IFRS for SMEs: The IFRS comparison
The South African Companies Act allows companies to prepare their financial statements in accordance with one of two frameworks, International Financial Reporting Standards (IFRS), and, if they are not listed, in the process of listing, or a state owned entity, IFRS for Small and Medium-sized Entities (IFRS for SMEs).
More and more entities are converting from IFRS to IFRS for SMEs. With the advent of IFRS 9 Financial instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases under IFRS, these numbers are escalating as people try to avoid grappling with the concept of expected credit loss and other perceived complicated issues. IFRS for SMEs is considered a simpler accounting framework that is based on IFRS but requires a lot less disclosures.
The following is a list of areas that have formed stumbling blocks for entities in converting to IFRS for SMEs. These are some of the major differences to be aware of when considering converting to IFRS for SMEs.
Topic | Differences |
Property, plant and equipment | One significant difference between the two frameworks is how useful life, residual value and depreciation methods is assessed. IFRS requires an entity to review these measurements on an annual basis accounting for any differences in expectations prospectively. Under IFRS for SMEs, the useful life, residual value and depreciation method is assessed only if there is an indicator that there is a significant change in the pattern by which the entity expects to consume the asset, how it is used etc. zero-valued assets are therefore more commonly accepted in IFRS for SMEs. |
Intangible assets | IFRS allows for the recognition of internally generated intangible assets where certain conditions are met. IFRS for SMEs does not allow for the recognition of these intangible assets. |
Borrowing costs | Borrowing costs under IFRS for SMEs are expensed as opposed to IFRS which requires them to be capitalised where applicable. |
Business combinations | IFRS requires that transaction costs be expensed in a business combination, and all intangible assets acquired be split out of goodwill on initial recognition. IFRS for SMEs requires the transaction costs be capitalised as part of the cost of the business combination and that intangible assets only be split out if it can be performed without undue cost and effort. |
Assessment of control | IFRS requires control to be assessed using three elements
IFRS for SMEs considers control to be achieved if the investor has the majority of the voting rights or the power to govern financial and operating policies of an investee to obtain benefits from its activities, unless this can be clearly demonstrated otherwise. An assessment of control could result in a different conclusion based on the framework applied. |
Goodwill | IFRS for SMEs requires goodwill recognised in a business combination to be amortised over its useful life. In the event the goodwill’s useful life cannot be reliably estimated, it will be based on management’s best estimate and not exceed longer than 10 years, unless a longer period can be reliably estimated. Under IFRS, goodwill does not have an estimated useful life and is assessed annually for any impairment by comparing its carrying amount with its recoverable amount. |
Financial instruments | IFRS for SMEs affords an entity the choice to either apply section 11 and 12 (basic or other financial instruments) or to elect to use the principles of IAS 39 with the disclosure requirements of section 11 and 12. IFRS only allows for the application of IFRS 9 in the measurement of financial instruments. IFRS for SMEs still requires the application of the incurred loss model for impairment, whereas IFRS requires the application of the expected loss model. |
Revenue | Costs to obtain a contract may not be capitalised in accordance with IFRS for SMEs, but these could be capitalised applying IFRS. IFRS requires a five-step approach to recognising revenue which includes identification of performance obligations and determining the transaction price. The recognition of the revenue over time or at a point in time is based on the transfer of control to the buyer. IFRS for SMEs does not require such in-depth steps to recognise revenue focussing on the transfer of risks and rewards. |
Non-current assets / liabilities held for sale | IFRS for SMEs do not have a specific section dealing with discontinued operations and non-current assets held for sale. While IFRS for SMEs requires disclosure of a single amount of profit/loss on a discontinued operation, there is no specific balance sheet disclosure requirements except that an entity treat the decision to sell an asset or discontinue an operation as an indicator of impairment. The assets stay within the specific classes they are in until they are disposed of. IFRS has very specific guidance and disclosure requirements for discontinued operations and non-current assets held for sale. |
Leases | IFRS for SMEs continues to classify leases as operating or finance leases for both the lessor and the lessee. IFRS maintains the classification for lessors, but requires lessees to recognise right-of-use assets and lease liabilities for all leases unless the lessee elects to classify them as low value or short-term leases. |
Government grants | IFRS requires government grants to be recognised when there is reasonable assurance that the entity will comply with the conditions attached. They are recognised on a systematic basis over the periods that the related compensated costs are incurred. IFRS allows a grant to be deducted from the value of an asset or to recognise it as deferred income. IFRS for SMEs only permits recognition when the conditions are actually satisfied. IFRS for SMEs requires that the grant be recognised as the specified future performance conditions are met, independent of the costs incurred. IFRS for SMEs only allows the recognition of deferred income, it may not be deducted from the value of an asset. |
Foreign currency translation reserves | IFRS for SMEs does not allow for the reclassification of this reserve to profit and loss on disposal of foreign operations, where IFRS does |
Offsetting | IFRS for SMEs does not permit offsetting except in limited circumstances, specifically taxation, hedge accounting and gains and losses on the sale of assets not as normal operating activities being reported after deducting the carrying amount and related selling expenses from the disposal proceeds. IFRS permits offsetting when it reflects the substance of the transaction. |
Restatements | When there is a restatement due to a change in accounting policy, reclassification or prior period error, IFRS requires the entity to present a third statement of financial position if the opening balances are impacted. IFRS for SMEs does not require a third balance sheet presentation for restatements. |
Undue cost or effort | IFRS for SMEs introduced the concept of undue cost or effort where the requirements of a section need not be applied if the incremental costs to achieve the disclosures exceed the benefit of the presentation (with disclosures that this exemption is applied). The areas impacted by this are:
Offsetting of current tax assets and liabilities and deferred tax assets and liabilities |
Where there is a transaction or event that IFRS for SMEs does not provide guidance on, one would either look to the current IFRS for SMEs or IFRS for formulation of a relevant accounting policy. IFRS for SMS sections 10.4 to 10.6 provide guidance in this regard.
Once a business has gone through the process of determining whether it can actually apply IFRS for SMEs, looking at the Companies Act Regulations and the scope of IFRS for SMEs, management should consider what the biggest impacts are likely to be.
These are a few areas that need to be considered when converting from IFRS to IFRS for SMEs. Depending on the business, the assets and liabilities recognised, and the first time adoption exemptions applied, it is always important to understand the impacts and know what the non-negotiable areas are before beginning the conversion process.
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