ifrs for smes based on paul pacter’s (iasb) presentation october 3, 2014

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

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

IFRS for SMEs

Based on Paul Pacter’s (IASB) PresentationOctober 3, 2014

Page 2: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

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

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

Page 4: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 5: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 6: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 7: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 8: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

Examples of Omitted Topics

Segment reporting

Interim reporting

Earnings per share

Assets held for sale

Page 9: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 10: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 11: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 12: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 13: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 14: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 15: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 16: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

Financial Statement Presentation

A set of financial statements under IFRS for SMEs (similar to full IFRS) comprises:

1. A statement of financial position

2. A statement of comprehensive income (or a separate income statement and a statement of comprehensive income)

3. A statement of changes in equity

4. A statement of cash flows (using either the direct or indirect method)

5. Notes, comprising a summary of significant accounting policies and other explanatory information

Page 17: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 18: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 19: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 20: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 21: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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

Page 22: IFRS for SMEs Based on Paul Pacter’s (IASB) Presentation October 3, 2014

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”