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IFRS for SMEs

DRAFT IMPLEMENTATION GUIDANCE
IFRS for Small and Medium-sized Entities

International Accounting Standards Board®

February 2007

DRAFT IMPLEMENTATION GUIDANCE
Illustrative Financial Statements
and Disclosure Checklist
Exposure Draft
INTERNATIONAL FINANCIAL
REPORTING STANDARD FOR
SMALL AND
MEDIUM-SIZED ENTITIES

IFRS 1

The development of the European Union as an economic and trade entity and the globalization trend created a need for standard international financial reporting. All public companies in EU countries adopted financial reporting according to IFRS already in 2005. This is a growing trend and more than 100 countries have already adopted the IFRS standards.

IFRS 1 sets up rules to accomplish the transition from financial reporting according to local accounting rules to financial reporting according to international accounting standards. IFRS 1 specifies that all international accounting standards should be adopted in advance in the opening statements of January 1st 2007.

Disclosure checklist - IFRS for SMEs

The summary of disclosures that are required throughout the [draft] IFRS for

SMEs does not specify between: - disclosure in the notes or

- disclosure on the face of the F/S

Several cases: disclosures required on face of F/S (balance sheet, income statement, statement of changes in equity and cash flow statement) are identified in this checklist.

The disclosure in the checklist should be regarded as minimum requirements. However, because the IFRS is principle-based, an entity must include in the F/S, information that is relevant to a better understanding of them. The company should decide whether this disclosure should be on the face of the F/S or in the notes.

Under the [draft] IFRS for SMEs, an entity is required or permitted to apply an International Financial Reporting Standard (IFRS) in the following cases:

(a) The entity elects to apply an accounting policy option that is included in the [draft] IFRS for SMEs by cross-reference to an IFRS.

(b) The entity is required or permitted to apply an IFRS because the [draft] IFRS for SMEs does not address specific events, transactions or circumstances that are covered in IFRSs.

Events, transactions or circumstances that the SME should apply the provisions of the relevant IFRS:

calculation of the recoverable amount of goodwill;

equity-settled share-based payment;

financial reporting in a hyperinflationary economy;

specialized industry accounting (extractive industries and agriculture); and interim reporting.

Section 3 Financial Statement Presentation Compliance with the draft IFRS for SMEs

SME compliant with Draft IFRS for SMEs:

- Disclose an explicit and unreserved statement of such compliance in the notes to the F/S.

- If entity departs from a requirement of this [draft] standard it should disclose that:

Management departed from a particular requirement to achieve a fair presentation;

Nature of the departure, including treatment that IFRS for SMEs would require, reason why treatment would be so misleading and treatment adopted;

Financial effect of the departure on each item in the F/S that would have been reported in complying with the requirement.

- Disclose if entity does not prepare F/S on a going concern, the basis on which it prepared them and reason why the entity is not regarded as a going concern.

Reclassifications

When presentation or classification of items in the F/S is changed, an entity shall reclassify comparative amounts unless the reclassification is impracticable.

When comparative amounts are reclassified, an entity shall disclose:

(a) the nature of the reclassification;

(b) the amount of each item or class of items that is reclassified; and

When it is impracticable to reclassify comparative amounts, an entity shall disclose:

(a) the reason for not reclassifying the amounts; and

(b) the nature of the adjustments that would have been made if the amounts had been reclassified.

An entity shall disclose comparative information in respect of the previous comparable period for all amounts reported in the F/S.

Section 4 Balance Sheet Information to be presented on the face of the balance sheet

As a minimum, an entity shall include, on the face of the balance sheet, line items

that present the following amounts:

(a) cash and cash equivalents;

(b) trade and other receivables;

(d) inventories;

(e) property, plant and equipment;

(f) intangible assets;

(g) biological assets;

(h) investments accounted for using the equity method;

(i) the total of non-current assets classified as held for sale and assets included in disposal groups classified as held for sale in accordance with Section 36, "Discontinued Operations and Assets Held for Sale".

(j) trade and other payables;

(k) financial liabilities (excluding amounts shown under (j) and (o);

(l) liabilities and assets for current tax;

(m) deferred tax liabilities and deferred tax assets (these shall always

be classified as non-current);

(n) liabilities included in disposal groups classified as held for sale;

(o) provisions;

(p) minority interest, presented within equity separately from the

parent shareholders' equity;

(q) equity attributable to shareholders of the parent.

Current/non-current distinction

It's up to the entity to decide the order of presentation but it shall present current and non-current assets, and current and non-current liabilities, as separate classifications on the face of its balance sheet.

When a presentation based on liquidity provides information that is reliable and more relevant than the first one, all assets and liabilities shall be presented in order of approximate liquidity.

Required sub classifications on the face of the balance sheet or in notes to F/S :

(a) classes of items of property, plant and equipment (Section 16);

(b) amounts receivable from trade customers, receivables from related parties, prepayments and other amounts;

(c) classes of inventories in accordance with Section 12, such as merchandise, production supplies, materials, work in progress and finished goods;

(d) provisions for employee benefits and other provisions; and

(e) classes of equity (paid-in capital, share premium, retained earnings) and items of income and expense that are recognized directly in equity.

An entity with share capital shall disclose on the face of the balance sheet or in the notes to F/S:

(a) for each class of share capital:

(i) the number of shares authorised;

(i) the number of shares issued and fully paid, and issued but not fully paid;

(iii) par value per share, or that the shares have no par value;

(iv) a reconciliation of the number of shares outstanding at the beginning and at the end of the period;

(v) the rights, preferences and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital;

(vi) shares in the entity held by the entity or by its subsidiaries or associates;

(vii) shares reserved for issue under options and contracts for the sale of shares, including the terms and amounts; and

(b) a description of each reserve within equity.

Partnerships or trusts disclose:

- changes during the period in each category of equity;

- Rights, preferences and restrictions attaching to each category of equity.

As mentioned before, a share capital company, should disclose for each class of share capital, a reconciliation of the number of shares outstanding (or other measure of quantity) at the beginning and at the end of the period.

Reconciliation identify separately:

- each significant type of change in the number of shares outstanding,

- exercises of options, rights and warrants;

- conversions of convertible securities;

- treasury share transactions;

- business combinations;

- and bonus issues (share dividends) and share splits.

Section 5 Income Statement
Information to be presented on the face of the income statement

Line items presenting the following amounts:

(a) revenue;

(b) finance costs;

(d) tax expense;

(e) a single amount comprising the total of

(i) the post-tax profit or loss of discontinued operations and

(ii) the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation;

(f) profit or loss.

Separate disclosure for the following items on the face of the income statement as

allocations of profit or loss for the period:

(a) profit or loss attributable to minority interest; and

(b) profit or loss attributable to equity holders of the parent.

Information to be presented either on the face of the income
statement or in the notes

Separate disclosure of nature and amount of material components of income and expense including:

(a) write-downs of property, plant and equipment to fair value less costs to sell, and the reversal of such write-downs;

(b) write-downs of inventories to net realizable value, and the reversal of such write-downs;

(d) disposals of items of property, plant and equipment;

(e) disposals of investments;

(f) discontinued operations;

(g) litigation settlements; and

(h) the reversal of other provisions.

Analysis of expenses using a classification based on:

- the nature of expenses

- the function of expenses within the entity

Entity chooses the one that provides information that is reliable and more relevant.

Entities classifying expenses by function shall disclose additional information on the nature of expenses, including depreciation and amortization expense and employee benefits expense.

Section 6 Statement of Changes in Equity and Statement
of Income and Retained Earnings

Information to be presented on the face of the statement of changes in equity or in

the notes to F/S:

(a) profit or loss for the period;

(b) each item of income and expense for the period that, as required by this draft standard, is recognized directly in equity, and the total of those items;

(c) total income and expense for the period (calculated as the sum of (a) and (b)), showing separately the total amounts attributable to equity holders of the parent and to minority interest; and

(d) for each component of equity, the effects of changes in accounting policies and corrections of errors recognized in accordance with Section 10 - Accounting Policies, Estimates and Errors.

Section 7 Cash Flow Statement

Cash flow statement should report the entity's cash flows for a period classified by: operating activities, investing activities and financing activities.

An entity shall report cash flows from operating activities using either:

(a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or

(b) the indirect method, whereby profit or loss is adjusted for the effects of non-cash transactions, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.

IFRS 3 for SMEs- BUSINESS COMBINATIONS

Concept of Business Combination

Accounting for Business Combinations

Identification of an Acquirer

Cost of a BC

Identifiable acquired assets and liabilities: recognition and valuation

Goodwill

Disclosure

1. Definition

A business combination is the bringing together of separate entities or businesses into one reporting entity. [IFRS 3.4]

IFRS 3 applies to all business combinations except combinations of entities under common control, combinations of mutual entities, combinations by contract without exchange of ownership interest, and formations of joint ventures.

2. Accounting for Business Combinations

Purchase method. All business combinations within the scope of IFRS 3 must be accounted for using the purchase method. [IFRS 3.14] The pooling of interests method is prohibited.

Applying the purchase method involves the following steps:

Identifying an acquirer (the old IAS 22 had required the pooling method if an acquirer could not be identified; Under IFRS 3, an acquirer must be identified for all business combinations. [IFRS 3.17]);

Measuring the cost of business combination;

Allocating, at the acquisition date, the cost of the business combination to the assets acquired and liabilities and contingent liabilities assumed.

3. Identification of an acquirer.

An acquirer must be identified for all business combinations. The acquirer is the combining entity that obtains control of the other combining entities.

4. Cost of a Business Combination

Fair value of consideration given plus costs. The acquirer measures the cost of a business combination at the sum of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus any costs directly attributable to the combination. [IFRS 3.24]

5. Identifiable acquired assets and liabilities

Recognition of acquired assets and liabilities.

Acquirer, at acquisition date, recognizes: [IAS 3.37]

ü an asset (other than an intangible asset) if probable associated future economic benefits flow to the acquirer, and fair value can be measured reliably;

ü a liability (other than a contingent liability) is recognized if it is probable that an outflow of resources will be required to settle the obligation, and its fair value can be measured reliably; and

ü an intangible asset or a contingent liability is recognized if its fair value can be measured reliably.

Measurement of acquired assets and liabilities

. Acquired identifiable assets, liabilities, and contingent liabilities are measured initially by the acquirer at their full fair values at the acquisition date, including any minority interest's share of the acquired item.

Non-current assets classified as held for sale, recognized at fair

value less costs to sell.

Any difference between:

* cost of the business combination

* acquirer's interest in the net fair value

of the identifiable assets, liabilities and

contingent liabilities recognized

________

Goodwill

Recognition and measurement.

Goodwill is recognized by the acquirer at acquisition date as an asset if there was an excess between the cost of the business combination over the acquirer's share of the net fair values of the acquiree's identifiable assets, liabilities and contingent liabilities. [IFRS 3.51]

No amortization of goodwill.

IFRS 3 prohibits the amortization of goodwill. Instead goodwill must be tested for impairment at least annually in accordance with IAS 36 Impairment of Assets. [IFRS 3.54]

After initial recognition, acquirer measures goodwill acquired in a business combination at cost less any accumulated impairment losses.

Negative goodwill.

If the acquirer's interest in the net fair value of the acquired identifiable net assets exceeds the cost of the business combination, that excess must be recognized immediately in the income statement as a gain. Before concluding that "negative goodwill" has arisen, however, IFRS 3 requires that the acquirer reassess the identification and measurement of the acquiree's identifiable assets, liabilities, and contingent liabilities and the measurement of the cost of the combination. [IFRS 3.56]

Acquirer's disclosure

Names and descriptions of the combining entities

Acquisition date

Percentage of voting equity instruments acquired

Cost of the combination (with separate disclosure of the number and fair values of equity instruments issued and how fair values were determined)

Amounts recognized at the acquisition date for each class of the acquiree's assets, liabilities, and contingent liabilities, including goodwill, and unless impracticable, the carrying amounts of each of those classes, determined in accordance with IFRSs, immediately before the combination.

Amount of any negative goodwill recognized in profit or loss,

a description of the factors that contributed to a cost that results in the recognition of goodwill

the amount of the acquiree's profit or loss since the acquisition date included in the acquirer's profit or loss for the period, unless disclosure would be impracticable. If such disclosure would be impracticable, that fact shall be disclosed, together with an explanation of why this is the case.

Business combination effected after the end of the reporting period but before the financial statements are authorized for issue, the acquirer shall make the disclosures mentioned above unless such disclosure would be impracticable.

For all business combinations

An acquirer shall disclose a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period, showing separately changes arising from new business combinations, impairment losses, disposals of previously acquired businesses, and other changes. An acquirer shall also disclose the gross amount and accumulated impairment losses at the end of the period.

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