27 May 2010 International Financial Reporting Standards IFRS for SMEs World Bank, Chisinau Michael Wells, Director of IFRS Education Initiative IASC Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IASC Foundation or the IASB
Why an IFRS for SMEs? 2 Improve access to credit bank lending decisions and loan monitoring supports lending based on the borrower s financial performance and cash flows Improve access to equity capital non-management investors foreign venture capital Ease burden where full IFRSs is now required Education and training Auditing efficiencies
The IFRS for SMEs 3 Good Financial Reporting Made Simple 230 pages Simplified IFRSs, but built on an IFRS foundation Designed specifically for SMEs Internationally recognised Final standard issued 9 July 2009
Who will be eligible to use it? 4 Any entity that does not have public accountability securities not publicly traded not a financial institution Over 99% of private entities around the world are expected to be eligible to use the standard Subsidiary of a listed company can use it if the sub itself is not listed
Is it stand-alone or linked to full IFRS? 5 Completely stand-alone The only fallback option to full IFRS is the option to use IAS 39 instead of the financial instruments sections of IFRS for SMEs
How does it differ from full IFRSs? 6 Tailored for SMEs User needs for cash flow information Costs and SME capabilities Much smaller (230 pages vs 2,855 in full IFRSs) Organised by topic Simplifications from full IFRSs
How did the IASB simplify? 7 1. Some topics in IFRSs omitted if irrelevant to SMEs 2. Where IFRSs have options, include only simpler option 3. Recognition and measurement simplifications 4. Reduced disclosures 5. Simplified presentation 6. Simplified drafting
1. Examples of topics omitted 8 Segment reporting (full IFRS = IFRS 8) Interim financial reporting (full IFRS = IAS 34) Earnings per share (full IFRS = IAS 33) Insurance contracts (full IFRS = IFRS 4) Assets held for sale (full IFRS = IFRS 5)
2. Examples of omitted complex options 9 Financial instruments options including: available for sale held to maturity fair value option Proportionate consolidation Revaluation of PP&E Revaluation of intangibles Various options for government grants
3.1 Examples of R&M simplifications 10 Borrowing costs expense as incurred (full IFRSs = asset if criteria met) Development costs expense as incurred (full IFRS = asset if conditions met)
3.2 R&M simplifications continued 11 Goodwill cost amortisation impairment model (full IFRSs = cost impairment model) if cannot estimate useful life then useful life = 10 years (full IFRS = indefinite useful life) impairment indicator approach (full IFRS = annual impairment test) Impairment test simplified
3.3 R&M simplifications continued 12 Indefinite life intangible assets cost amortisation impairment model (full IFRSs = cost impairment model) If cannot estimate useful life then useful life = 10 years (full IFRS = indefinite useful life) impairment indicator approach (full IFRS = annual impairment test)
3.4 R&M simplifications continued 13 Property, plant and equipment Review of depreciation method, depreciable amount and useful life indicator review trigger (full IFRS = annual review) Intangible assets Review of amortisation method, depreciable amount and useful life indicator review trigger (full IFRS = annual review)
3.5 R&M simplifications continued 14 Financial instruments accounting policy choice Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues; or IAS 39 measurement & S11 & 12 disclosures - Section 11 is amortised cost model (1 exception) - Many SMEs will have only basic financial instruments and so will need only section 11 - Section 12 deals with derivatives, complex instruments and hedge accounting
3.6 R&M simplifications continued 15 Operating leases straight-line expense, however, allow for general inflation increases (full IFRSs = straight-line expense)
3.7 R&M simplifications continued 16 Biological assets less fair value measurement circumstance driven fair value model cost depreciation impairment model (only when FV is not readily determinable without undue cost and effort) Full IFRS = fair value model (rebuttable presumption: FV can be determined). Only use cost if FV cannot be determined
3.8 R&M simplifications continued 17 Investment property circumstance driven fair value model cost method if cannot determine FV (undue cost and effort) Full IFRS accounting policy choice - cost model - fair value model
3.9 R&M simplifications continued 18 Associates accounting policy choice cost method (fair value if published quoted price); equity method; or at fair value through profit or loss (cost if FV cannot be measured reliably) Full IFRS = equity method
3.10 R&M simplifications continued 19 Joint ventures accounting policy choice (no proportionate consolidation) cost method (fair value if published quoted price); equity method; or at fair value through profit or loss (cost if FV cannot be measured reliably) Full IFRS accounting policy choice - equity method - proportionate consolidation
3.11 R&M simplifications continued 20 Share-based payments Recognise an expense for equity-settled SBPs using a 3-tier measurement hierarchy guidance 1. observable market price for the instrument granted 2. entity specific observable market data (eg recent transaction) 3. model, using market data to the extent possible Group plans subsidiaries permitted to recognise reasonable allocation of group s expense
3.12 R&M simplifications continued 21 Defined benefit plans (pensions & medical costs) Actuarial valuation method circumstance driven If can get information without undue cost or effort, use IAS 19 method (ie PUC etc) If not, IAS 19 approach but ignore future salary increase, future service, or possible mortality during an employee s period of service. However, take account of life expectancy of employees after retirement age. The resulting defined benefit pension obligation would reflect both vested and unvested benefits
3.13 R&M simplifications continued 22 Defined benefit plans (pensions and medical costs) Recognise actuarial gains and losses in the period in which they occur accounting policy choice in other comprehensive income or in profit or loss Full IFRSs has arbitrary corridor limits that defer recognition of certain actuarial gains and losses
3.14 R&M simplifications continued 23 Defined benefit plans (pensions & medical costs) Comprehensive valuations normally every 3yrs interim periods, valuations rolled forward for aggregate adjustments for employee composition and salaries, but without changing the turnover or mortality assumptions Outside actuary not required Group plans subsidiaries permitted to recognise reasonable allocation of group s expense
3.15 R&M simplifications continued 24 Government grants grant that does not impose specified future performance conditions recognised in income when the grant proceeds are receivable grant that imposes specified future performance conditions recognised only when the performance conditions are met grant received before the recognition criteria are satisfied are classified as liabilities IAS 20 (full IFRSs) methods are prohibited
3.16 R&M simplifications continued 25 Non-current assets held for sale No separate categorisation/presentation Continue to depreciate (if PPE or intangible) Holding an asset for sale is an indicator of impairment Full IFRSs = carry at lower of carrying amount and fair value less costs to sell
4. Reduced disclosures 26 Full IFRSs: More than 3,000 disclosures IFRS for SMEs: approximately 300 disclosures Simplifications based on users needs and cost-benefit Kept: Disclosures about short-term cash flow, liquidity, solvency, measurement uncertainties, accounting policy choices Dropped: Disaggregations, public capital market disclosures
5. Simplified presentation 27 Statement of financial position no opening statement of financial position Statement of income and retained earnings replaces statement of comprehensive income and statement of changes in equity when the only changes in equity arise from: profit or loss payment of dividends corrections of prior period errors; and changes in accounting policies
6. Simplified drafting 28 Starting point for IFRS for SMEs was black letter paragraphs of full IFRSs These were simplified using criteria of user needs, and cost-benefit Then these were rewritten into simple language
27 May 2010 International Financial Reporting Standards IFRS for SMEs Section 1 Scope Michael Wells, Director of IFRS Education Initiative IASC Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IASC Foundation or the IASB
Section 1 scope of the IFRS for SMEs 30 Learning objectives identify SMEs as defined by the IASB (know the characteristics of SMEs) identify which entities must not assert compliance with the IFRS for SMEs
Section 1 can I use the IFRS for SMEs? 31 Decisions on which entities are required or permitted to use the IFRS for SMEs rest with legislative and regulatory authorities and standard-setters in individual jurisdictions
Section 1 can I use the IFRS for SMEs? But IASB defines SMEs do not have public accountability (PA) publish general purpose financial statements (GPFS) 3.3 requires an explicit statement of compliance with the IFRS for SMEs 1.5 prohibits an entity that has PA from asserting compliance with the IFRS for SMEs 32
Section 1 what is PA? An entity has public accountability (PA) if: its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. 33
Section 1 do I have PA? 34 A small company whose shares are listed on a securities exchange? A large private (unlisted) manufacturer? A large private (unlisted) commercial bank? An entity s whose only business is earning interest on money that it lends to clients. The entity obtains all of its funds from its billionaire owner-manager?
Section 1 do I have PA? continued 35 Ex 10* An unlisted manufacturing subsidiary of an exchange listed parent that uses full IFRSs? Ex 13* A travel agency that requires its clients to pay a refundable deposit equal to 60% of a the price of a package holiday when booking? Ex 14* A supermarket that has a small deposit taking banking operation? * see example with the same number in Module 1 of the IASCF training material
Section 1 what are GPFS? General purpose financial statements are prepared on a basis that is designed to provide useful information to a wide range of users (eg investors and creditors) who are not in a position to demand reports tailored to meet their particular needs. 36
Section 1 are SMEs statements GPFS? The objective of financial statements prepared in accordance with the IFRS for SMEs is to provide information about the entity s financial position, performance and cash flows that is useful to a broad range of users who are not in a position to demand reports tailored to meet their particular information needs. 37
Section 1 do I have GPFS? 38 Ex 4* FS prepared in compliance with tax requirements for calculating taxable income (that are different from the IFRS for SMEs) and which are sent only to the tax authorities? Ex 5* FS prepared on the tax basis (see above) but also sent to the entity s bankers and the national repository. FS filed in the national repository are publicly available? * see example with the same number in Module 1 of the IASCF training material
27 May 2010 International Financial Reporting Standards IFRS for SMEs selected presentation issues Michael Wells, Director of IFRS Education Initiative IASC Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IASC Foundation or the IASB
Section 2 offsetting 40 An entity shall not offset assets and liabilities, or income and expenses, unless required or permitted to do so by another section of the IFRS for SMEs. However, measuring assets net of a valuation allowance (eg allowance for inventory obsolescence) is not offsetting if an entity s normal operating activities do not include buying and selling non-current assets (including investments and operating assets) then the entity reports the profit on disposal of such items on a net basis
Section 3 materiality and aggregation 41 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
Section 3 materiality decisions 42 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 IASCF training material
Section 3 consistency of presentation 43 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)
Section 10 change in accounting policy 44 Change accounting policy if if mandated, follow the transition guidance as mandated if voluntary, retrospective application impracticability exemption Disclosures
Section 10 retrospective application 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 45 * see example 20 in Module 10 of the IASCF training material
Section 10 impracticability exemption 46 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 IASCF training material
Section 10 accounting estimate 47 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.
Section 10 errors 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. 48
Section 10 change in estimate 49 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
Section 10 correcting errors 50 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
Section 10 change in estimate 51 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 IASCF training material
Section 10 change in estimate 52 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 IASCF training material
Section 10 prior period error 53 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 IASCF training material
Section 32 scope 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. 54
Section 32 types of events 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 55
Section 32 accounting and reporting 56 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
Section 32 example adjusting event 57 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 IASCF training material
Section 32 example non-adjusting event 58 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 IASCF training material
Section 32 example non-adjusting event 59 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.
Section 32 disclosure non-adjusting 60 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 IASCF training material
Section 32 disclosure non-adjusting Ex 15 continued: 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. 61
Questions or comments? 62 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 IASC Foundation 30 Cannon Street London EC4M 6XH UK www.iasb.org
63 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 IASC Foundation, the authors 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.