It is difficult to see how the IASB could impose any kind of specific size limits to define small companies if

such an approach were adopted. Instead, it might specify that size limits which are already given in
national legislation or standards could be adopted for the purpose.
To a certain extent (see IAS 33 and IFRS 8 above) partial exemption already applies. Indeed, an IFRS for
Small and Medium-sized Entities that applies some but not all of the requirements of existing IFRS
achieves this aim.

2.4.1 Cost of compliance

If the cost of compliance exceeds the benefits to users, an entity may decide not to follow an IFRS. This
applies to all reporting entities, not just smaller ones. However, smaller entities are more likely to make
use of this exception.
For example, impairment reviews can be time-consuming and a smaller entity may not have sufficient staff
to spare to carry out these reviews.

2.4.2 Materiality
Another point to note is that IFRSs apply to material items. In the case of smaller entities, the amount that
is material may be very small in monetary terms. However, the effect of not reporting that item may be
material in that it would mislead users of the financial statements. A case in point is IAS 24 Related Party
Disclosures. Smaller entities may well rely on trade with relatives of the directors/shareholders and this
needs to be disclosed.

3 International Financial Reporting Standard for Small

and Medium-sized Entities 12/10
FAST FORWARD
Published in July 2009 and revised in May 2015, the IFRS for Small and Medium-sized Entities aims to
simplify financial reporting for SMEs by omitting irrelevant topics, reducing guidance and disclosure and
eliminating choice. It also simplifies some of the recognition and measurement principles.

The IFRS for Small and Medium-Sized Entities (IFRS for SMEs) was published in 2009 and revised in
2015. It is only 230 pages, and has simplifications that reflect the needs of users of SMEs' financial
statements and cost-benefit considerations. It is designed to facilitate financial reporting by small and
medium-sized entities in a number of ways:
(a) It provides significantly less guidance than full IFRS.
(b) Many of the principles for recognising and measuring assets, liabilities, income and expenses in
full IFRSs are simplified.
(c) Where full IFRSs allow accounting policy choices, the IFRS for SMEs allows only the easier option.
(d) Topics not relevant to SMEs are omitted.
(e) Significantly fewer disclosures are required.
(f) The standard has been written in clear language that can easily be translated.

588 21: Reporting for small and medium-sized entities Part D Developments in reporting
3.1 Scope
The IFRS is suitable for all entities except those whose securities are publicly traded and financial
institutions such as banks and insurance companies. It is the first set of international accounting
requirements developed specifically for small and medium-sized entities (SMEs). Although it has been
prepared on a similar basis to IFRS, it is a stand-alone product and will be updated on its own timescale.
The IFRS will be revised only once every three years. It is hoped that this will further reduce the reporting
burden for SMEs.
There are no quantitative thresholds for qualification as a SME; instead, the scope of the IFRS is
determined by a test of public accountability. As with full IFRS, it is up to legislative and regulatory
authorities and standard setters in individual jurisdictions to decide who is permitted or required to use
the IFRS for SMEs.

3.2 Effective date

The IFRS for SMEs does not contain an effective date; this is determined in each jurisdiction. The IFRS will
be revised only once every three years. It is hoped that this will further reduce the reporting burden for
SMEs.

3.3 Accounting policies

For situations where the IFRS for SMEs does not provide specific guidance, it provides a hierarchy for
determining a suitable accounting policy. An SME must consider, in descending order:
The guidance in the IFRS for SMEs on similar and related issues.
The definitions, recognition criteria and measurement concepts in Section 2 Concepts and
Pervasive Principles of the standard.
The entity also has the option of considering the requirements and guidance in full IFRS dealing with
similar topics. However, it is under no obligation to do this, or to consider the pronouncements of other
standard setters.

3.4 Overlap with full IFRS

In the following areas, the recognition and measurement guidance in the IFRS for SMEs is like that in the
full IFRS.
Provisions and contingencies
Hyperinflation accounting
Events after the end of the reporting period
Taxation (since the 2015 revisions)
Property, plant and equipment (since the 2015 revisions)

3.5 Omitted topics

The IFRS for SMEs does not address the following topics that are covered in full IFRS.
Earnings per share
Interim financial reporting
Segment reporting
Classification for non-current assets (or disposal groups) as held for sale

Part D Developments in reporting 21: Reporting for small and medium-sized entities 589
 3.6 Examples of options in full IFRS not included in the IFRS for SMEs
Choice between cost and fair value models for investment property (measurement depends on the
circumstances)
Options for government grants

3.7 Initial comprehensive review of the IFRS for SMEs

In May 2015, the IASB completed its comprehensive review of the IFRS for SMEs. The most significant
amendments are as follows:
(a) SMEs are now permitted to use a revaluation model for property, plant and equipment.
(b) The main recognition and measurement requirements for deferred income tax are aligned with full
IFRS.
These revisions are taken into account in the table below.

3.8 Principal recognition and measurement simplifications

Area IFRS for SMEs Full IFRSs
Presentation & Combined statement of profit or loss and Not permitted
disclosure other comprehensive income and
statement of changes in equity permitted
(where no OCI nor equity movements
other than profit or loss, dividends and/or
prior period adjustments)
Segment disclosures and earnings per
share not required. Other disclosures Required (as full IFRSs apply only to
reduced by 90% versus full IFRSs. publicly quoted companies)

Revenue Goods: when significant risks and When performance obligation satisfied
rewards of ownership transferred (and (IFRS 15 five step approach).
no continuing managerial involvement nor
effective control)
Services: stage of completion.

Financial Amortised cost Amortised cost

instruments
All 'basic' financial instruments other
than those publicly traded or whose
fair value can be measured reliably.
Cost
Unquoted investments in equity
instruments (where FV not reliably
measurable)
Fair value through profit or loss
Financial assets: business model is
held to collect cash flows
Financial liabilities: all others not held
at fair value through profit or loss
Cost
Also the case
Fair value through profit or loss

All other financial instruments Financial assets: all others

Financial liabilities: held for trading or
SMEs can also choose to use the IFRS 9
part of group evaluated on FV basis
rules (limiting disclosures to those
required for SMEs).

590 21: Reporting for small and medium-sized entities Part D Developments in reporting
Area IFRS for SMEs
Investment Fair value through profit or loss (where
property fair value can be measured without undue
cost or effort, otherwise as PPE under
cost-depreciation-impairment model)
Intangible assets All intangibles (including goodwill) are
amortised.
Useful life cannot exceed 10 years if
cannot be established reliably.
Revaluation model not permitted.
All internally generated research and
development expenditure is expensed.
Separate financial Investments in subsidiaries, associates
statements of and joint ventures can be held at cost
investor (less any impairment) or fair value
through profit or loss.
Consolidated and Investments in associates and joint
separate financial ventures can remain at that same value
statements or be equity accounted.
Only partial goodwill allowed, i.e. non-
controlling interests cannot be measured
at full fair value. It is amortised as for
intangible assets.
Exchange differences on translating a
foreign operation are recognised in other
comprehensive income and not
subsequently reclassified to profit or
loss.
Government No specified future performance
grants conditions:
→ recognise as income when the grant
is receivable.
Otherwise:
→ recognise as income when
performance conditions met.
Borrowing costs Expensed when incurred
Part D Developments in reporting
Full IFRSs
Fair value through OCI
Investments in equity instruments
which are investments in equity
instruments not held for trading and
irrevocable election made at inception
Financial assets wherebusiness model
is held to collect contractual cash flows
and to sell financial assets
Fair value model, or
Cost model (accounting policy choice)
Only amortised if finite useful life
No specific limit
Revaluations permitted where active
market
Capitalised when the 'PIRATE' criteria
met
Cost or under IFRS 9 (fair value through
profit or loss, or fair value through other
comprehensive income if an election was
made on purchase)
Associates and joint ventures equity
accounted.
Choice of full or partial goodwill method.
Compulsory annual test for impairment,
not amortised.
Recognised in other comprehensive
income and reclassified to profit or loss
on disposal of the foreign operation.
Grants relating to income recognised in
P/L over period to match to related costs
Grants relating to assets either:
– presented as deferred income; or
– deducted in arriving at the carrying
amount of the asset.
Capitalised (when relate to an asset
being constructed).
21: Reporting for small and medium-sized entities 591
 Area IFRS for SMEs
Impairment of Impairment test (carrying amount vs
assets recoverable amount) only required where
there are indicators of impairment
(except for inventories which are tested
annually).
Impairment losses are charged to profit
or loss.
Non-current assets held for sale tested
for impairment in the same way as other
assets.
Employee benefits Actuarial gains and losses can be
recognised immediately in profit or loss
or other comprehensive income. Actual
return on plan assets recognised in profit
or loss.
Simplified calculation of defined benefit
obligations permitted.
Full IFRSs
Annual tests for:
indefinite life intangibles
intangibles not yet available for use
goodwill
Impairment losses charged 1st to OCI re
any rev'n surplus on revalued assets
Non-current assets held for sale held
under IFRS 5 rules.
Remeasurements in other
comprehensive income only.
Projected unit credit method must be
used.

4 Consequences, good and bad 12/10

FAST FORWARD
There is no perfect solution to the Big GAAP/Little GAAP divide. It remains to be seen how well the IFRS
for SMEs will work in practice.

4.1 Likely effect

Because there is no supporting guidance in the IFRS for SMEs, it is likely that differences will arise from
full IFRS, even where the principles are the same. Most of the exemptions in the IFRS for SMEs are on
grounds of cost or undue effort. However, despite the practical advantages of a simpler reporting
framework, there will be costs involved for those moving to IFRS – even a simplified IFRS – for the first
time.

4.2 Advantages and disadvantages of the IFRS for SMEs

4.2.1 Advantages
(a) It is virtually a 'one stop shop'.
(b) It is structured according to topics, which should make it practical to use.
(c) It is written in an accessible style.
(d) There is considerable reduction in disclosure requirements.
(e) Guidance not relevant to private entities is excluded.

592 21: Reporting for small and medium-sized entities Part D Developments in reporting
4.2.2 Disadvantages
(a) It does not focus on the smallest companies.
(b) The scope extends to 'non-publicly accountable' entities. Potentially, the scope is too wide.
(c) The standard will be onerous for small companies.
(d) Further simplifications could be made. These might include:
(i) Amortisation for goodwill and intangibles
(ii) No requirement to value intangibles separately from goodwill on a business combination
(iii) No recognition of deferred tax
(iv) No measurement rules for equity-settled share-based payment
(v) No requirement for consolidated accounts (as for EU small and medium-sized entities
currently)
(vi) All leases accounted for as operating leases with enhanced disclosures
(vii) Fair value measurement when readily determinable without undue cost or effort.

Part D Developments in reporting 21: Reporting for small and medium-sized entities 593