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2015 changes to IFRS for SMEs

A1The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) was developed in response to international demand for the IASB (The International Accounting Standards Board) to develop global standards for small and medium-sized entities (SMEs).  The Standard was issued in 2009, and has since been widely adopted. The IASB had decided that the IFRS for SMEs should be subject to a review approximately once every three years.

In May 2015 the IASB announced the amendments to the standards, which followed from its first comprehensive review. After consulting widely with constituents, the IASB concluded that the IFRS for SMEs required little change.  However, some areas were identified where targeted improvements could be made.

The most significant changes, which relate to transactions commonly encountered by SMEs, are:

  1. Property, plant and equipment (PPE): Permitting SMEs to use the revaluation model subsequent to initial recognition.

The result of this change is that entities that compile financial statements in terms of IFRS for SMEs can now choose to measure items of PPE at their fair values, provided these values can be estimated reliably. It is important to note that if an item of PPE is revalued, the entire class of PPE to which that asset belongs shall be revalued. This amendment should be applied prospectively from the beginning of the period the option is first adopted.

The frequency of revaluation depends upon the changes in fair values of the items of PPE being revalued. If the fair value of a revalued asset significantly changes from its carrying amount (which would be the most recent revalued amount less accumulated depreciation), management should obtain a new revaluation. Management would furthermore need to have a revaluation policy that stipulates the regularity and basis on which revaluations are performed. The guidance contained in IFRS proposes, except for PPE items that experience significant and volatile changes in fair value, that it may be necessary to revalue the class only every three to five years.

The tax effect on revaluations is accounted for as deferred tax. The tax obligation or benefit arising from revaluations will only materialise upon disposal of the revalued PPE.

The accounting treatment for revaluations is complicated and it is advised that guidance be obtained from an accredited accountant in this regard.

  1. Deferred income taxes: Aligning the main recognition and measurement requirements with IFRS. 

The IFRS for SMEs is currently based on ED/2009/2 Income Tax, which was never finalised by the IASB. The standard is now finalised and the recognition and measurement requirements are aligned with IFRS.

  1. Alignment of the main recognition and measurement requirements for exploration and evaluation (E&E) assets, with IFRS 6 Exploration for and Evaluation of Mineral Resources.

Entities can now make a policy choice as to which expenditures will be included in E&E assets, provided that the policy is applied consistently. Guidance that is more favourable is now available when identifying whether an E&E asset might be impaired.

  1. Intangible assets: minor amendments and inclusions.

Amendments and inclusions were made to the standard, and they are briefly presented as follows:

  • Intangible assets acquired in a business combination for which an entity is unable to measure reliably the fair value of the asset without undue cost or effort at acquisition date, are not recognised.
  • An entity is permitted to apply a useful life of less than 10 years when it cannot reliably determine the useful life of the intangible asset or goodwill, in contrast to the current IFRS for SMEs, where the period is fixed at 10 years under these conditions.
  1. Consolidated and Separate Financial Statements: minor amendments and inclusions.

Amendments and inclusions were made to the standard, and they are briefly presented as follows:

  • A subsidiary acquired with the intention to relinquish it within one year from the date of acquisition, is not consolidated. The investment in the subsidiary is measured at fair value. If the fair value cannot be determined without undue cost or effort, the investment is measured at amortised cost.
  • Where it is impractical for a subsidiary to prepare financial statements for the same reporting date, the parent entity should use the most recent financial statements of the subsidiary and adjust for the effects of transactions or events between the two reporting dates.
  • Where an entity prepares separate financial statements it can account for investments in associates, jointly controlled entities or subsidiaries at cost less impairment or at fair value or use the equity method.
  1. Additional undue cost or effort exemptions

When an accounting approach, where permitted, requires undue cost or effort for the company, these exemptions provide permission to deviate and follow a specified alternative. The IASB has also added clarifying guidance on when these exemptions could apply. The exemptions can be applied if the incremental cost (for example valuation fees), or additional effort (for example time spent by employees) is expected to substantially outweigh the benefit provided to the users of the financial statements of having this information. They can be applicable on both initial recognition and subsequent measurement. Entities must disclose the reasons for using the exemptions and explain why applying the requirements would involve undue cost and effort.

The majority of the amendments clarify existing requirements or add supporting guidance, rather than changes to the underlying requirements in the IFRS for SMEs. Consequently, for most SMEs and users of their financial statements, the amendments are expected to improve understanding of the existing requirements, without having a significant effect on an SME’s financial reporting practices and financial statements.

The amendments should be applied for annual periods beginning on or after 1 January 2017, but earlier adoption is permitted provided all amendments are applied at the same time.

Please note that this article is specifically aimed at the ASL Incorporated readers and client base, and does not  contain all changes made by the IASB.

Should you have any questions on the effect of these new reporting standards and their implications, kindly contact your relationship director or Ilze Mey at ilze@asl.co.za  or 021 840 1600.