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IFRS for Small and Medium-sized Entities (SMEs) provides an alternative accounting framework for entities meeting certain eligibility criteria. IFRS for SMEs is a self-contained, comprehensive standard specifically designed for entities that do not have public accountability and publish general purpose financial statements for external users.
This section is intended to provide an overview of IFRS for SMEs, its eligibility criteria, and some examples of the differences between IFRS for SMEs, full IFRS, and US GAAP.

16.1.1 What companies can use IFRS for SMEs?

The IASB has determined that any entity that does not have public accountability may use IFRS for SMEs. An entity has public accountability if (1) its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market, or (2) it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance entity, pension fund, or securities broker/dealer. The definition of a SME is, therefore, based on the nature of the entity rather than on its size.
To clarify, a subsidiary of a listed company that uses full IFRS is eligible to use IFRS for SMEs when preparing its own separate financial statements, provided that the subsidiary itself does not have public accountability. However, a subsidiary using IFRS for SMEs would need to convert its financial statements to full IFRS for consolidation into its parent’s financial statements, as there are differences between the two accounting frameworks.
Beyond the scope determined by the IASB, companies are also subject to the laws of their local jurisdiction. Many countries require statutory reporting, and each country will individually decide whether IFRS for SMEs is an acceptable basis for such reporting. Some countries that use full IFRS for public company reporting have replaced their local GAAP with IFRS for SMEs (e.g., South Africa), or with a standard based on the IFRS for SMEs (e.g., the United Kingdom), while others currently have no plans to allow use of IFRS for SMEs for statutory purposes (e.g., France). Companies will need to understand on a country-by-country basis where IFRS for SMEs is allowed or required for statutory reporting.

16.1.2 Differences between full IFRS and IFRS for SMEs

IFRS for SMEs retains many of the accounting principles of full IFRS but simplifies a number of accounting principles that are generally less relevant for small and medium-sized entities. In addition, IFRS for SMEs significantly streamlines the volume and depth of disclosures required by full IFRS, yielding a complement of disclosures that are more user-friendly for SME stakeholders.
Certain more complex areas of full IFRS deemed less relevant to SMEs, including earnings per share, segment reporting, insurance, and interim financial reporting, are omitted from the IFRS for SMEs. In other instances, certain full IFRS principles are simplified to take into account the special needs of SMEs. Some examples of the differences between full IFRS and IFRS for SMEs include:
Business combinations—Under full IFRS, transaction costs are excluded from the consideration included in the accounting for business combinations (i.e., expensed as incurred), and a liability for contingent consideration that will be paid in cash is recognized regardless of the probability of payment. Under IFRS for SMEs, transaction costs are included in the cost of the acquisition, and contingent consideration is recognized only if it is probable the amount will be paid and its amount can be reliably measured.
Capitalization of interest—Under full IFRS, interest directly attributable to the acquisition, construction, or production of qualifying assets should be capitalized. Under IFRS for SMEs, all interest must be expensed.
Investments in associates—Under full IFRS, investments in associates are accounted for using the equity method. Under IFRS for SMEs, investments in associates may be accounted for using the cost model, equity method, or at fair value through profit and loss.
Goodwill and indefinite-lived intangibles—Under full IFRS, goodwill and indefinite-lived intangible assets must be tested at least annually for impairment, or more often when an indicator of impairment exists. Under IFRS for SMEs, there is no concept of indefinite-lived intangible assets. IFRS for SMEs requires that goodwill and intangible assets be amortized over the useful life of the asset (or a term not to exceed 10 years if the useful life cannot be determined). Goodwill and intangible assets are also tested for impairment only when an indicator of impairment exists.
Research and development costs—Under full IFRS, research costs are expensed but development costs meeting certain criteria are capitalized. Under IFRS for SMEs, all research and development costs are expensed.
Recognition of exchange differences—Under full IFRS, exchange differences that form part of an entity’s net investment in a foreign operation (subject to strict criteria of what qualifies as net investment) are recognized initially in other comprehensive income and are recycled from equity to profit or loss on disposal of the foreign operation. Under IFRS for SMEs, recycling through profit or loss of any cumulative exchange differences that were previously recognized in OCI on disposal of a foreign operation is not permitted.

16.1.3 Differences between US GAAP and IFRS for SMEs

In areas where US GAAP and IFRS are mostly converged (e.g., business combinations), the differences between US GAAP and IFRS for SMEs likely will seem similar to the differences noted above between full IFRS and IFRS for SMEs. However, there are other examples of differences between US GAAP and IFRS for SMEs:
Inventory—Under US GAAP, last in, first out (LIFO) is an acceptable method of measuring the cost of inventory. In addition, impairments to inventory value are permanent. Under IFRS for SMEs, use of LIFO is not allowed, and impairments of inventory may be reversed under certain circumstances.
Provisions—Under US GAAP, a provision is recorded if it is probable (generally regarded as 75 percent or greater) that an outflow will occur. If no best estimate of the outflow is determinable but a range of possibilities exists, then the lowest point of the range is the value that should be recorded. Under IFRS for SMEs, a provision is recorded if it is more likely than not (generally considered to be greater than 50 percent) that an outflow will occur. If no best estimate of the outflow is determinable but a range of possibilities exists, and each point in that range is as likely as any other, the midpoint of the range should be recorded.
Equity instruments—Under US GAAP, complex equity instruments, such as puttable stock and certain mandatorily redeemable preferred shares, may qualify as equity (or mezzanine equity). Under IFRS for SMEs, these types of instruments are more likely to be classified as a liability, depending on the specifics of the individual instrument.
Finally, the Private Company Council (PCC) was established in 2012. The PCC is a sister entity to the FASB and is tasked with (1) identifying, deliberating and voting on proposed alternatives within existing US GAAP for private companies and (2) acting as the primary advisory body to the FASB for private company matters on its current technical agenda. Contrary to IFRS for SMEs, the alternatives proposed by the PCC do not represent a single comprehensive standard but separate individual accounting alternatives for private companies that are optional to adopt. As additional alternatives to existing US GAAP for private companies are proposed by the PCC and endorsed by the FASB, additional differences may be created for private companies between US GAAP and full IFRS or IFRS for SMEs.
While the PCC alternatives create optional simplifications to existing US GAAP, entities applying IFRS for SMEs may not generally elect to revert to full IFRS if they do not like the simplified accounting required by IFRS for SMEs. The one exception is in the area of financial instruments, when IFRS for SMEs specifically allows entities to choose to apply the recognition and measurement requirements of IFRS 9 as a policy election.
The FASB has issued accounting standards updates to US GAAP for private companies. These standards represent alternatives for private companies to existing US GAAP related to the accounting for goodwill subsequent to a business combination, the accounting for certain types of interest rate swaps, the application of variable interest entities guidance to common control leasing arrangements, and the accounting for identifiable intangible assets in a business combination. These alternatives to US GAAP are presented in each relevant chapter of this publication.

16.1.4 2019 comprehensive review of IFRS for SMEs

The Board intends to update IFRS for SMEs periodically (i.e., every three years or so) to minimize the impact of changing accounting standards on SME financial statement preparers and users of such financial statements. The last update was in 2015, with the related amendments being effective January 1, 2017. Accordingly, recently issued new standards, including IFRS 9, Financial Instruments, IFRS 15, Revenue from Contracts with Customers, and IFRS 16, Leases, were not considered in the last update. The next comprehensive review of the IFRS for SMEs started in early 2019.
As IFRS for SMEs is designed to be a stable, stand-alone standard, the IASB decided not to incorporate some significant changes in new or amended IFRS standards into the last update, including those in IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, and IFRS 13, Fair Value Measurement, and amendments to IFRS 3, Business Combinations, (2008) and IAS 19, Employee Benefits, (2011).
In addition to the IASB’s periodic updates to IFRS for SMEs, the SME Implementation Group (SMEIG) considers implementation questions raised by users of IFRS for SMEs. When deemed appropriate, the SMEIG develops proposed guidance in the form of questions and answers (Q&As) which, if approved by the IASB, are issued as non-mandatory guidance. Over time, these Q&As are generally incorporated into either IFRS for SMEs (and made mandatory) and/or the IFRS Foundation’s educational material (remaining non-mandatory).
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