The IFRS for SMEs
Topic 1.5
Sections 3–8, 10, 30, 32 and 33
Financial Statement Presentation
© 2011 IFRS Foundation
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The IFRS Foundation allows individuals and organisations to use this
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This presentation may be modified from time to time. The latest version
may be downloaded from:
http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm
The accounting requirements applicable to small and medium-sized entities
(SMEs) are set out in the International Financial Reporting Standard (IFRS)
for SMEs, which was issued by the IASB in July 2009.
The IFRS Foundation, the authors, the presenters and the publishers do not
accept responsibility for loss caused to any person who acts or refrains
from acting in reliance on the material in this PowerPoint presentation,
whether such loss is caused by negligence or otherwise.
© 2011 IFRS Foundation
Overview of financial statement presentation
3
• Section 3 specifies general requirements
for financial statement presentation
• Sections 4–8 cover the presentation of
each component of financial statements
• Section 10 covers accounting policies,
estimates and errors
• Section 30 covers foreign currency
translation
© 2011 IFRS Foundation
Overview of financial statement presentation
4
• Section 32 covers events after the end of
the reporting period
• Section 33 covers related party
disclosures
the main principles in these sections are
generally the same as full IFRSs
© 2011 IFRS Foundation
Illustrative financial statements
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• Accompanies the IFRS for SMEs issued by
IASB
– a fictional candle manufacturer group
– see http://www.ifrs.org/IFRS+for+SMEs/IFRS+for+SMEs+and+related+material.htm
available in Armenian, English, Chinese,
Czech, French, Italian, Portuguese (Brazil),
Romanian, and Spanish
• Issued by PwC (not reviewed by IASB/IFRS
Foundation)
– a fictional first-time adopter—fruit grower, wine
and fruit producer, wholesale and retail group
– see http://www.pwc.com/gx/en/ifrs-reporting/ifrs-illustrative-financialstatements-smes-pwc-publications.jhtml
© 2011 IFRS Foundation
Disclosure checklist
6
• Accompanies the IFRS for SMEs issued
by IASB
– see
http://www.ifrs.org/IFRS+for+SMEs/IFRS+for+SMEs+
and+related+material.htm
– available in Armenian, English, Chinese,
Czech, French, Italian, Portuguese
(Brazil), Romanian, and Spanish
© 2011 IFRS Foundation
The IFRS for SMEs
Section 3
Financial Statement Presentation
© 2011 IFRS Foundation
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Section 3 – scope
8
• Section 3 explains
– fair presentation of financial statements
– what compliance with the IFRS for SMEs
requires
– what is a complete set of financial
statements
© 2011 IFRS Foundation
Section 3 – fair presentation
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• Fair presentation is the faithful
representation of the effects of
transactions, other events and
conditions in accordance with the
definitions and recognition criteria for
assets, liabilities, income and expenses
• The application of the IFRS for SMEs
(with additional disclosure when
necessary) is presumed to result in a fair
presentation of the financial position,
financial performance & cash flows of an
entity that is not publicly accountable
© 2011 IFRS Foundation
Section 3 – compliance
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• An entity whose financial statements
comply with the IFRS for SMEs must
make an explicit and unreserved
statement of such compliance in the
notes
• Financial statements shall not be
described as complying with the IFRS for
SMEs unless they comply with all the
requirements of the IFRS for SMEs
© 2011 IFRS Foundation
Section 3 – compliance statement
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• Ex 1*: An entity prepares its consolidated
financial statements for the year ended
31 December 20X2 in accordance with the
IFRS for SMEs.
Note 2 Basis of preparation and
accounting policies
These consolidated financial statements have
been prepared in accordance with the
International Financial Reporting Standard
(IFRS®) for Small and Medium-sized Entities
issued by the International Accounting
Standards Board.
* see example 1 in Module 3 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 3 – compliance statement?
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Can either of the following entities assert
compliance with the IFRS for SMEs?
• Ex 5*: A has public accountability. It
uses the IFRS for SMEs.
• Ex 6*: B does not have public
accountability. It uses local GAAP.
The local GAAP is based mainly on the
IFRS for SMEs but has some material
differences.
* see example with the same number in Module 3 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 3 – going concern
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• An entity is a going concern unless
management either intends to liquidate
the entity or to cease operations, or has
no realistic alternative but to do so
• When preparing financial statements, the
management of an entity must make an
assessment of the entity’s ability to
continue as a going concern
© 2011 IFRS Foundation
Section 3 – going concern disclosures
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• Disclose material uncertainties related to
events or conditions that cast significant
doubt upon the entity’s ability to
continue as a going concern
• If financial statements are not prepared
on a going concern basis disclose:
– that fact
– the basis of preparation
– the reason why the entity is not regarded
as a going concern
© 2011 IFRS Foundation
Section 3 – consistency of presentation 15
• Same presentation and classification each
year unless:
–significant change in the nature of the
entity’s operations or review of
presentation and find another presentation
or classification more appropriate (ie
reliable and more relevant), or
–the IFRS for SMEs requires a change in
presentation.
• If change, restate comparatives and
disclose (nature, amount and reason)
© 2011 IFRS Foundation
Section 3 – comparative information
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• Disclose
– 1 year’s comparative amounts
– comparative information for narrative and
descriptive information when relevant to
understanding current period’s financial
statements
© 2011 IFRS Foundation
Section 3 – materiality and aggregation 17
• Material if could, individually or
collectively, influence economic decisions
of users
–depends on size and nature of the
omission or misstatement
–judged in the surrounding circumstances
• Present separately
–each material class of similar items
–items of a dissimilar nature or function
unless they are immaterial
Materiality threshold is lower for notes
© 2011 IFRS Foundation
Section 3 – materiality decisions
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Is the error material?
• Ex 13*: Before its 20X8 FS approved for
issue discovered depreciation expense
for 20X8 overstated by CU150. Ignored
the error (reported profit for 20X8 at
CU600,000, ie understated by CU150).
• Ex 15*: Same as Ex 13, except had the
error been corrected the entity would
have breached a borrowing covenant on
a significant long-term liability.
* see example with the same number in Module 3 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 3 – financial statements
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• Complete set of financial statements
– Statement of financial position (Section 4)
– Either single statement of comprehensive
income or two statements—an income
statement and a statement of
comprehensive income (Section 5)
– Statement of changes in equity (Section6)
– Statement of cash flows (Section 7)
– Notes (Section 8)
Present each with equal prominence
© 2011 IFRS Foundation
Section 3 – optional alternative formats
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• Statement of income and retained
earnings (instead of statement of
comprehensive income (SOCI) and
statement of changes in equity) if only
changes in equity arise from:
– profit or loss;
– payment of dividends;
– correction of prior period errors; and
– changes in accounting policies
• Income statement (instead of SOCI) if no
items of other comprehensive income
© 2011 IFRS Foundation
Section 3 – other comprehensive income 21
• The only other comprehensive income
(OCI) items are
– some foreign exchange gains and losses
(see Section 30)
– some changes in fair values of hedging
instruments (see Section 12)
– some actuarial gains and losses (see
Section 28)
© 2011 IFRS Foundation
Section 3 – identification
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• Clearly identify each of the financial
statements and notes and distinguish
them from other information in the same
document
• Display prominently (and repeat when
necessary)
– name
– individual or group financial statements
– presentation currency and level of
rounding
– reporting date
© 2011 IFRS Foundation
The IFRS for SMEs
Section 4
Statement of Financial Position
© 2011 IFRS Foundation
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Section 4 – scope
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The statement of financial position
(SOFP) (sometimes called the balance
sheet) presents an entity’s assets,
liabilities and equity as of a specific
date—the end of the reporting period.
• Section 4:
– sets out the information to be presented in
a statement of financial position and how
to present it
© 2011 IFRS Foundation
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•
•
•
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Section 4 – line items
Specifies minimum line items—
sufficiently different in nature or function
for separate presentation (see ¶4.2)
Requires additional line items headings
and subtotals when relevant to an
understanding of the entity’s financial
position.
Sequencing, format, and titles are not
mandated
Some items may be presented in the
SOFP or in the notes (see ¶4.11–4.14)
© 2011 IFRS Foundation
Section 4 – line items continued
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• Provide information that is relevant to an
understanding of the entity’s financial
position
• In making aggregation/disaggregation
judgements consider
– the amounts, nature and liquidity of assets
– the function of assets within the entity
– the amounts, nature and timing of liabilities
© 2011 IFRS Foundation
Section 4 – current/non-current distinction27
• Make current/non-current distinction
unless liquidity presentation is reliable
and more relevant
• In liquidity presentation present assets
and liabilities in order of liquidity
• Current assets and current liabilities are
defined
• All other assets and liabilities are noncurrent
• Deferred tax balances are non-current
© 2011 IFRS Foundation
Section 4 – current assets
• Current asset if
– expect to realise, sell or consume in
entity’s normal operating cycle
– held for trading
– expects to realise in next 12 months
– cash or equivalent, unless restricted for
+12 months
© 2011 IFRS Foundation
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Section 4 – examples current assets
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• Ex 3*: A produces whiskey from barley,
water and yeast in a 24-month distillation
process. Inventories include barley and
yeast raw materials, partly distilled
whiskey and distilled whiskey.
Current assets—expected to be realised
(ie turned into cash) in the entity’s normal
operating cycle.
* see example 3 in Module 4 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 4 – examples
continued
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• Ex 7*: On 1/1/20X7 B invested CU900,000
in corporate bonds.
Fixed interest of 5% per year is payable
on 1 January each year.
Capital is repayable in 3 annual
instalments of CU300,000 each starting
31/12/20X8.
* see example 7 in Module 4 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 4 – examples
continued
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• Ex 7 continued:
At 31/12/20X7 A presents
– current assets—CU45,000 accrued
interest & CU300,000 capital repayable
on 31/12/20X8—expected to be realised
within 12 months
– non-current asset—CU600,000 in +12
months
© 2011 IFRS Foundation
Section 4 – current liabilities
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• Current liability if
– expect to settle in entity’s normal operating
cycle
– held for trading
– due to be settled in next 12 months
– entity does not have an unconditional right
to defer settlement for at least 12 months
after reporting date
© 2011 IFRS Foundation
Section 4 – examples current liabilities
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• Ex 9*: An obligation to suppliers for the
purchase of raw materials.
Current liability—expected to settle
(ie pay) the supplier in the entity’s
normal operating cycle.
* see example 9 in Module 4 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 4 – examples
continued
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• Ex 10*: At 31/12/20X7 A was in breach of
a covenant in a loan that is otherwise
repayable 3 years later. The breach
entitles (but does not oblige) the bank to
require immediate repayment.
At 31/12/20X7 the loan is a current
liability—at 31/12/20X7 A does not have
an unconditional right to defer settlement
for at least 12 months.
* see example 10 in Module 4 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 4 – examples
continued
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• Ex 11*: Same as in Ex 10 except after the
end of the reporting period (31/12/20X7)
and before the financial statements were
approved for issue, the bank formally
agreed not to demand early repayment of
the loan.
At 31/12/20X7 the loan is a current
liability—at 31/12/20X7 A does not have
an unconditional right to defer settlement
for at least 12 months.
* see example 11 in Module 4 of the IFRS Foundation training material
© 2011 IFRS Foundation
The IFRS for SMEs
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Section 5
Statement of Comprehensive Income
and
Income Statement
© 2011 IFRS Foundation
Section 5 – scope
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The statement of comprehensive income
presents an entity’s financial
performance (ie its income and expenses)
for the period.
• Section 5
– requires financial performance be
presented in a single statement or two
statements (an accounting policy choice)
– sets out the information to be presented in
those statements
© 2011 IFRS Foundation
Section 5 – line items
• Specifies minimum line items (see ¶5.5)
• Requires
– additional line items, headings and
subtotals when relevant to an
understanding of the entity’s financial
performance
– an analysis of expenses based on either
–the nature of expenses or
–the function of expenses
– segregation of discontinued operations
• Prohibits use of the descriptor
‘extraordinary items’
© 2011 IFRS Foundation
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Section 5 – disclose allocations
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• Profit or loss and total comprehensive
income are before allocating those
amounts to non-controlling interests and
owners of the parent
• Disclose the allocations of those amounts
to
– the non-controlling interests
– the owners of the parent
© 2011 IFRS Foundation
Section 5 – presentation alternatives
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• Accounting policy choice—1 performance
statement or 2
• Single statement of comprehensive
income
– includes all income and expenses
– separate line items include (among others)
–profit or loss (unless no items of OCI)
–each item of other comprehensive
income displayed below profit or loss
–total comprehensive income
© 2011 IFRS Foundation
Section 5 – two statements
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• Two statements
– income statement
– statement of comprehensive income
• Income statement
– ends with profit or loss
• Statement of comprehensive income
– starts with profit or loss
– present each item of other comprehensive
income separately
– ends with total comprehensive income
© 2011 IFRS Foundation
The IFRS for SMEs
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Section 6
Statement of Changes in Equity
and
Statement of Income and Retained
Earnings
© 2011 IFRS Foundation
Section 6 – scope
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The statement of changes in equity
presents all changes in equity in the
reporting period, detailing those arising
from transactions with owners in their
capacity as owners.
• Section 6
– sets out requirements for presenting the
changes in an entity’s equity for a period,
either in a statement of changes in equity
or, if specified conditions are met and an
entity chooses, in a statement of income
and retained earnings
© 2011 IFRS Foundation
Section 6 – statement of changes in equity
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• Shows all changes to equity including
– total comprehensive income (and the
allocation to owners of the parent and
NCI)
– for each component of equity
–the effects of retrospective application and
retrospective restatement (see Section 10)
–reconciliation between the carrying amount at
the start & end of the period showing profit or
loss; each item of OCI; transactions with
owners as owners; & changes in ownership
interests in subsidiaries that do not result in
loss of control.
© 2011 IFRS Foundation
Section 6 – statement of income and
retained earnings
• A statement of income and retained
earnings can be presented (optional)
instead of statement of comprehensive
income and statement of changes in
equity) if only changes in equity arise
from:
– profit or loss;
– payment of dividends;
– correction of prior period errors; and
– changes in accounting policies.
© 2011 IFRS Foundation
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Section 6 – statement of income and
retained earnings
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• Shows
– all the information required by Section 5
(comprehensive income)
– retained earnings at the beginning and at
the end of the period
– dividends recognised in the period
– restatements of retained earnings for
correction of prior period errors and
changes in accounting policies
© 2011 IFRS Foundation
The IFRS for SMEs
Section 7
Statement of Cash Flows
© 2011 IFRS Foundation
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Section 7 – scope
48
The statement of cash flows provides
information about the changes in cash
and cash equivalents of an entity for a
reporting period, showing separately
changes from operating activities,
investing activities and financing
activities.
Section 7
– sets out the information that is to be
presented in a statement of cash flows
and how to present it
© 2011 IFRS Foundation
Section 7 – cash equivalents
49
Cash equivalents are short-term, highly
liquid investments held to meet shortterm cash commitments rather than for
investment or other purposes
• Cash equivalents include
– investments with a short maturity (say 3
months or less from the date of
acquisition)
– bank overdrafts only if they are repayable
on demand and form an integral part of an
entity’s cash management, bank
overdrafts
© 2011 IFRS Foundation
Section 7 – cash equivalents
50
• Present
–the components of cash and cash
equivalents
–reconciliation to the amounts in the
statement of financial position (unless
identical and similarly described)
• Disclose commentary by management the
amount of
–significant cash and cash equivalents that
are not available for use by the entity
–examples: foreign exchange controls or
legal restrictions
© 2011 IFRS Foundation
Section 7 – unrealised gains and losses
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• Unrealised gain and losses are not cash
flows
• However, unrealised exchange rate
gain/loss on foreign currency cash and
cash equivalents are shown in CFS
– separate from operating, investing and
financing activities
– ie in the reconciliation of cash and cash
equivalents
© 2011 IFRS Foundation
Section 7 – operating activities
52
Operating activities are the principal
revenue-producing activities of the entity
• Operating activity cash flows include
– cash receipts from customers
– cash payments to suppliers & employees
– cash flows of income tax, unless
specifically identified with financing and
investing activities
– cash flows from investments, loans and
other contracts held for dealing or trading
purposes
© 2011 IFRS Foundation
Section 7 – direct or indirect method
• Accounting policy choice to present
operating cash flows
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– indirect method
–profit or loss is adjusted for the effects of
non-cash transactions, any deferrals or
accruals of past or future operating cash
receipts or payments, and items of income
or expense associated with investing or
financing cash flows
– direct method
–major classes of gross cash receipts &
gross cash payments are presented
© 2011 IFRS Foundation
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Section 7 – investing activities
Investing activities are the acquisition &
disposal of long-term assets & other
investments not included in cash
equivalents.
• Investing activity cash flows include
– cash payments to acquire (cash receipts
from sale of) long-term assets (eg PP&E)
– cash payments to acquire (cash receipts
from the sale) equity or debt instruments
of other entities and interests in joint
ventures (other than payments/receipts
for those instruments classified as cash
equivalents or held for dealing/trading)
© 2011 IFRS Foundation
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Section 7 – financing activities
Financing activities are activities that
result in changes in the size and
composition of the contributed equity and
borrowings of an entity
• Financing activity cash flows include
– cash proceeds from issuing shares or other
equity instruments and cash payments to
owners to acquire or redeem the entity’s
shares
– cash proceeds from borrowings and cash
repayments of amounts borrowed
– cash payments by a lessee for the reduction
of the outstanding liability relating to a
finance lease
© 2011 IFRS Foundation
Section 7 – investing and financing
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• Present separately major classes of gross
cash receipts and gross cash payments
arising from investing and financing
activities.
• The aggregate cash flows arising from
acquisitions and from disposals of
subsidiaries or other business units shall
be presented separately and classified as
investing activities.
© 2011 IFRS Foundation
Section 7 – example
57
• Ex 1: In 20X7 A acquires 50% of the
equity of B for CU110 when B’s cash and
cash equivalents = CU10. From 1/1/20X7
A controls B (ie B is a subsidiary of A)
• Scenarios
(i) A settles the purchase price in cash
(ii) A buys on credit (will settle next year)
(iii) A settles by issuing its own equity to the
seller
(iv) A borrows CU110 from the bank and
uses cash borrowed to settle
© 2011 IFRS Foundation
Section 7 – example 1 continued
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• The group (A & B consolidated) would
present a cash flow in the investing
activities section for the purchase of a
subsidiary of:
–scenario (i) CU100 outflow (ie CU110 less
CU10)
–scenario (ii) CU10 inflow
–scenario (iii) CU10 inflow
–scenario (iv) CU100 outflow (in investing
activities) & CU110 inflow in financing
activities
© 2011 IFRS Foundation
Section 7 – example
• Ex 2: Same as Ex 1 except A has
significant influence over B (ie B is an
associate of A)
• A would present:
–scenario (i) CU110 outflow in investing
activities
–scenario (ii) no cash flows
–scenario (iii) no cash flows
–scenario (iv) CU110 outflow in investing
activities & CU110 inflow in financing
activities
© 2011 IFRS Foundation
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Section 7 – interest and dividends
60
• Interest and dividends CFs:
–show separately and classify consistently
–interest & dividends received = operating
or investing activity
–interest paid = operating or financing
activity
–dividends paid usually = financing activity
© 2011 IFRS Foundation
Section 7 – foreign currency and hedging
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• Foreign currency: record CFs at the
exchange rate on the date of the cash flow
• Hedge accounting: CFs of the hedging
instrument are classified same way as
CFs of hedged item
© 2011 IFRS Foundation
Section 7 – non-cash transactions
• Exclude from statement of cash flows
–however, disclose elsewhere in the
financial statements (eg notes)
• Examples
–finance lease (initial recognition)
–issue own equity to acquire business
–convert debt into equity
© 2011 IFRS Foundation
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The IFRS for SMEs
Section 8
Notes to the Financial Statements
© 2011 IFRS Foundation
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Section 8 – scope
64
Notes provide additional information―
narrative descriptions or disaggregations
of items presented in statements and
information about items that do not
qualify for recognition.
• Section 8 sets out the principles for
presenting note disclosures
• Other sections require note disclosures
© 2011 IFRS Foundation
Section 8 – overview of notes
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• Notes are presented systematically and
cross-reference to FS
• Notes present information about
– basis of presentation
– specific accounting policies used
– information about judgements and key
sources of estimation uncertainty
• Notes disclose
– the information required by the IFRS for
SMEs that is not presented elsewhere
– other information that is relevant to an
understanding of the FS
© 2011 IFRS Foundation
Section 8 – order of presentation
• 1st: statement of compliance (IFRS for
SMEs)
• 2nd: summary of significant accounting
policies applied
• 3rd: supporting information for items
presented in FS, follow sequence in FS
• 4th: other disclosures
© 2011 IFRS Foundation
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Section 8 – accounting policies
67
• Disclose:
– measurement bases used
– other relevant accounting policies used
– information about judgements made in
applying accounting policies that have the
most significant effect on the FS
– information about key sources of
estimation uncertainty that have a
significant risk of causing a material
adjustment within 1 year (including their
nature and carrying amount)
© 2011 IFRS Foundation
Section 8 – examples of judgements in
applying accounting policies
68
– Whether outflow is more likely than not re
a present obligation = recognise a liability?
– Whether a lease transfers substantially all
risks and rewards of ownership = finance
or operating lease?
– When risks and rewards transfer for goods
sold = when to recognise revenue?
– Whether arrangement = sales of goods or
financing?
– Whether controls exists = whether to
consolidate?
© 2011 IFRS Foundation
Section 8 – judgement in applying
AP
69
• Ex 3* lease classification
In 20X3 A entered into an agreement (as lessee) for the use
of an executive jet. It is not clear whether the lease transfers
substantially all the risks and rewards incidental to
ownership. However, management judge the lease to be an
operating lease and therefore the lease is accounted for as
an executory contract. Had the lease been judged to be a
finance lease, the entity would have recognised the leased
asset and a corresponding lease liability and it would have
apportioned lease payments between finance costs and the
repayment of the liability. It would also have depreciated the
leased asset over its useful life. The entity’s commitment to
make future non-cancellable lease payments for the use of
the jet is set out in note 40.
* see example 3 in Module 8 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 8 – key measurement
assumptions
70
• Ex 4* Fair value of financial instruments
Financial assets and financial liabilities that are not
basic financial instruments (see note 12) are carried
at their fair value, with changes in fair value
recorded in profit or loss. When no active market
exists, or when quoted prices are not otherwise
available, judgement is required in determining fair
value.
In these circumstances, fair value is determined
using a variety of valuation techniques including
present value methods, models based on
observable input parameters, and models where
some of the input parameters are unobservable.
* see example 4 in Module 8 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 8 – key measurement
assumptions
71
• Ex 4 continued:
Valuation models are used primarily to value
derivatives transacted in the over-the-counter
market, including credit derivatives and unlisted
securities with embedded derivatives. All valuation
models are validated before they are used, and
periodically reviewed thereafter, by independent
qualified financial instrument valuation experts.
Wherever possible, valuations derived from models
are compared with quoted prices of similar financial
instruments, and with actual values when realised,
in order to further validate and calibrate our models.
© 2011 IFRS Foundation
Section 8 – key measurement
assumptions
72
• Ex 4 continued:
Our models incorporate information about the actual
or estimated market prices and rates, time value,
volatility, market depth and liquidity among others.
When available, we use market observable prices and
rates derived from market verifiable data. When such
factors are not market observable, changes in
assumptions could affect the reported fair value of
financial instruments. The models are applied from
one period to the next. However, estimating fair value
inherently involves a significant degree of judgement.
Management therefore establishes valuation
adjustments to cover the risks associated with the
estimation of unobservable input parameters and the
assumptions within the models themselves.
© 2011 IFRS Foundation
Section 8 – key measurement
assumptions
73
• Ex 4 continued:
Valuation adjustments are also made to reflect such
elements as aged positions, deteriorating creditworthiness
(including country-specific risks), concentrations in specific
types of instruments and market risk factors (interest rates,
currencies etc), and market depth and liquidity. Although a
significant degree of judgement is, in some cases, required
in establishing fair values, management believes the fair
values recorded in the statement of financial position and the
changes in fair values recorded in the statement of
comprehensive income are reflective of the underlying
economics, based on the controls and procedural
safeguards employed.
© 2011 IFRS Foundation
Section 8 – key measurement
assumptions
74
• Ex 4 continued:
Nevertheless, management have estimated the
effect that a change in assumptions to reasonably
possible alternatives could have on fair values
where model inputs are not market observable. For
all financial instruments carried at fair value which
rely on assumptions for their valuation, we estimate
that fair value could lie in a range from CU500,000
lower to CU500,000 higher than the fair values of
CU2,000,000 (see note 12) recognised in the
financial statements.
© 2011 IFRS Foundation
The IFRS for SMEs
75
Section 10
Accounting Policies, Estimates and
Errors
© 2011 IFRS Foundation
Section 10 – scope
Section 10
• Provides guidance for selecting and
applying the accounting policies
• Specifies accounting for
– changes in accounting estimates
– corrections of errors in prior period
financial statements
© 2011 IFRS Foundation
76
Section 10 – accounting policies hierarchy77
• If IFRS for SMEs addresses an issue,
must follow IFRS for SMEs
• If not
– choose policy that results in most relevant
and reliable information by
–1st try to analogise from requirements in
other sections
–2nd use concepts/pervasive principles in
Section 2
–may also (not required) look to full
IFRSs
© 2011 IFRS Foundation
Section 10 – accounting policies hierarchy78
• Ex 5*: A received a grant of CU50,000
from a non-government development
agency to set up farming operations in a
specified rural area.
IFRS for SMEs does not specify how to account for
a grant from a non-government agency.
However, it specifies how to account for
government grants (Section 24 Government
Grants).
By analogy, A should account for the grant
received in accordance with Section 24.
* see example 5 in Module 10 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 10 – consistency of acc.
policies
79
• Select and apply its accounting policies
consistently for similar transactions,
other events and conditions
• Change accounting policy only if
– is required by change to IFRS for SMEs
(compulsory)
– results in reliable and more relevant
information (voluntary)
© 2011 IFRS Foundation
80
Section 10 – accounting policies
• Ex 7*: A measures invest’s in associates
at fair value. Because it cannot determine
the fair value of its investment in
associate B, it measures it using the cost
model.
A’s accounting policy is acceptable. Sect 14
requires A choose cost, equity method, or
fair value. If choose fair value still use cost
for investments if impracticable to measure
fair value reliably without undue cost or effort
(see paragraph 14.10).
* see example 7 in Module 10 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 10 – accounting policies
81
• Ex 9*: A’s acc. policy = account for
investments in associates at fair value
and jointly controlled entities at cost.
None of A’s investments are traded in a
public securities market.
A’s accounting policies are acceptable. Its
policy for associates need not be the same
as its policy for jointly controlled entities.
* see example 9 in Module 10 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 10 – change in accounting policy82
• Change accounting policy if
– if mandated, follow the transition guidance
as mandated
– if voluntary, retrospective application
–impracticability exemption
• Disclosures
© 2011 IFRS Foundation
Section 10 – retrospective application
83
• Ex 20*: In 20X7 A voluntarily changed an
accounting policy. The cumulative effect of
the change is a decrease of CU100,000 in
retained earnings at 1/1/20X7 (ie CU25,000
less profit for each of the past four years).
The entity presents two years of
comparative information.
Presented as a restatement of:
–retained earnings at 1/1/20X5—reduce by
CU50,000
–profit 20X5 & 20X6—reduce by CU25,000 each
* see example 20 in Module 10 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 10 – impracticability exemption
84
• Ex 21*: Facts same as Ex 20. Except, it is
impracticable to determine the individual
period effects of the change of policy.
Presented as a restatement of:
–retained earnings at 1/1/20X7—reduce by
CU100,000 (no adjustment to 20X5 & 20X6)
–additional disclosures
* see example 21 in Module 10 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 10 – accounting estimate
85
The use of reasonable estimates is an
essential part of accounting.
Changes in accounting estimates result
from new information or new
developments and, accordingly, are not
corrections of errors.
© 2011 IFRS Foundation
Section 10 – errors
86
Prior period errors are omissions from,
and misstatements in, financial
statements for prior periods arising from
a failure to use, or misuse of, reliable
information that:
– was available when financial statements
for those periods were authorised for
issue, and
– could reasonably be expected to have
been obtained and taken into account in
the preparation & presentation of those
financial statements.
© 2011 IFRS Foundation
Section 10 – change in estimate
87
• Account for changes in accounting
estimates prospectively
• Disclose
– nature of change and the effect of the
change on assets, liabilities, income and
expense for the current period
– if practicable, estimates of the effect of
the change in one or more future periods
© 2011 IFRS Foundation
Section 10 – correcting errors
88
• Correct prior period errors retrospectively
(ie restate comparative figures)
• Disclose
– nature of the error
– financial effects (each line-item)
– an explanation if it is not practicable to
determine the financial effects
© 2011 IFRS Foundation
Section 10 – change in estimate
89
• Ex 28*: On 1/1/20X1 A buys yacht for
CU1,000,000. Useful life = 30 years.
Residual value = CU100,000. Straight-line
method of depreciation.
At 31/12/20X9, as a result of research in
20X9, A reassessed the yacht as follows:
useful life at 20 years from 1/1/20X1;
residual value at nil; fair value at
CU800,000; and straight-line depreciation
as most appropriate method.
* see example 28 in Module 10 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 10 – change in estimate
90
• Ex 28 continued: The reassessment of the
yacht’s useful life and its residual value are
changes in accounting estimates. The
revised assessments are appropriately made
on the basis of new information that arose
from research performed in the current
reporting period—20X9.*
* for accounting entries see example 32 in Module 10 of the IFRS Foundation training
material
© 2011 IFRS Foundation
Section 10 – prior period error
91
• Ex 29*: Same as Ex 28, except, the
research was publicly available in late
20X5. A believed the research to be valid
but chose to ignore it until 20X9.
• A’s 20X5–20X8 financial statements include
errors. The comparative figures in its 20X9
financial statements must be restated to
correct the effects of the prior period errors
[if material].
* see example 29 in Module 10 of the IFRS Foundation training material
© 2011 IFRS Foundation
The IFRS for SMEs
Section 30
Foreign Currency Translation
© 2011 IFRS Foundation
92
93
Section 30 – background
An entity can have transactions in foreign
currencies and it can have foreign
operations.
It may also present its FS in a foreign
currency.
Accounting for financial instruments
denominated in a foreign currency and
hedge accounting of foreign currency items
are dealt with in Sections 11 and 12 (session
on PM day-2 of this workshop).
© 2011 IFRS Foundation
Section 30 – scope
94
Section 30 prescribes how to:
–determine an entity’s functional currency
–measure foreign currency transactions
–include foreign operations in FS (see
session on PM day-3 of this workshop)
–translate FS into a presentation currency
(see session on PM day-3 of this workshop).
It also specifies disclosures.
© 2011 IFRS Foundation
Section 30 – functional currency
95
• Each entity identifies its functional
currency―the currency of the primary
economic environment in which the entity
operates (ie normally the one in which it
primarily generates and expends cash)
• A foreign currency transaction is a
transaction that is denominated or
requires settlement in a foreign currency
(ie a currency other than the entity’s
functional currency)
© 2011 IFRS Foundation
Section 30 – determine functional currency96
• Most important factors to consider when
determining an entity’s functional currency:
– the currency:
–that mainly influences sales prices (often
the currency in which its sales are
denominated and settled), and
–of the country whose competitive forces and
regulations mainly determine its sales
prices.
– the currency that mainly influences labour,
material & other costs of providing goods or
services (this will often be the currency in
which such costs are denominated and
settled).
© 2011 IFRS Foundation
Section 30 – disclose functional
97
currency
• Disclose currency in which financial
statements are presented
• If presentation currency is not functional
currency disclose:
– that fact
– the functional currency
– reason for using a different presentation
currency
• When functional currency of entity or a
significant operation changes disclose:
– that fact
– reason for the change
© 2011 IFRS Foundation
Section 30 – change functional
currency
98
• Change functional currency only if
change to underlying transactions,
events and conditions
– eg a change in the currency that mainly
influences the sales prices of goods and
services
• Accounted for change prospectively
– translate all items using the exchange
rate at the date of the change
– resulting translated amounts for nonmonetary items are treated as their
historical cost
© 2011 IFRS Foundation
Section 30 – foreign currency
transaction
99
• Initial recognition
– measure a foreign currency transaction in
the functional currency using the spot
exchange rate on the date when the
transaction first qualifies for recognition
© 2011 IFRS Foundation
Section 30 – examples initial recognition 100
• Ex 1: A’s functional currency is CU.
On 1/12/20X1 A buys goods on credit for
FCU100,000 (FCU denominated) when
spot currency exchange rate = FCU1:CU2.
On 1/12/20X1 A recognises inventories and
trade payables of CU200,000.
© 2011 IFRS Foundation
Section 30 – examples initial recognition 101
• Ex 2: A’s functional currency is CU.
On 1/12/20X1 A buys an investment
property for FCU100,000 when the spot
currency exchange rate = FCU1:CU2 (ie A
pays CU200,000).
A accounts for the investment property at
its fair value.
On 1/12/20X1 A recognises its investment
property at CU200,000.
© 2011 IFRS Foundation
Section 30 – subsequent measurement
102
• At the end of each reporting period
– translate foreign currency monetary items
using the closing rate;
– translate non-monetary items that are
measured in terms of historical cost in a
foreign currency using the exchange rate
at the date of the transaction; and
– translate non-monetary items that are
measured at fair value in a foreign
currency using the exchange rates at the
date when the fair value was determined.
© 2011 IFRS Foundation
Section 30 – translation gains and losses
103
• Monetary items
–recognise, in profit or loss when the
exchange differences arise (ie on settlement
or on retranslating (exception see paragraph
30.13).
• Non-monetary items
–recognise exchange differences (in profit or
loss or OCI) follows classification of the
underlying item.
• Disclose
–amount of exchange differences recognised
in profit or loss (excluding those on items
carried using the fair value model)
© 2011 IFRS Foundation
Section 30 – subsequent measurement 104
• Ex 1 continued: On 31/12/20X1 (A’s year-end)
the spot currency exchange rate =
FCU1:CU2.1.
On 1/2/20X2 when the spot rate =
FCU1:CU2.05 A pays CU205,000 to settle
the FCU100,000 liability.
At 31/12/20X1 A reports the trade payable at
CU210,000 and recognises loss of
CU10,000 in profit or loss.
On 1/2/20X2 A derecognises the
FCU100,000 payable and recognises gain of
CU5,000.
© 2011 IFRS Foundation
Section 30 – subsequent measurement
105
• Ex 2 continued: On 31/12/20X1 (A’s financial
year-end) the fair value of the investment
property = FCU100,000 (ie coincidentally
no change) and the spot currency
exchange rate = FCU1:CU2.1.
At 31/12/20X1 A remeasures the investment
property at CU210,000 and records a gain of
CU10,000 as a change in fair value (rather
than exchange difference) in profit or loss.
© 2011 IFRS Foundation
Section 30 – subsequent measurement
106
• Ex 3: Same as Ex 2 except:
– A accounts for its investment property
using the cost model (because its fair
value cannot be measured reliably on
an ongoing basis).
At 31/12/20X1 A records the investment
property at CU200,000 (ie no
remeasurement because it is a nonmonetary asset carried at historical cost).
© 2011 IFRS Foundation
Section 30 – presentation &
disclosure
107
• The amount of exchange differences
recognised in profit or loss (other than
those arising from fair value changes)
• Non-monetary items
–recognise exchange differences (in profit
or loss or OCI) follows classification of the
underlying item.
© 2011 IFRS Foundation
The IFRS for SMEs
108
Section 32
Events after the End of the Reporting
Period
© 2011 IFRS Foundation
Section 32 – scope
109
Events after the end of the reporting
period are those events, favourable and
unfavourable, that occur between the end
of the reporting period and the date when
the financial statements are authorised
for issue.
© 2011 IFRS Foundation
Section 32 – types of events
110
Two types of events after the end of the
reporting period
– adjusting events―those that provide
evidence of conditions that existed at the
end of the reporting period
– non-adjusting events―those that are
indicative of conditions that arose after
the end of the reporting period
© 2011 IFRS Foundation
Section 32 – accounting and reporting
111
• Adjusting events—adjust the amounts
recognised (and update disclosures
made) in its financial statements
• Non-adjusting events—do not adjust the
amounts recognised in its financial
statements. However, disclose:
–the nature of the event, and
–an estimate of its financial effect, or a
statement that estimate cannot be made
© 2011 IFRS Foundation
112
Section 32 – example adjusting event
• Ex 7*: On 31/12/20X5 A assessed its
warranty obligation as CU100,000. Before
its 20X5 financial statements were
authorised for issue, A discovered a
latent defect in one of its lines of
products. It reassessed its warranty
obligation at 31/12/20X5 at CU150,000.
Adjusting event―latent defect existed at
31/12/20X5. Measure warranty provision at
CU150,000 at 31/12/20X5.
* see example 7 in Module 32 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 32 – example non-adjusting event113
• Ex 12*: On 28/2/20X1 A’s 31/12/20X0 FS
authorised for issue. At 31/12/20X0 the
fair value of A’s investment in B’s
publicly traded shares = CU20,000.
On 28/2/20X1 fair value of shares =
CU25,000.
* see example 12 in Module 32 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 32 – example non-adjusting event114
Ex 12 continued:
Non-adjusting event―the change in the fair
value results from conditions that arose after
20X0.
A does not adjust the amounts recognised in
its financial statements. However, it must
give additional disclosure see paragraph
32.10.
© 2011 IFRS Foundation
Section 32 – disclosure non-adjusting
115
• Ex 15*: 1/3/20X1 A’s 31/12/20X0 FS
authorised for issue when spot ex rate =
CU2.5:FCU1.
At 31/12/20X0 spot ex rate = CU2:FCU1. A
measured its FCU2,000,000 unhedged
non-current liability at CU4,000,000 in
SOFP.
* see example 15 in Module 32 of the IFRS Foundation training material
© 2011 IFRS Foundation
Section 32 – disclosure non-adjusting
• Ex 15 continued:
116
Note 20 Events after the end of the reporting
period
The financial statements were authorised for
issue on 1 March 20X1 when the exchange
rate was CU2.5:FCU1. The deterioration of
the exchange rate from CU2:FCU1 at
31 December 20X1 has increased the
expected settlement amount of the
FCU-denominated liability by CU1,000,000.
© 2011 IFRS Foundation
The IFRS for SMEs
Section 33
Related Party Disclosures
© 2011 IFRS Foundation
117
Section 33 – scope
118
FS include disclosures necessary to draw
attention to the possibility that an entity’s
financial position and performance have
been affected by the existence of related
parties and by transactions and
outstanding balances with such parties.
Assess the substance of the relationship
and not merely its legal form.
© 2011 IFRS Foundation
Section 33 – related parties defined
119
• (a) A person or a close member of that
person’s family that
– (i) is a member of the key management
personnel of the reporting entity or of a
parent of the reporting entity;
– (ii) has control over the reporting entity; or
– (iii) has joint control or significant influence
over the reporting entity or has significant
voting power in it.
© 2011 IFRS Foundation
Section 33 – related parties defined continued120
J is owned and managed by the X family—Mr
and Mrs X and their 2 children (Ms Y and Ms
Z).
X family
Mrs X
Mr X
Ms Y
Ms Z
Operations
Director
Administration
Director
Financial
Director
Sales
Director
25%
25%
25%
25%
Entity J
© 2011 IFRS Foundation
Section 33 – related parties defined continued121
Related parties
• X, X, Y & Z are related parties to J (33.2(a)(iii))
• If Y (the dominant party) acts for the family, Y
would be in control of J (33.2(a)(ii))
• If X, X, Y & Z contractually agree sharing control
over J; X, X, Y & Z are related to J (33.2(a)(iii))
• X, X, Y & Z are related parties to J (33.2(a)(i))
© 2011 IFRS Foundation
Section 33 – related parties defined continued122
• (b)An entity if any of the following
conditions applies:
– (i) the entity & the reporting entity are
members of the same group (parent,
subsidiary & fellow subsidiary are related
to the others).
– (ii) either entity is an associate or joint
venture of the other entity (or of a member
of a group of which the other entity is a
member).
– (iii) both entities are joint ventures of a
third entity.
© 2011 IFRS Foundation
Section 33 – related parties defined continued123
• (b)An entity if any of the following
conditions applies continued:
– (iv) either entity is a joint venture of a third
entity and the other entity is an associate
of the third entity.
– (v) the entity is a post-employment benefit
plan for the benefit of employees of either
the reporting entity or an entity related to
the reporting entity. If the reporting entity is
itself such a plan, the sponsoring
employers are also related to the plan.
© 2011 IFRS Foundation
Section 33 – related parties defined continued124
Entity X
Entity A
Entity B
Are A and B related parties?
© 2011 IFRS Foundation
Section 33 – related parties defined continued125
X’s influence over B
Control
Control
X’s
Joint
influence control
over A
Joint
control
Yes – 33.2(b)(i) Yes – 33.2(b)(ii)
Significant
influence
Yes – 33.2(b)(ii)
Yes – 33.2(b)(ii) Yes – 33.2(b)(iii) Yes – 33.2(b)(iv)
Significant
Yes – 33.2(b)(ii) Yes – 33.2(b)(iv) Not related
influence
© 2011 IFRS Foundation
Section 33 – related parties defined continued126
• (b)An entity if any of the following
conditions applies continued:
– (vi) the entity is controlled or jointly
controlled by a person identified in (a).
– (vii) a person identified in (a)(i) has
significant voting power in the entity.
– (viii) a person identified in (a)(ii) has
significant influence over the entity or
significant voting power in it.
© 2011 IFRS Foundation
Section 33 – related parties defined continued127
• (b)An entity if any of the following
conditions applies continued:
– (ix) a person or a close member of that
person’s family has both significant
influence over the entity or significant
voting power in it and joint control over the
reporting entity.
– (x) a member of the key management
personnel of the entity or of a parent of the
entity, or a close member of that member’s
family, has control or joint control over the
reporting entity or has significant voting
power in it.
© 2011 IFRS Foundation
Section 33 – related parties defined continued128
Family X
Entity A
Entity B
Are A and B related parties?
© 2011 IFRS Foundation
Section 33 – related parties defined continued129
Family X’s influence over Entity B
Control
Family
X’s
SVP
influence
over
Entity A KMP
SI
SVP
KMP
SI
Yes –
Yes –
Yes –
Yes –
Yes –
33.2(b)(vi) 33.2(b)(viii) 33.2(b)(x) 33.2(b)(viii)
Yes –
33.2(b)(vi)
Yes –
Yes –
33.2(b)(vi) 33.2(b)(ix)
Control 33.2(b)(vi)
JC
JC
Yes –
Yes –
33.2(b)(viii) 33.2(b)(ix)
Yes –
33.2(b)(x)
Yes –
33.2(b)(x)
Yes –
Yes –
33.2(b)(viii) 33.2(b)(ix)
Yes –
Yes –
33.2(b)(x) 33.2(b)(ix)
Not
related
Yes –
33.2(b)(v
ii and x)
Not
related
Yes –
33.2(b)(vii
and x)
Not
related
Not
related
Not
related
Not
related
Not
related
Section 33 – not necessarily related party 130
• 2 entities simply because of common director
• 2 venturers simply because they share joint
control
• Simply by virtue of their normal dealings with
an entity: providers of finance; trade unions;
public utilities; and government departments
and agencies.
• A customer, supplier, franchisor, distributor
or general agent with whom an entity
transacts a significant volume of business,
merely by virtue of the resulting economic
dependence.
© 2011 IFRS Foundation
131
Section 33 – relationship disclosures
• Disclose related party relationship only if
an entity has related party transactions
• Exception—disclose parent-subsidiary
relationship irrespective of whether there
are related party transactions
– including name of its parent and ultimate
controlling party
– if neither parent nor ultimate controlling
party produces FS available for public use
then also disclose name of the next most
senior parent that does do so
© 2011 IFRS Foundation
Section 33 – relationship disclosures
132
• Disclose key management personnel
compensation in total
– this disclosure is in addition to disclosures
about related party transactions (see
following slides)
© 2011 IFRS Foundation
Section 33 – related party transactions 133
A RPT is a transfer of resources, services or
obligations between a reporting entity and a
related party, regardless of whether a price is
charged.
• If an entity has a RPT it discloses information
about the transactions, outstanding balances
and commitments necessary for an
understanding of the potential effect of the
relationship on the financial statements.
• Do not state RPT made on terms equivalent to
arm’s length transactions unless can be
substantiated.
© 2011 IFRS Foundation
134
Section 33 – RPT disclosures
• RPT disclosures include (at minimum):
– the amount of the transactions
– the amount of outstanding balances and:
–their terms and conditions, including
whether they are secured, and the nature
of the consideration to be provided in
settlement, and
–details of any guarantees given or
received.
– provisions for uncollectible RP receivables.
– expense recognised for RP bad/doubtful
debts.
© 2011 IFRS Foundation
135
Section 33 – aggregation
• Disclose items of a similar nature in the
aggregate except when separate disclosure
is necessary for an understanding of the
effects of RPTs on the financial statements
• Disclose separately for each of
– entities with control, joint control or significant
influence over the entity
– entities over which the entity has control, joint
control or significant influence
– key management personnel of the entity or
its parent (in the aggregate)
– other related parties
© 2011 IFRS Foundation
Section 33 – exemption from RPT discl. 136
• Exemption applies to transaction
disclosures only (ie the nature of the
relationship must be disclosed).
– a state (a national, regional or local
government) that has control, joint control
or significant influence over the reporting
entity, and
– another entity that is a related party
because the same state has control, joint
control or significant influence over both
the reporting entity and the other entity.
© 2011 IFRS Foundation