IFRS for Small and Medium-sized
Entities (IFRS for SMEs)
Presented by:
SHABBIR YUNUS KHAIRULLAH
PARTNER
ERNST & YOUNG FORD RHODES SIDAT HYDER
Contents
IFRS for SMEs
Transition to IFRS for SMEs
Key differences between IFRS for SMEs and Accounting
Standards for Medium Sized Entities published by ICAP
Considerations before applying IFRS for SMEs
Applicability in other countries
Applicability in Pakistan
30 December 2009
Page 2
IFRS for SMEs
Background
A discussion paper was published in June 2004
Project was discussed with Standards Advisory Council
(SAC) at seven SAC meetings
Project was discussed at five annual meetings of the World
Accounting Standard-Setters (2003 & 2004 to 2008)
Working Group met four to five times to discuss the issues
and provide advice to the International Accounting
Standards Board (IASB)
The Exposure Draft (ED) was published in February 2007
The ED was translated into five languages to increase
outreach
30 December 2009
Page 4
Background Contd.
A questionnaire on the ED was posted on the IASBs
website in June 2007 and field test reports were
required to be submitted by 30 November 2007. Field
testers were asked to restate their most recent financial
statements using the ED and respond to a questionnaire.
Responses were received from 116 SMEs in 20
countries.
The IASB discussed the Project in a total of 44 public
meetings
Presentations at 104 conferences and round tables in
40 countries, including 55 presentations after the ED
was published.
30 December 2009
Page 5
Background Contd.
The IASB explained the ED and responded to questions
in two public webcasts for which nearly 1,000
participants registered.
The final standard was published in July 2009
The standard is a result of a five year project to
address the financial reporting needs of small and
medium-sized entities
30 December 2009
Page 6
Quest for a name
The standard was originally called IFRS for SMEs
when it was issued in draft in June 2004
However, as this did not precisely capture the intended
audience of the standard, the name of the standard has
changed several times during its evolution.
At various stages, the standard was renamed IFRS for
Private Entities and IFRS for Non-Publically
Accountable Entities
Each name has been rejected for various reasons and
eventually the standard was issued with its original name
30 December 2009
Page 7
Overview
The standard consists of 35 chapters (230 pages)
addressing all the requirements for SMEs
It is a stand alone document no fall back to full IFRS
(with one exception)
Update process
Review after two years of financial statements have been
published
Then review every three years
May need interpretative guidance from the IFRIC
between reviews
30 December 2009
Page 8
What is an SME?
SMEs are defined as entities that:
Do not have public accountability, and
Publish general purpose financial statements for external
users
An entity has public accountability if:
Its debt or equity instruments are traded in a public market, or
It holds assets in a fiduciary capacity for a broad group of
outsiders
30 December 2009
Page 9
Who can apply IFRS for SMEs?
The definition of an SME explains which entities the
standard applies to
The regulatory authorities in each jurisdiction
determine which entities can apply it
A publicly accountable entity cannot claim to comply
with IFRS for SMEs even if it is permitted or required to
apply it in its jurisdiction.
30 December 2009
Page 10
Five types of simplifications
IFRS for SMEs contains five types of simplifications of
full IFRSs:
some topics in IFRSs are omitted because they are not
relevant to typical SMEs
some accounting policy options in full IFRSs are not allowed
because a more simplified method is available to SMEs
simplification of many of the recognition and measurement
principles that are in full IFRSs
substantially fewer disclosures
simplified redrafting
The effect of simplification process was to produce a
standard of 230 pages compared with nearly 3,000
pages in the 2009 volume of full IFRS
30 December 2009
Page 11
Omitted topics
IFRS for SMEs does not address the following topics
that are covered in full IFRSs:
earnings per share
interim financial reporting
segment reporting
special accounting for assets held for sale
It should be noted that additional voluntary
information, if necessary, is not precluded, but is
encouraged in the standard.
30 December 2009
Page 12
Concepts and pervasive principles
Standard sets out the concepts and basic principles
underlying the financial statements of SMEs
Concepts are derived from the IASB Framework
Addresses issues such as:
Objective of the financial statements
Qualitative characteristics of information in the financial
statements (understandability, relevance, materiality, reliability,
substance over form, prudence, etc.)
General recognition and measurement requirements
30 December 2009
Page 13
Complete set of financial statements
Consolidated financial statements are the primary set
Complete set of financial statements is similar to that required by
IAS 1 Presentation of Financial Statements (revised) i.e. it
comprises:
A statement of financial position
A statement of comprehensive income (or two statements P&L and
statement of comprehensive income)
A statement of changes in equity (including only owner changes)
A statement of cash flows (prepared using direct or indirect method)
Notes, including summary of significant accounting policies
Comparative information must be provided
No requirement for an opening statement of financial position
(required where an accounting policy is applied retrospectively or
there is a retrospective restatement of the financial statements)
30 December 2009
Page 14
Complete set of financial statements
Contd.
The presentation of a combined statement of comprehensive
income and retained earnings is permitted, if the only changes to
equity during the period arise from:
Profit or loss
Payment of dividends
Correction of prior period errors
Changes in accounting policies
Must make a statement of compliance with IFRS for SMEs
The IFRS for SMEs includes a set of illustrative financial
statements and a presentation and disclosure checklist to assist
entities with preparing their financial statements.
30 December 2009
Page 15
Long-term assets
Property, plant and equipment (P,P and E)
Measured at cost less accumulated depreciation and impairment
losses
Revaluation option removed
Borrowing costs cannot be capitalised
Review of useful life, residual value and depreciation rate is
required only if there is a significant change in the asset or how it
is used
This section also applies to investment properties (not covered
by Investment Property section) and to assets held for sale
Holding of assets for sale is an indicator of possible impairment
30 December 2009
Page 16
Long-term assets Contd.
Investment properties (IP)
Cost model is not allowed
Measured at fair value, unless the fair value cannot be measured
reliably without undue cost or effort
Otherwise, the IP is treated as P,P and E
Remeasure to fair value at each reporting date with changes
recognised in profit and loss account
Unlike IAS 40, the IFRS for SMEs does not require disclosure of
the fair values of IP measured on a cost basis and classified as
P, P & E
30 December 2009
Page 17
Long-term assets - Contd.
Borrowing costs
Must all be expensed
Government grants
Must be recognised in profit or loss at fair value, when
performance conditions are met
If there are no performance conditions, recognise the grant
immediately in profit or loss
Other treatments of government grants in certain situations,
including allowing grants relating to specific assets to be
deducted from the carrying value of the asset are not available to
SMEs.
30 December 2009
Page 18
Intangible assets
Intangible assets
Measured at cost less accumulated amortisation and impairment
losses
Revaluation model is not allowed
All internally generated intangibles are expensed
Finite useful life 10 years if cant reliably estimate
Residual value is assumed to be zero unless there is an active
market or a committed third party
Goodwill
Amortised over useful economic life (cannot be indefinite)
Finite useful life 10 years if cant reliably estimate
No compulsory annual impairment test indicator approach
Reversal of goodwill impairment is not permitted
30 December 2009
Page 19
Group accounts
The reporting dates of parent and subsidiaries should
be the same, unless impracticable no guidance on
what might be considered an acceptable difference in
reporting dates
Exemption from preparing consolidated accounts:
If parent is a subsidiary and the ultimate parent produces
financial statements compliant with IFRS/IFRS for SMEs
If it has only one subsidiary acquired with the intention of
disposal within one year
Business combinations acquisition costs are
capitalised
30 December 2009
Page 20
Group accounts Contd.
Investments in Associates and jointly controlled
entities
Consolidated accounts the accounting policy choice is as
under:
at cost
at fair value (if published price quotation is available)
using the equity method
Separate financial statements
Separate financial statements measured using the cost model
(cost less impairment) or at fair value (with changes in fair value
recognised in profit or loss)
The entity shall 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.
30 December 2009
Page 21
Financial instruments - overview
IFRS for SMEs includes two sections on Financial
Instruments
Section 11 Basic financial instruments
Section 12 Other financial instruments issues
Relevant to all entities
More complex transactions primarily hedge accounting
Accounting policy choice
To apply the IFRS for SMEs; or
To apply IAS 39, and the disclosure requirements of the IFRS for
SMEs
30 December 2009
Page 22
Basic financial instruments
Examples
Cash
Demand and fixed-term deposits when the entity is the depositor,
e.g. bank accounts
Commercial paper and commercial bills held
Accounts, notes and loans receivable and payable
Bonds and similar debt instruments
Investments in non-convertible preference shares and nonputtable ordinary and preference shares
30 December 2009
Page 23
Other financial instruments
Examples
Asset-backed securities, such as collateralised mortgage
obligations, repurchase agreements and securitised packages of
receivables
Options, rights, warrants, futures contracts, forward contracts and
interest rate swaps that can be settled in cash or by exchanging
another financial instrument
Financial instruments that qualify and are designated as hedging
instruments in accordance with the requirements in Section 12.
Commitments to make a loan to another entity.
Commitments to receive a loan if the commitment can be net
settled in cash.
30 December 2009
Page 24
Basic financial instruments
Initial recognition and measurement
Subsequent measurement
No restrictions on reversal
Derecognition
Amortised cost
Fair value through P&L (cost if no reliable FV measurement)
No AFS equivalent
Impairment of instruments measured at cost or
amortised cost
Transaction price including transaction costs (other than the
instruments measured at fair value through profit or loss)
Based on the exposure draft of IAS amendments (March 2009)
Disclosures
Much simplified from full IFRS
30 December 2009
Page 25
Other financial instruments issues
Apart from obvious cross-references back to section 11,
for those complex instruments that are within scope of
section 12, this section deals only with hedge accounting
and hedge accounting disclosures
Very much simplified from IAS 39 equivalents (only four
instances in which an SME can apply hedge accounting)
No 80-125% effectiveness test specified
Reduced documentation requirements
30 December 2009
Page 26
Employee benefits
Defined benefit pension schemes
Projected unit credit method not required if undue cost or effort
Actuarial valuation is not mandated nor required to be conducted
annually if principal actuarial assumptions have not changed
significantly
Simplifications allowed, if projected unit credit method not used
No corridor - Actuarial gains and losses are recognised in full,
either through profit or loss or through other comprehensive
income
Past service costs are recognised in profit or loss as incurred
30 December 2009
Page 27
Employee benefits Contd.
Share-based payments
Directors judgement used to measure fair value of shares in
equity-settled transactions if observable market prices are not
available
Schemes that give choice of equity or cash settlement are
usually accounted for as cash-settled
Guidance on accounting for group plans reduced
30 December 2009
Page 28
Income tax
Drawn from IAS 12 and the March 2009 ED of proposed
amendments
Section covers:
Scope
Steps in accounting for income tax
Current tax (and withholding tax) discounting is prohibited
Deferred tax
Temporary difference approach retained (new, simpler definition
of tax base)
Valuation allowance for DT assets
Tax uncertainties (use the probability-weighted average amount
of all the possible outcomes, assuming that the tax authorities
will review the amounts reported and will have full knowledge of
all relevant information)
Presentation and disclosures
30 December 2009
Page 29
Related party disclosures
The definition of related parties and disclosure
requirements are similar to those under full IFRS
Disclosure reliefs from full IFRS are as follows:
Disclosure of key management personnel compensation in total
only, and not by category or type of benefit
Full exemption from the disclosure of relationships and
transactions with the state and other state-controlled entities,
except that the parent-subsidiary relationship is still required to be
disclosed.
30 December 2009
Page 30
Specialised activities
Provides guidance on
Agriculture (drawn from IAS 41)
Extractive industries (refers to PP&E, intangibles other than
goodwill, and Provisions sections)
Service concession arrangements (drawn from, but much
simplified, IFRIC 12)
30 December 2009
Page 31
Topics having no significant changes from
full IFRS
Accounting policies, estimates and errors
Inventories
Impairment of assets
Leases
Provisions and contingencies
Liabilities and equity (except for the changes covered in
the next slide)
Revenue (IAS 18 and IAS 11 combined)
Foreign currency translation
Hyperinflation
Events after the end of the reporting period
30 December 2009
Page 32
Issues addressed in IFRS for SMEs that are
not covered in full IFRS
In IASBs judgment, the following issues are relevant to
SMEs but are not addressed in full IFRS:
combined financial statements (paragraphs 9.28-9.30)
original issue of shares or other equity instruments
(paragraph 22.7-22.10)
sale of options, rights and warrants (paragraph 22.11)
Capitalisation or bonus issues of shares and share splits
(paragraph 22.12)
30 December 2009
Page 33
KEY DIFFERENCES BETWEEN
IFRS FOR SMES AND
ACCOUNTING STANDARDS FOR
MEDIUM SIZED ENTITIES
PUBLISHED BY ICAP
Main differences
Structure
The IFRS for SMEs (the IFRS) is a stand-alone document
with no fall back to full IFRS with one exception relating
to financial instruments. However, the MSE standard
published by ICAP has fall back to full IFRS.
Contents
No mention of the statement of comprehensive income
in the MSE standard
Borrowing costs not allowed to be capitalised in the
IFRS
Property, Plant and Equipment and Intangible Assets not
allowed to be carried at revalued amounts in the IFRS
30 December 2009
Page 35
Main differences Contd.
In the IFRS, all research and development costs are
expensed as incurred. No capitalization is allowed for
internally generated intangible assets.
As per the IFRS, intangible assets (including goodwill)
cannot have an indefinite life. If it is not possible to
estimate useful life, amortise it over 10 years. Impairment
test is required only if there are indicators of impairment.
Under the IFRS, entities have a choice to account for
financial instruments in accordance with IFRS for SMEs
or to apply IAS 39. Under the IFRS, reversal in
impairment (relating to Basic Financial Instruments) in
subsequent periods is recognised in profit or loss
immediately. Under the MSE standard, the recognition
30 December 2009
Page 36
Main differences Contd.
and measurement principles are the same as in IAS 39.
Reversal of impairment in AFS investment is not allowed
through profit or loss.
Hedge accounting is not addressed in the MSE
standard. The IFRS allow hedge accounting for four types
of risks.
No mention of functional currency in the MSE standard
As per MSE standard, if a defined benefit plan is funded,
actuarial valuation is required atleast once in 3 years.
However, as per the IFRS, use of independent actuary to
perform actuarial valuation is not mandated nor is
required to be conducted annually if principal actuarial
assumptions have not changed significantly. Further, the
30 December 2009
Page 37
Main differences Contd.
IFRS require the use of projected unit credit method only
if the entity is able to use it without undue cost or effort.
Otherwise, the entity is permitted to make the following
simplifications in its calculations:
Ignore estimated future salary increases (assume current salaries
continue until current employees begin receiving benefits)
Ignore future service of current employees (assume closure of
plan for existing as well as any new employees)
Ignore possible future in-service mortality (assume all current
employees will receive the benefits)
There are certain sections in the IFRS which are not
covered in the MSE standard such as, consolidated
financial statements, investments in associates and joint
ventures, investment property, share based payments,
etc.
30 December 2009
Page 38
TRANSITION TO IFRS FOR
SMEs
Effective date of IFRS for SMEs
The standard was issued on 9 July 2009 but it does not
have an effective date of application.
Therefore, the standard is considered immediately
effective for any entity preparing its financial statements
on or after 9 July 2009 and wishing to apply this
standard.
However, caution is required and any such entity must
consider the requirements of regulators and users in
transitioning to the standard.
30 December 2009
Page 40
Transition to IFRS for SMEs
Applies to all entities adopting IFRS for SMEs,
irrespective of the GAAP they are departing from
Transition rules are derived from IFRS 1, but simplified
Retrospective application is primarily required with
Five exceptions (Same four as IFRS 1 plus discontinued
operations)
Twelve exemptions (See next slide)
Restatements to the opening position do not have to be
made if they are impracticable
An entity can only be a first-time adopter once in its life
Reconciliations are required (same as IFRS 1)
30 December 2009
Page 41
Transition to IFRS for SMEs - exemptions
Business combinations (effected before the date of
transition to this IFRS)
Share-based payment (equity instruments granted or
liabilities settled before the date of transition)
Fair value as deemed cost (PP&E, intangible or IP)
Revaluation as deemed cost (PP&E, intangible or IP)
Cumulative translation differences (identical to IFRS 1)
Separate financial statements (identical to IFRS 1)
Compound financial instruments (identical to IFRS 1)
Service concession arrangements (for SCAs before the
date of transition)
Arrangements involving a lease (identical to IFRS 1)
30 December 2009
Page 42
Transition to IFRS for SMEs exemptions
Decommissioning liabilities included in the cost of PP&E
(identical to IFRS 1)
Extractive industries (identical to 2009 amendment to
IFRS 1 regarding full cost accounting)
Deferred tax
Not an exemption in IFRS 1
No recognition if undue cost and effort
30 December 2009
Page 43
CONSIDERATIONS BEFORE
APPLYING IFRS FOR SMEs
Key considerations
Needs of their own specific users
The standard concentrates on items such as short term cash
flows, liquidity and balance sheet strength. Full IFRS at times
provide too much information for the needs of an SME user.
Impact of tax accounting
The requirements surrounding the accounting for and disclosure of
uncertain tax positions, in particular, may have far-reaching data
gathering, documentation and support implications for an SME and
could potentially affect its dealings with tax authorities.
30 December 2009
Page 45
Long term considerations
Becoming publicly accountable or possible listing of
debt or equity instruments
An entity with such plans would be precluded from using this
standard in the future, as it would fail to meet the definition of an
SME.
This would then force the entity into a second diversion to full
IFRS.
Reporting to the Holding Company
If an SMEs holding company reports under full IFRS in order to
facilitate the consolidation process in its parent company, not
adopting this standard may avoid the need for dual reporting.
30 December 2009
Page 46
Long term considerations Contd.
Research and Development costs
An entity with heavy research and development expenditure (such
as a pharmaceutical company) must consider the fact that none of
these costs will be allowed to be capitalised under the IFRS for
SMEs.
30 December 2009
Page 47
APPLICABILITY IN OTHER
COUNTRIES
Applicability in other countries
In its press release of 9 July 2009 the American Institute of
Certified Public Accountants (AICPA) quoted its President and
CEO Barry Melancon as saying The AICPA welcomes the
introduction of IFRS for small and medium entities as an alternative
accounting and reporting option for private companies.
The Accounting Standards Board (ASB) in the United Kingdom
stated in its July press release, Since 2006, the ASB has been
saying that it considers the IFRS for SMEs could play a significant
role in the future reporting requirements for UK and Irish entities.
The ASB has since issued a Policy Proposal consultation paper
seeking input as to whether this standard should be considered as
an alternative to UK GAAP.
On 14 August 2009, the Accounting Practices Board of the South
African Institute of Chartered Accountants endorsed the standard
for immediate use in South Africa.
30 December 2009
Page 49
APPLICABILITY IN PAKISTAN
Status of adoption in Pakistan
A review of the IFRS for SMEs (standard) is currently
being carried out by the Accounting Standards
Committee of ICAP
A sub-committee has been formed which is in the process
of identifying practical difficulties in the transition from
MSE Standards to the IFRS for SMEs
Sub-committee comprises of following members:
Syed Iftikhar Anjum - Convener
Mohammad Almas
Naresh Kumar
Faisal Latif
Muddassar Mehmood
Shabbir Yunus
30 December 2009
Page 51
Status of adoption in Pakistan Contd.
The above Sub-committee has met once and as a result
of preliminary discussions, it is being considered that for
the purposes of applicability in Pakistan, the following
approach be followed:
Publicly accountable and economically significant entities
IFRS, as applicable in Pakistan
Medium sized entities ICAPs MSE standards will be
replaced by IFRS for SMEs
Small sized entities ICAPs SSE standards
Once approved by the ICAPs Council, the standard will
be sent to the SECP for necessary adoption and
amendments in the Fifth Schedule to the Companies
Ordinance, 1984.
30 December 2009
Page 52
