spotting the differences between ifrs for smes and full ifrs
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Spotting the differences between IFRS for SMEs and full IFRS
Thu, May 20, 2010
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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