The International Accounting Standards Board (IASB) published the proposed amendments (ED/2013/9) to the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) in October 2013 for comment. This is the first review since the release of the standard in 2009. It is the IASB’s expectation to review the standard in a three year cycle after this first review.
Included in the proposed amendments to the IFRS for SMEs are important clarifications and modifications to sections in the standard that may provide even further relief to entities currently reporting under or wish to report in accordance with this standard.
The most significant change to the standard is the re-alignment of the recognition and measurement requirements of Section 29 – Income Tax with IAS 12 – Income Taxes. The definition of tax bases for assets and liabilities and temporary differences have been stream lined to be in accordance with IAS 12. This allows for the recognition and measurement requirements of deferred tax assets and liabilities to also be brought in line with IAS 12. As a result, the requirement to recognise a valuation allowance against tax assets in times where future taxable profits are unlikely has been removed. The valuation allowance was replaced by the requirement that a deferred tax asset only be recognised to the extent that future taxable profits are likely to be realised.
Following the uncertainty that arose in International Financial Reporting Standards (IFRS) with regards to the correct tax rate to be used for the recognition of deferred tax on investment properties, this exposure draft also introduces the rebuttable presumption that the recoverability of an investment property will be through sale, as was introduced in the amendments to IAS 12 issued in 2010.. This allows for recognising deferred tax on the fair value of investment properties at a tax rate that will be applicable should the investment property be sold.
Undue cost or effort
Further guidance is provided in this exposure draft as to what is meant by ‘undue cost or effort’, an exemption that appears in several sections of this standard. The exposure draft reads:
“An undue cost or effort exemption is specifically included for some requirements in the IFRS for SMEs to clarify that, if obtaining or determining the information necessary to comply with the requirement would result in excessive incremental cost or an excessive additional effort for an SME, the SME would be exempt from that specific requirement …. Undue cost or effort depends on the entity’s specific circumstances and on management’s judgement when assessing the costs and benefits. Whether the cost or effort is excessive (undue) requires consideration of how the economic decisions of the expected users of the financial statements could be affected by the availability of the information.”(“Section 2.14A and B”)
The following amendments are proposed to provide further relief by including the undue “cost or effort exemption” to the sections:
· Basic financial instruments are by default measured at amortised cost less impairment. Excluded from this default requirement however are certain types of investments that should be valued at its fair value. These investments specifically include non-convertible preference shares, non-puttable ordinary shares or preference shares which are trading publicly or have a reliable measurable fair value. The amendment furthered relief to stipulate that these investments are only required to be measured at its fair value if the determination of this fair value is without undue cost or effort. (“Section 2.47”)
· Intangible assets that are obtained through a business combination are only required to be recognised if the fair value of the intangible asset is obtainable without undue cost or effort at the date of acquisition. (“Section 18.8”)
· Equity instruments that are issued as consideration paid on a financial liability are required to be measured at the fair value of the equity instruments issued. Should the fair value not be determinable reliably without undue cost or effort, the equity instruments should be measured at the fair value of the financial liability. (“Section 22.15A”)
· Current tax assets and tax liabilities and deferred tax assets and liabilities shall only be offset should the intention be that it will be settled together and the entity has a legal right to do so. This is only required if the determination of this intention is without undue cost or effort. (“Section 29.29”)
· Should the fair value of an asset that is required to be measured at its fair value become undeterminable; the latest carrying amount of that asset will become its new cost and measurement will be based on the cost less impairment up until the date that a reliable fair value is determinable. It is important to note that this exemption only applies to assets that are required to be measured at its fair value if the determination of its fair value be without undue cost or effort. (“Section 11.32”)
Intangible assets and goodwill
Another notable modification was proposed to the measurement requirements of intangible assets and goodwill. Currently, intangible assets and goodwill of which a reliable useful life is undeterminable, a useful life of 10 years should be set. This is proposed to be amended that the useful life of such an asset not be set at 10 years, but rather be limited to a maximum of 10 years. (“Section 18.20”)
IFRS Annual Improvements (2009-2011 Cycle)
The following Annual Improvements to the International Financial Reporting Standards (2009-2011 Cycle) were also introduced as proposed amendments to the IFRS for SMEs:
· Items such as spare parts, stand-by equipment and servicing equipment should be recognised as property, plant and equipment should they meet the recognition requirements of section 17 – Property, plant and equipment. (“Section 17.5”)
· Income tax relating to distributions to owners must be accounted for in accordance with Section 29 (“Section 22.17”)
· An entity that has applied IFRS for SMEs in a previous period which is not the most recent previous period is allowed to make use of Section 35 – Transition to the IFRS for SMEs again or apply the IFRS for SMEs retrospectively in accordance with Section 10 – Accounting Policies, Estimates and Errors as if they had never stopped applying IFRS for SMEs. (Section 35.2”)
All amendments to this standard are proposed to be applied retrospectively with early adoption permitted.
Refer to the exposure draft (2013/9) for detailed proposed amendments. Comments on the proposed amendments should reach the IASB by 3 March 2014.
Author: Arthur Bishop CA(SA) is a Lecturer at the School of Accountancy at the University of Stellenbosch.