1 International Financial Reporting Standards IFRS for SMEs IFRS Foundation-World Bank 18–20 October 2011 Sarajevo, Bosnia and Herzegovina Copyright © 2010 IFRS Foundation. All rights reserved.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 2 The IFRS for SMEs Topic 2.2(a) Quiz and Discussion Section 11 Basic Financial Instruments Pascal Frerejacque

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 3 Section 11 – Case Below are items in an entity’s trial balance. Which items are in the scope of Section 11? For those that are in, how to measure after initial recog- nition? FVTPL? Amortised cost? Cost less impairment? Subsequent Measurement? Account In Sec 11? FV TPL Amor -tised Cost Cost less Impair- ment Opening Retained Earnings No (see 11.7(b)) Entity’s own equity is covered by Section 22 Continued...

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 4 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Share capitalNo (see 11.7(b)) Entity’s own equity is covered by Section 22 PP&ENoNot a financial asset Intangible assetsNoNot a financial asset Investment in Associate No (see 11.7(a)) Associates are covered by Section 14 Deferred tax assetNoNot a financial asset – statutory, not contractual

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 5 Section 11 – Case Subsequent Measurement? AccountIn Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment InventoryNoNot a financial asset Trade receivablesYes (see para 11.14(a)) Measure at undiscounted cash to be received (ie net of impairment) unless a financing transaction

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 6 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment CashYesMeasure at cash equivalent in functional currency Investment in non- puttable listed ordinary shares Yes (11.14(c) (i)) Quoted market price

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 7 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Investment in non-puttable non- convertible unlisted preference shares Yes (11.14(c) (ii)) If FV is reliably measur able If FV not reliably measurable

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 8 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Investment in fixed interest term bonds Yes (unless violates 11.9(b)-(d)) Yes Investment in mutual fund (holds debt and equity) No. Not in Will be at FVTPL under Sec 12 because FV is reliably measurable.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 9 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Bank deposit (fixed term and interest) Yes (unless violates 11.9(b)-(d)) Yes Loan receivable from employee (fixed term & int.) Yes (unless violates 11.9(b)-(d)) Yes

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 10 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amortised Cost Cost less Impair- ment Loan receivable from associate, no interest, repayable on demand Yes (unless violates 11.9(b)- (d)) Yes (discounted from date expected to be received)

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 11 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Bank loan payable (fixed term & int.) Yes (unless violates 11.9(b)- (d)) Yes Liability for long-term employee benefits No (see 11.7(d)) Employee benefits are covered by Section 28

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 12 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amortised Cost Cost less Impair- ment Obligations under finance leases No (see 11.7(c)) Leases are covered by Section 20 Trade payablesYes (see para 11.14(a)) Measure at undiscounted cash to be paid unless a financing transaction

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 13 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amortised Cost Cost less Impair- ment Warranty obligation NoNot a financial liability – will not result in payment of cash or financial assets Rent payableYesMeasure at undiscounted cash to be paid unless a financing transaction

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 14 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Interest payableYes Current tax liability NoNot a financial liability – statutory, not contractual Bank overdraft (due on demand, market rate of interest) Yes. Not discounted (due on demand)

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 15 Section 11 – Quiz and discussion Question 1: Under the IFRS for SMEs an entity may choose, instead of Sections 11 and 12: a.Full IFRSs for fin. inst: (IAS 32, IAS 39, & IFRS 7) b.Recognition and measurement provisions of Sections 11 and 12 and the disclosure provisions of IFRS 7 c.Recognition and measurement provisions of IAS 39 and the disclosure provisions of Sections 11 and 12 Recognition and measurement provisions of either IFRS 9 or IAS 39 and disclosure provisions of Sections 11 and 12

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 16 Section 11 – Quiz and discussion Question 1: Under the IFRS for SMEs an entity may choose, instead of Sections 11 and 12: a.Full IFRSs for fin. inst: (IAS 32, IAS 39, IFRS 7) b.Recognition and measurement provisions of Sections 11 and 12 and the disclosure provisions of IFRS 7 c.Recognition and measurement provisions of IAS 39 and the disclosure provisions of Sections 11 and 12 d.Recognition and measurement provisions of either IFRS 9 or IAS 39 and disclosure provisions of Sections 11 and 12

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 17 Section 11 – Quiz and discussion Question 2: Which of the following is a financial asset outside scope of both Sections 11 & 12? a.Trade receivables b.5% holding in non-puttable ordinary shares of another entity c.5% holding in puttable ordinary shares of another entity d.30% holding in ordinary shares of another entity that give us ‘significant influence’ over the other entity e.Cash

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 18 Section 11 – Quiz and discussion Question 2: Which of the following is a financial asset outside scope of both Sections 11 & 12? a.Trade receivables b.5% holding in non-puttable ordinary shares of another entity c.5% holding in puttable ordinary shares of another entity d.30% holding in ordinary shares of another entity which give us ‘significant influence’ over the other entity. Associate – follow Section 14. e.Cash

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 19 Section 11 – Quiz and discussion Question 3: Which of the following is not a basic financial instrument (ie outside scope of Sec 11)? a.Investment in non-convertible, non-puttable preference shares b.An entity’s own equity instrument c.A fixed-interest, fixed-term loan payable to a bank d.A variable-interest, fixed-term loan payable to a bank e.An interest-free loan from a parent entity

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 20 Section 11 – Quiz and discussion Question 3: Which of the following is not a basic financial instrument (ie outside scope of Sec 11)? a.Investment in non-convertible, non-puttable preference shares b.An entity’s own equity instrument c.A fixed-interest, fixed-term loan payable to a bank d.A variable-interest, fixed-term loan payable to a bank e.An interest-free loan from a parent entity

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 21 Section 11 – Quiz and discussion Question 4: Entity buys 100 ordinary shares in Co X on London Stock Exchange for 20 per share, plus brokerage fee of 100. Co X is not a subsidiary, not a JV, not an associate of the entity. Entity should initially recognise the investment at: a.1,900 b.2,000 c.2,100

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 22 Section 11 – Quiz and discussion Question 4: Entity buys 100 ordinary shares in Co X on London Stock Exchange for 20 per share, plus brokerage fee of 100. Co X is not a subsidiary, not a JV, not an associate of the entity. Entity should initially recognise the investment at: a.1,900 b.2,000. Quoted equity instrument, so FVTPL, therefore 100 fee is expensed c.2,100

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 23 Section 11 – Quiz and discussion Question 5: Entity borrows 10,000 from a bank 5 years, fixed interest payable annually 6% in arrears. (This is a market rate.) Bank charges entity 50 loan application fee. Entity should measure the loan on initial recognition at... a.7,473 (= PV 10,000 at 6% for 5 years) b.7,423 c.9,950 d.10,000 e.10,050

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 24 Section 11 – Quiz and discussion Question 5: Entity should measure the loan on initial recognition at... a.7,473 (= PV 10,000 at 6% for 5 years) b.7,423 c.9,950. Loan will be carried at amortised cost. Fee is netted against loan. Affects effective interest. See next slide... d.10,000 e.10,050

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 25 Section 11 – Quiz and discussion Excel Col A Column B [“Guess” at IRR, can omit] % [=IRR(A1:A6,A7)] Using Excel to calculate internal rate of return in Question 5

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 26 Section 11 – Quiz and discussion Year Loan liability beginning Interest expense at % Cash paid Loan liability ending 1 9, , , , , ,000 Calculations for the answer, Question 5:

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 27 Section 11 – Quiz and discussion Question 6: 1/1/X1 entity gives employee interest- free 4-year of car loan 10,000. Bank would have charged 8%. Loan receivable at 1/1/X1= ??? And interest income for year X1 = ??? ChoicesInitial receivableInterest income for X1 a7,3500 b 800 c7, d10,0000 e 800

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 28 Section 11 – Quiz and discussion Question 6: 1/1/X1 entity gives employee interest- free 4-year of car loan 10,000. Bank would have charged 8%. Loan receivable at 1/1/X1= ??? And interest income for year X1 = ??? (c) Loan receivable 1/1/X1= 7,350* Interest income for X1 = 8% x 7,350 = 588 *Present value of 10,000 to be received in 4 years at 8%. In an Excel spreadsheet cell put: =(10000)/1.08^4

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 29 Section 11 – Quiz and discussion Question 7: When assessing impairment of financial assets measured at cost or amortised cost, which must be assessed individually? a.All financial assets that are individually significant b.All equity instruments that are individually significant c.All equity instruments d.All financial assets except equity instruments e.All equity instruments and other financial assets that are individually significant

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 30 Section 11 – Quiz and discussion Question 7: Which must be assessed individually? a.All financial assets that are individually significant b.All equity instruments that are individually significant c.All equity instruments d.All financial assets except equity instruments e.All equity instruments and other financial assets that are individually significant

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 31 Section 11 – Quiz and discussion Question 8: SME sells 100 of receivables to bank for 85. SME continues to collect and remit amounts collected to bank, for which bank pays a fee to SME. SME has no obligation for credit losses or for slow payment by debtors. How is this transaction accounted for? See choices on next slide...

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 32 Section 11 – Quiz and discussion Question 8: Answer choices: a.SME removes receivables from its statement of financial position and shows no liability for 85 proceeds b.SME keeps 100 receivables on its statement of financial position and shows a liability for 85 c.SME keeps 100 receivables on its statement of financial position and shows no liability for 85 d.SME removes receivables from its statement of financial position and shows a liability for 85

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 33 Section 11 – Quiz and discussion Question 8: Answer choices: a.SME removes receivables from its balance sheet and shows no liability for 85 proceeds b.SME keeps 100 receivables on its statement of financial position and shows a liability for 85 c.SME keeps 100 receivables on its statement of financial position and shows no liability for 85 d.SME removes receivables from its statement of financial position and shows liability 85

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 34 Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK This presentation may be modified from time to time. The latest version may be downloaded from: The accounting requirements applicable to small and medium ‑ sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.