International Financial Reporting Standards, usually called IFRSs are accounting standards developed and promoted by the IFRS Foundation and the International Accounting Standards Board (IASB), to provide a common global language for business affairs so that company financial statements are understandable and comparable across international boundaries.
Full IFRS is aimed primarily at public-traded entities however there are far more companies with no public accountability than publicly-traded ones. The IFRS for SMEs was therefore developed for companies with no public accountability, which needs to prepare financial statements. At the time of writing, the IFRS for SMEs is currently used in over 70 countries.
In this article, we will specifically consider the IFRS for SMEs, which is an internationally-recognised framework for the preparation of financial statements by companies with no public accountability. IFRS for SMEs framework was originally published in 2009 by IASB. It is aimed at the needs of private companies. It is intended to ensure that lenders, investors and other stakeholders receive high quality financial information to help them make lending and other decisions. A cost-benefit approach was taken in developing the IFRS for SMEs, with the emphasis on easing the financial reporting burden on private companies.
What does the IFRS for SMEs look like?
The IFRS for SMEs is a self-contained standard built on the foundation of full IFRS. After the IASB’s 2015 Amendments to the Standard, it is not more than 250 pages. By way of contrast the text of full IFRS comes to thousands of pages. Many of the principles for recognizing and measuring assets, liabilities, income and expenses however are simplified. Furthermore, topics not relevant to SMEs are omitted, and the number of required disclosures is significantly reduced.
It is important to note that the use of the phrase “SME” is based on the nature of a business entity rather than its size. Therefore developing The IFRS for SMEs was aimed at addressing the following needs;
(i) Difficulty and cost of preparing full IFRS, (ii) Difference in focus between users of private company financial statements and users of public entities, (iii) Meeting users’ needs while balancing cost and benefits for preparers, (iv) Modest disclosures more appealing to users and preparers.
Components of financial statements
A complete set of financial statements prepared under the IFRS for SMEs includes;
• A statement of financial position as at the reporting date
• Either (i) a single statement of comprehensive income or
(ii) a separate income statement and a separate statement of comprehensive income
• A statement of changes in equity for the reporting period
• A statement of cash flows for the reporting period (this can be presented using either the direct method or indirect method)
• Notes, comprising a summary of significant accounting policies and other explanatory information.
Comparative information is generally required for the previous period for all amounts presented. As a simplification in comparison to full IFRS, if the only changes to equity during the current and comparative periods arise from profit or loss, payment of dividends, corrections of prior period errors, and changes in accounting policy, the entity may present a single statement of income and retained earnings in place of a separate statement of comprehensive income and a statement of changes in equity
General recognition and measurement principles
The requirements contained in the IFRS for SMEs for recognising and measuring assets, liabilities, income and expenses are based on the concepts and the pervasive principles under section 2 of the IFRS for SMEs standard. Where the IFRS for SMEs does address a specific transaction or other event or condition, management applies judgement in developing an accounting policy that results in information that is relevant and reliable. In making such a judgement, a hierarchy is provided. Management is advised to refer to and consider the applicability of the following sources in descending order: a) the requirements and guidance in the IFRS for SMEs dealing with similar and related issues, and b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in the section in the IFRS for SMEs on ‘Concepts and Pervasive Principles’. In making the judgement, management may also consider the requirements and guidance in full IFRSs dealing with similar and related issues, but this is not mandatory.
Source 1. IFRS Foundation https://en.wikipedia.org/wiki/IFRS_Foundation 2. International Accounting Standards Board https://en.wikipedia.org/wiki/International_Accounting_Standards_Board 3. ICPAK, (21/11/2016) The Financial Reporting Workshop- A Focus On SMEs, Overview of IFRS for SMEs %MCEPASTEBIN%
