IFRS FOR SME’S

BACKGROUND

The IFRS for SME exposure draft was early adopted by the Accounting Practices Board in South Africa on 7 August 2007. The international standard will in all likelihood only be issued in the first part of 2008. The reason for the early adoption in South Africa is to address the need for differential reporting standards for limited interest companies, as defined in the Corporate Laws Amendment Act (also see our Facts Sheet on the Corporate Laws Amendment Act). This act has already gone through the Parliamentary process and was signed by the President earlier this year. It is expected that the act will become effective in due course.

Auditors would be able to still express a “fair presentation” audit opinion on financial statements prepared in terms of IFRS for SMEs.

The standard also includes illustrative financial statements and a disclosure checklist.

FACT 1: Who can apply IFRS for SMEs?

• Limited interest companies, as defined in the Corporate Laws Amendment Act. No size test is applicable. However, limited interest companies can still choose to comply with full IFRS.
  
  
  
• Other entities with no public interest can also choose to apply IFRS for SMEs, except where a regulator has other specific requirements.

FACT 2: Simpler options now applicable

Where full IFRS have options with regard to the treatment of certain transactions and items, IFRS for SMEs have chosen the simpler option to be applied by SMEs. These include:

• Cost accounting for investment property – no fair value disclosures required.
  
• Cost accounting for property, plant and equipment. Note that the components approach is still required.
  
• All borrowing costs are to be expensed.
  
• Indirect method suggested for cash flow statements.
  
• One method for all grants, based on performance conditions.
  

FACT 3: Recognition and measurement simplifications

• Financial instruments:
  
  • 2 instead of 4 classifications.
    
  • Continuing involvement approach for derecognition dropped.
    
  • More simplified hedge accounting to qualify/when hedging is permitted.
    
    
• Goodwill impairment:
  
  • No amortisation.
    
  • o Indicator approach considered at every reporting date.
    
    
• Expense all research and development costs.
  
  
• Cost method for associates and joint ventures.
  
  
• Income taxes:
  
  • Simplified explanations with fewer exceptions.
  • Temporary differences approach (explained in terms of timing differences).
    
  • Still need to account for deferred tax.
    
  • Taxes payable method rejected.
    
    
• Biological assets:
  
  • Only fair value if it is readily determinable without undue cost or effort.
    
  • Otherwise cost less accumulated depreciation and impairment losses.
    
  • Agricultural produce at fair value less estimated costs to sell.
    
    
• Defined benefit plans:
  
  • Principle approach with no corridor tests.
    
  • All actuarial gains/losses immediately to income statement.
    
    
• Share-based payments - IFRS 2 already provides relief for SMEs to apply intrinsic value for equity settled share-based payments.
  

• Simplified calculations for lessees in the case of finance leases:
• Less prior period date required for first-time adoption of IFRS.
  

FACT 4: Disclosure simplifications

• Full IFRS have more than 3000 disclosure items in disclosure checklist. IFRS for SMEs have less than 400.
  
  
• Simplifications are based on users’ needs and cost-benefit, therefore the following was done:
  
  • Kept - short-term cash flow, liquidity, solvency, measurement uncertainties, accounting policy choices.
    
  • Dropped - disaggregations, public capital market disclosures, relate to topics or options not covered in IFRS for SMEs.
    

FACT 5: Rejected simplifications

The International Accounting Standards Board gives the following reasons for rejecting certain of the recommendation made with regard to further relief to be given to SMEs:

• Drop the cash flow statement – useful to lenders and users.
  
• All leases operating – off balance sheet obligations.
  
• All pension plans defined contribution – off balance sheet obligations.
  
• Completed contract method only – misleading.
  
• Fewer provisions – off balance sheet obligations
  
• Non-recognition of share-based payment – not recognising an expense.
  
• Non-recognition of deferred tax – large outflows and inflows of cash.
  
• Cost model for all agriculture – not in line with how it is managed, namely market prices.
  
• No consolidation – transactions between entities not at arms length, essential information for users.
  
• Derivatives at cost – non-recognition effect.
  
• Amortisation of goodwill over a specified period – does not take impairments into account.
  

FACT 6: How often will it change?

The International Accounting Standards Board indicated that it is committed to not make changes to the IFRS for SMEs standards on a regular basis, in order to allow preparers time to apply standards and to avoid continuous changes that result in undue costs, uncertainties and confusion.

It has therefore agreed that it would update the IFRS for SMEs standards every 2 years, if needed and issue an omnibus exposure draft with all the proposed changes.