the stage of completion of the transaction at the
end of the reporting period.
When the outcome of a transaction involving the rendering of
services can be estimated reliably, revenue must be recognised
by reference to the stage of completion of the transaction at the
end of the reporting period.
If the services are performed by an indeterminate number of acts
over a specified period of time, revenue may be recognised on a
straight-line basis.
If the services are performed by an indeterminate number of acts
over a specified period of time, revenue may be recognised on a
straight-line basis.
When the outcome of the transaction involving the rendering of
services cannot be estimated reliably, an entity must recognise
revenue only to the extent of the expenses recognised that are
recoverable.
When the outcome of the transaction involving the rendering of
services cannot be estimated reliably, an entity must recognise
revenue only to the extent of the expenses recognised that are
recoverable.
There is no difference between IFRS for SMEs and IFRS.
Interest, royalties and dividends
Interest — recognised using the effective interest rate method.
Interest — recognised using the effective interest rate method.
Royalties — recognised on an accrual basis in accordance with
the substance of the relevant agreement.
Royalties — recognised on an accrual basis in accordance with the
substance of the relevant agreement.
Dividends — recognised when the shareholder’s right to receive
payment is established.
Dividends — recognised when the shareholder’s right to receive
payment is established.
There is no difference between IFRS for SMEs and IFRS.
Elements of statement of comprehensive income ª CHAPTER FOUR ª 105
Section 23: Revenue continued
IFRS for SMEs
Section 23 Revenue
IFRS
IAS 18 Revenue
IAS 11 Construction Contracts
Impact assessment
When the outcome of a construction contract can be estimated
reliably, contract revenue and contract costs associated with the
construction contract must be recognised as revenue and
expenses respectively by reference to the stage of completion of
the contract activity at the end of the reporting period
(percentage of completion method).
When the outcome of a construction contract can be estimated
reliably, contract revenue and contract costs associated with the
construction contract must be recognised as revenue and
expenses respectively by reference to the stage of completion of
the contract activity at the end of the reporting period
(percentage of completion method).
There is no difference between IFRS for SMEs and IFRS.
However, IAS 11 Construction Contracts provides additional
detailed guidance on fixed price and cost-plus contracts.
Reliable estimation of the outcome requires reliable estimates of
the stage of completion, future costs and collectability of billings.
Reliable estimation of the outcome requires reliable estimates of
contract revenue, the stage of completion, future costs and
collectability of billings.
Construction contracts
Percentage of completion method
The stage of completion of a transaction or contract is
determined using the method that measures most reliably
the work performed. Possible methods include:
• The proportion of costs incurred for work performed to date,
but not including costs relating to future activity, such as
materials or prepayments
• Surveys of work performed
• Completion of physical proportion of the service transaction
or contract work
The stage of completion of a contract may be determined in a
variety of ways. The entity uses the method that measures
reliably the work performed. Depending on the nature of the
contract, the methods may include:
• The proportion of contract costs incurred for work
performed to date compared to the estimated total
contract costs
• Survey of work performed
• Completion of a physical proportion of contract work.
Any costs for which recovery is not probable are recognised as an
expense immediately.
An expected loss on the construction contract must be
recognised as an expense immediately.
When the outcome of a construction contract cannot be
estimated reliably:
When the outcome of a construction contract cannot be
estimated reliably:
• Revenue is recognised only to the extent of contract costs
incurred that it is probable will be recoverable
and
• Contract costs must be recognised as an expense in the period
in which they are incurred.
• Revenue is recognised only to the extent of contract costs
incurred that it is probable will be recoverable
and
• Contract costs must be recognised as an expense in the period
in which they are incurred.
106 ª CHAPTER FOUR ª Elements of statement of comprehensive income
There is no difference between IFRS for SMEs and IFRS.
Section 23: Revenue continued
IFRS for SMEs
Section 23 Revenue
IFRS
IAS 18 Revenue
IAS 11 Construction Contracts
Impact assessment
An exchange of dissimilar goods or services is regarded as a
transaction that generates revenue. The revenue is measured at
the fair value of the goods or services received, adjusted by the
amount of any cash or cash equivalents transferred. When the
fair value of the goods or services received cannot be measured
reliably, the revenue is measured at the fair value of the goods or
services given up, adjusted by the amount of cash or cash
equivalents transferred.
There is no difference between IFRS for SMEs and IFRS.
Barter transactions
When goods are sold or services are exchanged for dissimilar
goods or services in a transaction that has commercial
substance, the transaction must be measured at:
• The fair value of the goods or services received adjusted by
the amount of any cash or cash equivalents transferred
• If the fair value of the goods or services received cannot be
measured reliably, then it is measured at the fair value of the
goods and services given up adjusted by the amount of any
cash or cash equivalents transferred
or
• If the fair value of neither the asset received nor the asset
given up can be measured reliably, then at the carrying
amount of the asset given up adjusted by the amount of any
cash or cash equivalents transferred.
An exchange of similar goods or services is not regarded as a
transaction that generates revenue.
No revenue is recognised for an exchange of goods and services
that are of a similar nature and value or for an exchange of
dissimilar goods where the transaction lacks commercial
substance.
Discounting of revenues
Discounting of revenues to present value is required in instances
where the inflow of cash or cash equivalents is deferred. In such
instances, an imputed interest rate is used for determining the
amount of revenue to be recognised, as well as the separate
interest income component to be recorded over time.
The imputed rate of interest is the more clearly determinable
of either:
• The prevailing rate for a similar instrument of an issuer with a
similar credit rating
or
• A rate of interest that discounts the nominal amount of the
instrument to the current cash sales price of the goods or
services.
When the inflow of cash or cash equivalents is deferred, the fair
value of the consideration may be less than the nominal amount
of cash received or receivable. If an arrangement effectively
constitutes a financing transaction, the fair value of the
consideration is determined by discounting all future receipts
using an imputed rate of interest. The imputed rate of interest is
the more clearly determinable of either:
There is no difference between IFRS for SMEs and IFRS.
• The prevailing rate for a similar instrument of an issuer with a
similar credit rating
or
• A rate of interest that discounts the nominal amount of the
instrument to the current cash sales price of the goods or
services.
The difference between the fair value and the nominal amount of
the consideration is recognised as interest revenue.
Elements of statement of comprehensive income ª CHAPTER FOUR ª 107
Section 23: Revenue continued
IFRS for SMEs
Section 23 Revenue
IFRS
IAS 18 Revenue
IAS 11 Construction Contracts
Impact assessment
Agreements for the construction of real estate are dealt with in
IFRIC 15 Agreements for the Construction of Real Estate. An
entity that undertakes the construction of real estate and enters
into an agreement with one or more buyers accounts for the
agreement as a sale of services using the percentage-ofcompletion method if:
There is no difference between IFRS for SMEs and IFRIC 15.
Agreements for the construction of real estate
An entity that undertakes the construction of real estate and that
enters into an agreement with one or more buyers accounts for
the agreement as a sale of services using the percentage-ofcompletion method if:
• The buyer is able to specify the major structural elements
of the design of the real estate before construction begins
and/or specify major structural changes once construction
is in progress
or
• The buyer acquires and supplies construction materials and
the entity provides only construction services.
If the entity is required to provide services together with
construction materials in order to perform its contractual
obligation to deliver real estate to the buyer, the agreement
must be accounted for as the sale of goods. In this case, the
buyer does not obtain control or the significant risks and
rewards of ownership of the work in progress in its current
state as construction progresses. Rather, the transaction occurs
only on delivery of the completed real estate to the buyer.
• The buyer is able to specify the major structural elements
of the design of the real estate before construction begins
and/or specify major structural changes once construction
is in progress
or
• The buyer acquires and supplies construction materials and
the entity provides only construction services.
If the entity is required to provide services together with
construction materials in order to perform its contractual
obligation to deliver real estate to the buyer, the agreement
must be accounted for as the sale of goods. In this case, the buyer
does not obtain control or the significant risks and rewards of
ownership of the work in progress in its current state as
construction progresses. Rather, the transaction occurs only on
delivery of the completed real estate to the buyer.
Customer loyalty programmes
If an entity grants, as part of a sales transaction, its customer a
loyalty award that the customer may redeem in the future for
free or discounted goods or services, the entity must account for
the award credits as separately identifiable component of the
initial sales transaction. The entity must allocate the fair value of
the consideration received or receivable in respect of the initial
sale between the award credits and the other components of the
sale. The consideration allocated to the award credits must be
measured by reference to their fair value, i.e., the amount for
which the award credits could be sold separately.
Customer loyalty programmes are dealt with in IFRIC 13
Customer Loyalty Programmes. If an entity grants, as part of a
sales transaction, its customer a loyalty award that the customer
may redeem in the future for free or discounted goods or
services, the entity must account for the award credits as
separately identifiable component of the initial sales transaction.
The entity must allocate the fair value of the consideration
received or receivable in respect of the initial sale between the
award credits and the other components of the sale. The
consideration allocated to the award credits must be measured
by reference to their fair value, i.e., the amount for which the
award credits could be sold separately.
108 ª CHAPTER FOUR ª Elements of statement of comprehensive income
There is no difference between IFRS for SMEs and IFRIC 13.
Section 30: Foreign currency translation
IFRS for SMEs
Section 30 Foreign Currency Translation
IFRS
IAS 21 The Effect of Changes in Foreign
Exchange Rates
Impact assessment
Functional currency — the currency of the primary economic
environment in which the entity operates.
Functional currency — the currency of the primary economic
environment in which the entity operates.
There is no difference between IFRS for SMEs and IFRS.
Presentation currency — the currency in which the financial
statements are presented.
Presentation currency — the currency in which the financial
statements are presented.
Definitions
Functional currency
All components of the financial statements are measured in the
functional currency. All transactions entered into in currencies
other than the functional currency are treated as transactions in
a foreign currency.
All components of the financial statements are measured in the
functional currency. All transactions entered into in currencies
other than the functional currency are treated as transactions in
a foreign currency.
There is no difference between IFRS for SMEs and IFRS.
A foreign currency transaction must be recorded, on initial
recognition in the functional currency, by applying to the foreign
currency amount the spot exchange rate between the functional
currency and the foreign currency at the date of the transition.
For practical reasons, a rate that approximates the actual rate at
the date of the transaction might be used if it does not fluctuate
significantly.
There is no difference between IFRS for SMEs and IFRS.
Foreign currency transactions
A foreign currency transaction must be recorded on initial
recognition in the functional currency using the spot exchange
rate at the date of transaction. For practical reasons, average
rates may be used if they do not fluctuate significantly.
At the end of each reporting period:
• Foreign currency monetary balances must be translated using
the exchange rate at the closing rate
• Non-monetary balances that are measured in terms of
historical cost in a foreign currency must be translated using
the exchange rate at the date of the transaction
• Non-monetary items that are measured at fair value in a
foreign currency must be translated using the exchange rates
at the date when the fair value was determined.
At the end of each reporting period:
• Foreign currency monetary items must be translated using the
closing rate
• Non-monetary items that are measured in terms of historical
cost in a foreign currency must be translated using the
exchange rate at the date of the transaction
• Non-monetary items that are measured at fair value in a
foreign currency must be translated using the exchange rates
at the date when the fair value was determined.
Elements of statement of comprehensive income ª CHAPTER FOUR ª 109
Section 30: Foreign currency translation continued
IFRS for SMEs
Section 30 Foreign Currency Translation
IFRS
IAS 21 The Effect of Changes in Foreign
Exchange Rates
Impact assessment
Exchange differences arising on the settlement of monetary
items or on translating monetary items at rates different from
those at which they were translated on initial recognition during
the period or in previous financial statements are recognised in
profit or loss in the period in which they arise.
There is no difference between IFRS and IFRS for SMEs in relation
to the recognition of exchange differences. However, under IAS
21, exchange differences on a monetary item that forms part of
a net investment in a foreign operation are reclassified from
equity to profit or loss on disposal of the foreign operation.
Therefore, an SME will recognise a different gain or loss on
disposal of a foreign operation.
Recognition of exchange differences
Exchange differences on monetary items are recognised in profit
or loss for the period except for those differences arising on a
monetary investment in a foreign entity (subject to strict criteria
of what qualifies as net investment). In the consolidated financial
statements, such exchange differences are recognised in other
comprehensive income and reported as a component of equity.
Recycling through profit or loss of any cumulative exchange
differences that were previously recognised in equity on disposal
of a foreign operation is not permitted.
Exchange differences on a monetary item that forms part of a
net investment in a foreign operation are reclassified from equity
to profit or loss on disposal of the foreign operation.
Change in functional currency
A change in functional currency is justified only if there are
changes in underlying transactions, events and conditions that
are relevant to the entity.
A change in functional currency is justified only if there are
changes in underlying transactions, events and conditions that
are relevant to the entity.
The effect of a change in functional currency must be accounted
for prospectively from the date of the change.
The effect of a change in functional currency must be accounted
for prospectively from the date of the change.
There is no difference between IFRS for SMEs and IFRS.
Presentation currency
An entity may choose to present its financial statements in any
currency. If the presentation currency differs from the functional
currency, an entity translates its items of income and expense
and financial position into the presentation currency.
An entity may choose to present its financial statements in any
currency. If the presentation currency differs from the functional
currency, an entity translates its items of income and expense
and financial position into the presentation currency.
110 ª CHAPTER FOUR ª Elements of statement of comprehensive income
There is no difference between IFRS for SMEs and IFRS.
Section 25: Borrowing costs
IFRS for SMEs
Section 25 Borrowing Costs
IFRS
IAS 23 Borrowing Costs
Impact assessment
Borrowing costs are interest and other costs that an entity incurs
in connection with the borrowing of funds and include:
Borrowing costs are interest and other costs that an entity incurs
in connection with the borrowing of funds and may include:
There is no difference between IFRS for SMEs and IFRS.
• Interest expense calculated using the effective interest
method
• Finance charges in respect of finance leases
• Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs.
• Interest expense calculated using the effective interest
method
• Finance charges in respect of finance leases
• Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs.
Scope
IFRS for SMEs does not include a similar scope exemption
because of the required accounting treatment explained below.
IAS 23 does not apply to borrowing costs relating to the
acquisition, construction or production of:
• A qualifying asset measured at fair value, e.g., a
biological asset
or
• Inventories that are manufactured or otherwise produced, in
large quantities on a repetitive basis.
Recognition
All borrowing costs are expensed in profit or loss in the period in
which they are incurred.
Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset as part of the
cost of that asset are capitalised. All other borrowing costs
are expensed.
Expensing borrowing costs is a major difference between IFRS for
SMEs and full IFRS. For many entities this will be simpler to apply
as SMEs will not need to calculate the borrowing costs to be
capitalised. However, in some industries, such as the real estate
industry, expensing borrowing costs may be disadvantageous as
the costs will be recognised in profit or loss in the period in which
they are incurred, which may lead to greater volatility in
earnings. Therefore, entities will need to consider whether this is
a significant factor for their business before deciding to adopt
IFRS for SMEs.
Elements of statement of comprehensive income ª CHAPTER FOUR ª 111
Section 24: Government grants
IFRS for SMEs
Section 24 Government Grants
IFRS
IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance
Impact assessment
This standard applies to accounting for government grants and
the disclosure of government assistance.
There are no differences between IFRS for SMEs and full IFRS in
terms of the definition of government grants. The main
difference in scope is that IFRS for SMEs applies to government
grants related to agriculture, which are dealt with in a separate
standard under full IFRS.
Scope
This section applies to all government grants.
Government grants are assistance by the government in the form
of transfers of resources to an entity in return for past or future
compliance with certain conditions relating to the operation
activities of the entity.
Government grants are assistance by government in the form of
transfers of resources to an entity in return for past or future
compliance with certain conditions relating to the operation
activities of the entity.
Government grants exclude those forms of government
assistance that cannot reasonably have a value placed upon them IAS 20 does not apply to:
and transactions with government that cannot be distinguished
• Government assistance that is provided for an entity in the
from the normal trading transactions of the entity.
form of benefits that are available in determining taxable
profit or tax loss, or are determined or limited on the basis of
The section on government grants does not cover government
income tax liability. Examples of such benefits are income tax
assistance that is provided for an entity in the form of benefits
holidays, investment tax credits, accelerated depreciation
that are available in determining taxable profit or tax loss, or are
allowances and reduced income tax rates
determined or limited on the basis of income tax liability.
• Government participation in the ownership of the entity
Examples of such benefits are income tax holidays, investment
• Government grants covered by IAS 41 Agriculture.
tax credits, accelerated depreciation allowances and reduced
income tax rates.
112 ª CHAPTER FOUR ª Elements of statement of comprehensive income
Generally the disclosure requirements of IFRS for SMEs are less
than under full IFRS and therefore disclosure of government
assistance is not dealt with in IFRS for SMEs.
Section 24: Government grants continued
IFRS for SMEs
Section 24 Government Grants
IFRS
IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance
Impact assessment
An entity shall recognise government grants according to the
nature of the grant as follows:
Government grants, including non-monetary grants, shall not be
recognised until there is a reasonable assurance that:
• A grant that does not impose specified future performance
conditions on the recipient is recognised in income when the
grant proceeds are receivable
• A grant that is imposes specified future performance
conditions on the recipient is recognised in income only when
the performance conditions are met
• Grants received before the income recognition criteria are
satisfied are recognised as a liability and released to income
when all attached conditions have been complied with.
• The entity will comply with the conditions attached to
the grants
and
• The grants will be received.
The IFRS for SMEs approach to account for government grants
simplifies the rules of IAS 20. The most significant difference is
that under IFRS for SMEs, grants of non-monetary assets must
be measured at the fair value of the asset receivable.
Grants are measured at the fair value of the asset received or
receivable.
A government grant that becomes receivable as compensation
for expenses or losses already incurred or for the purpose of
giving immediate financial support to the entity with no future
related costs shall be recognised in profit or loss of the period in
which it becomes receivable.
Recognition and measurement
Government grants are recognised in profit or loss on a
systematic basis over the periods in which the entity recognises
as expenses the related costs for which the grants are intended
to compensate.
Grants in the form of the transfer of a non-monetary asset can be
measured either at the fair value of the asset received or at
nominal amount.
Elements of statement of comprehensive income ª CHAPTER FOUR ª 113
Chapter five
Transition to the IFRS for SMEs
Executive summary
In this chapter, we consider the transition requirements for the first-time adoption of IFRS for SMEs.
The transition rules apply equally to all entities whether they have previously applied IFRS or another
GAAP. The rules are based on the requirements of IFRS 1 First-time Adoption of International Financial
Reporting Standards but in some cases the section has been altered to make the transition requirements
easier to apply.
Under the transition rules, restatements of the opening statement of financial position do not need to be
made if it is impractical to do so. In some cases this may relieve the need for restatement, although the
ability to meet the impracticability hurdle may prove difficult.
Transition to the IFRS for SMEs ª CHAPTER FIVE ª 115
Section 35: Transition to the IFRS for SMEs
IFRS for SMEs
Section 35 Transition to the IFRS for SMEs
Scope
The section applies to a first-time adopter of IFRS for SMEs, whether its previous accounting
framework was full IFRS or another set of GAAP.
An entity’s first financial statements that conform to IFRS for SMEs are the first annual financial
statements in which the entity makes an explicit and unreserved statement in those financial
statements of compliance with the IFRS for SMEs.
Recognition
An entity’s date of transition to the IFRS for SMEs is the beginning of the earliest period for which
the entity presents full comparative information in accordance with this IFRS in its first financial
statements that conform to this IFRS.
Accounting policies in the opening statement of financial position
In the opening statement of financial position, entities must:
a) Recognise all assets and liabilities whose recognition is required by the IFRS for SMEs
b) Not recognise items as assets or liabilities if this IFRS does not permit such recognition
c) Reclassify items recognised under a previous financial reporting framework as one type of asset,
liability or component of equity, but are a different type of asset, liability or component of equity
under this IFRS
d) Apply this IFRS in measuring all recognised assets and liabilities.
Recognition of adjustments
Adjustments, resulting from different accounting policies in the previous GAAP, are recognised
directly in retained earnings (or, if appropriate, another category of equity) at the date of transition
to this IFRS.
116 ª CHAPTER FIVE ª Transition to the IFRS for SMEs
Section 35: Transition to the IFRS for SMEs continued
IFRS for SMEs
Section 35 Transition to the IFRS for SMEs
Exceptions to retrospective application
Entities must not retrospectively change the previous accounting for any of the following:
•
•
•
•
•
Derecognition of financial instruments
Hedge accounting
Accounting estimates
Discontinued operations
Measuring non-controlling interests.
Voluntary exemptions from retrospective application
•
•
•
•
•
•
•
•
•
•
•
•
Business combinations
Share-based payment transactions
Fair value as deemed cost
Revaluation as deemed cost
Cumulative translation differences
Separate financial statements
Compound financial instruments
Deferred income tax
Service concession arrangements
Extractive activities
Arrangements containing a lease
Decommissioning liabilities included in the cost of property, plant and equipment.
Exemptions from retrospective application
If it is impracticable for an entity to restate the opening statement of financial position at the date
of transition for one or more of the adjustments, the entity must apply the requirements for such
adjustments in the earliest period for which it is practicable to do so, and must identify the data
presented for prior periods that are not comparable with data for the period in which it prepares its
first financial statements that conform to this IFRS.
If it is impracticable for an entity to provide any disclosures required by this IFRS for any period
before the period in which it prepares its first financial statements that conform with this IFRS,
the omission must be disclosed.
Transition to the IFRS for SMEs ª CHAPTER FIVE ª 117
Contents by section
Section
1
Small and medium-sized entities
2
Concepts and pervasive principles
3
Financial statement presentation
4
Statement of financial position
5
Statement of comprehensive income and income statement
6
Statement of changes in equity and statement of income and retained earnings
7
Statement of cash flows
8
Notes to the financial statements
9
Consolidated and separate financial statements
10 Accounting policies, estimates and errors
11 Basic financial instruments
12 Other financial instruments issues
13 Inventories
14 Investments in associates
15 Investments in joint ventures
16 Investment property
17 Property, plant and equipment
18 Intangible assets other than goodwill
118 ª Contents by section
6
7
9
12
13
14
15
17
36
18
79
79
67
47
42
57
54
59
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
Business combinations and goodwill
Leases
Provisions and contingencies
Liabilities and equity
Revenue
Government grants
Borrowing costs
Share-based payment
Impairment of assets
Employee benefits
Income tax
Foreign currency translation
Hyperinflation
Events after the end of the reporting period
Related party disclosures
Specialised activities
Transition to the IFRS for SMEs
28
61
92
74
104
112
111
88
64
94
69
109
24
20
21
98
116
Contents by section ª 119
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