Younger siblings all over the world will be familiar with being given clothes previously worn by their older siblings, often breeding resentment that they do not get the newest and most in-fashion items. This situation can also be applied to the IFRS for SMEs accounting standard.
The standard is a self-contained document, designed for small and medium-sized entities. While it is applicable to far more businesses than any other accounting standard, it does not get updated every time a shiny new accounting standard is released. Instead, it has to wait for the periodic update before adopting an adapted version of any new or revised standards.
In this, the first of two articles, we will look at the major differences between the full IFRS Standards and IFRS for SMEs, particularly in relation to accounting topics not covered and where differences in accounting treatments exist.
Next month we will look at some of the tentative decisions that have been made by the International Accounting Standards Board (IASB) in the changes it has proposed so far.
It is a shame there is no requirement to produce information on segmental reporting
Omissions
IFRS for SMEs cannot be applied by entities that have public accountability, which largely means listed entities or financial institutions such as banks and insurance companies. As a number of IFRS Standards are required only for listed entities, these are unsurprisingly not included within IFRS for SMEs.
This means that SMEs will not have to produce information on earnings per share, interim financial reporting or insurance contracts. While this makes sense, it is a shame that there is no requirement to produce information on segmental reporting, which is often a very useful area in assessing the performance of an entity – see my YouTube video on the fundamentals of IFRS 8 to find out why.
Different treatments
A number of differences have existed between IFRS Standards and the SME standard for several years, which means that these are the least likely to change following the conclusion of the IASB’s update. Some of these major differences include:
- Presentation. SMEs can show an income statement and statement of changes in equity as a single statement of income and retained earnings, as long as the changes in equity are due only to profits, dividends, changes in accounting policies or the correction of errors.
- Investments in associates. SMEs can hold these at any of the cost model, the equity method, or at fair value through profit or loss, as opposed to the requirement to use the equity method under IFRS Standards.
- Treatment of costs. Unlike in IFRS, borrowing costs cannot be capitalised under IFRS for SMEs, regardless of whether they are applicable to a qualifying asset or not.
- Intangible assets. Internally generated intangible assets cannot be capitalised under IFRS for SMEs, which means that costs must be expensed even if they meet the criteria for development costs.
- Amortisation. All intangible assets are deemed to have a useful life under IFRS for SMEs, and this can be no more than 10 years. This is also applicable to goodwill, which is amortised rather than having an indefinite life.
Newer standards
The most recent update to the SMEs standard took place in 2015, so it is no surprise that some of the major differences relate to some of the newer IFRS Standards. This has led to some major differences in relation to group accounting, revenue recognition and leases.
- Leases. The lease section of IFRS for SMEs is largely consistent with IAS 17, Leases, meaning the accounting treatment for SMEs is largely done in the ‘old’ way compared to the changes implemented under IFRS 16, Leases. As a result, the requirements for SMEs in lessee accounting and sale and leasebacks differs quite significantly from the requirements for entities following full IFRS Standards.
- Revenue recognition. The treatment is again largely in line with the previous standards – ie with the principles of IAS 18, Revenue Recognition, and IAS 11, Construction Contracts. While the changes to revenue recognition under IFRS 15, Revenue from Contracts with Customers, may not have hugely significant changes for most SMEs, this is an area that will be looked at extensively under the updated IFRS for SMEs.
- Group accounting. There are a number of differences in the calculation and treatment of goodwill. As stated earlier, goodwill is amortised under IFRS for SMEs. In addition, direct costs are capitalised as part of the acquisition, rather than being expensed under IFRS. Contingent consideration is currently included within the calculation if they are probable, whereas they are recognised at fair value under IFRS. The non-controlling interest is recognised at the proportionate share of net assets under IFRS for SMEs, compared to the choice of the proportionate method or fair value method on offer under IFRS.
Coming changes
The IFRS for SMEs accounting standard is therefore a little behind the timeline of the full IFRS accounting standards, and often receives its updates after its bigger siblings have tried them on for a few years. While this may seem unfair when many more companies qualify for IFRS for SMEs, it also means that any teething problems with new standards have (hopefully) been ironed out before they are adapted for the majority of entities.
My article next month will go through what the major proposed changes will be, and preparers are likely to be affected.
More information
See Adam Deller's series of videos for AB on 'the fundamentals of IFRS'
