IFRS for small and medium-sized entities ( IFRS for SMEs) 1. Basics 1.1 Development of an IFRS for SMEs. 1. Basics 1.2 Definition of SMEs. 1.

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1 IFRS for small and medium-sized entities ( IFRS for SMEs) 1. Basics 2. Components of a complete set of financial statements 3. Pecularities in the accounting policy for SMEs 4. Transition to IFRS for SMEs 5. Case Studies: IFRS for SMEs 1 1. Basics 1.1 Development of an IFRS for SMEs IASC states in 1998: A demand exists for a special version of International Accounting Standards for small enterprises Installment of a working group in 2003 and a hearing of 40 standard-setters June 2004: Publication of Preliminary views on accounting standards for small and medium-sized entities discussion demonstrates a demand of specific accounting standards for small entities higher extent of simplification in recognition and measurement principles preferred by the responding standard-setters April 2005 January 2006: Questionnaires and public round table discussions to identify areas for possible simplifications of recognition and measurement principles for SMEs August 2006: Publication of the Staff Draft IFRS for SMEs February 2007: Publication of the Exposure Draft IFRS for SMEs July 2009: final IFRS for SMEs -Standard is published 2 1. Basics 1.2 Definition of SMEs Definition of SMEs in IFRS-SME 1.2: SMEs are entities that a) do not have public accountability - debt or equity instruments are traded in a public market or in the process of filing - it does not hold assets in a fiduciary capacity (as one of its primary businesses) b) publish general purpose financial statements no quantitative threshold for SMEs ED-SME-accounting also suited for Micros (no further simplification in recognition and measurement principles) 3

2 1.3 Structure of the IFRS-SME-Standard General Accounting for SMEs regulated in general in a single accounting standard, subdivided in 35 sections ( stand-alone-document ), in the compulsory application no exception to the idea of the standalone-document Voluntary application of the IFRS in the following matters - recognition and measurement of financial instruments according to IAS 39 instead of IFRS-SME 11 and 12 (IFRS-SME 11.2 b) - in the case that the IFRS-SME-standard does not specifically address a particular transaction, other event or condition: possibility of considering the requirements and guidance in full IFRS on the last stage of selecting an accounting policy (IFRS-SME 10.6) Deviation table (cross-reference to the IAS/IFRS) and a glossary (with IFRS-SME or IFRS-specific accounting terms) as appendices IFRS-SME-Implementation Guide contains an illustrative financial statements and a complete disclosure checklist (with crossreference to the IFRS-SME-section which prescribes the relevant disclosures) Structure of the IFRS-SME-Standard Preface Preface to International Reporting Standards 1 Small and Medium-sized Entities - 2 Concepts and Pervasive Principles Framework, IAS 1 3 Financial Statement Presentation IAS 1 4 Statement of Financial Position IAS 1 5 Statement of Comprehensive Income and Income Statement 6 Statement of Changes in Equity and Statement of Comprehensive Income and Retained Earnings IAS 1 IAS Structure of the IFRS-SME-Standard 7 Statement of Cash Flows IAS 7 8 Notes to the Financial Statements IAS 1 9 Consolidated and Separate Financial Statements IAS Accounting Policies, Estimates and Errors IAS 8 11 Basic Financial Instruments and 12 Other Financial Instruments Issues IAS 32, IAS 39, IFRS 7 13 Inventories IAS 2 14 Investments in Associates IAS Investments in Joint Ventures IAS 31 6

3 1.3 Structure of the IFRS-SME-Standard 16 Investment Properties IAS Property, Plant and Equipment IAS Intangible Assets other than Goodwill IAS Business Combinations and Goodwill IFRS 3 20 Leases IAS Provisions and Contingencies IAS Liabilities and Equity IAS 1, IAS Revenue IAS 11, IAS Structure of the IFRS-SME-Standard 24 Government Grants IAS Borrowing Costs IAS Share-based Payment IFRS 2 27 Impairment of Assets IAS 2, IAS Employee Benefits IAS Income Taxes IAS Foreign Currency Translation IAS Hyperinflation IAS Structure of the IFRS-SME-Standard 32 Events after the End of the Reporting Period IAS Related Party Disclosures IAS Specialised Activities IAS 41, IFRS 6 35 Transition to the IFRS for SMEs IFRS 1 9

4 1.4 Purpose of the IFRS-SME-Financial statements The objective of financial statements of a small or medium-sized entity is to provide information about the financial position, performance and cashflows of the entity that is useful for economic decision-making by a broad range of users who are not in a position to demand reports tailored to meet their particular information needs. (IFRS-SME 2.2) no other purpose of the accounting for SMEs as in the IFRSaccounting ( broad range of users instead of wide range of users ) user groups of the financial statements of SMEs: banks which have the position of lenders of capital, suppliers, customers, rating agencies, shareholders of the SME which are not in a management function in the IASB view: basis/starting point for determining taxable income and for determination of the distributable income under national laws or reulations (IFRS-SME.BC 51 and 52) 10 2 Components of a complete set of financial statements 2.1 Overview The financial statements of an entity shall include (IFRS-SME 3.17): a statement of financial position (balance sheet) a statement of comprehensive income - single statement of comprehensive income, displaying the profit and loss as a subtotal or - a separate income statement and a separate statement of comprehensive income, starting with profit or loss and then displaying the items of the other comprehensive income a statement of changes in equity a statement of cash flows notes, comprising a summary of significant accounting policies and other explanatory information pecularity: possibility of setting-up a statement of income and retained earnings instead of a statement of comprehensive income and a separate 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 policy for all periods presented in the financial statements (IFRS-SME 3.18) 11 2 Components of a complete set of financial statements 2.2 Pecularities of the structure of financial statements Balance sheet structure is nearly complete identical with the structure for the balance sheet according to IAS/IFRS (no separate disclosure of assets classified as held for sale included in a disposal group and liabilities included in a disposal group classified as held for sale) Statement of comprehensive income: identical with IFRS-accounting Statement of changes in equity: identical with IFRS-accounting Statement of cash flows: identical with IFRS-accounting Notes to financial statements: structure identical to notes according to IAS/IFRS - but in general fewer requirements due to cost-benefit analysis, due to missing or limited accounting expertise, due to missing accounting options contained in the IFRS-SME-Standard and due to not allowed accounting policies for SMEs (e.g. revaluation of property, plant and equipment) 12

5 3.1 Accounting choices identical in the IFRS-SME- and full IFRS-accounting In general: Significant reduction of accounting choices in the IFRS-SME- Standard in comparison to the former Exposure Draft: Remaining accounting choices identical in the IFRS-SME-accounting: Measurement after recognition of inventories which are ordinarily interchangeable and not segregated for specific projects (IFRS-SME 13.17; IAS 2.25) Measurement methods for investments in subsidiaries, joint ventures and in associates in the separate financial statements (IFRS-SME 9.26; IAS 27.37) Accounting choices in the IFRS-SME-accounting without a corresponding choice in the full IFRSaccounting IFRS-SME accounting choice application of IFRS-SME 11 and 12 or IAS 39 (IFRS-SME 11.2 b) Accounting for investments in associates: - Cost model, - Equity method or - Fair value through profit or loss model as alternatives (IFRS-SME 14.4) Accounting for investments in joint ventures: - Cost model, - Equity method, - Fair value through profit or loss model as alternatives (IFRS-SME 15.9) Regulation in the IAS/IFRS IAS 39 and IFRS 7 Equity-Method (IAS 28.13) accounting choice between Equity Method and proportionate consolidation (IAS and 31.38) Accounting choices in the IFRS-SME-accounting without a corresponding choice in the full IFRSaccounting IFRS-SME accounting choice (hidden) accounting choice: projected unit credit method for measuring the obligation and cost under a defined benefit plan: simplified calculation method is allowed (ignoring estimated future salary increases, future service of current employees and in-service mortality): IFRS-SME accounting treatment for actuarial gains or losses (IFRS-SME 28.24) - recognise all actuarial gains or losses in profit or loss - recognise all actuarial gains or losses in other comprehensive income Regulation in the IAS/IFRS Projected unit credit method IAS IAS D In addition to the accounting choices in the IFRS-SMEstandard: corridor method (IAS ) 15

6 Subsequent measurement of property, plant and equipment and intangible assets Subsequent measurement of investment property Borrowing costs cost less accumulated depreciation and less impairment losses (IFRS-SME and IFRS-SME 18.18) in the case that the fair value can be measured reliably without undue cost or effort: measurement at fair value through profit or loss; Otherwise: cost model according to IFRS-SME 17 no capitalisation of borrowing costs (IFRS-SME 25.2) accounting option between cost model and revaluation model (IAS and IAS 38.72) accounting option between the cost model and the revaluation model (IAS 40.30) capitalisation of borrowing costs only in the case of qualifying assets (IAS 23.8) 16 internally generated intangible assets Subsequent measurement of intangibles with an indefinite useful life prohibition of capitalising research and development costs, unless the internally generated intangible asset forms part of another asset that meets the recognition criteria in the IFRS-SME (IFRS-SME 18.14) assume a useful life of 10 years capitalise the development costs, if the entity fulfills the capitalising criteria in IAS no regular amortisation, therefore - asset impairment test annualy without the existience of an obvious impairment indicator - annual review if the useful life is still indefinite 17 Goodwill acquired (initial measurement) Subsequent measurement of goodwill acquired Measuring of the noncontrolling interest`s at the non-controlling interest`s share of the acquiree`s identifiable net assets assume a useful life of 10 years option for each business combination: measure the noncontrolling-interest in the acquiree -at the fair falue (full-goodwillmethod) or - the non-controlling interest`s share of the acquiree`s identifiable net assets (IFRS-SME 3.19) no regular amortisation, therefore - asset impairment test annualy without the existience of an obvious impairment indicator - annual review if the useful life is still indefinite 18

7 Deferred taxes -different systematic in comparison to IAS 12 - measuring current and deferred tax assets and liabilities using the probability-weighted average amount of all possible outcomes by a review of the tax authorities (IAS 29.24) - valuation allowance against deferred tax assets so that the net carrying amount equals the highest amount that is more likely than not to be recovered on current or future taxable profit IAS 12 -No explicit topic of IAS 12 (more in the scope of IAS 37) - probabilty is a recognition criterion for tax assets 19 Deferred taxes (continued) exception for outside basis differences in IFRS-SME a): - only for foreign subsidiaries, joint ventures and associates - no differences between subsidiaries on the one side and joint ventures and associates on the other side exception for outside basis differences in IAS and 12.44: - no limitation on foreign companies - subsidiaries: ability to control the timing of the reversal of the temporary differences (in the opposite in the normal case no ability to control the reversal for joint ventures and associates) - no differences between deferred tax assets and liabilities - slight differences between deferred tax assets and liabilities (IAS vs ) 20 non-current assets held for sale or disposal group no special measurement rules in IFRS-SME accounting, but plans to discontinue or to restructure the operation are an indicator for an asset impairment (IFRS- SME 27.9 f) no separate disclosure on the face of the financial statements, but disclosure in notes according to IFRS-SME 4.14 measurement of a non-current asset classified as held for sale or a disposal group at the lower of its carrying amount and fair value less costs to sell (IFRS 5.15) compare the separate disclosure on the face of the financial statement of position (IAS 1.54) 21

8 currency translation in the consolidated financial statements: exchange differences arising on a monetary item in a foreign operation shall be recognised initially in the other comprehensive income and reported as a component of equity; no reclassification in the case of a later disposal of this foreign operation (IFRS- SME 30.13) difference to the IFRS-SME accounting: The exchange difference initially recognised in the other comprehensive income has to be reclassified (it means has to be recognised in profit or loss) in the case of a disposal of the foreign operation (IAS and IAS 21.48) Transition to IFRS for SMEs IFRS-SME 35 with the same function as IFRS 1 (simplifications in order to ease the transition to IFRS for SMEs) basic principle of retrospective application is identical (IFRS-SME 35.7 f.) prohibition of retrospective application of accounting treatments for a first-time adopter of the IFRS-SME-accounting (IFRS-SME 35.9) - derecognition of financial assets and financial liabilities - hedge accounting - estimates - discontinued operations and - measuring the non-controlling interests (allocation of the comprehensive income in other comprehensive income and p/l) comparable to the exemptions in IFRS Transition to IFRS for SMEs choices of retrospective application of the IFRS-SME-accounting policy in the IFRS-SME-opening balance sheet (IFRS-SME 35.10) - business combinations - fair value and revalued amounts as deemed costs for tangible fixed assets, intangibles and investment property - cumulative translation differences - compound financial instruments - share-based payment transactions - deferred income taxes - measurement of the investment in subsidiaries, joint ventures and associates in the separate financial statements - decommissioning liabilities included in cost of an item of property, plant and equipment accounting choices in IFRS-SME are much more farreaching than the corresponding accounting choices in IFRS 1 24

9 4. Transition to IFRS for SMEs choice of a gradual transition to the IFRS-SME-accounting in the case of impracticability (IFRS-SME 35.11): restatement in the earliest period for which it is practicable to do (disclose the fact and the date of transition and the fact that data presented for prior periods are not comparable) possibility of starting the IFRS-SME-accounting even without an IFRS-SME-conforming opening statement of financial position in the case of a continous treatment of the transactions, events and other circumstances after an initial application of IFRS-SMEaccounting rules (without an IFRS-SME conforming opening statement of financial position): possibilty of a IFRS-SME conforming financial statements under materiality aspects (IFRS- SME 2.6) due to the expiring effect of transactions, events and other circumstances accounted according to prior applied GAAP 25