Deciphering the Code:

IFRS for SMEs

International Financial Reporting Standards
for Small and Medium-sized Entities
Report compiled by Vishal Soni
 Report on IFRS for SMEs
Preface
"Back in 1999, Kenya was praised as being ahead of the pack for adopting the IFRSs, a set of
guidelines governing how companies report their financial health, for all its businesses.
But as IFRS, dubbed the 'big book', has swelled to 3,000 pages of rules and guidelines over the last
10 years, Kenya's decision started to look less like a blessing and more like a curse.
Now kenya is leading the way in its plans to adopt a new narrowed down version of the reporting
standards aimed at small and medium sized entities that has been promulgated by the IASB.
IFRS for SMEs is 230 pages long, and is expected to make reporting easier for Kenyan companies
and accountants"
Business Daily - Finance For Business, 30th October, 2009

 Most of the times, taking a step forward, is seen to be a wise decision, but some time to see clearer
picture of something, you need to take a few steps backwards.
 IFRS for SMEs is actually to be seen in the same light, as taking some steps backwards. In
principle, a small and medium sized enterprise is the first step to begin a business with, which then
grows further to become a larger entity, not limited to a few members, but open to the public at
large.
 Thus accounting for a small/medium sized company should be the first step, in which everything is
expected to be simple and understandable. Thereafter as the company grows, the need for more
complex systems and accounting standards arises, which accordingly would be the full IFRSs
themselves.

Basically up till now, all small and medium sized enterprises which were using the full IFRS were
actually trying to fit into extremely large shoes, which did not fit them, nor suit them. Thus the
IASB has turned back and bridged the gap, to allow for such accounting standards which would be
easily comprehended, and applied.
 Thus there is no reason why anyone should have any reservations what so ever, towards accepting
and implementing the new IFRS for SMEs.
Vishal Soni.



This guideline looks at the key areas covered by the IFRS for SMEs and
 explains the basic requirements. It is not a fully comprehensive guide for the application of the standards.

While every effort has been made to ensure accuracy, some information that may be relevant
 to a particular reader may not be comprehensive or may have been omitted.

This guide is not intended as a study of all aspects of the ‘International Financial
Reporting Standard for small and medium-sized entities’ and does not address the

standard’s disclosure requirements. The guide is not a substitute for reading the standard
 when dealing with points of doubt or difficulty.

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 Report on IFRS for SMEs

Contents

1 Advantages and Impact of IFRS for SMEs on Grant Thornton - Mombasa A

3 to 5

2 Full IFRS v IFRS for SMEs B

6 to 11

3 Transition to the IFRS for SMEs C

12 to 14

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 Report on IFRS for SMEs

A
Advantages and Impact of
IFRS for SMEs on Grant Thornton Mombasa

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 Report on IFRS for SMEs
Direct Advantages of the IFRS for SMEs to Grant Thornton - Mombasa

Apart from the usual advantages stated in all publications, the following are a few benefits which
our office shall gain from the adoption of the IFRS for SMEs:

 The IFRS for SMEs shall be appilcable to majority of Grant Thornton's clients, thus
making it easier for the firm to deal with its client's accounts.

 Being only 230 pages, most audit and accouting staff shall be motivated to not only read
but also easily understand the content as it has been written in clear and easily translatable
language, compared to almost 3000 pages of the full IFRS, which most of us shall be
discouraged to even lift.

 The IFRS for SMEs shall be reviewed every 3 years compared to the full IFRS which
can be reviewed several times in a year. Thus more stability and less catching up with
updates every now and than, as is the case with the full IFRS

 It is organised by topics, as opposed to being numbered by standard, thus no hassle

of remembering and/or quoting the standard number.
Being organised by topics, makes it easier for the readers of the financial statements
as they shall not be faced with jargon like numbered standards, but rather a self
explanatory heading.

 Where a transaction is not addressed by the IFRS for SMEs, and if such a
transaction is covered in full IFRS, than we can refer to the appropriate
international standard if we wish to but it is not required to do so by the IFRS
for SMEs.

 The full IFRS disclosure checklist is about a 100 pages, filling of which for most of
our clients is cumbersome and impractical. Where as the checklist for IFRS for SMEs
is about 40 pages, which atleast makes it possible for us to fill.

 The glossary of terms is a 20 pages list in the IFRS for SMEs, while that in the full
IFRS, is about 50 pages. That basically implies that users of the IFRS for SMEs shall
only have to be equiped with less than half the technical terms of the full IFRS, once
again evidencing the simplicity of the IFRS for SMEs.

 Looking at the above advantages, I am sure that we can expect many more practical
advantages as we go on using the IFRS for SMEs.

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 Report on IFRS for SMEs

Impact of the IFRS for SMEs to Grant Thornton - Mombasa

 The IFRS for SMEs being derived from the full IFRS, has no new challenge, in terms
of application and understandability, as it is ment to be easier to use compared to the
full IFRS.

 As most of our clients are categorised as SMEs, we have been only applying the relevant
standards from the full IFRS and not the whole of it. The IFRS for SMEs just cuts down
all what we weren't using in the past, leaving behind a streamlined set of almost fully
applicable standards.

 First-time adoption requires full retrospective application of the IFRS for

SMEs effective at the reporting date for an entity’s 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.

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.

 The East African Community, is seen to be growing to make cross border trade and
employment between member countries more fluid and profitable. In that light, Uganda and
Tanzania are also planing to adopt the IFRS for SMEs within the next 3 years, as reported
by in an informal GTI poll. That would basiacally imply that financial statements across
the EAC shall almost be standardised, and consistent with each other, thus making it
easier to audit for companies incorporated outside of Kenya.

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 Report on IFRS for SMEs

B
Full IFRS v IFRS for SMEs

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 Report on IFRS for SMEs
Overall Difference between Full IFRS and IFRS for
SMEs
Area Full IFRS
1 Financial A statement of changes in equity is
statements required, presenting a
reconciliation of equity items between
the beginning and end of the
period.
2 Business Transaction costs are excluded under
combinations IFRS 3 (revised).
Contingent consideration is recognised
regardless of the probability
of payment.
3 Investments in Investments in associates are accounted
associates for using the equity method. The cost
and joint ventures 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.
4 Expense Research costs are expensed as
recognition incurred; development costs are
capitalised and amortised, but only when
specific criteria
are met. Borrowing costs are capitalised
if certain criteria are met.
Financial ‘Financial instruments: Recognition and
5 instruments – measurement’, distinguishes four
derivatives and measurement categories of
hedging 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.
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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.
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.
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.
All research and development costs
and all
borrowing costs are recognised as an
expense.
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. The
hedging models under IFRS and IFRS
for SMEs are based on the principles in
full IFRS. However, there are a number
of detailed
application differences, some of which
are more restrictive under IFRS for
SMEs (for example, a limited number of
risks and hedging instruments are
permitted). However, no quantitative
effectiveness
test required under IFRS for SMEs.
 Report on IFRS for SMEs
Area Full IFRS
6 Non-financial For tangible and intangible assets, there
assets and is an accounting policy choice between
goodwill the cost model and the revaluation
model.
Goodwill and other intangibles with
indefinite lives are reviewed for
impairment and not amortised.
‘Intangible assets’, the useful life of an
intangible asset is either finite or
indefinite. The latter are not amortised
and an annual impairment test is
required.
‘Investment property’, offers a choice of
fair value and the cost method.
‘Non-current assets held for sale and
discontinued operations’, requires non-
current assets to be classified as held
for sale where the carrying amount is
recovered
principally through a sale transaction
rather than though continuing use.
7 Employee ‘Employee benefits’, actuarial gains or
benefits – losses can be recognised immediately
defined benefit or amortised into profit or loss over the
plans expected remaining working lives of
participating employees.
The use of an accrued benefit valuation
method (the projected unit credit
method) is required for calculating
defined
benefit obligations.
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IFRS for SMEs
The cost model is the only permitted
model. All intangible assets, including
goodwill, are assumed to have finite
lives and are amortised.
There is no distinction between assets
with finite or infinite lives. The
amortisation approach therefore applies
to all
intangible assets. These intangibles are
tested for impairment only when there is
an indication.
Investment property is carried at fair
value if this fair value can be measured
without undue cost or effort.
Assets held for sale are not covered,
the decision to sell an asset is
considered an impairment indicator.
Requires immediate recognition and
splits the expense into different
components.
The circumstance-driven approach is
applicable, which means that the use of
an accrued benefit valuation method
(the projected unit credit method) is
required if the information that is
needed to make such a calculation is
already available, or if it can be
obtained without undue cost or effort. If
not, simplifications
are permitted in which future salary
progression, future service or
possible mortality during an employee’s
period of service are not
considered.
 Report on IFRS for SMEs
Area Full IFRS
8 Income taxes A deferred tax asset is only recognised
to the extent that it is probable that there
will be sufficient future taxable profit to
enable recovery of the deferred tax
asset.
No deferred tax is recognised upon the
initial recognition of an asset and liability
in a transaction that is not a business
combination and affects neither
accounting profit nor taxable profit
at the time of the transaction.
There is no specific guidance on
uncertain tax positions. In practice,
management will record the liability
measured as either
a single best estimate or a weighted
average probability of the possible
outcomes, if the likelihood is greater than
50%.
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IFRS for SMEs
A valuation allowance is recognised so
that the net carrying amount of the
deferred tax asset equals the highest
amount that is more likely than not to be
recovered. The net carrying amount of
deferred tax asset is likely to be the
same between full IFRS and IFRS for
SMEs.
No such exemption.
Management recognises the effect of
the possible outcomes of a review by
the tax authorities. It should be
measured
using the probability-weighted average
amount of all the possible
outcomes. There is no probable
recognition threshold.
 Report on IFRS for SMEs

Areas that are in the Full IFRS but Excluded in IFRS for SMEs

Business combinations
• Subsequent adjustments to assets and liabilities (re-measurement period).
• Deferred tax recognised after initial purchase accounting.
• Non-controlling interests.
• Step acquisitions.
• A business combination achieved without the transfer of consideration.
• Indemnification assets.
• Re-acquired
rights.
• Shared-based payments.
• Employee
benefits.

Consolidation
• Loss of control.
• Transactions with minorities.

Investments in associates
• Guidance on significant influence.
• Consequences when an investment ceases to be an
associate.
• Profit and loss from upstream and downstream transactions.
• Impairment
losses.
• Acquisition of an investment in an associate.

Investments in joint ventures

• Contractual arrangements.
• Exceptions to proportionate consolidation and equity method.
• Operators of joint ventures.

Income and
expenses
Revenue
• Extended warranties.
• Distinction between advertising and non-advertising barter transactions as included in SIC 31.
• Transfer of assets from customers (IFRIC 18).

Government grants
• Non-monetary government grants.
• Government assistance.
• Repayment of government grants

Financial assets and liabilities

• Derivatives and embedded derivatives.
• Reclassifications between categories of financial instruments.
• Detail guidance on derecognition of financial assets.
• Qualifying hedging instruments and qualifying hedged items.

Non-financial assets
• Extensive guidance on net realisable value.

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 Report on IFRS for SMEs

Investment property
• Extensive guidance on transfers to and from investment
property.
• Disposals.
• Inability to determine fair value reliably.

Property, plant and equipment

• Exchange of assets.

Intangible assets other than goodwill

• Disposals.
• Acquisition by way of government grants.
• Revaluation.

Impairment of non-financial assets

• Guidance to estimate value in use.
• Corporate assets.

Employee benefits
• Defined benefit plans that share risks between various entities under common control.
• Asset ceiling test.
• Detailed guidance on the measurement of defined benefit obligation.

Income taxes
• Assets carried at fair value.
• Reassessment of unrecognised deferred tax assets.
• Deferred tax arising from a business combination.
• Current and deferred tax arising from share-based payment transactions.
• Exchange differences on deferred foreign tax liabilities or
assets.

Leases
• Implementation guidance.
• Operating leases – incentives (SIC 15).
• Evaluating the substance of transactions involving the legal form of a lease (SIC 27).

Foreign currencies
• Tax effects of all exchange differences.

Specialised activities
• Government grants related to biological assets.
• Scope and elements of cost of exploration and evaluation assets (IFRS 6).

Discontinued operations and assets held for sale

• Segment reporting (IFRS 8).
• Earnings per share (IAS 33).
• Interim financial reporting (IAS 34).

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 Report on IFRS for SMEs

C
Transition to the IFRS for SMEs

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 Report on IFRS for SMEs

Transition to the IFRS for SMEs

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 entity’s first financial statements
prepared in accordance with the IFRS for SMEs. To facilitate transition, there
are 12 specific optional exemptions, 1 general exemption and 5
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:
i. derecognition of financial assets and financial liabilities.
ii. hedge accounting.
iii.accounting estimates.
iv.discontinued operations and
v. measuring of non-controllinginterests.

 There are 12 optional exemptions from the requirement for retrospective

application. These relate to:
i. business combinations;
ii. share-based payment transactions;
iii. fair value as deemed cost for certain non-current assets;
iv. revaluation as deemed costs for certain non-current assets;
v. cumulativetranslation differences;
vi. provisions relating to separate financial statements;
vii. compound financial instruments;
viii. deferred income tax;
ix. arrangements;
x. extractive activities.
xi. arrangements containing a lease.
xii. decommissioning liabilities included in the cost of P.P.E

 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.

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 Report on IFRS for SMEs

 An entity shall also have to explain, in the form of reconciliations, how the
transition from its previous reporting framework to this IFRS affected its
reported financial position, financial performance and cash flows.

 Inorder to explain the transition, the entity will have to include the following
in its financial statements:
i. Description of the nature of each change in accouting policy
ii. Reconciliations of its equity.
iii. Reconciliation of profit/loss

 The above reconciliations can also be used to distinguish the corrections

of any errors discovered in the previous financial reporting framework, to
the extent practicable.

 If financial statements were not presented for an entity for previous periods,
it shall disclose that fact in its first financial statements that confirm to
this IFRS.

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