International Financial Reporting Standards
1
IFRS for SMEs
IFRS Foundation-World Bank
18–20 October 2011
Sarajevo, Bosnia and Herzegovina
Copyright © 2010 IFRS Foundation.
All rights reserved.
The IFRS for SMEs
Topic 3.1(b) and 3.2
Section 20 Leases
Section 29 Income Tax
Michael Wells
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The IFRS for SMEs
Section 20 Leases
3
Section 20 – Scope
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A lease is an agreement whereby the
lessor conveys to the lessee in return for
payment or a series of payments the right
to use an asset for an agreed period of
time
• Section 20 covers accounting and
reporting for most leases (see paragraphs
20.1–20.3 for exceptions and inclusions)
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Section 20 – Classification of leases
• A lease is classified
– a finance lease if it transfers substantially
all the risks & rewards incidental to
ownership
– an operating lease if it does not transfer
substantially all the risks & rewards
incidental to ownership
• Use judgement considering all facts &
circumstances to classify leases
– operating lease if lessor retains significant
risks & rewards of ownership
–substance of finance lease is similar to
the purchase of an asset on credit.
Section 20 – Classification of leases continued
6
• Situations that individually or in
combination normally indicate a finance
lease:
– lease transfers ownership of the asset to
lessee
– from inception lessee reasonably certain
to exercise bargain purchase option
– lease term is for the major part of asset’s
economic life
– at inception PV of MLPs = substantially all
asset’s fair value
– specialised asset (only lessee can use
without major modifications)
Section 20 – Classification of leases continued
• Situations that individually or in
combination could indicate a finance
lease
– lessee can cancel the lease but
compensates the lessor’s for associated
losses
– gains or losses from the fluctuation in the
residual value of the leased asset accrue
to the lessee
– lessee can continue the lease for a
secondary period at a rent that is
substantially lower than market rent
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Section 20 – Lease classification Ex
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Ex 1: On 1/1/20X1 enter into 5-yr
non-cancellable lease over a machine.
Machine’s cash cost = 100,000, economic
life = 10 yrs and residual value = 0.
Annual lease payments on 31/12: 4 ×
23,000 & 23,539 at end of yr 5 when
ownership transfers to the lessee.
The interest rate implicit in the lease is
5% p.a. which approximates lessee’s
incremental borrowing rate.
Section 20 – Lease classification Ex
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• Ex 2: Same as Ex 1 except ownership of
the machine does not automatically
transfer to the lessee at the end of the
lease. Instead, the lessee has an option
to acquire the machine from the lessor
on 1/1/20X6 for CU1.
• Ex 3: Same as Ex 1 except economic life
of the machine is five years and
ownership of the machine does not
transfer to the lessee at the end of the
lease.
Section 20 – Lease classification Ex
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• Ex 4: Same as Ex 1 except ownership
does not transfers to lessee at the end of
the lease. Instead lessee has an option
to continue the lease asset for a further 5
years at a rent of CU1 per year.
• Ex 5: Same as Ex 1 except ownership
transfers to the lessee at the end of the
lease for a variable payment equal to the
asset’s then fair value (instead of 23,539).
Section 20 – Lease classification Ex
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• Ex 6: Tripartite lease agreement.
– Lessor transfers substantially all risks
& rewards to 2 unrelated parties:
–the lessee obtains the right of use of the
leased asset for a period of time; and
–the other party contracts to acquire the
leased asset from the lessor at the end
of the lease term at a fixed price.
Section 20 – Lease classification Ex
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• Ex 6 continued:
Lease classification:
– lessor = finance lease
– lessee = operating lease
– other party has firm commitment to acquire
asset
The IFRS for SMEs
Lessee
(finance lease & operating lease)
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Section 20 – Lessee: finance lease
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• Initial recognition & measurement:
– recognise assets (rights) & liabilities
(obligations) at fair value of leased
property or, if lower, the present value of
the minimum lease payments
– add to asset the lessee’s incremental
costs that are directly attributable to
negotiating & arranging a lease
Section 20 – Lessee: finance lease
continued
15
• Subsequent measurement:
– apportion minimum lease payments
between finance charge & liability using
effective interest method
– depreciate asset in accordance with
relevant section (eg Section 17 PP&E)
Section 20 – Lessee: finance lease Ex
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Ex 7: Same as Ex 1.
Finance lease obligation amortisation table:
1 Jan
Finance
cost
Payment
31 Dec
20X1
100,000
5,000
(23,000)
82,000
20X2
82,000
4,100
(23,000)
63,100
20X3
63,100
3,155
(23,000)
43,255
20X4
43,255
2,163
(23,000)
22,418
20X5
22,418
1,121
(23,539)
–
100,000
15,539
115,539
Section 20 – Lessee: finance lease Ex
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Ex 7 continued:
1/1/20X1 (initial recognition) recognise:
– asset (PP&E) 100,000; and
– liability (finance lease obligation) 100,000
For the year ended 31/12/20X1 recognise:
– allocate payment of 23,000 (5,000 finance
cost in profit or loss & 18,000 repayment of
finance lease obligation)
– CU10,000 depreciation expense in profit or
loss and as a reduction to the asset
Section 20 – Lessee: finance lease
continued
18
Disclose:
• For each class of asset, the net carrying
amount at reporting date
• Total FMLPs on reporting date, showing
due (i) in < 1 year; (ii) > 1 year but < 5 yrs;
(iii) in > 5 years
• General description of significant leasing
arrangements
• Also see Sections 17, 18, 27 and 34.
Section 20 – Lessee: operating lease
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• Recognition & measurement:
– expense lease payments on straight-line
basis unless:
– another systematic basis is more
representative of the user’s benefit; or
– payments are structured to increase in
line with expected general inflation
(based on published indexes or
statistics).
Section 20 – Operating lease examples 20
• Ex 8: On 1/1/20X1 A entered into a 5-year
non-cancellable operating lease over a
building.
Rentals X1–X4 = 0. Rental X5 = 5,000.
• Ex 9: Same as Ex 8 except lessor agrees to
pay the lessee’s relocation costs (ie 500) as
an incentive to the lessee for entering into
the new lease
• Ex 10: Operating lease payments increase
by expected CPI (10% p.a.) to compensate
the lessor for expected inflation.
X1 = 1,000; X2 = 1,100; X3 = 1,210; etc
Section 20 – Lessee: operating lease
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Disclose:
• Total FMLPs for non-cancellable operating
leases, showing due (i) in < 1 year;
(ii) > 1 year but < 5 years; (iii) in > 5 years
• lease payments recognised as an expense
• a general description of the lessee’s
significant leasing arrangements
– including for example, information about
contingent rent, renewal or purchase
options and escalation clauses, subleases,
and restrictions imposed by lease
arrangements
The IFRS for SMEs
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Lessor
(Finance Lease & Operating Lease)
Section 20 – Lessor: finance lease
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• Initial recognition & measurement:
– recognise assets held under a finance
lease (a receivable) at an amount equal
to the net investment in the lease (ie
gross investment in the lease
discounted at the interest rate implicit in
the lease). The gross investment in the
lease is the aggregate of:
– (a) the minimum lease payments
receivable by the lessor under a
finance lease, and
– (b) any unguaranteed residual value
accruing to the lessor.
Section 20 – lessor: finance lease
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• Subsequent measurement
– recognise finance income—constant
periodic rate of return on net investment in
lease
– apply lease payments against gross
investment in the lease to reduce both the
principal & the unearned finance income.
– if indication that estimated unguaranteed
residual value used in computing the
lessor’s gross investment in lease has
changed significantly, income allocation
over lease term is revised, & reduction in
respect of amounts accrued recognised
immediately in profit/loss
Section 20 – Lessor: finance lease
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Other issues:
• Manufacturer or dealer lessors have 2
types of income:
– profit or loss equivalent to the profit or loss
resulting from an outright sale of the asset
being leased, at normal selling prices,
reflecting any applicable volume or trade
discounts, and
– finance income over the lease term.
• Disclosures (see paragraph 20.23)
Section 20 – Lessor: operating lease
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• Recognition & measurement
– lease payments as income on straightline basis unless:
– another systematic basis is more
representative of the user’s benefit; or
– payments are structured to increase in
line with expected general inflation
(based on published indexes or
statistics)
• recognise other costs incurred in
earning the lease income (eg
depreciation)
Section 20 – Lessor: operating lease
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Examples
• Ex 11: On 1/1/20X1 A entered into a 5-yr
non-cancellable operating lease over a
building.
No rentals for 4 yrs. Rental for yr-5 =
5,000.
• Ex 12: Same as Ex 11 except lease
payments increase by expected CPI (10%
p.a.) to compensate the lessor for
expected inflation. X1 = 1,000; X2 =
1,100; X3 = 1,210; etc
The IFRS for SMEs
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Sale and lease-back transactions
(Finance Lease & Operating Lease)
Section 20 – Sale and leaseback
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• A sale and leaseback transaction
involves the sale of an asset and the
leasing back of the same asset.
– the lease payment & the sale price are
usually interdependent because they are
negotiated as a package
– the accounting treatment of a sale and
leaseback transaction depends on the
type of lease (finance or operating).
Section 20 – Finance leaseback
30
• Recognition of sale & finance leaseback
– the seller-lessee defers recognition of
income (ie does not recognise any
excess of sales proceeds over the
carrying amount in profit or loss
immediately)
– Deferred income is recognised in profit or
loss over the lease term
Section 20 – Operating leaseback
31
• Recognition of sale & operating leaseback
by seller-lessee
– if at FV, recognise profit or loss
immediately
– if SP < FV & lease payments not adjusted,
recognise profit or loss immediately
– if SP < FV & lease payments are adjusted,
defer & amortise such loss in proportion to
the lease payments over the period for
which the asset is expected to be used.
– If SP > FV defer the excess over fair value
and amortise it over the period for which
the asset is expected to be used.
Section 20 – Operating leaseback examples
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Ex 13: On 1/1/20X1 A sells a building (CA =
85,000) for 100,000 (fair value) & rents it
back under a 3-yr operating lease.
Lease rentals = 9,500 (payable yearly in
arrears).
On 31 January 20X1 the remaining
economic life of the building was 25 years
with nil residual value.
Section 20 – Operating leaseback examples
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Ex 14: Same as Ex 13 except SP = 95,000
& rentals = 7,800.
Ex 15: Same as Ex 13 except SP = 80,000
& rentals = 2,800.
The IFRS for SMEs
Section 29 Income Tax
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Section 29 – Introduction
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• Section 29 is based on the IASB’s March
2009 Exposure Draft, Income Tax.
– Same ‘temporary difference’ approach as
in IAS 12
– Simpler explanation
– Fewer exceptions
Section 29 – Scope and definitions
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• Income tax defined
– Income tax: All domestic and foreign tax
based on taxable profit
– Taxable profit = taxable income minus
deductible amounts (a net amount)
– Tax based on revenue ≠ income tax
– Sales tax, VAT, tax on capital, and
social security tax ≠ income tax
– Income tax = tax rate x taxable profit
Section 29 – Other definitions
• Current tax: Amount of income tax
payable/refundable based on taxable
profit/loss for the current period or past
periods
• Deferred tax: Tax payable/recoverable in
the future period as a result of past
transactions
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Section 29 – Other definitions
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• Tax basis: Measurement of asset, liability,
or equity under the tax law on basis of sale
• Temporary difference: Difference in
carrying amount of asset, liability, or other
item in the financial statements and its tax
basis – if entity expects the item will affect
future taxable profit
Section 29 – Steps in accounting for income tax
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1. Recognise current tax
2. Identify which assets and liabilities would
affect taxable profit if recovered or settled for
their carrying amounts
3. Determine tax basis of items in (2) plus
other items that have a tax basis although not
recognised (eg borrowing cost or R&D that is
capitalised for tax purposes)
4. Compute temporary differences, unused
tax losses, unused tax credits
Section 29 – Steps in accounting for income tax
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5. Recognise deferred tax assets or liabilities
arising from temporary differences
6. Measure deferred tax assets and liabilities
– Use substantively enacted tax rates
– Consider possible outcomes of a review by
tax authorities
7. Valuation allowance against deferred tax
assets (probable recovery)
8. Allocate current and deferred tax to related
components of P&L, OCI, equity
Section 29 – Recognition of current tax
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• Current Tax
– Liability for any tax payable on current or
prior taxable profit
– Asset if overpayment is recoverable
– Measure using tax law enacted or
substantively enacted at reporting date
– Current period expense or income, but if
current tax relates to an item of OCI, that
tax is presented as part of OCI
Section 29 – Recognition of current tax
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• Example: Calculate Current Tax
– Accounting profit 150,000, tax rate 15%
– 20,000 royalty income is tax exempt
– 5,000 meals expense is not deductible
– Bad debt expense 2,500 included 500
estimate not deductible until write-off
– Tax depreciation (accelerated) is 43,000,
book depreciation is 35,000.
What is current tax expense?
continued...
Section 29 – Recognition of current tax
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• Example: Calculate Current Tax (cont’d)
Taxable profit:
Accounting profit
150,000
Less nontaxable royalty
(20,000)
Plus nondeductible meals
5,000
Plus nondeductible bad debts
500
Less add’l tax depreciation
(8,000)
Taxable Profit
127,500
Current tax = 15% x 127,500 = 19,125
Section 29 – Recognition of deferred tax
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• Deferred tax
– Based on difference between amounts in
balance sheet and tax basis of those items
– If recovery of asset/liability will not affect
taxable profit, no deferred tax
– Tax basis = amount that would be
deductible if asset were sold (or liability
were settled) at end of reporting period for
its carrying amount
Section 29 – Recognition of deferred tax
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• Deferred tax
– Measure using enacted (or substantively
enacted) tax rates
– But use the rate base on expected income
at the time of reversal of the temporary
difference to calculate the expected
effective tax rate
Section 29 – Recognition of deferred tax
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• Example: Calculate Deferred Tax
– Accounting profit 150,000, tax rate 15%
– 20,000 royalty income is tax exempt
– 5,000 meals expense is not deductible
– Bad debt expense 2,500 included 500
estimate not deductible until write-off
– Tax depreciation (accelerated) is 43,000,
book depreciation is 35,000.
What is deferred tax expense?
continued...
Section 29 – Recognition of deferred tax
47
• Example: Calculate Deferred Tax (cont’d)
Deferred tax asset – nondeductible bad debt:
500 x 15% = 75
Deferred tax liability – accelerated deprec:
8,000 x 15% = 1,200
Same jurisdiction, right of offset
Deferred tax expense = 1,200 – 75 = 1,125
Deferred tax liability = 1,125
Total tax expense 19,125 + 1,125 = 20,250
Section 29 – Recognition of deferred tax
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• Example: Journal entry (reflects the last
two examples)
Income tax expense (19,25 + 1,125)
Taxes currently payable
Deferred tax liability
20,250
19,125
1,125
Section 29 – Recognition of deferred tax
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• Example: Graduated tax rates
– Temporary difference arises 7,500 in 20X1,
expected to reverse in 20X3
– Tax rate 15% on first 500,000 of profit, 25% on
excess over 500,000
– Taxable profit 20X1 = 400,000
– Expected taxable profit 20X3 = 600,000
– Effective tax rate 20X3 = (500,000 x 15%) +
(100,000 x 25%) = 100,000/600,000 = 16.67%
– Deferred tax liability 20X1 = 16.67% x 7,500 =
1,250
Section 29 – Temporary differences
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• Temporary differences
– Can arise on initial recognition of an asset
or liability
– Can arise after initial recognition because
income/expense is recognised in P&L in
one period and in taxable profit in a
different period
– Can arise when tax basis of asset or liability
changes but changes will never affect the
carrying amount
Section 29 – Recognition of deferred tax
51
• Recognise (a few exceptions – next slide):
– Deferred tax liability for all temporary
differences that will increase taxable profit
in the future
– Deferred tax asset for all temporary
differences that will reduce taxable profit in
the future
– Deferred tax asset for tax loss and tax
credit carryforwards
Section 29 – Recognition of deferred tax
52
• Exceptions to recognition:
– No deferred tax for temporary differences
associated with unremitted earnings of
foreign sub, associate, JV
– No deferred tax for temporary difference
associated with initial recognition of
goodwill
Section 29 – Recognition of deferred tax
53
• Example: 25% owned associate, equity method
used for books, ordinary tax rate 30%, capital
gains tax rate 0%
– Cost 10,000
– Equity method income year 1 = 1,000
– Temporary difference = 1,000
– Deferred tax liability = 0% x 1,000 = 0
– Taxable dividend received = 200
– Current tax expense = 30% x 200 = 60
– End of year 1 carrying amount = 10,800
Section 29 – Recognition of deferred tax
54
• Changes in deferred tax liabilities / assets:
– Recognised in P&L (or in OCI if it relates to
an item of OCI)
• Example using data in slide 46: Tax rate
now increases to 20%, deferred tax asset
and liability not yet reversed.
– Deferred tax liability is 1,125
– Def tax liab should be 20% x 7,500 = 1,500
– Tax expense charged to P&L = 375
Section 29 – Measurement of deferred tax
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• Use tax rate that has been enacted or
substantively enacted
• If different rates apply to different types of
income, use rate the entity expects to pay
only if deductions would be the same if sell
or use
• Valuation allowance against tax assets:
– Net carrying amount = probable recovery
– Review carrying amount each period
Section 29 – Measurement of deferred tax
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• Example: Valuation allowance
– 31/12/X1 temporary differences of 120 available
to reduce future taxable profit
– Cannot be carried back
– Of the 120, based on forecasts of future profits,
only 30 has > 50% likelihood to be utilised
– Tax rate 20%
Journal entry at 31/12/X1
Deferred tax asset [120 x 20%]
Valuation allowance [(120 - 30) x 20%]
Income tax benefit – deferred tax (P&L)
Debit
24
Credit
18
6
Section 29 – Measurement of deferred tax
57
• Do not discount current or deferred taxes
• Uncertainty in measuring both deferred tax
assets and liabilities:
– Use probability-weighted average amount
of all possible outcomes, assuming tax
authorities know all facts
• If different tax rates apply to undistributed
and distributed income, accrue at
undistributed rate initially
– Adjust through P&L when distributed
Section 29 – Presentation
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• Classification:
– All deferred tax assets and liabilities as
non-current
• Offsetting:
– Do not offset current tax assets and
liabilities or deferred tax assets and
liabilities unless entity has legal right to
offset and it intends either to settle net or
simultaneously
Section 29 – Disclosure
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• Disclose major components of tax expense:
– Current tax expense (income)
– Adjustments to current tax of prior periods
– Deferred tax expense (income) relating to:
– New or reversing temporary differences
– Changes in tax rates or new taxes
– Effects of changes in uncertainty
– Changes in valuation allowance
– Tax expense relating to changes in
accounting policies or errors
Section 29 – Disclosure
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• Other disclosures:
– Current and deferred tax relating to items of
OCI
– Explanation of significant differences in
amounts in P&L and amounts reported to
tax authorities
– Changes in tax rates
continued next slide...
Section 29 – Disclosure
61
• Other disclosures (continued):
– For each type of temporary difference and
unused tax loss and tax credit:
– Amount of deferred tax and valuation
allowance at end of period
– Analysis of changes in deferred tax and
valuation allowance during period
– Expiry date of temporary differences and
unused tax losses and tax credits
– Explanation if payment of undistributed
earnings will have a tax impact
Questions or comments?
Expressions of individual views by
members of the IASB and its staff
are encouraged.
The views expressed in this
presentation are those of the
presenter.
Official positions of the IASB on
accounting matters are determined
only after extensive due process
and deliberation.
© 2010 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
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latest version may be downloaded from:
http://www.ifrs.org/Conferences+and+Workshops/IFRS+for+SMEs+Train+
the+trainer+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.
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