Deciphering the Code


International Financial Reporting Standards for Small and Medium-sized Entities
Report compiled by Vishal Soni

 Basically up till now. in which everything is expected to be simple and understandable. It is not a fully comprehensive guide for the application of the standards. to allow for such accounting standards which would be easily comprehended. which then grows further to become a larger entity.000 pages of rules and guidelines over the last 10 years. is seen to be a wise decision. some information that may be relevant to a particular reader may not be comprehensive or may have been omitted. This guide is not intended as a study of all aspects of the ‘International Financial Reporting Standard for small and medium-sized entities’ and does not address the standard’s disclosure requirements. But as IFRS. 30th October.Finance For Business. but some time to see clearer picture of something. Thus the IASB has turned back and bridged the gap.  IFRS for SMEs is actually to be seen in the same light. not limited to a few members. for all its businesses. has swelled to 3.Report on IFRS for SMEs Preface "Back in 1999. a small and medium sized enterprise is the first step to begin a business with. Now kenya is leading the way in its plans to adopt a new narrowed down version of the reporting standards aimed at small and medium sized entities that has been promulgated by the IASB. all small and medium sized enterprises which were using the full IFRS were actually trying to fit into extremely large shoes. IFRS for SMEs is 230 pages long. Kenya was praised as being ahead of the pack for adopting the IFRSs.  Thus there is no reason why anyone should have any reservations what so ever. The guide is not a substitute for reading the standard when dealing with points of doubt or difficulty. taking a step forward.    This guideline looks at the key areas covered by the IFRS for SMEs and explains the basic requirements. 2009  Most of the times. but open to the public at large. the need for more complex systems and accounting standards arises. In principle. and applied.   -1- . Thereafter as the company grows. you need to take a few steps backwards. a set of guidelines governing how companies report their financial health. While every effort has been made to ensure accuracy.  Thus accounting for a small/medium sized company should be the first step. Vishal Soni. nor suit them. Kenya's decision started to look less like a blessing and more like a curse. and is expected to make reporting easier for Kenyan companies and accountants" Business Daily . towards accepting and implementing the new IFRS for SMEs. which accordingly would be the full IFRSs themselves. dubbed the 'big book'. as taking some steps backwards. which did not fit them.

Report on IFRS for SMEs Contents 1 Advantages and Impact of IFRS for SMEs on Grant Thornton .Mombasa A 3 to 5 2 Full IFRS v IFRS for SMEs B 6 to 11 C 12 to 14 3 Transition to the IFRS for SMEs -2- .

Report on IFRS for SMEs A Advantages and Impact of IFRS for SMEs on Grant Thornton Mombasa -3- .

which atleast makes it possible for us to fill. That basically implies that users of the IFRS for SMEs shall only have to be equiped with less than half the technical terms of the full IFRS. compared to almost 3000 pages of the full IFRS. makes it easier for the readers of the financial statements as they shall not be faced with jargon like numbered standards.  The glossary of terms is a 20 pages list in the IFRS for SMEs. thus no hassle of remembering and/or quoting the standard number. but rather a self explanatory heading.Mombasa Apart from the usual advantages stated in all publications.  The IFRS for SMEs shall be reviewed every 3 years compared to the full IFRS which can be reviewed several times in a year. Where as the checklist for IFRS for SMEs is about 40 pages. most audit and accouting staff shall be motivated to not only read but also easily understand the content as it has been written in clear and easily translatable language. as is the case with the full IFRS  It is organised by topics. once again evidencing the simplicity of the IFRS for SMEs. is about 50 pages. while that in the full IFRS. the following are a few benefits which our office shall gain from the adoption of the IFRS for SMEs:  The IFRS for SMEs shall be appilcable to majority of Grant Thornton's clients. I am sure that we can expect many more practical advantages as we go on using the IFRS for SMEs. which most of us shall be discouraged to even lift. Being organised by topics. as opposed to being numbered by standard.  Looking at the above advantages.  The full IFRS disclosure checklist is about a 100 pages. -4- . filling of which for most of our clients is cumbersome and impractical.  Being only 230 pages.  Where a transaction is not addressed by the IFRS for SMEs. Thus more stability and less catching up with updates every now and than. than we can refer to the appropriate international standard if we wish to but it is not required to do so by the IFRS for SMEs.Report on IFRS for SMEs Direct Advantages of the IFRS for SMEs to Grant Thornton . and if such a transaction is covered in full IFRS. thus making it easier for the firm to deal with its client's accounts.

Mombasa  The IFRS for SMEs being derived from the full IFRS. That would basiacally imply that financial statements across the EAC shall almost be standardised. is seen to be growing to make cross border trade and employment between member countries more fluid and profitable. and consistent with each other. Uganda and Tanzania are also planing to adopt the IFRS for SMEs within the next 3 years. one general exemption and five mandatory exceptions to the requirement for retrospective application. A first-time adopter of the IFRS for SMEs is an entity that presents its annual financial statements in accordance with the IFRS for SMEs for the first time. we have been only applying the relevant standards from the full IFRS and not the whole of it. in terms of application and understandability. The IFRS for SMEs just cuts down all what we weren't using in the past. as it is ment to be easier to use compared to the full IFRS. has no new challenge.  First-time adoption requires full retrospective application of the IFRS for SMEs effective at the reporting date for an entity’s first financial statements prepared in accordance with the IFRS for SMEs. regardless of whether its previous accounting framework was full IFRS or another set of generally accepted accounting principles. there are 10 specific optional exemptions. as reported by in an informal GTI poll. thus making it easier to audit for companies incorporated outside of Kenya. leaving behind a streamlined set of almost fully applicable standards.Report on IFRS for SMEs Impact of the IFRS for SMEs to Grant Thornton .  As most of our clients are categorised as SMEs. In that light. To facilitate transition. -5- .  The East African Community.

Report on IFRS for SMEs B Full IFRS v IFRS for SMEs -6- .

To account for a jointly controlled entity. held-tomaturity investments. ‘Financial instruments: Recognition and measurement’. loans and receivables and available-for-sale financial assets.Report on IFRS for SMEs Overall Difference between Full IFRS and IFRS for SMEs 1 Area Financial statements Full IFRS A statement of changes in equity is required. more complex financial instruments. and a section for other. some of which are more restrictive under IFRS for SMEs (for example. Most of the basic financial instruments are measured at amortised cost. a limited number of risks and hedging instruments are permitted). All research and development costs and all borrowing costs are recognised as an expense. 3 Investments in associates and joint ventures 4 Expense recognition 5 Financial instruments – derivatives and hedging There are two sections dealing with financial instruments: a section for simple payables and receivables. The cost and fair value model are not permitted. the complex instruments are generally measured at fair value through profit or loss. presenting a reconciliation of equity items between the beginning and end of the period. financial assets or liabilities at fair value through profit or loss. • The fair value through profit or loss model. 2 Business combinations Transaction costs are excluded under IFRS 3 (revised). -7- . and other basic financial instruments. no quantitative effectiveness test required under IFRS for SMEs. The hedging models under IFRS and IFRS for SMEs are based on the principles in full IFRS. correction of prior-period errors or changes in accounting policy. there are a number of detailed application differences. Investments in associates are accounted for using the equity method. development costs are capitalised and amortised. • The equity method. a combined statement of income and retained earnings can be presented instead of both a statement of comprehensive income and a statement of changes in equity. Research costs are expensed as incurred. Contingent consideration is recognised regardless of the probability of payment. However. Borrowing costs are capitalised if certain criteria are met. However. Transaction costs are included in the acquisition costs. payment of dividends. distinguishes four measurement categories of financial instruments – that is. IFRS for SMEs Same requirement.Contingent considerations are included as part of the acquisition cost if it is probable that the amount will be paid and its fair value can be measured reliably. However. if the only changes to the equity during the period are a result of profit or loss. but only when specific criteria are met. IFRS for SMEs: An entity may account of its investments in associates or jointly controlled entities using one of the following: • The cost model (cost less any accumulated impairment losses). The cost and fair value model are not permitted except in separate financial statements. either the proportionate consolidation method or the equity method are allowed.

Report on IFRS for SMEs Area 6 Non-financial assets and goodwill Full IFRS For tangible and intangible assets. These intangibles are tested for impairment only when there is an indication. All intangible assets. actuarial gains or losses can be recognised immediately or amortised into profit or loss over the expected remaining working lives of participating employees. Assets held for sale are not covered. -8- . there is an accounting policy choice between the cost model and the revaluation model. which means that the use of an accrued benefit valuation method (the projected unit credit method) is required if the information that is needed to make such a calculation is already available. requires noncurrent assets to be classified as held for sale where the carrying amount is recovered principally through a sale transaction rather than though continuing use. The latter are not amortised and an annual impairment test is required. including goodwill. the decision to sell an asset is considered an impairment indicator. Requires immediate recognition and splits the expense into different components. ‘Investment property’. ‘Non-current assets held for sale and discontinued operations’. simplifications are permitted in which future salary progression. There is no distinction between assets with finite or infinite lives. 7 Employee benefits – defined benefit plans ‘Employee benefits’. or if it can be obtained without undue cost or effort. The amortisation approach therefore applies to all intangible assets. IFRS for SMEs The cost model is the only permitted model. offers a choice of fair value and the cost method. Investment property is carried at fair value if this fair value can be measured without undue cost or effort. the useful life of an intangible asset is either finite or indefinite. The circumstance-driven approach is applicable. ‘Intangible assets’. The use of an accrued benefit valuation method (the projected unit credit method) is required for calculating defined benefit obligations. Goodwill and other intangibles with indefinite lives are reviewed for impairment and not amortised. future service or possible mortality during an employee’s period of service are not considered. are assumed to have finite lives and are amortised. If not.

No such exemption.Report on IFRS for SMEs 8 Area Income taxes Full IFRS A deferred tax asset is only recognised to the extent that it is probable that there will be sufficient future taxable profit to enable recovery of the deferred tax asset. No deferred tax is recognised upon the initial recognition of an asset and liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit at the time of the transaction. It should be measured using the probability-weighted average amount of all the possible outcomes. management will record the liability measured as either a single best estimate or a weighted average probability of the possible outcomes. Management recognises the effect of the possible outcomes of a review by the tax authorities. There is no specific guidance on uncertain tax positions. There is no probable recognition threshold. if the likelihood is greater than 50%. -9- . In practice. The net carrying amount of deferred tax asset is likely to be the same between full IFRS and IFRS for SMEs. IFRS for SMEs A valuation allowance is recognised so that the net carrying amount of the deferred tax asset equals the highest amount that is more likely than not to be recovered.

10 - . Investments in associates • Guidance on significant influence. Non-financial assets • Extensive guidance on net realisable value. Income and expenses Revenue • Extended warranties. • A business combination achieved without the transfer of consideration. Investments in joint ventures • Contractual arrangements. • Consequences when an investment ceases to be an associate. • Transactions with minorities. • Distinction between advertising and non-advertising barter transactions as included in SIC 31. Government grants • Non-monetary government grants. . • Impairment losses. • Deferred tax recognised after initial purchase accounting. • Qualifying hedging instruments and qualifying hedged items. • Operators of joint ventures. • Detail guidance on derecognition of financial assets. • Non-controlling interests. • Employee benefits. • Indemnification assets. • Repayment of government grants Financial assets and liabilities • Derivatives and embedded derivatives. • Step acquisitions. • Shared-based payments. • Government assistance. • Profit and loss from upstream and downstream transactions. • Exceptions to proportionate consolidation and equity method. • Reclassifications between categories of financial instruments. • Acquisition of an investment in an associate. • Re-acquired rights.Report on IFRS for SMEs Areas that are in the Full IFRS but Excluded in IFRS for SMEs Business combinations • Subsequent adjustments to assets and liabilities (re-measurement period). Consolidation • Loss of control. • Transfer of assets from customers (IFRIC 18).

Foreign currencies • Tax effects of all exchange differences. Specialised activities • Government grants related to biological assets.Report on IFRS for SMEs Investment property • Extensive guidance on transfers to and from investment property. • Reassessment of unrecognised deferred tax assets. Impairment of non-financial assets • Guidance to estimate value in use. Employee benefits • Defined benefit plans that share risks between various entities under common control. • Deferred tax arising from a business combination. • Acquisition by way of government grants. Discontinued operations and assets held for sale • Segment reporting (IFRS 8). plant and equipment • Exchange of assets. • Asset ceiling test. • Earnings per share (IAS 33). Income taxes • Assets carried at fair value. • Detailed guidance on the measurement of defined benefit obligation. • Corporate assets. • Exchange differences on deferred foreign tax liabilities or assets. • Scope and elements of cost of exploration and evaluation assets (IFRS 6). Leases • Implementation guidance. • Evaluating the substance of transactions involving the legal form of a lease (SIC 27). • Operating leases – incentives (SIC 15). • Revaluation. • Inability to determine fair value reliably. . • Current and deferred tax arising from share-based payment transactions. • Disposals. Intangible assets other than goodwill • Disposals.11 - . • Interim financial reporting (IAS 34). Property.

Report on IFRS for SMEs C Transition to the IFRS for SMEs .12 - .

P. extractive activities. xi. Adjustments arising from the first-time application of the IFRS for SMEs are recognised directly in retained earnings (or. To facilitate transition.accounting estimates. compound financial instruments. v.  Comparative information is prepared and presented on the basis of the IFRS for SMEs. the concessions on first-time adoption are not available. 1 general exemption and 5 mandatory exceptions to the requirement for retrospective application.  If management chooses not to apply the IFRS for SMEs in some future period and then subsequently reverts to it. arrangements containing a lease. iv. if appropriate.E  The general exemption from retrospective application is on grounds of impracticability. provisions relating to separate financial statements. vi. cumulativetranslation differences.13 - .  The mandatory exceptions that a first-time adopter of the IFRS for SMEs must take relate to the accounting that it followed previously for: i. deferred income tax.Report on IFRS for SMEs Transition to the IFRS for SMEs First-time adoption  A first-time adopter of the IFRS for SMEs is an entity that presents its annual financial statements in accordance with the IFRS for SMEs for the first time. These relate to: i. decommissioning liabilities included in the cost of P. iii. vii. share-based payment transactions. iii. ii. measuring of non-controllinginterests. . ii. another category of equity) at the date of transition to the IFRS for SMEs. business combinations. fair value as deemed cost for certain non-current assets. there are 12 specific optional exemptions. ix. The glossary defines ‘impracticable’ as being ‘when the entity cannot apply a requirement after making every reasonable effort to do so’. derecognition of financial assets and financial liabilities. viii. xii. hedge accounting.discontinued operations and v.  There are 12 optional exemptions from the requirement for retrospective application. arrangements. regardless of whether its previous accounting framework was full IFRS or another set of generally accepted accounting principles. iv.  First-time adoption requires full retrospective application of the IFRS for SMEs effective at the reporting date for an entity’s first financial statements prepared in accordance with the IFRS for SMEs. revaluation as deemed costs for certain non-current assets. x.

. iii. financial performance and cash flows. Reconciliation of profit/loss  The above reconciliations can also be used to distinguish the corrections of any errors discovered in the previous financial reporting framework. Reconciliations of its equity.  If financial statements were not presented for an entity for previous periods. how the transition from its previous reporting framework to this IFRS affected its reported financial position.  Inorder to explain the transition.14 - . Description of the nature of each change in accouting policy ii. the entity will have to include the following in its financial statements: i. in the form of reconciliations. it shall disclose that fact in its first financial statements that confirm to this IFRS. to the extent practicable.Report on IFRS for SMEs  An entity shall also have to explain.