IFRS FOR SMALL AND MEDIUM-SIZED ENTITIES (SMEs)

Content:
 IFRS for SMEs
 Stand Alone Document
 Key difference Between IFRS FOR SMEs and Full IFRS
 Consolidated and separate financial statements
 Change in accounting policy and retrospective restatements
 Investment in associates and jointly controlled entities
 Investment property
 Business combination
 Government grant
 Employee benefits
 Foreign Currency Translation
 Insurance Companies
 Financial Statement of Life Insurance Companies
 Banks
 Statement of financial position
 Profit and Loss Account
 Statement of Comprehensive Income
 Lending to Financial Statement
 Borrowing
 Deposit and other accounts
 Mutual Funds
 Mutal funds: statement of Comprehensive Income
 Movement in unit holders’ funds
 IAS 26: Retirement Benefit Plans
 Net asset available for benefits
 Change in Net Asset
IFRS FOR SMALL AND MEDIUM-SIZED ENTITIES (SMEs)
Introduction:
International accounting standards are written to meet the needs of investors in international capital markets.
Most companies adopting IFRSs are listed entities. The IASB has not stated that IFRSs are only aimed at
quoted companies, but certainly the majority of adopters are large entities. In many countries IFRSs are
used as national GAAP which means that unquoted small and medium- sized entities (SMEs) have to apply
them. SMEs are defined as entities that do not have public accountability* and publish general purpose
financial statements for external users.
An entity has public accountability * if:
(a) Its 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; or
(b) It holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary
businesses (most banks, insurance companies, securities brokers/dealers, mutual funds
and investment banks would meet this second criterion).
The users of financial statements of SMEs are different from the users of the general-purpose financial
statements. The only ‘user groups’ that use the financial statements of an SME are normally:
 Its owners who are not involved in managing the business;
 Existing and potential creditors and
 Credit rating agencies.
The SME is often owned and managed by a small number of entrepreneurs, and may be a family- owned and
family-run business. Large companies, in contrast, are run by professional boards of directors, who must
be held accountable to their shareholders.

Considerations in developing standards for SMEs

The aim of developing a set of accounting standards for SMEs is that they allow information to be presented
that is relevant, reliable, comparable and understandable. The information presented should be suitable
for the uses of the managers and directors and any other interested parties ofthe SME.
Additionally, many of the detailed disclosures within full IFRSs are not relevant and the accounting standards
should be modified for this. The difficulty is getting the right balance of modification, too much and the
financial statements will lose their focus and will not be helpful to users.

IFRS for SMEs

The currently applicable IFRS for SMEs was issued by IASB in May 2015. It is a small Standard
(approximately 250 pages) that is tailored for small companies. While based on the principles in full IFRS
Standards, the IFRS for SMEs Standard is stand-alone. It is organized by topic. The IFRS for SMEs Standard
reflects five types of simplifications from full IFRS Standards:
 Some topics in full IFRS Standards are omitted because they are not relevant to typical
SMEs;
 Some accounting policy options in full IFRS Standards are not allowed because a more
simplified method isa available to SMEs;
  Many of the recognition and measurement principles that are in full IFRS Standards havebeen
simplified;
 Substantially fewer disclosures are required;
The IFRS for SMEs does not address the following topics:
 Earnings per share (i.e., there is no equivalent to IAS 33);
 Interim accounting (i.e., there is no equivalent to IAS 34);
 Segment reporting (i.e., there is no equivalent to IFRS 8);
The omission of equivalent rules to those in IAS 33, IAS 34 and IFRS 8 is not surprising as they are only
relevant to listed entities.

Stand-alone document
The IFRS for SMEs is a stand-alone document. This means that it contains all of the rules to be followed by
SMEs without referring to other IFRSs. For example, it sets out rules for property, plant and equipment without
specifying that the rules are similar or dissimilar to those found in IAS 16.
In the following pages, we provide an overview of the sections of the IFRS for SMEs and often refer to
similarity or difference to equivalent other IFRSs. This is not what the IFRS for SMEs does but we adopt the
approach to make it easier for you to gain an understanding of the main features of the standard.
The IFRS for SMEs is derived from rules in other IFRS. You will note that it uses the same terminology and
that many of the rules are identical. However, in several cases, the rules in otherIFRSs from which the IFRS
for SMEs derives have been changed whereas the equivalent rules inthis standard have not been changed.
For example, the rules on joint ventures are based on IFRS11 which you covered earlier. You should not
interpret this as meaning that the standard is out ofdate. It simply means that there is a difference between
the rules for SMEs and those followed byother entities. Changes to the main body of standards will not
necessarily result in a revision to the IFRS for SMEs.

KEY DIFFERENCES BETWEEN IFRS FOR SMEs & FULL IFRS

The key differences between IFRS for SMEs and full IFRS are summarized below: Financial statement presentation

IFRS for SMEs IFRS

Sing/e statement of income and retainedearnings.
The IFRS also require an entity to present the
IFRS for SMEs require an entity to present the statement
of comprehensive income by either a single statement or statement of comprehensive income by either
a single statement or two statement
two statement approach. Additionally, IFRS for SMEs also
approach. However, IFRSs do not permit an
permit an entity to present a combined statement of
entity to present a combined statement of
income and retained earnings instead of the statement of
income and retained earnings instead of the
comprehensive income and statement of changes in equity
statement of comprehensive income and
when changes in equity during the period arise only from
statement of changes in equity.
profit or loss, payment of dividends, correctio of prior
period errors and changes in accounting policy.
Consolidated and separate financial statements

IFRS for SMEs IFRS

Combined financial statements

The IFRS for SMEs defines combined financial statements Full IFRSs do not include definition or principles
as a single set of financial statements of two or more for preparation of combined financial
entities controlled by a single investor. Although, the statements.
IFRS for SMEs does not require combined financial
statements to be prepared, it does provide basic
principles when anentity voluntarily prepares combined
financial statements in compliance with the IFRS for SMEs.

Change in accounting policy and retrospective restatements

IFRS for SMEs IFRS

Third balance sheet
IFRS for SMEs does not require presentation of three When financial statements are restated
statements of financial position when financial/ retrospectively, IFRSs require presentation of three
statements are restated retrospectively. statements of ‘financial position.
Financial Instruments

IFRS for SMEs IFRS

Scope
IFRS for SMEs distinguishes between basic and The IFRSs do not provide distinction between basic
complex financial/ instruments. Section 11 and complex financial/ instruments. Accordingly,
establishes measurement and repo din$ there are no separate requirements for
requirements for basic financial instruments, - recognition and measurement based on
Section 12 deals with complex financial instruments. complexity of the financial instatements.
If an entity enters into only basic financial/
instruments transactions then section 12 is not
applicable.
 IFRS for SMEs IFRS

Accounting policy choice

An entity has a choice of applying either:
• The requirements of both Sections of 11 and 12 of IFRS The IFRSs do not provide an accounting po/icy
for SMEs in full, - or
choice for recognition and measurement of
• Recognition and measurement requirements of full IFRS
financial instruments.
(IAS 39) and disclosure requirements of IFRS for SMEs
under Sections 11 and 12.

IFRS for SMEs IFRS

Hedge Accounting
IFRS for SMEs permits specific types of hedging that SMEs Full IFRSs do not restrict hedge accounting for
are likely to use and only allows hedge accounting for limited number of risks and hedging
limited number of risks and hedging instruments. instruments.
Consequently, hedge accounting is not permitted under
IFRS for SMEs when hedge is done by using debt
instruments such as a foreign currency loan, or an option-
based hedging strategy.

Disclosures
IFRS for SMEs does not require disclosures to enable
evaluation of nature and extent of risks arising from
financial instruments to which entity is exposed at the end
of the reporting period.
IFRSs require disclosures to enable
evaluation of nature and extent of risks
arising from financial instrument to which
entity is exposed at the end of the reporting
period.

Investment in associates and jointly controlled entities

IFRS for SMEs IFRS

Accounting policy choice for associates and jointlycontrolled

entities
IFRS /'or SMEs does not permit the cumulative amount of The IFRSs require investments in associates
exchange differences relating to a foreign operation, that
and jointly controlled entities to be accounted
were previously recognized in other comprehensive
for using the equity method in an investor’s
income, from being reclassified from equity to profit or
primary financial statements.
loss (as a reclassification adjustment) when the Main or loss
on disposal of foreign operation is recognized.
Investment property
IFRS for SMEs
Measurement after initial recognition:
Investment property whose fair value can be
measure reliably without undue cost or effort shall
be measured at fair value at each reporting date.
All other investment property (whose fair value
cannot be measured reliably without undue cost
and effort) shall be measured using cost model.
Disclosures
Reconciliation of the carrying amount at the
beginning$ and end of the reporting period is
notrequired for the prior period.
property, plant and equipment
IFRS for SMEs
Disclosures
Reconciliation of the carrying amount at the
beginning and end of the reporting period is not
required for the prior period.
Non-current assets held for sale
IFRS for SMEs
Presentation and measurement
The IFRS for SMEs does not require a non-current
asset held for sale to be recognized at the lower of
carrying amount or fair value less cost to sell and
presented separately as in the statement of
financial position.
Intangible assets
IFRS for SMEs
Useful life and amortization:
The intangible assets must have a determinable
useful life, whereas assets with indeterminable
useful life are considered to have ten years of
useful life.
IFRS
IFRS allow an accounting policy choice of either
fair value through profit or loss or a cost-
depreciation-impairment model (with some limited
exceptions). An entity /'o/losing the cost-
depreciation-impairment model is required to
provide supplemental disclosure of the fair value of
its investment property.
IFRS require comparative information in respect
of previous period for reconciliation of the carrying
amount at the beginning and end of the reporting
period.
IFRS
IFRSs require comparative information in respect
of previous period for reconciliation of the carrying
amount at the beginning and end of the reporting
period.
IFRS
The IFRS is require a non-current asset held for sale
(including the non-current assets of a
discontinued operation) to be carried at the lower
of it carrying amount and fair value less estimated
costs to sell the asset. A con- current asset
classified as held for sale and the assets of a
disposal group classified as held for sale are
required to be presented separately from other
assets in the statement of financial position.
IFRS
IFRSs require intangible assets with indefinite life to
be carried at cost less impairment loss, if any and
such assets are not depreciated.
 IFRS for SMEs IFRS

Disclosures

Reconciliation of the carrying amount at the IFRSs require comparative information

beginning and end of the reporting period is not in respect of previous period for
required for the prior period. reconciliation of the carry/ng amount at the
beginning and end of the reporting
period.
Development expenditure
The development and research expenditures are IFRSs require development costs which
always recorded as an expense. meet the specified condition to be
capitalized as an asset.

Business combination
IFRS for SMEs IFRS

Cost of a business combination

The cost of a business combination includes the fair
value of assets given, liabilities incurred or
assumed and equity instruments issued by the
acquirer, in exchange for the control of the
acquiree, plus any directly attributable costs.
The IFRSs excludes directly attributable costs
from the cost of a business combination
and such costs are required to be recognized
in profit or loss when incurred.

Goodwill
After initial recognition, the goodwill is measured at
cost less accumulated amortization and any
accumulated impairment losses. Goodwill is
amortized over its useful life, which is presumed to
be: I0 years if the entity is unable to make a
reliable estimate of the useful life.
Under the IFRSs, the goodwill acquired
in a business combination is not
amortized. It is required to be subject to
impairment testing at least annually
and, additionally, when there is an
indication of impairment

Provision and Contingencies

IFRS for SMEs IFRS

Disclosures of provisions
IFRS for SMEs does not require an entity to IFRS require comparative information for
disclose comparative information in the required the previous period in the required
disclosures for provisions. disclosures for provision.
Government grant

IFRS for SMEs IFRS

Recognition
IFRS for SMEs does not require or permit an entity to The IFRSs require government grants to be
match the grant with the expenses for which it is recognized as income over the periods
intended to compensate or the cost of the asset that necessary to match them with the related
it is used to finance. costs for which they are intended to
compensate, on a systematic basis.
(IFRS for SMEs - 24.4)
Measurement
All government grants, including non-monetary The lFRSs permit an entity that receives a
Government grants, must be measured at the fair non-monetary grant to either measure both
value of the asset received or receivable. the asset and the grant at a nominal amount
(often zero) or at the fair value of the non-
monetary asset.

Borrowing costs
IFRS for SMEs IFRS

Recognition IFRSs require borrowing costs directly

All borrowing costs shall be recognized as an expense attri6utab/e to the acquisition, construction
in profit or loss. or production of a qualifying asset to be
capitalized as a part o/'the cost of' the asset.

Employee benefits

IFRS for SMEs IFRS

Actuarial gains and losses

Actuarial gains and losses on liabilities are recognized
in full in profit or loss or in other comprehensive The IFRS is require recognition of actuarial
income (without recycling) in the period in which they gains and losses for the reporting period in
occur. the other comprehensive income.

Foreign Currency Translation

IFRS for SMEs IFRS

Exchange differences relating to a foreign

Operation:
IFRS for SMEs does not permit the cumulative
amount of exchange differences relating to a foreign
operation, that were previously recognized in other
comprehensive income, from being reclassified from
equity to profit or loss (as a reclassification
adjustment) when the gain or loss on disposal of
foreign operation is recognized.
The lFRSs require the cumulative amount of
exchange differences relating to a foreign
operation, that were previously recognized
in other comprehensive income, from being
reclassified from equity to pro/'it or loss (as
a reclassification adjustment) when the gain
or loss on disposal is recognized.
Note: The students are advised to refer to the latest Financial Statements of SMEs for further
understanding of applicable formats

INSURANCE COMPANIES

Introduction to accounting by insurance companies

Insurance companies, in Pakistan, are subject to the Insurance Ordinance, 2000 and Insurance
Rules, 2017 which requires all insurance companies to prepare the Financial Statements as
follows:
In the case of a life insurer, -
• Statement of Financial Position
• Statement of Comprehensive Income
• Statement of Cash Flows
• Statement of Changes in equity
In the case of a non-life insurer,
• Statement of Financial Position
• Statement of Comprehensive Income
• Statement of Cash Flows
• Statement of Changes in equity

Insurance companies must also pay regard to the requirements of the Companies Act, 2017 in
so far as they are not inconsistent with the Insurance Ordinance, 2000. Therefore, insurance
companies must prepare financial statements in accordance with IFRS just like any other type of
company.

Summary
All insurance companies operating in Pakistan must prepare their accounts in accordance with
the following:
 the Companies Act, 2017,
 the Insurance Ordinance, 2000,
 Insurance Rules, 2017, and
 IFRS as notified in the official Gazette by the Securities and Exchange Commission of
Pakistan for listed companies.
FINANCIAL STATEMENT OF LIFE INSURANCE COMPANIES
`
 BANKS

Introduction to accounting by banks

Section 34 of the Banking Companies Ordinance 1962 requires that every bank incorporated in Pakistan must
prepare financial statements in accordance with the second schedule of the act.
The second schedule requirements are now published as in BPRD (Banking Policy and Regulation Department)
circular No. 2 of 2018 issued by the State Bank of Pakistan.
This also applies to banks incorporated overseas in respect of all business transacted through branches in
Pakistan.
Banks must also pay regard to the requirements of the Companies Act, 2017 in so far as they are not
inconsistent with the Banking Companies Ordinance 1962. Therefore, banks must prepare financial
statements in accordance with IFRS just like any other type of company.
 Summary
All banks operating in Pakistan must prepare their accounts in accordance with the following:
 Directives issued by the State Bank of Pakistan,
 The Banking Companies Ordinance 1962,
 IFRS as notified in the official Gazette by the Securities and Exchange Commission ofPakistan
for listed companies under section 234(3)(i) of the Companies Act, 2017.
This is the case whether the bank is incorporated in Pakistan or outside Pakistan and whether itlisted or no.

BPRD circular No.2 OF 2018

BPRD circular No. 2 of 2018 contains formats that must be used when preparing financial statements. The
formats for the statement of financial performance (profit and loss account) andstatement of financial
position (balance sheet) are shown in the following sections.

Statement of financial position

Profit and Loss account
Statement of Comprehensive Income
Other statements and disclosures
Banks are subject to disclosure requirements that require them to provide information on accounting issues
specific to banks.
 Cash and Balance with Treasury banks
 Lending to financial institutions
 Investments
 Advances
 Borrowings
 Deposits and other accounts.

Disclose information about the extent and nature of the deposit accounts, including significant
terms and conditions that may affect the amount, timing and certainty of future cash flows
Lending to financial statement
n
.
Borrowing
 Deposit and other accounts

MUTUAL FUNDS
Introduction to mutual funds
The mutual funds industry is regulated by The Securities and Exchange Commission of Pakistan
(SECP).
A mutual fund is a collective investment scheme, which specializes in investing a pool of money
collected from investors for the purpose of investing in shares, bonds and other securities. This
gives small investors access to professionally managed, diversified portfolios of equities, debt
instruments etc. that they would otherwise not be able to achieve.
Mutual funds are operated by asset management companies (AMCs). An AMC is a public limited
company registered under Companies Act, 2017.
Investors purchase units (shares) and receive a share of income based on the number of units
(shares) which they own. The value of the units (shares) changes on an ongoing basis so the
holders are exposed to capital gain or loss.
The value of a unit (share) is based on the net asset value at the date of the valuation and the
number of units available.
Types of mutual funds
There are basically two types of mutual funds:
Open-ended mutual funds:
 Open-ended mutual funds (also called unit trusts) are funds which continually issueor
redeem new units on demand.
 Units may be purchased or redeemed at the prevailing net asset value.
 Trading is through a management company which announces offer and redemptionprices
daily.

Closed-ended mutual funds:

 Closed-ended mutual funds have a fixed number of units which are quoted on an
exchange.
 Units are traded on the exchange based on price determined by market forces whichis
closely related with the Net Asset Value per unit.

Accounting issues

A mutual fund is an entity controlled by the AMC that manages it. In the absence of rules to the contrary, an AMC which
managed a fund would classify it as a subsidiary and therefore have consolidate it.
IFRS 10 contains an exemption from the general requirement to consolidated controlled entities in this circumstance.
An investment entity must not consolidate the entities that it controls but it must measure them at fair value through
profit or loss in accordance with IFRS 9: Financial Instruments.

Nature of the units

Units in open ended mutual funds are redeemable on demand. This means that in the absence of further guidance they
would be classified as liabilities in accordance with the definition of liabilities found in IAS 32: Financial instruments:
Presentation. In that case, the statement of financial position of such a fund would have no equity.
IAS 32 contains rules under which instruments of this kind are classified as equity. It describes such instruments as puttable
instruments and rules that they should be classified as equity as long as they meet certain criteria. These criteria are
designed to include units of mutual funds but prevent other liabilities from being classified as equity when it would not be
appropriate to do so.
Mutal funds: statement of Comprehensive Income
Other statements and disclosures:
 Movement in unit holders’ funds

IAS 26: RETIREMENT BENEFIT PLANS

Scope
IAS 26 complements IAS 19, Employee Benefits which is concerned with the determination of the cost of
retirement benefits in the financial statements of employers.
IAS 26 applies to the reports of retirement benefit plans whether they are:
 Defined contribution plans; or
 Defined benefit plans; and
 Regardless of:
 Whether a fund has a separate legal identity; or
 Whether there are trustees.
All other IFRS apply to the reports of retirement benefit plans to the extent that they are not superseded
by IAS 26.

Insured benefits
Retirement benefit plans with assets invested with insurance companies are within the scope of IAS 26
unless the contract with the insurance company is in the name of a specified participant or a group of
participants and the retirement benefit obligation is solely the responsibility of the insurance company.

Outside scope
IAS 26 does not deal with other forms of employment benefits such as employment termination
indemnities, deferred compensation arrangements, long-service leave benefits, special early retirement
or redundancy plans, health and welfare plans or bonus plans.
Government social security type arrangements are also excluded from the scope of IAS 26.

Definitions
Retirement benefits are arrangements whereby an entity provide benefits for its employees on after
termination of services (either in the foam of an annual income or Lum sump) when such benefit, or the
employer’s contribution toward them, can be determined or estimate in advance of retirement from the
provision of document or foam the entity’s practice.

A retirement benefit plan is a reporting entity separate from the employers of the participants in the
plan.
Retirement benefit plans are known by a variety of names, for example, pension schemes,
superannuation schemes; or retirement benefit schemes'

Valuation of plan assets

Retirement benefit plan investments are carried at fair value. The fair value of marketable securities is
market value.
Where an estimate of fair value is not possible for plan asset the reason why this is the case must be
disclosed.
Securities that have a fixed redemption value and that have been acquired to match the obligations of
the plan may be carried at amounts based on their ultimate redemption value assuming a constant rate
of return to maturity (amortized cost).

Defined Contribution Plans

Objective of report
The reporting objective is to provide information about the plan and the performance of its
investments.
 The participants are interested in
 the activities of the plan because they directly affect the level of future benefits; and
 knowing whether contributions have been received and proper control has been exercised to
protect the rights of beneficiaries.
 An employer is interested in the efficient and fair operation of the plan. The reporting objective
is usually achieved by providing a report including:
 a description of significant activities for the period and the effect of any changes relating to the
plan, and its membership and terms and conditions;
 statements reporting on the transactions and investment performance for the period and the
financial position of the plan at the end of the period; and
 a description of the investment policies.

Requirement
The report of a defined contribution plan must contain:
 A statement of net assets available for benefits; and
 A description of the funding policy.
Objective of report
The reporting objective is to provide information about the financial resources and activities of the plan
that is useful in assessing the relationships between the accumulation of resources and plan benefits
over time.
This is usually achieved by providing a report including the following:
 A description of significant activities for the period and the effect of any changes relating to the
plan, and its membership and terms and conditions;
 Statements reporting on the transactions and investment performance for the period and the
financial position of the plan at the end of the period;
 Actuarial information either as part of the statements or by way of a separate report; and
 A description of the investment policies.

Requirement
The report must contain either:
 A statement that shows:
 The net assets available for benefits;
 The actuarial present value of promised retirement benefits, distinguishing between vested
benefits and non-vested benefits,
 The resulting excess or deficit; or
 A statement of net assets available for benefits including either:
 A note disclosing the actuarial present value of promised retirement benefits, distinguishing
between vested benefits and non-vested benefits; or
 A reference to this information in an accompanying actuarial report.
The report should explain:
 The relationship between the actuarial present value of promised retirement benefits; and the
net assets available for benefits; and
 The policy for the funding of promised benefits.
If an actuarial valuation has not been prepared at the date of the report, the most recent valuation is
used as a base and the date of the valuation disclosed.

Actuarial Present Value of Promised Retirement Benefits

The actuarial present value of promised retirement benefits is based on the benefits promised under the
terms of the plan on service rendered to date using either:
 Current salary levels; or
 Projected salary levels

Disclosure:
Specific requirement
The report of a retirement benefit plan (defined benefit or defined contribution) must contain the
following information:
 A statement of changes in net assets available for benefits;
 A summary of significant accounting policies; and
 A description of the plan and the effect of any changes in the plan during the period.
Guidance
Reports provided by retirement benefit plans include the following, if applicable:
 A statement of net assets available for benefits disclosing:
  Assets at the end of the period suitably classified;
 The basis of valuation of assets;
 Details of any single investment exceeding either 5% of the net assets available for
benefits or 5% of any class or type of security;
 Details of any investment in the employer; and
 Liabilities other than the actuarial present value of promised retirement benefits;
 a statement of changes in net assets available for benefits showing the following:
 Employer contributions;
 Employee contributions;
 Investment income such as interest and dividends;
 Other income;
 Benefits paid or payable (for example, as retirement, death and disability benefits,
and lump sum.
 Administrative expenses;
 Other expenses;
 Taxes on income;
 Profits and losses on disposal of investments and changes in value of investments;
and
 Transfers from and to other plans;
 a description of the funding policy; For defined benefit plans:
 the actuarial present value of promised retirement benefits (which may distinguish between
vested benefits and non-vested benefits) based on the benefits promised under the terms of
the plan on service rendered to date using either:
 Current salary levels; or
 Projected salary levels;
 A description of the significant actuarial assumptions made and the method used to calculate
the actuarial present value of promised retirement benefits.
Report of retirement benefit plans
A description of the plan must be provided either as part of the financial information or in a separate
report.
It may contain the following:
 The names of the employers and the employee groups covered;
 The number of participants receiving benefits and the number of other participants, classified
as appropriate;
 The type of plan - defined contribution or defined benefit;
 A note as to whether participants contribute to the plan;
 A description of the retirement benefits promised to participants;
 A description of any plan termination terms,
 Changes in any of the above during the period covered by the report.

Other statements

Net asset available for benefits

Change in net asset