The International Accounting Standards Board (IASB) is currently working on changes to the IFRS for Small and Medium Enterprises (SMEs), which are expected to affect over 15 sections of International Financial Reporting Standards (IFRS) for SMEs. Below are the main changes you can expect in the first facelift to IFRS for SMEs since it was introduced in South Africa in August 2009.
• Investments in unlisted shares may be carried at cost
SMEs are currently required to measure investments in unlisted shares at fair value if their fair value can be measured reliably. A new exemption will allow SMEs to measure unlisted shares at cost if it can be demonstrated that there is ‘undue cost or effort’ involved in the determination of their fair values.
It is expected that the introduction of this exemption will be welcomed by SMEs, because it allows management to apply a cost-benefit approach to measuring unlisted equity share investments.
• Revaluation model for property, plant and equipment (“PPE”)
Currently, PPE is carried at cost less accumulated depreciation less any accumulated impairment losses, without the option to revalue. A new revaluation model option will be introduced which will allow SMEs to measure PPE at revalued amounts i.e. at fair value at the date of revaluation less accumulated depreciation less any accumulated impairment losses.
An option to use the revaluation model will mean that items of PPE can be measured on a fair value basis which may provide more relevant information to users in certain instances. This is expected to be welcomed by SMEs, especially those operating in capital-intensive industries.
• Investment property measured using the cost model
Investment property under the cost model is currently required to be classified and presented as PPE. The amendment will require investment property measured in terms of the cost model to be presented separately as investment property measured using the cost model on the face of the statement of financial position.
It is expected that this amendment will be welcomed, because it allows SMEs to present property held to earn rentals, for capital appreciation, or both, as investment property regardless of the measurement model applied.
• Disclosure changes
The introduction of the amendments to IFRS for SMEs is expected to bring with it more disclosure. One change requires SMEs to disclose when the ‘undue cost or effort’ exemption has been applied and the reason for doing so. Another change will require prior years to be adjusted for most differences which may result from the adoption of the amendments.
The additional disclosure requirements are expected to have an impact on the cost of the preparation of SME financial statements.
• No change to borrowing costs
SMEs currently do not have the option to capitalise borrowing costs. The amendments will not change this position, which means that SMEs must continue to expense all borrowing costs.
As a result of the above, SMEs in the construction industry, who often utilise long-term interest bearing debt to finance building projects, may prefer full IFRS, which requires the capitalisation of borrowing costs to inventories when the criteria for capitalisation in IAS 23 Borrowing Costs are met. The IAS 23 requirements, in many of these SMEs’ view, provide a more realistic presentation of their gross profit.
Some of the other changes include undue cost or effort relief when separately recognising intangible assets in business combinations; allowing use of the equity method in the entity’s separate financial statements for investments in subsidiaries, joint ventures and associates; and alignment of certain tax and deferred tax principles with full IFRS.
There is no doubt that the first facelift to IFRS for SMEs will bring with it some major changes. However, it remains to be seen whether the right balance has been struck between the need to keep the standard simple and to provide relevant information to users of SME financial statements. The amendments to IFRS for SMEs are currently at the balloting stage and are expected to be released in the first half of this year.
Culled from March 16, 2015 by Finweek