By Samuel Bediako & Mo Zhang IFRS for Small and Medium Entities(SME)

SME back ground & Definition Developed in 2009 IFRS made the Guide to Small and Medium sized Companies in response to the international demand for regulations for emerging and developed economies. SMEs are defined as entities that do not have public accountability (securities not publicly traded, not financial institutions), and publishes general purpose financial statements for external users. Who Can Use IFRS For SMES 1. Any entity that publishes general purpose financial statements for external users and does not have public accountability. 2. Subsidiary of a listed company can use it if the subsidiary itself is not listed.

IFRS For Small and Medium Entities(SME) Objectives Of Financial Statements The objective of financial statements of SMEs applying IFRS is to provide information about the financial position, performance and cash flows of the entity that is useful for economic decision-making by users who are not in a position to demand reports tailored to meet their particular information needs. Financial statements also show the results of the stewardship of management — the accountability of management for the resources entrusted to them.

IFRS For Small and Medium Entities(SME) Statement of Financial Position The financial position of an entity is the relationship of its assets, liabilities and equity as of a specific date. (a) an asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity; (b) a liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits; and (c) equity is the residual interest in the assets of the entity after deducting all its liabilities.

IFRS For Small and Medium Entities(SME) Key Features Complete stand alone feature not linked to full IFRS Much smaller in regulations only 230 pages compared to full IFRS 2,500 pages and GAAP 17,000 pages. Simplification from Full IFRS

IFRS For SMEs Simplification from Full IFRS Simpler options where Full IFRS require accounting policy options. Measurement and Recognitions are simplified Reduced discloser Simplified drafting Elimination of irrelevant reporting standard that does not apply to SME in full IFRS.

Elimination of reporting standards for SMEs from full IFRS Segment reporting Interim reporting Earnings per share Assets held for sale

Options taken out of full IFRS to fit SMEs Revaluation model for Property, Plant Equipment Intangible Assets Proportional consolidation for investments for 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 Financial instruments options

IFRS For SMEs Financial Instruments Accounting policy choice for all financial instruments to Financial instruments sections of IFRS for SMEs IAS 39 plus disclosure requirements of IFRS for SMEs Financial instruments covered in two section 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

Recognition and Measurement Simplifications Financial Instruments two categories; Amortized Cost and Fair Value through profit and lose Goodwill (and other intangible assets) amortized over useful life (or over 10 years if useful life cannot be reliably estimated) Expenses all R&D and borrowing costs Cost model for investments in associates and Joint Ventures allowed. Goodwill impairment – indicator approach meaning not necessarily annually

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 must be recognized immediately either through profit or loss or Other Comprehensive Income Exchange differences recognized initially in Other Comprehensive Income need not to be reclassified to profit or losses on disposal of related investments Shares based payments Director’s judgment can be used in estimating value if market prices are not available

Policy Options in IFRS for SMEs Optional transition exemption from full retrospective application for 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

Policy Options in IFRS for SMEs Apply Fair Value or cost through profit and loss model for investments in associates and Joint Ventures Accounting for investments in separate financial statements at cost or fair value through profit and loss Recognizing actual profit and loss in the period in which they occur in the profit and loss statement or comprehensive income

IFRS For SMEs Accounting Policy Hierarchy Level 1. The guidance in IFRS for SMEs dealing with similar or related issues Level 2. The definitions, recognition criteria, and measurement concepts, 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

IFRS For SMEs Financial Statement Presentation A statement of financial position 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

IFRS For SMEs Disclosure Simplifications Roughly 300 disclosures for SME compared to 3000 disclosures for full IFRS Some disclosures in full IFRS are more relevant to investment decisions in public capital markets Some disclosures omitted relate to disallowed complex recognition and measurement options in full IFRS

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

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

Cons for adopting IFRS for SMEs Increase in workload and cost for first-time adoption Personnel trained in IFRS Impact on information system Difference in interpretations from more principles based standards Impact on debt convents, taxes and customer supplier contracts in transition