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Big GAAP, Little GAAP (IFRS for SMEs)

September 20, 2009

The IASB issued IFRS for SMEs (small and medium-sized entities) in July 2009. Could IFRS for SMEs be right for your company? Is using two different standards to disclose the same transaction a good idea? Most of the world uses IFRS, so a very large number of small and medium-sized entities will be able to use a different set of standards from the larger counterparts – even for similar transactions.

IFRS for SMEs simplifies IFRS for the purpose of easing the financial reporting burden on private companies. The intent of IFRS for SMEs is to provide a simplified, cost-effective set of standards for smaller companies with general purpose financial statements. As a self-contained standard of about 230 pages it appears to deliver on its promise of simplifying financial reporting for small and medium sized entities.

IFRS for SMEs lists five types of simplifications from full IFRS. The simplifications are listed below.

  • Some full IFRS topics are omitted because they are not relevant to most SMEs. The omitted topics include:
    • Earnings per share
    • Interim financial reporting
    • Segment reporting
    • Special accounting for assets held for sale
  • IFRS for SMEs includes simplified reporting options, so some full IFRS accounting policy options are not allowed Examples of the omitted options include:
    • Financial instrument options, including available‐for‐sale, held‐to‐maturity and fair value options
    • The revaluation model for property, plant and equipment as well as intangible assets
    • Proportionate consolidation for investments in jointly‐controlled entities
    • Measurement is driven by circumstances for investment property rather than allowing an accounting policy choice between the cost and fair value models
    • Various options for government grants.
  • Many of the recognition and measurement principles that are in full IFRS are simplified in IFRS for SMEs. The simplifications include:
    • Financial instruments:
      • Financial instruments meeting certain criteria are measured at cost or amortized cost. All other financial instruments are measured at fair value through profit or loss.
      • IFRS for SMEs utilizes a simplified principle for derecognition.
      • Hedge accounting, including the detailed calculations, is simplified for SMEs.
    • Goodwill and other indefinite‐life intangible assets are always amortized over their estimated useful lives or ten years if the useful life cannot be estimated reliably.
    • Investments in associates and joint ventures can be measured at cost unless there is a published market price quotation.
    • Research and development costs must be expensed as incurred.
    • Borrowing costs must be expensed as incurred.
    • Property, plant and equipment and intangible assets ‐ Residual value, useful life and depreciation method for items of property, plant and equipment, and amortization period/method for intangible assets, need to be reviewed only if there is an indication they may have changed since the most recent annual reporting date (full IFRSs require an annual review).
    • Defined benefit plans:
      • All past service cost must be recognized immediately in profit or loss.
      • All actuarial gains and losses must be recognized immediately either in profit of loss or other comprehensive income.
      • An entity is required to use the projected unit credit method to measure its defined benefit obligation and the related expense only if it is possible to do so without undue cost or effort.
    • Income tax ― Requirements follow the approach set out in the Board’s ED Income Tax, published in March 2009, which proposes a simplified replacement for IAS 12 Income Taxes.
    • No separate held‐for‐sale classification ― Instead, holding an asset (or group of assets) for sale is an impairment indicator.
    • Biological assets ― the fair value through profit or loss model is required for biological assets only when fair value is readily determinable without undue cost or effort. Otherwise, SMEs follow the cost‐depreciation‐impairment model.
    • Equity‐settled share‐based payment ― the directors’ best estimate of the fair value of the equity‐settled share‐based payment is used to measure the expense if observable market prices are not available.
  • Substantially fewer disclosures
  • Simplified redrafting

To support the implementation of the IFRS for SMEs the IASC Foundation is developing comprehensive training material. The Foundation is also working with international development agencies to provide instructors for regional workshops to ‘train the trainers’ in the use of the training material, particularly within developing and emerging economies.

IASB publishes IFRS for SMEs     IFRS for SMEs Fact Sheet     IFRS for SMEs FAQs

IFRS for SMEs is intended to be used by Small and Medium sized Entities, which are entities that publish general purpose financial statements for external users and do not have public accountability. An entity has public accountability under the IASB’s definition if it files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market; or it holds assets in a fiduciary capacity for a broad group of outsiders. Examples of entities that hold assets in a fiduciary capacity include banks, insurance companies, brokers and dealers in securities, pension funds and mutual funds. It is not the IASB’s intention to exclude entities that hold assets in a fiduciary capacity for reasons incidental to their primary business (for example, travel agents, schools and utilities) from utilizing IFRS for SMEs.

Practically speaking, IFRS for SMEs is not viewed as an accounting framework for entities that are not of the size nor have the resources to use full IFRS. In the United States, the term “SME” would encompass many private companies.

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