Spotting the differences between IFRS for SMEs and full IFRS

Thu, May 20, 2010

 inShare

Since 2005, listed groups in the UK and Ireland have been required to prepare their

consolidated financial statements in accordance with International Financial Reporting

Standards ("IFRS"). Almost all other entities have had a choice in that they can follow IFRS or

UK/Irish GAAP. If they are small, they have the further option to apply the Financial

Reporting Standard for Smaller Entities ("FRSSE"). However from 2012/13, the options are

likely to change. UK/Irish GAAP is expected to be replaced by the new IFRS for Small and

Medium-sized Entities ("IFRS for SMEs").

Until recently, the International Accounting Standards Board ("IASB") has focussed on

developing standards for entities trading on public capital markets. The resulting standards

are relatively complex and contain many disclosure requirements.

Over one hundred countries make use of IFRS but there has been a growing demand for the

IASB to produce a regime more suited to entities without public accountability. As a result,

the IASB introduced a new standard for non-publicly accountable entities, the IFRS for SMEs,

a much simplified version of full IFRS.

With the UK (and Ireland) Accounting Standards Board proposing to replace UK/Irish GAAP

with this new standard, the choice for the majority of UK and Irish companies above the

small companies thresholds will be whether to apply IFRS for SMEs or full IFRS. These

companies include:

companies which are listed and have not adopted IFRS in their individual financial

statements;

subsidiaries in listed groups which have not adopted IFRS throughout the group;

all public companies which are not publicly accountable; and

all private groups and companies, except those which may qualify as small.

This article seeks to highlight the key differences between the two sets of standards, and to

encourage finance professionals in industry to carefully consider, where available to them,

the choice of which to apply as the resulting accounting treatments can in many cases be at

opposing ends of the spectrum.

Simplification

As you would expect, the IFRS for SMEs is a much simplified version of the full IFRS. It was

designed by the IASB with the needs of users of non-publicly accountable entities and the

costs and benefits of compliance in mind. As a result, it is smaller in comparison to IFRS and

has approximately one tenth of the disclosure requirements contained within full IFRS. The

main format differences are illustrated as follows:

 

Full IFRS

Standards numbered as published

Almost 3,000 pages

Around 3,000 disclosure points

Updates almost monthly

While the detailed accounting provisions are broadly consistent with full IFRS, there are key

differences and simplifications. The following are the key simplifications made:

Some topics in full IFRS are omitted because they are not considered relevant to SMEs.

These include segmental reporting, assets held for sale and earnings per share.

Some accounting policy treatments in full IFRS are not allowed because a simplified

method is available to SMEs.

Easing of recognition and measurement principles in full IFRS.

Some of the more detailed provisions are discussed further below.

Key areas of accounting impact

Transitioning to either IFRS for SMEs or full IFRS for an entity is likely to mean changes in the

recognition and measurement of a number of items in the financial statements. The list

which follows is by no means exhaustive in its comparison of the two standards but seeks to

indicate the more significant accounting differences resulting from the simplification of full

IFRS.

 

Topic Full IFRS

Goodwill and Intangibles Capitalisation of development costs mandatory.

Goodwill and indefinite life intangibles are not amortised but subject to an annual

impairment test.

Investment Propoerty

Option to use cost or fair value through profit and loss ("FVTPL").

Property Plant and Option to revalue through the comprehensive income statement.

 

Topic Full IFRS

Equipment

Borrowing costs Mandatory capitalisation.

Financial Instruments

Complex mixed cost/fair value model using four asset categories, recycling of gains from equity, separation of embedded derivatives and restrictive hedging rules.

Defined benefit pension schemes

Net liability approach using projected salaries. Spreading of actuarial gains/losses permitted.

Business combinations

Acquisition method using a fair value exchange approach - attributable costs are expensed, and adjustments to contingent consideration generally to the profit and loss.

Income tax Temporary difference approach. Limited rules on tax uncertainties *

* See below for further tax specific impacts.

Example

The following example considers the impact of the differing treatments under the standards

for internally generated and acquired intangibles.

In financial year 20X0, a private company spends £/€2m on product development costs. In

addition, it acquires a customer list from a competitor for £/€1m on the first day of FY 20X0.

a) Under IFRS for SMEs the company will expense the development costs through the profit

and loss in FY 20X0. It will capitalise the cost of the customer list at £/€1m and amortise it

over (a maximum) period of 10 years from the date of acquisition (£/€100k per annum).

b) Under full IFRS, the company will capitalise both the development costs and the customer

list in the balance sheet, recording assets of £/€3m. At each period end, the company will

carry out an impairment review on the carrying value of the assets, debiting any impairment

through the profit and loss.

The position at the end of 20X0 under each would therefore be as follows:

  Full IFRS IFRS for SMEs

  €/£ €/£

Balance Sheet    

Intangible assets 3,000,000 900,000

     

Profit and Loss    

Development costs - (2,000,000)

Amortisation - (100,000)

As can be seen from the simple example above in one particular area of the standards, the

process of simplification has resulted in very different results.

Key areas of taxation impact

In terms of current tax, the tax section of the new standard includes no significant

differences between the IFRS for SMEs proposals and the current IAS 12 standard. However,

there are potentially significant differences when a company's deferred tax position is

considered. These include:

Tax basis for deferred tax calculations - under IFRS for SMEs, the tax basis of an asset is

determined based on the tax consequences associated with selling the asset for its carrying

amount. Under full IFRS, the tax basis is calculated by reference to the expected manner of

recovery. As a result, the recognition and measurement of deferred taxes under IFRS for

SMEs is likely to differ from full IFRS and the requirement to determine tax basis by

reference to sale could mean that the tax basis may not reflect the underlying economic

circumstances associated with the asset.

Uncertain tax positions - all tax positions need to be measured using a 'probability weighted

average amount' of all potential outcomes (on the basis that the relevant Revenue authority

has full knowledge of all relevant information). Under full IFRS there is less prescriptive

guidance on uncertain tax positions.

However the IFRS for SMEs standard currently does not apply a threshold to the recognition

of uncertain tax positions. Assessing every tax position taken is an area which could

potentially be costly and time consuming for companies and has already received significant

negative feedback from many respondents.

Valuation allowance - under IFRS for SMEs there is a requirement that the net carrying

amount of a deferred tax asset equals the highest amount which is more likely than not to

be recovered. The expected realisable figure however has not to be discounted, unlike full

IFRS which provides for discounting of deferred tax.

Perhaps more importantly, companies will need to consider the potential tax implications

associated with the areas of accounting impact noted above. These will include:

the requirement to expense internally generated goodwill and intangibles should allow a

company to obtain an upfront tax deduction for all such costs

greater applicability of the complex Disregard Regulations in relation to financial

instruments

 

Conclusions

It is likely that IFRS for SMEs will replace UK/Irish GAAP in 2012 or 2013. Non-publicly

accountable companies will have the ability to choose whether to apply this new standard or

full IFRS. As discussed above, there are significant differences resulting from the

simplification process applied by the IASB which companies should bear in mind when

considering which route to select. They will need to weigh up the pros and cons of both

regimes to their particular circumstances, and, as well as the accounting differences in

recognition and measurement and the differences in disclosure requirements between the

two regimes, there are a number of other factors to consider e.g. Is the company

considering a listing in the near future? What are competitors doing? How complex is the

company?- See more at: http://www.charteredaccountants.ie/Members/Technical/Finance-Leaders-Articles/Spotting-the-differences-between-IFRS-for-SMEs-and-full-IFRS---Robert-Clarke-ACA-and-Steven-Stewart-ACA-CTA/#sthash.NxLxxphl.dpuf