Question

TASK TWO

Full IFRSs are generally designed for use by entities that are quoted on world’s major capital markets. However, the world’s majority entities are Small and Medium sized Enterprises (SMEs) and unlisted. The IASB has developed IFRSs specific to SMEs. The main purpose of this was to provide a framework that generates relevant, reliable and useful information which should provide a high quality and understandable set of accounting standards suitable for SMEs.

Required:

1. Describe FOUR major differences between accounting treatment under full IFRS and IFRS for SMEs.                                                                   

2. Create FOUR scenarios simulating a particular SME where you describe transactions with numerical data as well as specified accounting periods. For each created scenario:

1. Discuss the required accounting treatment in accordance with IFRS for SMEs
2. Contrast the accounting treatment in (b) (i) with the treatment under Full IFRS.

Answer 1

ANS:

a. Describe FOUR major differences between accounting treatment under full IFRS and IFRS for SMEs.-

1) Financial statements :

Full IFRS: A statement of changes in equity is required, presenting a reconciliation of equity items between the beginning and end of the period.

IFRS for SMEs: Same requirement. However, if the only changes to the equity during the period are a result of profit or loss, payment of dividends, correction of prior-period errors or changes in accounting policy, 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.

2)Business combinations:

Full IFRS: Transaction costs are excluded under IFRS 3 (revised). Contingent consideration is recognised regardless of the probability of payment.

IFRS for SMEs: Transaction costs are included in the acquisition costs. 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.

3)Investments in associates and joint ventures:

Full IFRS: Investments in associates are accounted for using the equity method. The cost and fair value model are not permitted except in separate financial statements. To account for a jointly controlled entity, either the proportionate consolidation method or the equity method are allowed. The cost and fair value model are not permitted.

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 equity method.

• The fair value through profit or loss model.

4)Expense recognition:

Full IFRS: Research costs are expensed as incurred; development costs are capitalised and amortised, but only when specific criteria are met. Borrowing costs are capitalised if certain criteria are met.

IFRS for SMEs: All research and development costs and all borrowing costs are recognised as an expense.

5)Financial instruments – derivatives and hedging:

Full IFRS: IAS 39, ‘Financial instruments: Recognition and measurement’, distinguishes four measurement categories of financial instruments – that is, financial assets or liabilities at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets.

IFRS for SMEs: There are two sections dealing with financial instruments: a section for simple payables and receivables, and other basic financial instruments; and a section for other, more complex financial instruments. Most of the basic financial instruments are measured at amortised cost; the complex instruments are generally measured at fair value through profit or loss.