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The IFRS for SMEs

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  1. The IFRS for SMEs 27th Annual TSAE Convention September 24, 2010 Brentwood, TN Eva K. Jermakowicz, Ph.D., CPA Tennessee State University Nashville, TN

  2. IFRS Adoption Around the World • One of the most significant regulatory changes in accounting history • World-wide, over 120 nations require IFRS-based financial reporting for listed companies (including all 27 EU countries, Switzerland, Australia and Hong Kong) • It is projected to be over 150 by 2011 (Canada and India converged to IFRS by 2011, Japan by 2013) • IFRS is required for all companies in 90 countries (Deloitte,, 2010) • IFRS is set to become the global accounting language

  3. IFRS for Small- and Medium-Sized Entities (IFRS for SMEs) – AN OVERVIEW

  4. IFRS for SMEs - Background • Issued on July 9, 2009, in response to strong international demand from both developed and emerging economies for ‘little IFRS’, that is much simpler than full IFRS • On May 18, 2008, the Governing Council of the AICPA amended Appendix A to Rules 202 and 203 of the AICPA’s Code of Professional Conduct to designate the IASB as the body to establish professional standards with respect to international financial reporting • AICPA members are now allowed to report on financial statements prepared in accordance with IFRS as issued by the IASB as an alternative to U.S. GAAP

  5. Scope and Definition • SMEs are defined as entities that: • Do not have public accountability (securities not publicly traded, not financial institutions), but • Must produce general purpose financial statements that present fairly financial position, operating results, and cash flows for external capital providers & others • 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

  6. Key Features • Tailored for SMEs and needs of users of their financial statements • Completely stand-alone standard – not linked to full IFRS • The only ‘fallback’ option to full IFRS is the option to use IAS 39 instead of the financial instruments sections of IFRS for SMEs • Much smaller: about 230 pages versus 2,500 in full IFRS and 17,000 in U.S. GAAP • Organized by topics (35 Sections) • Updated only once every 3 years • Simplifications from full IFRS

  7. Simplifications from Full IFRS • Some topics included in full IFRS omitted if irrelevant to SMEs • Where IFRS have accounting policy options, only simpler option included • Recognition and measurement simplifications • Reduced disclosures • Simplified drafting

  8. Examples of Omitted Topics • Segment reporting • Interim reporting • Earnings per share • Insurance • Assets held for sale

  9. Examples of Disallowed Options • The revaluation model for PP&E and intangible assets • Financial instruments options (e.g., ‘available for sale’, ‘held to maturity’, ‘fair value option’) • Proportionate consolidation for investments in jointly controlled entities • Free choice of treatment on investment property • Various options for the accounting for government grants • Capitalization of borrowing costs • Capitalization of development costs • Deferral of actuarial gains and losses of defined benefit plans

  10. Recognition and Measurement Simplifications • Financial instruments (two classifications: amortized cost; fair value through profit or loss) • Goodwill (and other intangible assets) amortized over useful life (or over 10 years if useful life cannot be reliably estimated) • Goodwill impairment – indicator approach meaning not necessarily annually • Cost model for investments in associates and JVs allowed • Expense all R&D • Expense all borrowing costs

  11. Recognition and Measurement Simplifications • Pension accounting: • Defined benefit – No corridor or deferrals; Not required to use the projected unit credit method if impracticable • All past service cost must be recognized immediately in profit or loss • All actuarial gains and losses must be recognized immediately either in profit or loss or other comprehensive income (OCI) • Exchange differences recognized initially in OCI are not reclassified to profit or loss on disposal of the related investment (the need for tracking them eliminated) • Share-based payment – Director’s judgment can be used in estimating value if market prices are not available

  12. Financial Instruments • Accounting policy choice for all financial instruments to use either: • Financial instruments sections of IFRS for SMEs; or • IAS 39 plus disclosure requirements of IFRS for SMEs • Financial instruments covered in two sections: • Section 11 – Basic financial instruments (criteria: returns, prepayment, loss of principal or interest by holder) • Section 12 – Other financial instruments • Two classification categories: • Amortized cost using effective interest rate • Fair value through profit or loss

  13. Other Policy Options in IFRS for SMEs • Optional transition exemptions from the full retrospective application on first-time adoption • Present single statement of comprehensive income, or separate income statement and statement of comprehensive income; Present expenses by nature or by function • Combined statement of income and retained earnings allowed in some circumstances • Present operating cash flows using the direct or indirect method; Classify interest and dividends as operating, investing, or financing

  14. Other Policy Options in IFRS for SMEs • Apply the cost, or FV through P&L model, or the equity method for investments in associates and joint ventures • Account for investments in separate financial statements at cost or at FV through P&L • Recognize actuarial gains and losses in the period in which they occur in profit or loss or in other comprehensive income

  15. Accounting Policy Hierarchy • Level 1. The guidance in IFRS for SMEs on similar or related issues • Level 2. The definitions, recognition criteria, and measurement concepts in Section 2, Concepts and Pervasive Principles, of the Standard • Level 3. The requirements and guidance in full IFRS dealing with similar or related issues; no reference to considering the pronouncements of other standard-setters

  16. Financial Statement Presentation • A set of financial statements under IFRS for SMEs (similar to full IFRS) comprises: • A statement of financial position • A statement of comprehensive income (or a separate income statement and a statement of comprehensive income) • A statement of changes in equity • A statement of cash flows (using either the direct or indirect method) • Notes, comprising a summary of significant accounting policies and other explanatory information

  17. Disclosure Simplifications • Reduced disclosure requirements: • Full IFRS – more than 3,000 items in the disclosure checklist • IFRS for SMEs – roughly 300 disclosures • Some disclosures omitted relate to disallowed complex recognition and measurement options in full IFRS • Some disclosures in full IFRS are more relevant to investment decisions in public capital markets

  18. Transition to IFRS for SMEs • Additional simplifications are provided in relation to comparative information on first-time adoption of IFRS for SMEs • An impracticability exception from having one year comparative information and with respect to restating the opening statement of financial position is included

  19. Adopting IFRS for SMEs - Pros • Improved comparability • Improved access to capital • Focused on the needs of users of SME financial statements • Reduced time and effort to prepare financials • Less disclosure requirements • Updated only once every 3 years • Attract foreign investors • Harmonization of internal and external reporting

  20. Adopting IFRS for SMEs - Cons • Increased cost and workload on first-time adoption • Need for personnel trained in IFRS • Impact on information systems • Different interpretations due to more principles-based standards • Impact on taxes, debt covenants and other customer/supplier contracts in transition

  21. The Future of Private Entity Reporting

  22. International Adoption of IFRS for SMEs • As of June 2010, 62 jurisdictions – many from developing and emerging economies - have either already adopted or plan to adopt it soon (e.g., Brazil, Hong Kong, Ethiopia and South Africa) • The UK and Ireland, have proposals to adopt IFRS for SMEs for certain smaller entities • France, Germany, and Italy are unlikely to adopt IFRS for SMEs because of its impact on taxes • The European Commission is evaluating the future of private company reporting (there are about 55 different SMEs GAAP in the EU today!)