IFRS for SME’s

1. IFRS for SME’s Panicos K. Charalambous 13 April 2010

2. Agenda-1 • Introduction • Basics • Assets • Financial Instruments

3. Agenda-2 • Liabilities • Group accounting • Transition to SME-IFRS

4. Agenda • Introduction

5. SME definition • SMEs are entities that: • Do not have public accountability, and • Publish general purpose f/s for external users

6. Public accountability • An entity has public accountability if: • Its debt or equity instruments are traded in a public market or it is in the process…., or • It holds assets in a fiduciary capacity….(banks, insurance co’s etc)

7. Introduction-Purpose and scope • Some parts of full IFRS are unnecessary, too complex or too expensive forother sorts of reporting, e.g. unconsolidated statements or most unlisted companies • IFRS for SMEs (July 2009) is designed for this other reporting • Some unlisted companies which are publicly accountable, e.g. banks or insurance companies, can not use IFRS for SMEs

8. Introduction-Purpose and scope Entities Listed Unlisted Publicly acc. Not publicly acc.

9. Introduction • H (full IFRS) • Sub (IFRS for SMEs)

10. Introduction: Authority • National Law governs financial reporting • e.g. Cyprus Company Law currently does NOT permit the application of IFRS for SMEs

11. Introduction: Overview of IFRS for SMEs • 230 pages long (plus basis for conclusions, disclosure checklist and illustrative f/s) • 35 sections plus a preface and glossary • Initial implementation review after 2 years • Amendments expected every 3 years

12. Introduction: high level comparison with full IFRS • Shorter • Less frequent amendments • Simplifications: -deleted topics -simpler recognition and measurement

13. Introduction: high level comparison with full IFRS • Simplifications: -deleted options -inserted options -fewer disclosures

14. Organized and numbered by IAS/IFRS Around 2800 pages Around 3000 disclosure points Updated continuously Organized by topic (e.g. Inventories etc) Around 230 pages Around 300 disclosure points Updated- 3 year cycle Full IFRS vs IFRS for SMEs

15. Agenda • Basics

16. Basics • Concepts • Presentation and disclosure • Accounting policies, estimates, errors

17. Concepts • Two fundamental elements of accounting as per Framework are: • Assets -Resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

18. Concepts • Liabilities -Present obligation arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

19. Concepts • Recognition should occur when: -inflow or outflow are probable (more likely than not); and -cost or value can be measured reliably

20. Presentation: Fairness • In extremely rare circumstances, where compliance would not enable fair presentation, the entity must depart from a requirement • Unless the regulatory framework prohibits departure

21. Presentation: other principles • Assess whether entity is going concern • Consistency of presentation unless the standard changes or a change would be more appropriate • Comparative information for one prior year • Substance over form

22. Presentation: financial statements • Statement of financial position (B/S) • Statement of comprehensive income -can show down to “profit or loss” in a separate statement • Statement of changes in equity • Statement of cash flows

23. Statement of financial position (B/S) • Assets • Current assets x • Non current assets x • Total assets x

24. Statement of financial position • Liabilities and equity • Current liabilities x • Non current liabilities x • Equity x • Total liabilities and equity x

25. Statement of comprehensive income • If a two statement approach is chosen, what is outside of “profit or loss”? -currency gains/loss on foreign statements -actuarial gains and losses (optional) -cash flow hedges • These can be called “other comprehensive income” (OCI)

26. Statement of changes in equity: contents • Total comprehensive income (split into profit/loss* and OCI) • Retrospective restatements for policy changes or error corrections* • Dividend payments* • Issues of shares

27. Statement of changes in equity: contents • If an entity has no OCI, and only the * items, it can add these to profit or loss as a statement of comprehensive income and retained earnings

28. Statement of Comprehensive Income and Retained Earnings • Revenue x • COS (x) • Profit for the year x • Opening Retained Earnings x • Dividends (x) • Closing Retained Earnings x

29. Accounting policies • Materiality applies • Seek guidance from other sections, from Section 2 (concepts) and, optionally full IFRS • Consistency • Change in policy (PYA) if: -SME-IFRS changes -more relevant information

30. Disclosure notes • Disclosure of accounting policies • Many other disclosures, but fewer than in full IFRS

31. Basics: differences from full IFRS -no “held for sale” category in statement of financial position -can sometimes omit statement of changes in equity -fewer disclosures

32. Agenda • Assets

33. Assets-1 • Inventories • Property, plant and equipment • Investment property • Grants and borrowing costs

34. Assets-2 • Intangibles • Specialised activities

35. Inventories • Measure at lower of cost and NRV • Can use FIFO or WA (but not LIFO) • Borrowing costs are expensed

36. Property, plant and equipment • Measurement on cost basis • Cost doesnotinclude borrowing costs • Review method of depreciation, RV, and depreciable lifewhen there are indications that this is necessary, not automatically every period

37. Investment property • Should bemeasured at fair valuewhere this can be done reliably without undue cost or effort;otherwise as PPE on the cost basis • Changes to FV recorded to profit or loss

38. Grants and borrowing costs • Grants that do not impose future performance conditions are recognised as income when receivable • Borrowing costs are recognised as expenses

39. Intangibles except goodwill • Examples of costsnotrecognised as assets: -internally generated brands,R&D -start up costs -training, advertising

40. Intangibles except goodwill • Assets measured oncostbasis • Amortisation over estimated life, or (if no reliable estimate)ten years • RV zero unless evidence of value

41. Specialised activities • Agriculture -Biological assetsshouldbe measured using FV model,unless this involves undue cost or effort -FV model measures assets at FV less costs to sell with changes in profit or loss

42. Assets: differences from full IFRS • No revaluation of PPE or intangibles • Borrowing costs expensed • Development costs expensed • 10 year amortisation instead of impairment only for indefinite life intangibles

43. Assets: differences from full IFRS • Investment properties at cost or FV according to circumstances • Biological assets can use cost model

44. Agenda • Financial instruments

45. Financial instruments • For recognition and measurement, follow either a) IAS 39 (i.e. full IFRS), or b) IFRS for SMEs

46. Financial instruments • IFRS for SMEs divides instruments into: -basic (amortised cost except for listed shares or shares with reliable fair value) -others (mostly at fair value) • Significantly reduced disclosures

47. Financial instruments • Basic instruments include: -cash, receivables, payables -bonds -non-puttable ordinary or preference shares

48. Financial instruments • Others include: -derivatives (options, forward contracts or Interest Rate Swaps IRS) -investments in convertible debt

49. Financial instruments: basic • Initial measurement -transaction price (including costs, except for items held at FV) -DCF for financing transactions

50. Financial instruments: basic • Subsequent measurement -debt at amortised cost with annual checks for impairment -shares at FV if listed or reliable FV (changes to P&L) -others at cost