IFRS for small and medium-sized entities

Pocket guide 2009

ard for entities in
countries that have no national GAAP. IFRS for SMEs will provide an
accounting framework in such countries for entities that are not of the size
nor have the resources to adopt full IFRS.
Another aim is to provide countries that already have an established national
GAAP with an alternative, IFRS standard that will be recognised and
understood across different territories. This will ease transition to full IFRS
for growing entities once they become publicly accountable.
The volume of accounting guidance has been reduced by more than 85 per
cent compared with the full IFRS. Much of the implementation guidance in
full IFRS has been omitted, together with the detailed explanation and
requirements relating to the more complex circumstances not usually
applicable to SMEs. The IFRS for SMEs does not just reduce disclosure
requirements; it also simplifies the recognition and measurement
requirements for example, in connection with financial instruments. When
there is a policy choice, the IFRS for SMEs generally adopts the simpler
option. IFRS for SMEs is written so that it is complete in itself and contains
all the mandatory requirements for SME financial statements.
Introduction
IFRS for SMEs Pocket guide 2009 ii
The term small and medium-sized entities has different meanings in
different territories. The definition in the context of the IFRS for SMEs is
entities that do not have public accountability and publish general purpose
financial statements. Every entity has some form of accountability, if only to
its owners and the local tax authorities. Public accountability is defined to
cover entities with or seeking to have securities traded in a public market or
that hold assets in a fiduciary capacity as their main business activity. The
definition is therefore based on the nature of an entity rather than on its size.
Where a transaction is not addressed by the IFRS for SMEs, management is
expected to use judgement to determine its accounting policy. If such a
transaction is covered in full IFRS, management may refer to the appropriate
international standard if it wishes but is not required to do so by the IFRS
for SMEs.
This pocket book looks at the key areas covered by the IFRS for SMEs and
explains the basic requirements. It is written primarily for those who have
little or no knowledge of full IFRS but who have a reasonable understanding
of basic accounting concepts and terminology.
Introduction
iii IFRS for SMEs Pocket guide 2009
Contents
1 Accounting framework of the IFRS for SMEs 1
1.1 Scope 1
1.2 Historical cost 1
1.3 Concepts 1
1.4 Fair presentation 2
1.5 First-time adoption 2
1.6 Selection of accounting policies 3
2 Financial statements 4
2.1 Statement of financial position 4
2.2 Statement of comprehensive income and income statement 5
2.3 Statement of changes in equity 7
2.4 Statement of income and retained earnings 7
2.5 Statement of cash flows 8
2.6 Accounting policies, estimates and errors 8
2.7 Notes to the financial statements 10
2.8 Related parties 10
2.9 Events after the end of the reporting period 11
3 Assets and liabilities 12
3.1 Non-financial assets 12
3.2 Financial instruments 16
3.3 Impairment of non-financial assets 20
3.4 Provisions and contingencies 21
3.5 Employee benefits 23
3.6 Income taxes 25
3.7 Leases 26
4 Business combinations, consolidated financial statements,
and investments in associates and joint ventures 28
4.1 Business combinations 28
4.2 Consolidated and separate financial statements 29
4.3 Investments in associates 30
4.4 Investments in joint ventures 31
iv IFRS for SMEs Pocket guide 2009
Contents
5 Liabilities and equity 33
5.1 Issue of equity shares 33
5.2 Compound financial instruments 33
5.3 Treasury shares 33
5.4 Non-controlling interest 33
6 Income and expenses 34
6.1 Revenue 34
6.2 Government grants 35
6.3 Borrowing costs 36
6.4 Share-based payment 36
7 Currencies 37
7.1 Functional currency 37
7.2 Presentation currency 37
7.3 Hyperinflation 38
8 Specialised activities 39
8.1 Agriculture 39
8.2 Extractive industries 39
8.3 Service concession arrangements 39
9 Main changes since the IFRS for SMEs exposure draft 41
6 IFRS for SMEs Pocket guide 2009
1 IFRS for SMEs Pocket guide 2009
Accounting framework of the IFRS for SMEs
1 Accounting framework of the IFRS for SMEs
1.1 Scope
Any entity that publishes general purpose financial statements for external
users and does not have public accountability can use the IFRS for SMEs.
An entity has public accountability if it files or is in the process of filing its
financial statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instrument in a public
market or if, as a main part of its business, it holds assets in a fiduciary
capacity for a broad group of third parties. Banks, insurance entities,
securities brokers, and dealers and pension funds are examples of entities
that hold assets in a fiduciary capacity for a broad group of third parties. Note
that size is not the determining factor as to which entitles can use the IFRS
for SMEs the applicability is based entirely on whether the entity has public
accountability or not.
1.2 Historical cost
The IFRS for SMEs mainly requires items to be measured at their historical
cost. However, it requires the revaluation of investment property and biological
assets to fair value, where such information is readily available. It also requires
certain categories of financial instrument to be measured at fair value. All
items are subject to impairment other than those carried at fair value.
1.3 Concepts
Financial statements are prepared on an accruals basis and on the
assumption that the entity is a going concern and will continue in operation
for the foreseeable future (which is at least 12 months from the end of the
reporting period). Their objective is to provide information about the financial
position, performance and cash flows of an entity that is useful to users in
making economic decisions.
The principal qualitative characteristics that make information provided in
financial statements useful to users are understandability, relevance,
materiality, reliability, substance over form, prudence, completeness,
comparability, timeliness and achieving a balance between benefit and cost.
Information is material if its omission or misstatement could influence the
economic decisions of users made on the basis of the financial statements.
2 IFRS for SMEs Pocket guide 2009
Accounting framework of the IFRS for SMEs
Materiality depends on the size of the omission or misstatement judged in
the particular circumstances.
1.4 Fair presentation
Financial statements should show a true and fair view, or present fairly the
financial position, of an entitys performance and changes in financial
position. This is achieved by applying the IFRS for SMEs and the principal
qualitative characteristics explained in Section 1.3.
Entities are permitted to depart from the IFRS for SMEs only in extremely
rare circumstances, if management concludes that compliance with one of
the requirements would be so misleading as to conflict with the objective of
the financial statements. The nature, reason and financial impact of the
departure should be explained in the financial statements.
1.5 First-time adoption
A first-time adopter of the IFRS for SMEs is an entity that presents its annual
financial statements in accordance with the IFRS for SMEs for the first time,
regardless of whether its previous accounting framework was full IFRS or
another set of generally accepted accounting principles.
First-time adoption requires full retrospective application of the IFRS for
SMEs effective at the reporting date for an entitys first financial statements
prepared in accordance with the IFRS for SMEs. To facilitate transition, there
are 10 specific optional exemptions, one general exemption and five
mandatory exceptions to the requirement for retrospective application.
The mandatory exceptions that a first-time adopter of the IFRS for SMEs
must take relate to the accounting that it followed previously for
derecognition of financial assets and financial liabilities, hedge accounting
estimates discontinued operations and measuring of non-controlling
interests.
There are 10 optional exemptions from the requirement for retrospective
application. These relate to business combinations; share-based payment
transactions; fair value as deemed cost for certain non-current assets;
revaluation as deemed costs for certain non-current assets; cumulative
translation differences; provisions relating to separate financial statements;
3 IFRS for SMEs Pocket guide 2009
Accounting framework of the IFRS for SMEs
compound financial instruments; deferred income tax; service concession
arrangements; and extractive activities.
The general exemption from retrospective application is on grounds of
impracticability. The glossary defines impracticable as being when the
entity cannot apply a requirement after making every reasonable effort
to do so.
Comparative information is prepared and presented on the basis of the IFRS
for SMEs. Adjustments arising from the first-time application of the IFRS for
SMEs are recognised directly in retained earnings (or, if appropriate, another
category of equity) at the date of transition to the IFRS for SMEs.
If management chooses not to apply the IFRS for SMEs in some future
period and then subsequently reverts to it, the concessions on first-time
adoption are not available.
1.6 Selection of accounting policies
Accounting policies are the specific principles, bases, conventions, rules
and practices applied by an entity in preparing and presenting financial
statements.
Where the IFRS for SMEs does not specifically address a transaction, other
event or condition, management uses its judgement in developing and
applying an accounting policy. This information must be relevant to the
users needs and reliable. Reliability means that the financial statements
represent faithfully the financial position, financial performance and cash
flows of the entity, reflect the economic substance of transactions, and are
neutral, prudent and complete in all material respects (see Section 2.6).
IFRS for SMEs Pocket guide 2009 4
2 Financial statements
The objective of financial statements is to provide information for economic
decisions. A complete set of financial statements comprises a statement of
financial position; either a single statement of comprehensive income or a
separate income statement and a separate statement of comprehensive
income; a statement of changes in equity; a statement of cash flows and
explanatory notes (including accounting policies).
There is no prescribed format for the financial statements. However, the
Implementation Guidance for the IFRS for SMEs includes a full illustrative
set of financial statements and a disclosure checklist. There are minimum
disclosures to be made on the face of the financial statements as well as in
the notes.
Financial statements disclose corresponding information for the preceding
period (comparatives), unless there are other specific requirements.
2.1 Statement of financial position
The statement of financial position presents an entitys assets, liabilities and
equity at a specific time.
Items presented in the statement of financial position
The following items, as a minimum, are presented in the statement of
financial position.
Assets property, plant and equipment; investment property intangible
assets; financial assets; investments; biological assets; deferred tax
assets; current tax assets; inventories; trade and other receivables; and
cash and cash equivalents.
Equity equity attributable to the owners of the parent; and noncontrolling
interests presented separately from the owner equity
interests.
Liabilities deferred tax liabilities; current tax liabilities; financial
liabilities; provisions; and trade and other payables.
Financial statements
5 IFRS for SMEs Pocket guide 2009
Financial statements
Current/non-current distinction
Current and non-current assets and current and non-current liabilities are
presented as separate classifications in the statement of financial position,
unless presentation based on liquidity provides reliable and more relevant
information.
An asset is classified as current if it is expected to be realised, sold or
consumed in the entitys normal operating cycle (irrespective of length);
primarily held for the purpose of being traded; expected to be realised
within 12 months after the end of the reporting period; or is cash or cash
equivalents (that is not restricted to beyond 12 months after the end of the
reporting period).
A liability is classified as current if it is expected to be settled in the entitys
normal operating cycle; primarily held for the purpose of being traded; due
to be settled within 12 months after the end of the reporting period; or the
entity does not have an unconditional right to defer settlement of the liability
until at least 12 months after the end of the reporting period.
2.2 Statement of comprehensive income and income statement
Management can choose whether to present its total comprehensive
income in one or two financial statements. A single statement of
comprehensive income presents all items of income and expense in the
period in the one statement; the two-statement approach comprises an
income statement (including all items of income and expense recognised in
the period except those recognised outside profit or loss) and a statement
of comprehensive income (which presents the items recognised outside
profit or loss). Changing between one and two statements is a change of
accounting policy and is presented as such.
Items to be presented in the statement of comprehensive income
Management presents all income and expense recognised in a period either
in a single statement of comprehensive income or in two statements.
6 IFRS for SMEs Pocket guide 2009
Financial statements
The following items, as a minimum, are presented in the income statement:
Revenue.
Finance costs.
Share of the profit or loss of associates and joint ventures accounted for
using the equity method.
Tax expense.
A single item comprising the total of (1) the post-tax profit or loss of
discontinued operations, and (2) the post-tax gain or loss recognised on
the measurement to fair value less costs to sell or on the disposal of the
net assets constituting the discontinued operation, and profit and loss
for the period.
The statement of comprehensive income then starts with the profit or loss
for the period and includes each item of other comprehensive income,
share of the other comprehensive income of associates and jointly
controlled entities and total comprehensive income.
If the single statement presentation is used, the same details are included in
a single statement, which must include a subtotal of profit or loss for the
period.
Under both approaches, profit or loss for the period is allocated to the
amount attributable to non-controlling interest and to the owners of the
parent.
Additional line items or subheadings are presented when such presentation
is relevant to an understanding of the entitys financial performance.
An analysis of total expenses is presented using a classification based on
either the nature or function of expenses within the entity, whichever
provides information that is reliable and more relevant.
Material and extraordinary items
The IFRS for SMEs requires the separate disclosure of items of income and
expenses that are material. Disclosure may be in the statement of
comprehensive income or in the notes. Such income and expenses may
include restructuring costs; write-downs of inventories or property, plant
and equipment (PPE); discontinued operations; litigation settlements;
7 IFRS for SMEs Pocket guide 2009
reversals of provisions; and gains or losses on disposals of PPE and
investments.
Extraordinary items are not permitted.
2.3 Statement of changes in equity
The statement of changes in equity presents a reconciliation of equity items
between the beginning and end of the reporting period.
The following items are presented in the statement of changes in equity:
Total comprehensive income for the period, showing separately the total
amounts attributable to owners of the parent and to non-controlling
interests.
For each component of equity, the effects of changes in accounting
policies and corrections of material prior-period errors.
For each component of equity, a reconciliation between the carrying
amount at the beginning and end of the period, separately disclosing
changes resulting from (1) profit or loss, (2) each item of other
comprehensive income, and (3) transactions with owners that do not
result in a loss of control.
Details of distributions, the balance of retained earnings and a reconciliation
of the carrying amount of each class of equity and each item recognised
directly in equity are presented either in the statement of changes in equity
or in the notes to the financial statements.
2.4 Statement of income and retained earnings
In many cases, the only changes to the equity of an entity during the period
will be in:
Income for the period.
Retained earnings at the start of the period.
Dividends declared and paid or payable during the period.
Restatement of retained earnings for correction of prior-period errors.
Restatement of retained earnings for changes in accounting policy.
Retained earnings at the end of the period.
Financial statements
8 IFRS for SMEs Pocket guide 2009
Financial statements
Where this occurs, management is permitted to present a statement of
income and retained earnings in place of both the statement of
comprehensive income and statement of changes in equity. If management
is using the two performance statement approach, this does not remove the
requirement for an income statement.
2.5 Statement of cash flows
The statement of cash flows presents the generation and use of cash by
category (operating, investing and finance) over the reporting period.
Operating activities are the entitys principal revenue-producing activities.
Investing activities are the acquisition and disposal of long-term assets
(including business combinations) and investments. Financing activities are
changes in equity and borrowings.
Management may present operating cash flows by using either the indirect
method (adjusting net profit or loss for non-operating and non-cash
transactions, and for changes in working capital) or the direct method (gross
cash receipts and payments).
Non-cash transactions include impairment losses or reversals, depreciation,
amortisation, unrealised fair value gains and losses, and income statement
charges for provisions.
Cash flows from investing and financing activities are reported separately
gross (that is, gross cash receipts and gross cash payments).
2.6 Accounting policies, estimates and errors
If the IFRS for SMEs specifically addresses a transaction, other event or
condition, an entity applies the IFRS for SMEs. However, if it does not,
management uses its judgement in developing and applying an accounting
policy that results in information that meets the qualitative characteristics
explained in Section 1. Where there is no relevant guidance, management
considers the applicability of the following sources, in descending order: the
requirements and guidance in the IFRS for SMEs for similar and related
issues; and the definitions, recognition criteria and measurement concepts
for assets, liabilities, income and expenses in Section 2. Management may
also, but is not obliged to, consider full IFRS.
9 IFRS for SMEs Pocket guide 2009
Management chooses and applies consistently its accounting policies. They
are applied consistently to similar transactions and events.
Changes in accounting policies
Changes in accounting policies as a result of an amendment to the IFRS for
SMEs standard are accounted for in accordance with the transition provisions
of that amendment. When specific transition provisions do not exist,
management follows the same procedures as for correction of prior-period
errors explained below.
When the IFRS for SMEs provides a choice of accounting policy for a specific
transaction and management changes its choice, this is a change of
accounting policy.
Critical accounting estimates and judgements
An entity discloses the nature and carrying amount of those assets and
liabilities for which judgements, estimates and assumptions have a significant
risk of causing a material adjustment to the carrying amounts within the next
financial period.
Changes in accounting estimates
Changes in accounting estimates are recognised prospectively by including
the effects in profit or loss in the period that is affected (that is, the period of
the change and future periods, where relevant) except if the change in
estimate gives rise to changes in assets, liabilities or equity. In this case, it is
recognised by adjusting the carrying amount of the related asset, liability or
equity in the period of the change.
Corrections of prior-period errors
Errors may arise from mistakes and oversights or misinterpretation of
available information.
Material prior-period errors are adjusted retrospectively (that is, by adjusting
opening retained earnings and the related comparatives). There is an
exception when it is impracticable to determine either the period-specific
effects or the cumulative effect of the error. In the latter case, management
Financial statements
10 IFRS for SMEs Pocket guide 2009
Financial statements
corrects such errors prospectively from the earliest date practicable. The
error and effect of its correction on the financial statements are disclosed.
2.7 Notes to the financial statements
The notes are an integral part of the financial statements. Information
presented in an entitys statement of financial position, statement of
comprehensive income, statement of changes in equity (or statement of
income and retained earnings) and statement of cash flows are crossreferenced
to the relevant notes where possible.
Notes provide additional information to the amounts disclosed on the face
of the primary statements. The following disclosures are included, as a
minimum, within the notes to the financial statements:
A statement of compliance with the IFRS for SMEs.
Accounting policies.
 Critical accounting estimates and judgements.
Information not presented in the primary statements but required by the
IFRS for SMEs.
Changes in accounting policies, changes in accounting estimates and
information about externally imposed capital requirements are also disclosed
where applicable.
2.8 Related parties
The main categories of related parties are:
Subsidiaries.
Fellow subsidiaries.
Associates.
Joint ventures.
Key management personnel of the entity and its parent (which include
close members of their families).
Parties with control or joint control or significant influence over the entity
(which include close members of their families, where applicable).
Post-employment benefit plans.
11 IFRS for SMEs Pocket guide 2009
Related parties exclude finance providers and governments in the course of
their normal dealings with the entity. There is also an exemption from the
disclosure requirements where there is state control over the entity.
The names of the immediate parent and the ultimate controlling parties
(which could be an individual or a group of individuals) are disclosed
irrespective of whether there have been transactions with those related
parties.
Where there have been related-party transactions, disclosure is made of the
nature of the relationship, the amount of transactions, and outstanding
balances and other elements necessary for a clear understanding of the
financial statements (for example, volume and amounts of transactions,
amounts outstanding and pricing policies). The disclosure is made by
certain categories of related party and by major types of transaction. Items
of a similar nature may be disclosed in aggregate (for example, short-term
employee benefits) except when separate disclosure is necessary for an
understanding of the effects of related-party transactions on the entitys
financial statements.
Disclosures that related-party transactions were made on terms equivalent
to those that prevail in arms length transactions are made only if such terms
can be substantiated.
2.9 Events after the end of the reporting period
Events after the end of the reporting period may qualify as adjusting events
or non-adjusting events. Adjusting events provide further evidence of
conditions that existed at the end of the reporting period and lead to
adjustments to the financial statements. Non-adjusting events relate to
conditions that arose after the end of the reporting period and do not lead to
adjustments, only to disclosures in the financial statements.
Dividends proposed or declared after the end of the reporting period are not
recognised as a liability in the reporting period.
Management discloses the date on which the financial statements were
authorised for issue and who gave that authorisation. If the owners or other
persons have the power to amend the financial statements after issue, this
fact is also disclosed.
Financial statements
12 IFRS for SMEs Pocket guide 2009
Assets and liabilities
3 Assets and liabilities
An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.
A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.
The recognition of an asset or a liability depends on whether it is probable
that any future economic benefit associated with the item will flow to or
from the entity, and whether the item has a cost or value that can be
measured reliably.
3.1 Non-financial assets
Inventories
Inventories are initially recognised at cost. The cost of inventories includes
all costs of purchase, costs of conversion and other costs incurred in
bringing the inventories to their present location and conditions.
Cost of purchase of inventories includes the purchase price, import duties,
non-refundable taxes, transport and handling costs and any other directly
attributable costs less trade discounts, rebates and similar items.
Inventories are subsequently valued at the lower of (a) cost, and (b) selling
price, less costs to complete and sell.
The cost of inventories used is assigned by using either the first-in, first-out
(FIFO) or weighted average cost formula. Last-in, first-out (LIFO) is not
permitted. The same cost formula is used for all inventories that have a
similar nature and use to the entity. Different cost formulae may be justified
where inventories have a different nature or use.
13 IFRS for SMEs Pocket guide 2009
Assets and liabilities
Investment property
Investment property is a property (land or a building, or part of a building or
both) held by the owner or by the lessee under a finance lease to earn
rentals or for capital appreciation or both. A property interest held for use in
the production or supply of goods or services or for administrative purposes
is not an investment property, nor is an interest held for sale in the ordinary
course of business.
Initial measurement
The cost of a purchased investment property is its purchase price plus any
directly attributable costs, such as professional fees for legal services,
property transfer taxes and other transaction costs.
Subsequent measurement
Where the fair value of investment property can be measured reliably,
without undue cost or effort, an entity carries such property at fair value,
with changes in fair value recognised in profit or loss. Where fair value is no
longer available without undue cost or effort, the property is deemed to be
an item of property, plant and equipment and its accounting follows
accordingly. Management should use the latest available fair value as its
deemed cost until a reliable measure of fair value becomes available again.
When an investment property interest is held under a lease, only the interest
in the lease is recognised, not the underlying property.
Where investment properties are carried at cost, the property is treated as
part of property, plant and equipment (PPE).
Transfers to or from investment property apply when the property meets or
ceases to meet the definition of an investment property.
Property, plant and equipment
PPE consists of tangible assets that: (a) are held for use in the production or
supply of goods and services, for rental to others or for administrative
purposes; and (b) are expected to be used during more than one period.
This section also applies to investment property carried at cost as a result of
undue cost or effort preventing it being carried at fair value.
14 IFRS for SMEs Pocket guide 2009
Initial measurement
PPE is measured initially at cost. Cost includes: (a) purchase price, including
legal and brokerage fees, import duties and other non-refundable taxes (net
of discounts and rebates); (b) any directly attributable costs to bring the
asset to the location and condition necessary for it to be capable of
operating in the manner intended by management; and (c) the initial
estimate of the costs of dismantling and removing the item and restoring the
site on which its is located.
Subsequent measurement
Classes of PPE are carried at cost less accumulated depreciation and any
accumulated impairment losses. The depreciable amount of an item of PPE
(being the gross carrying value less the estimated residual value) is
depreciated on a systematic basis over its useful life.
PPE may have significant parts with different useful lives. Depreciation is
calculated based on each individual parts life. Significant parts that have
the same useful life and depreciation method may be grouped in
determining the depreciation charge.
The cost of a major inspection or replacement of parts of an item occurring
at regular intervals over its useful life is capitalised to the extent that it
meets the recognition criteria of an asset. The carrying amount of the
previous inspection or parts replaced is derecognised.
Intangible assets other than goodwill
An intangible asset is an identifiable non-monetary asset without physical
substance. The identifiability criterion is met when the intangible asset is
separable (that is, it can be sold, transferred, licensed, rented or
exchanged), or where it arises from contractual or other legal rights.
Recognition
Expenditure on intangibles is recognised as an asset when it meets the
recognition criteria of an asset.
Assets and liabilities
15 IFRS for SMEs Pocket guide 2009
Assets and liabilities
Initial measurement of separately acquired intangible assets
Intangible assets are measured initially at cost. Cost includes (a) the
purchase price (including import duties and non-refundable purchase taxes,
net of trade discounts and rebates); and (b) any costs directly attributable to
preparing the assets for its intended use.
Internally generated intangible assets
Internal expenditure arising on intangible assets, including any expenditure
from research and development activities, is recognised as an expense,
unless that expense forms part of the cost of another asset that meets the
asset recognition criterion in the IFRS for SMEs. In such a case, the
expenditure is added to that asset and measured subsequently in
accordance with the requirements of the IFRS for SMEs.
The recognition criteria are strict. Most costs relating to internally generated
intangible items cannot be capitalised and are recognised as an expense as
incurred. Examples of such costs include start-up costs, training,
advertising and relocation costs. Expenditure on internally generated
brands, mastheads, customer lists, publishing titles and items similar in
substance are not recognised as assets.
Subsequent measurement
Intangible assets are carried at cost less any accumulated amortisation and
any accumulated impairment losses.
Intangible assets are amortised on a systematic basis over the useful lives
of the intangibles. This life is determined based on the contractual period of
the asset or on other legal rights and cannot be indefinite. Where
management cannot determine the useful life, that life is presumed to be
10 years.
The residual value of such assets at the end of their useful lives is assumed
to be zero, unless there is either a commitment by a third party to purchase
the asset or there is an active market for the asset.
16 IFRS for SMEs Pocket guide 2009
3.2 Financial instruments
A financial instrument is any contract that gives rise to both a financial asset
of one entity and a financial liability or equity instrument of another entity.
A financial instrument is recognised when the entity becomes a party to its
contractual provisions.
The IFRS for SMEs splits the financial instruments requirements into two
sections: section 11 on basic financial instruments; and section 12 on
additional financial instrument issues. Section 11 applies to all entities within
the scope of the IFRS for SMEs; section 12 only affects larger and more
complex entities.
Management has a choice of either applying the provisions of sections 11
and 12 of the IFRS for SMEs or applying the recognition and measurement
provisions of IAS 39, Financial instruments: Recognition and measurement,
but the disclosure requirements of the IFRS for SMEs.
It is likely that the accounting policy choice of opting to apply IAS 39 will
only be taken by entities that belong to groups where the parent reports
under full IFRS.
Basic financial instruments
Basic financial instruments are: cash; simple debt instruments (such as
loans payable or receivable); a commitment to receive a loan; and an
investment in non-convertible preference shares and non-puttable ordinary
and preference shares.
A debt instrument qualifies as basic if it satisfies the following conditions:
Unleveraged returns to holders that are easily determined;
No contractual provision that could, by its terms, result in the holder
losing the principal amount or interest attributable to the current or prior
periods;
Contractual terms that permit early repayment are not contingent on
future events; and
No conditional returns or repayment provisions other than those listed
above.
Assets and liabilities
17 IFRS for SMEs Pocket guide 2009
Assets and liabilities
Examples of basic debt instruments include demand deposits, accounts
and loans payable and receivable, commercial paper, bonds and similar
debt instruments.
Initial measurement
On initial recognition, a basic financial instrument is measured at transaction
price, unless the arrangement is in effect a financing transaction. In this
case, it is the present value of the future payment discounted using a
market rate.
Subsequent measurement
At the end of each reporting period basic financial instruments are
measured as follows:
Debt instruments at amortised cost using the effective interest rate
method.
Commitments to receive a loan at cost (which could be nil) less
impairment.
Investments in non-convertible or non-puttable shares at fair value if the
shares are publicly traded or fair value can be measured reliably,
otherwise at cost less impairment.
Fair value
Fair value is calculated in accordance with the following hierarchy:
The quoted price for an identical asset in an active market.
If no active market exists, the price of a recent transaction for an
identical asset.
If neither of the above applies, by use of a valuation technique.
Impairment of financial instruments measured at cost or amortised cost
Where there is any objective evidence of impairment of financial assets
measured at cost or amortised cost, an impairment loss is recognised
immediately in profit or loss.
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For an instrument measured at amortised cost, the impairment loss is the
difference between the assets carrying amount and the present value of
estimated cash flows discounted at the assets original effective interest
rate. Where an asset is measured at cost less impairment, the impairment
loss is the difference between the assets carrying amount and the best
estimate of the amount that the entity would receive for the asset in a sale at
the reporting date.
Derecognition of financial assets
An entity only derecognises a financial asset when:
The rights to the cash flows from the assets have expired or are settled;
The entity has transferred substantially all the risks and rewards relating
to the financial asset; or
It has retained some significant risks and rewards but has transferred
control of the asset to another party. The asset is therefore derecognised,
and any rights and obligation created or retained are recognised.
Derecognition of financial liabilities
Financial liabilities are derecognised only when they are extinguished that
is, when the obligation is discharged, cancelled or expires.
Additional issues relating to financial instruments
All financial instruments in the scope of section 12 are measured at fair
value both on initial recognition and at each reporting date except for
situations where there is no longer a reliable measure of fair value. In this
case, an entity continues to carry that instrument at its last available fair
value, which is treated as cost, subject to impairment, until the instrument is
derecognised or its fair value becomes available.
Hedge accounting
An entity may establish a hedging relationship, designating a hedging
instrument and a hedged item in such a way that the criteria below are met
and apply hedge accounting. This means that the gain or loss related to the
hedged risks on the hedged item and hedging instrument are recognised in
profit or loss at the same time.
Assets and liabilities
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Assets and liabilities
A hedging instrument:
Can take form of an interest rate swap, a foreign currency swap, a
foreign currency or commodity forward exchange contract that is
expected to be highly effective in offsetting the risk designated as the
hedged risk.
Involves a party external to the entity.
Has a notional amount equal to the designated amount of the principal or
notional amount of the hedged item.
Has a specified maturity date no later than the maturity of the item being
hedged, the expected settlement of a commodity transaction being
hedged or the occurrence of the highly probably forecast transaction
being hedged.
Has no pre-payment, early termination or extension facilities.
To qualify for hedge accounting, an entity:
Documents at the inception of the hedge the relationship between
designated hedging instruments and hedged items;
Identifies the risk hedged as:
an interest rate risk;
a foreign exchange rate in a firm commitment or a highly probable
forecast transaction, or in a net investment in a foreign operation; or
a price risk of a commodity; and
Expects the hedging instrument to be highly effective in offsetting the
designated hedged risk.
The effectiveness of a hedge is the degree to which changes in fair value or
cash flows of the hedged item that are attributable to the hedged risk are
offset by changes in the fair value or cash flows of the hedging instrument.
The entity documents its assessment, both at hedge inception and on an
ongoing basis, of whether the hedging instruments that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items.
For a fair value hedge (hedge of fixed interest risk or of commodity price risk
of a commodity held), the hedged item is adjusted for the gain or loss
attributable to the hedged risk. That element is included in profit or loss to
offset the impact of the hedging instrument.
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Gains and losses on instruments qualifying as cash flow hedges (hedges of
variable interest rate risk or foreign exchange risk, or hedge of a net
investment in a foreign operation) are included in equity and recycled to
profit or loss when the hedged item affects profit or loss, or are used to
adjust the carrying amount of an asset or liability at acquisition.
3.3 Impairment of non-financial assets
Assets are subject to an impairment test according to the requirements
outlined below, with the following exceptions: deferred tax assets, employee
benefit assets, financial assets, investment properties carried at fair value,
and biological assets carried at fair value less estimated costs to sell.
Impairment of inventories
Inventories are assessed for impairment at each reporting date by
comparing the carrying amount with the selling price less costs to complete
and sell. Management then reassesses the selling price, less costs to
complete and sell in each subsequent period, to determine if the impairment
loss previously recognised should be reversed.
Impairment of assets other than inventories
An asset is impaired when its recoverable amount is less than its carrying
amount. The reduction is an impairment loss and is recognised immediately
in profit or loss.
Assets (including goodwill) are tested for impairment where there is an
indication that the asset may be impaired. Existence of impairment
indicators is assessed at each reporting date.
External indications of impairment include a decline in an assets market
value, significant adverse changes in the technological, market, economic
or legal environment, increases in market interest rates, or when the
entitys net asset value is above the value that might be expected in a sale
of the entity.
Internal indications include evidence of obsolescence or physical damage of
an asset, changes in the way an asset is used (for example, due to
restructuring or discontinued operations) or evidence from internal reporting
Assets and liabilities
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Assets and liabilities
that the economic performance of an asset is, or will be, worse than
expected.
When performing the impairment test of an asset, management estimates
the fair value less costs to sell. The best evidence for this is a price in a
binding sale agreement in an arms length transaction or a market price in
an active market. Failing that, the value is based on the best available
information to reflect the amount that an entity could obtain at the reporting
date from disposal of the asset in an arms length transaction between
knowledgeable, willing parties, less costs of disposal.
The fair value of goodwill is derived from measurement of the fair value of
the larger group of assets to which the goodwill belonged. For the purpose
of impairment testing, goodwill acquired in a business combination is
allocated from the acquisition date to each of the acquirers cash-generating
units that is expected to benefit from the synergies of the combination,
irrespective of whether other assets or liabilities are assigned to those units.
At each reporting date after recognition of the impairment loss, management
assesses whether there is any indication that an impairment loss may have
decreased or may no longer exist. The impairment loss, other than goodwill,
is reversed if the fair value less cost to sell of an asset exceeds its carrying
amount. The amount of the reversal is subject to certain limitations.
Goodwill impairment can never be reversed.
3.4 Provisions and contingencies
Recognition and initial measurement
A provision is recognised only when: the entity has a present obligation to
transfer economic benefits as a result of a past event; it is probable (more
likely than not) that an entity will be required to transfer economic benefits in
settlement of the obligation; and the amount of the obligation can be
estimated reliably.
The amount recognised as a provision is the best estimate of the amount
required to settle the obligation at the reporting date. Where material, the
amount of the provision is the present value of the amount expected to be
required to settle the obligation.
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A pres