Ivan P.

Ojeda September 15, 2010

A3B Advanced Accounting 1

Small and medium-sized entities are entities that do not have public accountability and

publish general purpose financial statements for external users. In order to account for these

small and medium-sized entities, IFRS for SMEs is established. This project was started last

July 2003 and was approved last June 2009. The publication for this standard was made last

July 2009 and was then effective immediately. IFRS for SMEs seeks to simplify the accounting

requirements and to reduce the cost and effort required to produce the financial statements.

This standard is also a completely stand-alone standard. It contains 231 pages and has 35

sections organized by topics.

With the application of the new IFRS for SMEs, it creates differences between the

regular IFRS and the IFRS for SMEs. Some of the differences are; first, in the preparation of the

financial statements. In the full IFRS, a statement of changes in equity which presents the

reconciliation of the equity items between the beginning and the end of the period is required.

While in IFRS for SMEs, if the only changes to the equity during the period are the profit or loss,

payments of dividend, prior period errors or changes in accounting policies, a combined

statement of income and retained earnings can be presented instead of doing both a statement

of comprehensive income and a statement of changes in equity.

For tangible and intangible assets, under the full IFRS, you can choose between the cost

model and the revaluation model. Goodwill and other intangibles with indefinite lives are only

reviewed for impairment and not amortized. Under the IFRS for SMEs, the only model used is

the cost model. All intangible assets, including goodwill, are assumed to have a finite life and

are amortized. Also, under full IFRS, the useful life of intangible assets is either finite or

indefinite. If indefinite, it is not amortized and annual test for impairment is required. In IFRS for
SMEs, there is no distinction between assets with finite and infinite lives. Amortization applies to

all intangible assets and tests for impairment are done only when there is an indication.

For an investment property, under the full IFRS, there is also a choice between the cost

method and the fair value method while in the IFRS for SMEs, investment properties are carried

at fair value if the fair value can be measured without undue cost or effort.

For employee benefits, under the full IFRS, actuarial gains or losses can be recognized

immediately or amortized through the corridor approach into the profit or loss over the expected

working lives of the participating employees. Under the IFRS for SMEs, actuarial gains or losses

are recognized immediately and expenses are split into different components.

For income taxes, under the full IFRS, a deferred tax asset is only recognized to the

extent that it is probable that there will be sufficient future taxable profit to enable recovery of the

deferred tax asset. Under the IFRS for SMEs, a valuation allowance is recognized so that the

net carrying amount of the deferred tax asset equals the highest amount that is more likely than

not to be recovered. However, the net carrying amount of deferred tax asset is likely to be the

same under full IFRS and IFRS for SMEs.

For business combinations, under the full IFRS, transaction costs are excluded and

recognized as expense. Contingent consideration is recognized regardless of the probability of

payment. Under the IFRS for SMEs, transaction costs are included as part of the acquisition

cost. 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.

Under the full IFRS, investments in associates are accounted for using the equity

method. Cost and fair value model are not permitted except in separate financial statements.

For jointly controlled entities, either the equity or proportionate consolidation method are

allowed. Cost and fair value model are still not permitted. Under the IFRS for SMEs,

investments in associates and jointly controlled entities may be accounted using one of the cost

model, equity method or fair value through profit or loss.

 Under the full IFRS, research costs are expensed immediately when incurred,

development costs are capitalized and amortized, only when specific criteria are met and

borrowing costs are capitalized if certain criteria are met. Under the IFRS for SMEs, all research

and development costs and all borrowing costs are expensed immediately when incurred.

Although IFRS for SMEs creates some difference from the full IFRS, there will be a great

need for accountants to study this standard. It is because almost 90% of business entities here

in the Philippines are small and medium-sized entities. However, I think it will be easy to

remember and understand this standard since it is simpler compared to full IFRS.

For us accounting students, the new standard will be a great challenge to us since this

will be included in our board exam. We should learn both the full IFRS and IFRS for SMEs.

However, since the IFRS for SMEs are simplified this will be easier for us to apply and will

reduce our effort in solving problems regarding SMEs. Also, during the board exam, it will be

hard if you don’t know whether the question will use the full IFRS or will apply the new IFRS for

SMEs. And then if you try to solve using both IFRS, both then answers are on the choices, that

will be a great dilemma for us and will just depend on our instinct. On the other view, it helps to

have a standard developed internationally, because transactions are now globally available.

With this standard, there will be an improved comparability between entities’ financial

statements. The only drawback that I can see is for those countries that adopt these standards

but with some modifications and exemptions.

Regarding the standard, I think it is good that the new IFRS for SMEs is simpler

compared to the full IFRS. This IFRS will serve its purpose of reducing the cost and effort

required in making the financial statements. Thus, I recommend that the new standard be more

clearly specified as to when it will be included in the board exam since some say that the exam

depends on the examiner whether he is an old or young examiner. Also, I recommend that the

standard still be revised and improved regarding the other sections of IFRS for SMEs which are

still confusing.