In July 2009, the International Accounting Standards Board (IASB) issued the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs).
IFRS for SMEs is a self-contained, standalone standard of about 230 pages, organized by topic.
It is delivered with implementation guidance, consisting in illustrative financial statements and disclosure checklists, as well as training materials which are still under development (19 out of 35 modules are currently available).
IFRS for SMEs is separate from full IFRS. It does not contain any cross references to full IFRS, except for a single reference to IAS 39 Financial Instruments (that can be applied by SMEs instead of sections 11 and 12 of this standard).
IFRS for SMEs is a more stable platform than full IFRS. The IASB plans to update this standard approximately once every three years only.
For which companies?
Irrespective of its title, the standard does not contain any reference to size criteria when it comes to defining what SMEs are.
In section 1, SMEs are defined as entities that do not have public accountability but do 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 if it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses (e.g. a Banking or an Insurance company).
The IASB leaves it up to legislative and regulatory authorities and standard-setters in individual jurisdictions to decide whether entities are required or permitted to use the IFRS for SMEs (provided that the conditions above are met which exclude listed companies and financial institutions).
Surprising as it is, U.S. private companies are among the first to be able to use the IFRS for SMEs. Indeed, the AICPA (American Institute of CPAs) recognized in 2008 the IASB as an accounting standard-setting body. Thus, U.S. private companies can use either full IFRS or IFRS for SMEs instead of US GAAP.
At least 35 countries – many from developing and emerging economies – have said they will use the IFRS for SMEs within three years.
On the other hand, no decision has been taken yet in the European Union (EU). The public consultation lead by the EU Commission revealed that opinions are divided about the opportunity to use this standard. As long as IFRS for SMEs has not been endorsed, companies within the EU cannot apply the standard.
What are the key differences with full IFRS?
First of all, the following topics are not addressed in the IFRS for SMEs:
- Earnings per share
- Interim financial reporting
- Segment reporting
- Assets held for sale and discontinued operations
- Insurance contracts
Secondly, many of the principles for recognizing and measuring assets, liabilities, income and expenses have been simplified. Furthermore, where full IFRS allow accounting policy choices, the IFRS for SMEs only allows the easiest option.
The key simplifications are summarized below:
Presentation of financial statements
- A single statement of income and retained earnings (instead of a statement of comprehensive income and a statement of changes in equity) if the only changes to equity during the periods arise from profit or loss, payment of dividends, corrections of prior period errors, and changes in accounting policies
- 2-year comparatives even in case of a change in accounting policies
- A SME can apply either the requirements of the IFRS for SMEs or the recognition and measurement provisions of IAS 39 and the disclosure requirements of the IFRS for SMEs
- Two categories of financial instruments (4 in IAS 39) : amortized cost model (basic financial instruments) or fair value through profit or loss
- More restrictive conditions to benefit from hedge accounting
Investments in associates and joint-ventures in consolidated statements
3 methods are permitted (equity method, at cost or at fair value through P&L), whereas full IFRS require:
- the use of equity method for associates,
- either equity method or proportionate consolidation for jointly controlled entities
Foreign currency translation
On disposal of a foreign operation, any cumulative exchange differences previously recognized in other comprehensive income are not reclassified to P&L (recycling applies in full IFRS)
Fixed assets (investment property, PPE & intangible assets)
- Investment property: at fair value only if it can be measured reliably without undue cost or effort ; otherwise, investment property is accounted for as PPE
- The revaluation model is not permitted (neither for PPE nor for intangible assets)
- All expenditure for both research and development activities is recognized as an expense (capitalization of development expenditure in full IFRS)
- All intangible assets are considered to have finite useful lives and are therefore amortized
Business combinations and goodwill
- “Full goodwill method” is not permitted
- Goodwill is amortized over its useful life (which is presumed to be 10 years if it cannot be estimated reliably)
- A government grant related to assets cannot be deducted from the carrying amount of the related assets
- All borrowing costs are expensed as incurred
- The “corridor” method is not permitted for actuarial gains and losses on defined benefit plans (P&L or other comprehensive income)
Last but not least, substantially fewer disclosures are required: about 10% of the number required by full IFRS.
To consult the comprehensive presentation about IFRS 2010, including the potential impacts on SAP BusinessObjects Financial Consolidation Starter Kit for IFRS, please click here.
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