A sman and medium sized entities Definition _ Asmall or medium entity may be defined or characterised as follows: * they are usually owner-managed by a relatively small number of individuals such as a family group, rather than having an extensive ownership base * they are usually smaller entities in financial terms such as revenues generated and assets and liabilities under the control of the entity * they usually have a relatively small number of employees * they usually undertake less complex or difficult transactions which are normally the focus of a financial reporting standard. The problem of differential reporting _ * It can be difficult to define a small or medium entity. * Ifa company ceases to qualify as a small or medium entity then there will be a cost and time burden in order to comply with full IFRS and IAS Standards. * There may be comparability problems if one company applies full IFRS and IAS Standards whilst another applies the SMEs Standard. matter of several reporting SXandards has been omitted from the i'd, as follows: Omission subject matter from tl cause the cost of prepaNag and reporting infor nefits which users wod|d expect to derive fror at informationKey differences in accounting treatment between full IFRS (‘t) and the IFRS for SMEs PHO mae ‘Some aerounting standards have been omitted completly from IFRS for SMEs, mainly due tothe standards not being relevant or the cos! of reporting exceeding the perceived benefits Eamings por | Full IFRS requires IAS 23 Earnings per Shara to be applied for listed share {EPS} companies. [AS 33 requires calevlation and presentation of EPS and clvted EPS for all reported periods. The concept of EPS is not relevant to SMEs as they «re not listed Interim reporting | IAS 34 interim Financiaf Reporting applies when «an entity prepares interim reporls. SMEs are highly unlikely lo prepare such reports. Interim reporting is ‘omitted from the IFRS for SMEs. Segmental IFRS 8 Operating Segments requires listed enfles fo repor information on the reporting cllferent types of operations they ate involved in, clifferent goographical arecis etc. SMEs are net listed and therefore IFRS 8 does not apply. The IFRS for SMEs does not require any obher segmental reporting as SMEs are unlikely to have such diverse operations and the cost of reporting such information would be prohibitive for such entities. Assets held for | IFRS 5 Noncurrent Assets Hold for Sale and Discontinued Operations contsins sale specific accounting requirements for assets classified as held for sala. The cost of reporting inthis yay is expected to exceed the benclits for SMEs and it is therefore omitted from the IFRS for SMEs (instead, holding asses fr sale is an impainnent indicator)Pee ee treatments under the IFRS for SMEs There are a number of differences between the accounting treatment required under full IFRS and that undor the IFRS for SMEs. rey Investment property, eos Fair yale through profit or boss must be used {if fair value can he mecsuTéd without undue cost or coffon);othorwise the cos! model is applied (IFRS lor SMEs: para. 16.7) Cana: Permit to make a ehgice between fair value model, or egst mocel (aecBuning policy choice} Intangible assets The revaluation model ignet permjtted. Intangible assets must be held at cost less accumulated amortisation (IFRS for SMEs: para. 18.18) Revaluaions permitted whore acive market Goverment grants No specified {ure performance conditions: — recognise as income when the grant is tcaiyable Otherwise: — recognise as ineome when performance conditions rot UIFRS for SMEs: pars 24.4) Grants relating te income recognised in profit or loss ever period to mach to related costs Grants relating to assets cithor + Presented as deferred income; + Deducted in artiving at the ccamying cmount of the ascot Borrowing costs Expensed when incurred (IFRS for SMEs: pears. 25.2) Capitalised hon relate to consituetion of « qualifying asset Development costs Allintornelly genoreted rasoerch and cbyelopment expenditure ‘expensed (IFRS for SMEs: para. 18.4} Development expenditure capitalised when tho IAS 28 Intangible Assets criteria are metPension cetucriel asins and losses Actuarial gains and losses can bo recognised immediately in pr loss or other comprehensive income (OCI) (IFRS for SMEs: para. 28.24) Simplified caleulation of defined benefit obligations ignoring future senyice/adlary rises) permitted if not able o use projected unit credit method withoul undue cos!/elfort (IFRS for SMEs: para. 28.18) % Remecisurements in OCI only Projected unit credit method must be used 5 Fineaneiell instruments All classified at either cost or amortised cost or fi through profit or loss “Basic! debt instruments + Amortized cost Investments in shares (excluding convertible preference shores ancl pital shares) + Fair yalue through profit or loss + Cos less impairment (where fair value cannot Le measured reliably without undue cosi/effor) Other financi + Fair value through profit or loss (IFRS for SMEs: para. 11.14) instruments FINANCIAL ASSETS Investments in debt instruments Business model: held to collect contractual cash flows + Amortsed cost Business model: held to collect cconitaetval cash flows and sel + Fair valve through OCI Investments in equity instruments not held for trading + Fair yalue through OC jf intevocable election mace) All other financial assets + Fair valve through profit or loss FINANCIAL LIABILITIES (main categories only) Most © Amortised cost Financial liabilities at fair value through profit or loss + Hele for racing + Desivetves that ano abilities + Accounting mismatch + Group managed nl eyaluatod on FY basis,llustration 1 Borrowing costs — full IFRS v IFRS for SMEs Harold Co completed the construction of a new warehouse facility during the year ended 31 December 20X6. Harold incurred borrowing costs totalling $1,480,000 in the year. Of this, $980,000 was incurred bofore the warehouse was complete on | August 20X6 and $700,000 was incurred betwean completion and the year end date, The warehouse facility was available for use cand brought into use on | Oetobor 20X6 and has an esimated usoll life of 20 years Required Briefly ciscuss the cilforence in accounting treaimen! in respect of the borrowing costs incurted under {ull IFRS cand IFRS for SMEs and consider the impact on the reported profit of Harold Co for the year ended 31 December 20X6. Solution Under full IFRS Borrowing costs incurred up to 1 August 20X6 should ke capitalised as part of the cos ofthe asset Those incurred afer the asset is completed should be expensed fo profit or loss, The asset should be cleprecicted from the date itis rs rough into use. The cimount charged to profit or bss in respect of the borrowing coats would be: $ Exponsed borrowing costs 700,000 Romane Depreciation on capitalized costs 12,250 deprecision sos {980,000 / 20 yrs x 3/12) chee Total expense Under the IFRS for SMEs The whole borrowing cost of $1,680,000 would be expensed to profit or loss in the current year Impact on reported profit The reported profit forthe period would be lower under the IFRS for SMEs. This has a negative impact on profitability raties3 ifications introduced by the IFRS for SME: @ implifications introduced by the for SMEs Pe et eee There are several accounting and reporting standards that have been simplified before inclusion in disclosure - {SPL and other comprehensive income {CCI and sefement of changes in equity (SOCIE} permitted fvhere no OCI nor equity movements other than profit or loss, dividends and/or prior ppetiod axjustments (PPA)} isclosures and Segment ‘earnings per share not required. Chor disclostaos reduced bby 90% varsus full IFRS IFRS for SMEs. ro aes es Presentation and Diselosure Prosantation and | Combined stalemen! of profit or loss _| Not permitted ed (as full FRSs apply to publicly quoted companies) Recognition and measurement (IFRS for SMEs: pene 9.26) Revenue Goods: when significant risks and | When performance obligation ~ rewards of ownership sts! (IRE 15 Revenue hors transferred (anc no continuing | Contracts with Customers five sep manogorial involvement nor effective | approach) control) (ERS for SMEs: para. 23.10) Services: stage of completion Intangible assets | All intangibles Gncloding goodwill, | Only amertised if finite useful life ” are amortized Useful fe cannot exceed 10 No specific lmiton useful lives years if cannot be astablishad reliably (ERS for SMEs: pares. 18.19, 18.20) An impairment tes is required An annual impairment test is only il thore is an indication of | Teavired for goodwill, for intangible inopement cases wih an indefinite useful if, anc foram intangible asset no! yet aeilable for use, ‘Separate Investments in subsidiaries, associates | Cost or under IFRS 9 Financial finance cin joiat ventures can be held al cost | Instruments Geir value through profit statements of | (ess any impaitmentj or fair value | or loss, oF lair valve tnough ether investor through profit or loss or using | comprehensive income if an a tho equity method lection was made on purchase) or using the equity methodConsolidated fincineial slovements o- Investments in crssociates cand joint ventures can remain at the same value as in the separate financial statements Only partial goodwill lowed, ie noncontolling inlerests cannot be imacsurad a [ll ir vale. Goodyill is amortised as lor intangible assets Exchange cilerences on translating c foreign operation are macognisad in other comprehensive income cond net subsequently reclassified to profit or loss Subsidiaries acquired and held with the intention of salling/disposing within ene year aire not consolidated Associates and joint ventures ceuity counted Choice of full oF partial goodwill method. Compukory annual test for impairment, no! cmortsed Recognised in ether comprehensive income and reclassified to profit oF loss on disposal of the foreign ‘operation Consolidated, but using IFRS 5 principles thald forsaleIllustration 2 Goodwill - full IFRS v IFRS for SMEs Poppy Co acquired 70% of the ordinary shares of Branch Co on | August 20X32. Poppy Co paid $3.45 to.aequire the investment in Branch Co. The fair yolue of Branch Co's identifiable net assets ‘was assessed as $4.5m al the date of acquisition. The far val of the non-contolling inirost (NCI in Branch Co was assessed to be $1.7, Required fc) Caleulote the amount thal would he recognised as goodwill using fi FUILIFRS, assuming NC1 is valued! at fair yale fi) IFRS for SMEs. bh) Brielly discuss the reason for the difference between the Iwo methods. Solution fa}6) Full IFRS $n (a) fi) IFRS for SMEs fin Consideration 345 Consideration 345 NClat share of net NCI fair value 17 assets 30%) 135 5.15 48 Fair value of asses less Fair value of asses less liabilities AS liabilities AS Goodwill 065 Goodwill 03 6) Under fll IFRS, the non contrlling interest can be yalued either a ts share of net assets or its fair value whereas the IFRS for SMEs does not permit fair valve fo be used. Inthe given ‘example the fair value of the NCL is higher than its share of net assets, which gives rise to higher amount of goodwill being recognisedCeeorr) \Whitebirk has met the definition of a SMEin its[urisciction and wishes to comply with the (AAS ior Small and Medium-sized Entifes. The entity wishes to seek advice on how it will deal with the following accounting issues inits financial staternents for the year erded 30 November 20X2. The entity already preparesits {nancial statements under full |FRS. () Whitebirk purchased 90% of Glose, a SME, on 1 December 20K1. The purchase consideration was $5.7 million and the value of Close’s identifiable assets was $6 million. The value of the non- controlling interest ai 1 December 20K1 was measured at $0.7 milion. WnitebIrk nas used the Tull goodwill method to account for business combinations and the life of goodwill cannot de estimated with any accuracy. Whitebirk wishes fo know now to account for goodwill under the (FAS for SMEs. (i) Wohitebirknas incurred $1 milion of research expendttur® to develop anew product in ine year to 30 Noverrber 20X2. Additionally, itincurred $500,000 of developrnent expenditure to bring another product toa stage wher itis ready to be marsetad and sold (il) Whitebirk purchased some properties for $1.7rn on 1 December 20X1 and cesigrated ther as investrnent properties undar the cost model. No depraciaticn was charged as areal estate agent valued the properties at $1.9m at the year end. (¥) Whitebirk has an intangible asset valued at $1rn on 1 December 20X1 The asset has an indefinite useful life, and in previous years had been reviewed for impairment. As ai 30 Novernber 20X2, there are ro indicalions that the assetis impaired Requited Discuss hew the above transactions should be dealt with in the financial statements of Whitebirk, with reference to the IFRS for Small and Medium-sized En ities, (11 marks](iy «ity (iv) Businass combination IFRS 8 Business combiratonsallows an entity to adopt the ful or partial good method in its consolidated firancial statements, The (FAS iar Si4Es only allows the yatlal goodwill method. This, avoids the need for SMES to determine the fair vdu2 ofthe non-cortroling interests nt purchased ‘when undertaking a business combination In addition, FRS 3 Business combina fonsrequires goodwill 1 be tasted anrualy for impairrmart ‘The (FAS ior SMEs requires goodalll to be amortisad Instead. This is a rruch simpler approach ard the {FS for SEs specifies tat if an entity isunable to make & reliable estirrataof tha ussiul lite, i is presumed to be tenyeets, simplying rings even further Goodwill on Wenitebire’s acquisition of Close will be calculated as: cod Consideration transferred 8,700 Non-contoling interest: 10% x g6n _600 6300 Less feir value of identifiable net assets acquired Gcodwill ‘This goodwill of §0.3m will be arnortised over ten years, that is $30,000 par ennum. Research and davelopment expenditure ‘The (ERS for SMES requires al intarnaly ganerated research and cevaloprnant axpeniture to be ‘axpensed through profit or Loss. This is simpler than tull IFRS — IAS 98 lntang'Hle Assets requires intemally generates assets to be capitalised if cer'ain criteria | proving future eccnornc Benefits) are Imei, and iis ollen cificult to determine whether or not they Have beer met, ‘Whitebirk’'s total expenditure on resaerch (§0 Sr and daval pment ($m) must be writan off to Profit ar loss for the year, giving a charge at $1 Sm Invostment property Investment proper tes rust be nald al fair valua through profi or loss under tha LAS for SMES where ther ir valu2 can be reasured without undue cost or aftorl,which eppacrs to be the case hera, given Mal ar estate agen! valuation ig avallabla, Consequently again of $0.2m ($1.97 - $1.7) ‘wil be reported in Whitebirk's prof ir loss for the year. Intangible asset IAS 96 tmoairment of aeseis raquiras annual Imoalrmant ests for indarnita le Intangibles, intang bles not yet available for use and gondwil. This is a complex, ‘ima-consuming and expansive ‘Ws ‘The (ERS tor SMEs only requires Impairmant tests where there are indleators of Impairmant. In tha case of Whilebir's intangible, Inere are no indicators of impairment, and so ar impairment test fs Pot