1. IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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 EU countries, Canada, Switzerland, Australia and Hong Kong)  Unlisted companies require IFRS in over 100 jurisdictions  IFRS is set to become the global accounting language

3. 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  Around 80 jurisdictions already permit or require its use or plan to do so in the next 3 years  Over 99% of private entities around the world are expected to be eligible to use the standard

4. IFRS for SMEs - Background  The 52 largest stock exchanges in the world together have only 45,000 listed companies  Europe: 25 million private sector enterprises  USA: 20 million private sector enterprises  UK alone: 4.7 million private sector enterprises  99.6% have fewer than 100 employees

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  Subsidiary of a listed company can use it if the subsidiary itself is not listed

6. Key Features  Tailored for SMEs and needs of users of their financial statements  Completely stand-alone standards – 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  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. Comprehensive Review  Progress to date on the update every 3 years:  Requests for information issued in 2012  SME Implementation Group met in 2013  Issued recommendations for comment in early 2014  SMEIG reviewing responses and will make recommendations to the IASB late 2014/early 2015  2016 Effective target date for revisions

22. Proposed Amendments  Will not have a material impact for most SMEs  Useful life of goodwill must not exceed 10 yrs.  Income tax – align with IAS 12  Additional guidance on some standards including classifying financial instruments as equity or liability  New exemptions where measurements involve “undue cost or effort”