The initial plan was to allow at least three years without any changes to the IFRS for SMEs standard. In 2012 a comprehensive review commenced, ending in May 2015 with a number of amendments to a majority of the sections in the standard. The amendments are effective for reporting periods beginning on or after 1 January 2017. Early adoption is allowed, and can take place with immediate effect. In the event that an entity chooses early adoption, all the amendments are required to be adopted at once.
As we head into the last few months of 2015, management should start to consider whether it may be beneficial to early adopt the amendments for their 2016 financial statements.
It would seem that the majority of the amendments serve to clarify existing requirements or add guidance rather than change the reporting requirements under the IFRS for SMEs.
There are however two major changes to sections in the IFRS for SMEs which are worth considering as they relate to transactions and balances generally found in most SMEs:
- The inclusion of an option to use a revaluation model for property, plant and equipment (PPE).
- Changing recognition and measurement criteria of income taxes (mostly for deferred tax) to be in alignment with full IFRS.
I will deal with each of these changes individually, and then briefly mention a few other amendments that seem relevant to most SMEs. Revaluation model for PPE
Full IFRS has historically allowed the option of carrying PPE at a revalued amount (in which case the entire class needs to be revalued and the value needs to be reliably determinable). IFRS for SMEs did not previously allow this option, and the logic behind this was to keep the standard as simple as possible. Having now completed a comprehensive review of the standards, along with input from various stakeholders and users of the IFRS for SMEs, it has been determined that the exclusion of a revaluation model is too restrictive.
The usefulness of the revaluation model is obviously to have assets stated on the Balance Sheet at a market related values. It may be that this will better reflect the value in use of the asset at each year end. Under this model assets will be carried at the revalued amount less any subsequent accumulated depreciation and/or impairment. The carrying value at year end will be required to not differ materially from what the carrying would have been had it been fair valued at year end.
I would suggest that the cost of regularly obtaining reliable fair values (possibly every year) should be carefully considered. If the assets are not carefully valued, with sufficient regularity, and with evidence at hand to substantiate the fair values, the financial statements could easily become materially misstated. The variability and subjectivity that a model such as this introduces greatly increases the risk of materially misstated financial statements. Users of financial statements need to be able to rely on the statement of financial position, whether PPE is at cost or fair value and therefore care would need to be taken to ensure these values are fairly presented.
It should be noted that an increase in fair value will be recognised in a revaluation surplus and not in distributable reserves. Adopting the revaluation model will therefore not be a means of creating distributable reserves. On the other hand, a decrease in fair value (other than decreasing a previously recognised increase in the revaluation surplus) will be recognised in profit and loss, thereby decreasing distributable reserves.
Lastly, despite reflecting PPE at a revalued amount, disclosure will still be required of the carrying amount that would have been recognised had the assets been carried under the cost model. This seems to be quite an onerous requirement. Recognition and measurement of income taxes
The most common occurrence of deferred tax in SMEs results from unused tax losses and carrying values of assets being recognised over a longer/shorter period that the related tax allowances. The IFRS for SMEs income tax section has been completely reworded to bring it into alignment with that of full IFRS. Deferred tax assets and liabilities will need to be revisited to ensure they are measured correctly.
Since deferred tax has unofficially been viewed "a fairly arbitrary accounting adjustment" there does not seem to be any value in early adoption of the amendments for the sole purpose of revisiting the measurement of deferred tax assets and liabilities. Other amendments Undue cost or effort exemptions
A few additional undue cost or effort exemptions have been added through the amendments. These are applicable in situations where the standard only requires the application of certain measurement criteria if it can be applied without involving undue cost or effort for the entity. These exemptions can prove to be very useful and the intention is to provide relief for SMEs in certain cases from onerous reporting requirements.
A useful additional exemption relates to the requirement of having to measure certain shares that are publicly traded at fair value. Where the fair value cannot be determined without undue cost or effort, these financial instruments can now be measured at cost. Investment Property
An interesting addition has been added to the IFRS for SME section on PPE: where investment property is recognised under PPE at cost due to not being able to obtain a fair value without undue cost or effort, there is a requirement to disclose that fact and the reasons why the fair value measurement would involve undue cost or effort. There is also a new requirement to present investment property measured at cost separately on the face of the statement of financial position. Intangible assets
In the current IFRS for SMEs standard, if an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life is presumed to be ten years. A modification has been made to require that if the useful life cannot be determined reliably, the life must be determined based on management's best estimate, but limited to ten years. In conclusion
The majority of the amendments are to be applied retrospectively, thereby affecting the prior year comparative figures in the first set of financial statements to which the amendments are applied. Where it is impracticable to apply any of the amendments retrospectively, provision has been made for applying the amendments to the earliest possible period for which it is practicable to do so. The revised statement on income taxes (referred to above) may be applied prospectively if elected to do so (and impracticable to apply retrospectively) and the revaluation model for PPE (referred to above) shall be applied prospectively if it is impracticable to apply retrospectively.
If you are looking for accountants/auditors who take an interest in your business as well as your financial reporting, feel free to contact us at Meredith Harington. We deal with the IFRS for SMEs standard on a daily basis and take great care and pleasure in applying these standards accurately to the business activities and financial data of our clients.