PFRS for SMEs

JEFF-MIKE SMITH
SULE,
FRIACC, ENP, REB,

Part 2 REA, CPA, MICB

LECTURER
P F RS FO R S M ES V S . F U L L P F RS
S I G NI F I C A NT A C COUNT I NG S I M P L I FI C AT I ONS
S M E s a r e n o t r e q u i r e d t o a p p l y P F R S sta n d a r d s a p p l i c a b l e t o l i st e d e n t i t i e s , s u c h a s :
▪ S e g m e n t i n fo r m a t i o n
▪ Ea r n i n g s p e r s h a r e
▪ Interim reporting
Fa i r va l u e m e a s u r e m e n t i s r e ta i n e d i n P F R S fo r S M E s :
• C e r ta i n fa i r va l u e a c c o u nt i n g o p t i o n s u n d e r f u l l P F RS w e r e r e m o v e d
• M e a s u r e m e nt p ro v i s i o n s r e l a t i n g t o f i n a n c i a l i n st r u m e n t s w e r e s i m p l i f i e d
• S M E t ra n s a c t i o n s a r e b a s i c a n d t y p i c a l l y r e q u i r e st ra i g h t fo r wa r d fa i r va l u e
m e a s u r e m e nt , i f a ny
• “ U n d u e c o st o r e f fo r t ” r e l i e f i n P F R S fo r S M E s
P F RS FO R S M ES V S . F U L L P F RS
S I G NI F I C A NT A C COUNT I NG C H A NG ES
C o m p l ex a c c o u n t i n g o p t i o n s r e m o v e d :
1 ) S e c t i on 1 1 A n d 1 2 : F i n a nc i a l I n st r um ent s
✓ O p t i o n t o c a t e g o r i ze f i n a n c i a l a s s e t s a s ava i l a b l e fo r s a l e o r h e l d t o m a t u r i t y a n d “ fa i r va l u e
option” – removed.
✓ S M E s h av e t h e o p t i o n t o r e v e r t b a c k t o p a s 3 9
✓ S i m p l i f i e d d e r e c o g n i t i o n r u l e s a n d h e d g e a c c o u nt i n g r e q u i r e m e nt s
2 ) S e c t i on 1 4 : M u l t i pl e O pt i ons Fo r I nvest m ent s I n A s s o c i ates .
✓ A c c o u nt i n g p o l i c i e s c a n b e s e l e c t e d f ro m : 1 ) t h e c o st m o d e l , 2 ) fa i r va l u e t h ro u g h p ro f i t o r l o s s
model or 3) equity method.
✓ Fa i r va l u e m o d e l m u st b e a p p l i e d w h e n t h e r e i s a p u b l i s h e d p r i c e q u o ta t i o n .
✓ A p p l y t h e s a m e a c c o u nt i n g p o l i c y fo r a l l i nv e st m e n t s i n a s i n g l e c l a s s .
P F RS FO R S M ES V S . F U L L P F RS
S I G NI F I C A NT A C COUNT I NG C H A NG ES
C o m p l ex a c c o u n t i n g o p t i o n s r e m o v e d :
3 ) S e c t i o n 1 5 : P r o p o r t i o n a t e C o n s o l i d a t i o n O f J o i n t l y - c o n t ro l l e d E n t i t i e s .
✓ Similar to section 14
✓ Number of accounting alternatives is increased when compared to full PFRS
4 ) S e c t i o n 1 8 : C a p i ta l i z i n g D e v e l o p m e n t C o s t s M e e t i n g S p e c i f i e d C r i t e r i a .
✓ All research and development costs expensed as incurred.
✓ Capitalization of development costs is not an option.
5 ) S e c t i o n 1 9 : G o o d w i l l A n d O t h e r I n d e f i n i t e L i fe I n t a n g i b l e s A r e A m o r t i ze d O v e r T h e i r U s e f u l L i fe
✓ Business combination accounting retains most of the provisions of the old version of PFRS 3.
P F RS FO R S M ES V S . F U L L P F RS
S I G NI F I C A NT A C COUNT I NG C H A NG ES
C o m p l ex a c c o u n t i n g o p t i o n s r e m o v e d :
6 ) S e c t i o n 2 0 : I n f l a t i o n C o s t R e l a t i n g To O p e ra t i n g L e a s e s C a n B e R e c o g n i ze d O n A C a s h B a s i s .
✓ Operating lea ses exempted from straight - line method if payments to the lessor are structured purely to
compensate for expected cost increases.
✓ Inflation component is de facto recognized on a cash basis.
7) Section 24: Accounting For Government Grants Is Simplified .
✓ N e w m o d e l i s r e q u i r e d b a s e d o n t h e p r i n c i p l e s f o r r e c o g n i z i n g g r a n t s i n c l u d e d i n PA S 4 1 , a g r i c u l t u r e .
8 ) S e c t i o n 2 5 : C a p i ta l i z i n g B o r ro w i n g C o s t s M e e t i n g S p e c i f i e d C r i t e r i a .
✓ Borrowing costs are always expensed as incurred
P F RS FO R S M ES V S . F U L L P F RS
S I G NI F I C A NT A C COUNT I NG C H A NG ES
C o m p l ex a c c o u n t i n g o p t i o n s r e m o v e d :

9 ) S e c t i o n 2 6 : S h a re - b a s e d P ay m e n t s C a l c u l a t i o n H a s B e e n S i m p l i f i e d .
✓ Simplifications in terms of fair value measurement
✓ D i r e c t o r s ’ b e s t e s t i m a t e c a n b e u s e d w h e r e o b s e r v a b l e m a r ke t p r i c e s a r e n o t a v a i l a b l e
✓ Intrinsic value method is not permitted
✓ Mere disclosure without expense recognition, is not appropriate
P F RS FO R S M ES V S . F U L L P F RS
S I G NI F I C A NT A C COUNT I NG C H A NG ES
C o m p l ex a c c o u n t i n g o p t i o n s r e m o v e d :
1 0 ) S e c t i o n 2 8 . A c c o u n t i n g F o r D e f i n e d B e n e f i t O b l i ga t i o n s H a s B e e n S i g n i f i c a n t l y S i m p l i f i e d .
✓ Allows SMEs to choose between two methods for recognizing actuarial gains and losses:
a) Immediate recognition in profit or loss; or
b) Immediate recognition in other comprehensive income without recycling
✓ If able, SMEs should use the projected unit credit method
✓ I f n o t , u s e a n a p p r o a c h b a s e d o n PA S 1 9 , e m p l o y e e b e n e f i t s b u t w i t h c a l c u l a t i o n s s i g n i f i c a n t l y
simplified.
✓ This minimizes need to engage ex ternal experts.
P F RS FO R S M ES V S . F U L L P F RS
S I G NI F I C A NT A C COUNT I NG C H A NG ES
C O M P L E X A C C O U N T I N G O P T I O N S R E M OV E D :

R e c y c l i n g O f F o r e i g n C u r r e n c y Tr a n s l a t i o n ( C TA ) n o t r e q u i r e d .
✓ N o r e c y c l i n g t h r o u g h p r o f i t o r l o s s o f a n y c u m u l a t i v e e x c h a n g e d i f fe r e n c e s o n d i s p o s a l o f a f o r e i g n
operation.
✓ E l i m i n a t e s s i g n i f i c a n t a d m i n i s t r a t i v e b u r d e n n e e d e d t o t r a c k h i s t o r i c a l e x c h a n g e d i f fe r e n c e s .
✓ E x c h a n g e d i f fe r e n c e s a r e r e p o r t e d i n t h e s t a t e m e n t o f c o m p r e h e n s i v e i n c o m e w h e n t h e y a r i s e .
P F RS FO R S M ES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

S e c t i o n 3 : F i n a n c i a l S t a t e m e n t P r e p a ra t i o n .
✓ N o s i g n i f i c a n t d i f fe r e n c e s c o m p a r e d t o f u l l P F R S .
✓ If using PFRS for SMEs, there must be an explicit, unreserved statement of such compliance in the
notes.

S e c t i o n 4 : S t a t e m e n t O f F i n a n c i a l P o s i t i o n / S e c t i o n 5 : S t a t e m e n t O f C o m p re h e n s i v e I n c o m e A n d I n c o m e
Statement.
✓ Minimum line items must be disclosed, on the face of a financial statement or in the notes.
✓ Statement of financial position presentation based on liquidity if more reliable and relevant than a
current/non-current presentation.
✓ The criteria used for classifying assets and liabilities as current same as in full PFRS
P F RS FO R S M ES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES
Section 6: Statement Of Changes In Equity And Statement Of Income And Retained Earnings.
✓ Same as full PFRS, items of other comprehensive income are included in the statement of changes in
e q u i t y.
✓ U n l i ke f u l l P F R S , o p e n i n g b a l a n c e s h e e t f o r e a r l i e s t p e r i o d p r e s e n t e d d o e s n o t n e e d b e p r e s e n t e d f o r :
▪ Restatements
▪ Reclassifications
▪ Changes in accounting policy
✓ E x e m p t i o n f o r i m p r a c t i c a b i l i t y, i n s t e a d o f u n d u e c o s t o r e f f o r t p r i n c i p l e , a p p l i e s
P F RS FO R S M ES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES
S e c t i on 7 : S tatem ent O f C a s h F l ows .
✓ G e n e ra l l y c o n s i st e n t w i t h p a s 7
✓ S M E s c a n u s e e i t h e r t h e i n d i r e c t m e t h o d o r t h e d i r e c t m e t h o d t o p r e s e n t o p e ra t i n g c a s h
flows.
S e c t i on 9 : C o n s o l i dated A n d S e p a rate F i na nc i a l S tatem ent s .
✓ S u b sta n t i a l l y t h e s a m e a s f u l l P F R S .
✓ P F RS fo r S M E s h a s o p t i o n t o p r e s e n t c o m b i n e d f s fo r t w o o r m o r e e n t i t i e s c o n t ro l l e d b y a
s i n g l e i nv e st o r.
✓ S M E s c a n r e c o g n i ze i nv e st m e n t s a t fa i r va l u e t h ro u g h p ro f i t o r l o s s ra t h e r t h a n c o st m e t h o d .
✓ F u l l P F RS a l l o w s c l a s s i f i c a t i o n a s ava i l a b l e fo r s a l e a n d r e c o g n i t i o n o f c h a n g e s i n fa i r va l u e
t h ro u g h c o m p r e h e n s i ve i n c o m e ra t h e r t h a n i n c o m e sta t e m e nt .
P F RS FO R S M ES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

S e c t i o n 1 0 : A c c o u n t i n g P o l i c i e s , E s t i m a t e s A n d E r ro rs .
When PFRS for SMEs is silent on the appropriate accounting treatment…
✓ SMEs are not required to use the requirements and guidance in full PFRS or other authorities.
✓ R e fe r i n s t e a d t o :
• Other sections in PFRS for SMEs which deal with similar or related issues, or
• General principles in section 2, concepts and pervasive principles.
P F RS FO R S M ES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

Section 13: Inventories .

✓ S u b s t a n t i a l l y t h e s a m e a s PA S 2 .
✓ Lifo is prohibited as an inventory costing method.
✓ Inventories are measured at the lower or cost and selling price less costs to complete and sell.
✓ The techniques for measuring inventory cost have been retained.
✓ Impairment can be reversed if certain criteria are met.
P F RS FO R S M ES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

S e c t i o n 1 6 : I n v e s t m e n t P r o p e r t y.
✓ Use fair value model if SME can measure the fair value of an investment property reliably without
undue cost or effort.
✓ O t h e r w i s e , u s e t h e c o s t m o d e l a n d c l a s s i f y a s p r o p e r t y a s p r o p e r t y, p l a n t a n d e q u i p m e n t .
✓ “ C o m p o n e n t i z a t i o n ” a p p r o a c h s i m i l a r t o p a s 1 6 , p r o p e r t y, p l a n t a n d e q u i p m e n t h a s b e e n r e t a i n e d .
S e c t i o n 1 7 : P ro p e r t y, P l a n t , A n d E q u i p m e n t / S e c t i o n 1 8 : I n t a n g i b l e A s s e t s O t h e r T h a n G o o d w i l l .
✓ R e s i d u a l v a l u e , u s e f u l l i fe a n d d e p r e c i a t i o n / a m o r t i z a t i o n m e t h o d s a r e r e v i e w e d u p o n a n i n d i c a t i o n
that a change may be required.
✓ Full PFRS requires review at each reporting date, irrespective of whether indicators exist.
P F RS FO R S M ES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

Section 19: Business Combinations And Goodwill.

✓ Goodwill is amortized under PFRS for SMEs.
✓ Goodwill assessed for impairment using an indicator approach.
✓ Purchase price allocation process has to be performed, same as in full PFRS
✓ Intangible assets and contingent liabilities acquired in a business combination are separately recognized
if:
✓ Their fair value can be measured reliably
✓ Without undue cost or effort

✓ Pooling of interests method of accounting is not permitted

✓ Combinations of entities under common control excluded in scope.
P F RS FO R S MES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

S e c t i on 2 0 : L e a s es .
✓ C l a s s i f i c a t i o n o f a l e a s e a s e i t h e r a n o p e ra t i n g o r f i n a n c e l e a s e i s r e q u i r e d
✓ Fo r o p e ra t i n g l e a s e s w i t h p ay m e n t w h i c h i n c l u d e “ex p e c t e d i n f l a t i o n ”, st ra i g h t - l i n e m e t h o d
o f ex p e n s i n g p ay m e n t i s n o t r e q u i r e d
S e c t i on 2 1 : P rovi s i ons A n d C o nt i ngenc i e s .
✓ S a m e w i t h f u l l P F RS
✓ E xa m p l e s ta i l o r e d t o t h e c i r c u m sta n c e s o f S M E s p ro v i d e d a s i m p l e m e n ta t i o n g u i d a n c e
P F RS FO R S MES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

S e c t i on 2 2 : L i a bi l i ti e s A n d Eq ui t y.
S a m e a s f u l l P F RS :
✓ Eq u i t y i s t h e r e s i d u a l i n t e r e st i n a s s e t s a f t e r d e d u c t i n g l i a b i l i t i e s .
✓ A ny n o n - c o n t ro l l i n g i n t e r e st i n t h e n e t a s s e t s o f a s u b s i d i a r y i s i n c l u d e d i n e q u i t y.
P F RS FO R S MES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

Section 23: Revenue.

✓ Retains approach of full PFRS.
✓ C o m b i n e s t h e r e q u i r e m e n t s o f PA S 1 1 , c o n s t r u c t i o n c o n t r a c t s a n d PA S 1 8 , r e v e n u e .

Revenue Categories:
1) Sale of goods
2) Rendering of services
3) Interest, royalties and dividends,
4) Construction contracts
P F RS FO R S MES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

Section 23: Revenue.

✓ Percentage Of Completion Method Applied For Revenue From Service And Construction Contracts.
✓ Additional Examples Addressing Issues Covered By IFRIC Added As Implementation Guidance
Section 27: Impairment Of Assets.
• Same As Full PFRS
• I m p a i r m e n t B a s e d O n A “ O n e - s t e p A p p r o a c h ”.
• Impairment Recognized When The Recoverable Amount Is Lower Than The Carr ying Amount.
• R e c o v e ra b l e A m o u n t I s T h e H i g h e r O f Fa i r Va l u e L e s s C o s t s To S e l l A n d Va l u e I n U s e .
P F RS FO R S MES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES
S e c t i on 3 1 : H y per i nf l at i on.
✓ C o n s i st e n t w i t h PA S 2 9 .
✓ S M E s t o p r e p a r e g e n e ra l p r i c e - l e v e l a d j u st e d f i n a n c i a l sta t e m e nt s a n d r e l a t e d d i s c l o s u r e s
w h e n i t s f i n a n c i a l c u r r e n c y i s hy p e r i n f l a t i o n a r y
✓ C o n s i d e r e d hy p e r i n f l a t i o n a r y w h e n a p p rox i m a te l y g r e a t e r t h a n 1 0 0 % o v e r t h r e e ye a r.
S e c t i o n 3 2 : Ev e n t s A f t e r T h e E n d O f T h e R e p o r t i n g P e r i o d .
✓ Consistent with pas 10.
✓ Events which occur after the end of the reporting period are classified as “adjusting ” or “non -
adjusting ” events.
✓ Dividend distributions are accounted for as a liability only when declaration is made.
P F RS FO R S MES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

S e c t i on 3 3 : Re l ated Pa r t y D i s c l o s ure s
✓ C o n s i st e n t W i t h F u l l P F RS
✓ S i m p l i f i e d D i s c l o s u r e O f Ke y M a n a g e m e n t Pe rs o n n e l C o m p e n s a t i o n
S e c t i on 3 4 : S p ec i a l i zed A c t i vi t i es .
Combines:
• PA S 4 1 , A g r i c u l t u r e ,
• P F RS 6 , E x p l o ra t i o n Fo r A n d Eva l u a t i o n O f M i n e ra l Re s o u r c e s , A n d
• I F R I C 1 2 , S e r v i c e C o n c e s s i o n A r ra n g e m e n t s .
P F RS FO R S MES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

S e c t i o n 3 4 : S p e c i a l i ze d A c t i v i t i e s .
Agriculture industry
✓ Substantially the same as Full PFRS.
✓ Introduction of the undue cost or effort relief
Ex tractive industries
✓ C o s t s r e l a t i n g t o t h e e x p l o r a t i o n f o r, e v a l u a t i o n o r e x t r a c t i o n o f m i n e r a l r e s o u r c e s a r e e x p e n s e d a s
incurred
✓ Under full PFRS, can be partly capitalized
P F RS FO R S MES V S . F U L L P F RS
M I N OR A C COU NT I NG C H A NG ES

S e c t i o n 3 4 : S p e c i a l i ze d A c t i v i t i e s .

Insurance industry
• I n s u r e r s h o l d a s s e t s i n a f i d u c i a r y c a p a c i t y h e n c e P F R S f o r S M E s i s n o t i n t e n d e d f o r, a n d s h o u l d n o t b e
u s e d b y, i n s u r e r s .
Concession arrangements
• I F R I C 1 2 a r e a p p l i c a b l e t o S M E s a s w e l l , w i t h a fe w m i n o r a d j u s t m e n t s .