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.