introduction to and scope of the ifrs for sme’s · the views expressed are those of the ... •...

Introduction to and Scope of the IFRS for SME’s

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Welcome

• What is an SME in terms of the IFRS for SMEs?

• Presenter:

• Anton van Wyk M. Com CA (SA)

• [email protected]

• 082-805-1593

mailto:[email protected]

Small and Medium-sized Entities

• Basis of this lecture is the International Financial Reporting Standard for Small and

Medium-sized Entities (IFRS for SMEs) published by the International Accounting

Standards Board (IASB) in July 2009

• Certain amendments to the existing IFRS for SMEs

• Amendments published May 2015

• Amendments effective 1 January 2017 only

• Basic principle: IFRS for SMEs to be applied to the general purpose financial

statements of entities that do not have public accountability

• This module investigates the characteristics of SMEs as defined by the IASB

The IFRS for SMEs (July 2009)

• Includes mandatory requirements, and other non-mandatory material

• Non-mandatory material:

• Preface to IFRS for SMEs

• Implementation guidance (including illustrative AFS and disclosure checklist)

• Basis for conclusions

• Dissenting opinion(s)

• Appendices to Section 21 Provisions and Contingencies, Section 22 Liabilities

and Equity and Section 23 Revenue

• Questions and answers developed by the SME Implementation Group (SMEIG)

The objective of AFS

• The objective of general purpose financial statements of a small or medium-

sized entity is to provide information about the entity’s financial position (“balance

sheet”), performance (“income statement”) and cash flows (“cash flow statement”),

that is useful for economic decision-making by a broad range of users…

• Owners not involved in managing the business

• Potential owners/investors

• Existing and potential lenders

• Other creditors

…who are not in a position to demand reports tailored to meet their particular

information needs

Scope of IFRS for SMEs

• May only be used by SMEs

• Decisions on which entities are required/permitted to use the IFRS for SMEs rest

with legislative and regulatory authorities and standard-setters in individual

jurisdictions

• The IASB did not prescribe quantified size criteria to help determine this

decision, hence certain local jurisdictions may do so to assist

• In South Africa, the Companies Act, Act number 71 of 2008, determines the

calculation of the Public Interest Score (PIS), which will be discussed later in this

lecture…

“PUBLIC INTEREST SCORE”

IASB definition of “SME”

• Entities that:

• Do not have public accountability; and

• Publish general purpose financial statements for external users

• What is public accountability?

• Public accountability exists if:

• Debt or equity instruments are traded in a ‘public market’ or it is in the process of issuing such instruments for trading in a public market (e.g. domestic or foreign stock exchange, an OTC market, local and regional markets); OR

• It holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses (typically banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks)

Public accountability

• What is a “public market”?

• Not restricted to recognised or regulated stock exchanges

• All markets that bring together:

• Entities who seek capital; and

• Investors who are not involved in managing the entity

• Public markets must be accessible by a broad group of outsiders

• Trading is an important part of public accountability (e.g. shares for sale may

have to be advertised publicly before being sold, but the lack of trading in those

shares means that there is no public accountability; or shares could have a

quoted price but there is no public market in which they are traded (buyers and

sellers meet directly to trade), which also means there is no public

accountability

Public accountability (2)

• Do all entities holding assets in a fiduciary capacity, have public accountability?

• No – only if held for a broad group of outsiders who cannot demand reports, and

as a main business line

• What does that imply?

• Judgement is required

• Accountability to those existing and potential resource providers and others

external to the entity who make economic decisions but are not in a position

to demand reports tailored to meet their particular information needs

• E.g. a subsidiary holding assets on behalf of only group companies would not

typically have public accountability as it doesn’t hold the assets on behalf of a

broad group of outsiders, and group companies may require specific reports

South Africa: Public Interest Score

• Companies Regulations (effective 1 May 2011) determine in Regulation 26(2) the following:

• “For the purposes of regulations 27 to 30, 43, 127 and 128, every company must calculate its “public interest score” at the end of each financial year, calculated as the sum of the following –• a) a number of points equal to the average number of employees of the company

during the financial year;

• b) one point for every R1 million (or portion thereof) in third party liability of the company, at the financial year-end,

• c) one point for every R1 million (or portion thereof) in turnover during the financial year; and

• d) one point for every individual who, at the end of the financial year, is known by the company –

• i. in the case of a profit company, to directly or indirectly have a beneficial interest in any of the company’s issued securities; or

• ii. in the case of a non-profit company, to be a member of the company, or a member of an association that is a member of the company.

What is the P.I.S. used for?

• To assist in determining whether an entity should be audited or independently reviewed in terms of the Companies Act, Act number 71 of 2008

• All entities with public accountability (e.g. state-owned entities and public companies) must be audited and must use full IFRSs in their financial statements

• Profit and non-profit entities to be audited/independently reviewed based on their public interest score (PIS)

• Public interest score also indicates which financial reporting standards (FRS) should be used, also considering whether entity’s financial statements are independently or internally compiled

• Full IFRSs; or

• IFRS for SMEs; or

• Micro-GAAP etc. Not the focus of this lecture

IASB definition of “SME” (2)

• Entities that:

• Do not have public accountability; and

• Publish general purpose financial statements for external users

• General purpose financial statements

• Directed towards the common information needs of a wide range of users, for example, shareholders, creditors and employees

• Specific-purpose financial statements are not necessarily general purpose financial statements too

• E.g. for the use of owner-managers;

• For tax reporting;

• For non-securities regulatory filing purposes etc.

Statement of compliance

• An entity whose financial statements comply with the IFRS for SMEs must make

an explicit and unreserved statement of such compliance in the notes to the

financial statements

• Any entity who has public accountability, is prohibited from making this statement,

even if it is required by law to apply the IFRS for SMEs in its jurisdiction

• What does the statement look like?

• “These financial statements have been prepared in accordance with the

International Financial Reporting Standard (IFRS) for Small and Medium-sized

Entities (SMEs) issued by the International Accounting Standards Board.”

Group issues

• A subsidiary whose parent uses full IFRSs (or that is part of a consolidated group

that uses full IFRSs) is not prohibited from using the IFRS for SMEs for preparation

of its own financial statements, as long as the subsidiary:

• Does not have public accountability; or

• Does not hold fiduciary assets on behalf of a broad group of outsiders

• Decision based on its OWN circumstances, and not those of parent/group

• Separate financial statements of a parent, prepared in addition to consolidated

financial statements may be presented in terms of the IFRS for SMEs, even if it

prepares consolidated financial statements in terms of full IFRSs

• The same considerations as above will apply

In summary…

• Full IFRSs are designed to apply to the general purpose financial statements and

other financial reporting of all profit-oriented entities.

• The IFRS for SMEs is intended to apply to the general purpose financial

statements only of entities that do not have public accountability.

Test your knowledge (1)

Question 1

In which of the following situations can an entity that does not have public accountability claim compliance with the IFRS for SMEs in its financial statements?

(a) The entity prepares its financial statements in accordance with local tax requirements that are substantially the same as the IFRS for SMEs.

(b) The entity prepares its financial statements in accordance with local tax requirements that are, except in name, word-for-word the same as the IFRS for SMEs.

(c) The entity prepares its financial statements in accordance with local tax requirements that are, except in name, word-for-word the same as full IFRSs.

(d) In both cases (b) and (c) above.


Question 2

In which of the following situations can an entity that does not have public

accountability claim compliance with the IFRS for SMEs in its financial statements?

(a) The entity prepares its financial statements in accordance with local GAAP that is

substantially the same as the IFRS for SMEs.

(b) The entity prepares its financial statements in accordance with local GAAP that is,

except in name, word-for-word the same as the IFRS for SMEs.

(c) The entity prepares its financial statements in accordance with the IFRS for SMEs.

(d) In both cases (b) and (c) above.


Question 3

Which of the following entities must not describe its financial statements as being in compliance with the IFRS for SMEs even if it is required by law to prepare its financial statements in accordance with the IFRS for SMEs?

(a) the entity is a subsidiary whose parent uses full IFRSs.

(b) the entity is an associate of an investor that uses full IFRSs.

(c) the entity is a jointly controlled entity whose venturers (investors) use full IFRSs.

(d) cases (a), (b) and (c) above.

(e) none of the cases (a)–(c) above.


Question 4


(a) an entity that holds assets in a fiduciary capacity for a broad group of outsiders as its primary business (e.g. a bank).

(b) an entity that operates two divisions in each of its retail outlets—a supermarket and a bank (which holds assets in a fiduciary capacity for a broad group of outsiders)). Both divisions are primary businesses of the entity.

(c) an entity that operates primarily as supermarket chain. However, it also enters into insurance contracts (as the insurer) with its customers. The entity’s short-term insurance and life insurance operations are small relative to the size of its supermarket operations and are operated from the entity’s supermarkets.

(d) an entity holds assets in a fiduciary capacity for a broad group of outsiders for reasons incidental to a primary business(e.g. a law firm that is legally required to hold in trust advances from its clients for legal services to be rendered).

(e) cases (a), (b) and (c) above.

(f) cases (a)–(d) above.


Question 5


(a) an entity whose shares are traded in a public market (e.g. a local securities exchange).

(b) an entity whose debt instruments (but not its shares) are traded in a public market (e.g. a local securities exchange).

(c) an entity that is in the process of issuing its shares for trading in a public market (e.g. a local securities exchange).

(d) an entity that is in the process of issuing its debt instruments (but not its shares) for trading in a public market (e.g. a local securities exchange).

(e) cases (a) and (b) above.

(f) cases (a)–(d) above.

Questions

• Should you have any questions, relating to this lecture and its content, please

direct them to the following e-mail address, with the subject of the e-mail clearly

indicating “Scope of the IFRS FOR SMEs”:

[email protected]

• We trust you have enjoyed this module.

mailto:[email protected]

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