Wednesday, October 27, 2010

Learning IFRS for SMEs from PwC Publications

On July 9, 2009 the IASB published the International Financial Reporting Standard for Small and Medium-size Entities (IFRS for SMEs). The IFRS for SMEs applies to all entities that do not have public accountability. An entity has public accountability if it files its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instrument in a public market, or if it holds assets in a fiduciary capacity for a broad group of outsiders – for example, a bank, insurance entity, pension fund, securities broker/dealer.

The definition of an SME is therefore based on the nature of an entity rather than on its size.

The IASB developed this standard in recognition of the difficulty and cost to private companies of preparing full compliant IFRS information. It also recognised that users of private entity financial statements have a different focus from those interested in publically listed companies. IFRS for SMEs attempts to meet the user’s needs while balancing the costs and benefits to preparers.

IFRS for SMEs is a stand-alone standard; it does not require preparers of private entity financial statements to cross-refer to full IFRS.

One of the big four accounting firms, PricewaterhouseCoopers (PWC) has published several materials to help familiarise accounting practices with the requirement of this standards.

There are four downloadable IFRS for SMEs publications as listed below. Just click the link to download directly from the source pages :

  1. Similarities and Differences : A Comparison of 'Full IFRS' and IFRS for SMEs 
  2. IFRS for SMEs : Pocket Guide 2009
  3. IFRS for SMEs - Illustrative Consolidated Financial Statements 2010
  4. IFRS for SMEs: A Less Taxing Standard ?

Source : PwC - IFRS for SMEs

The main changes of IAS 40 (2003 revised)

In December 2003, the IASB issued a revised version of IAS 40 Investment Property.

There are several main changes of revised IAS 40 from the previous version as described below (IN4 to IN11 of IAS 40) :

IN5 of IAS 40 states that a property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property provided that :

  1. the rest of the definition of investment property is met;
  2. the operating lease is accounted for as if it were a finance lease in accordance with IAS 17 Leases; and
  3. the lessee uses the fair value model set out in IAS 40 for the asset recognised.

The classification alternative described in paragraph IN5 is available on a property-by-property basis. However, because it is a general requirement of the Standard that all investment property should be consistently accounted for using the fair value or cost model, once this alternative is selected for one such property, all property classified as investment property is to be accounted for consistently on a fair value basis.

The Standard requires an entity to disclose :

  1. whether it applies the fair value model or the cost model; and
  2. if it applies the fair value model, whether, and in what circumstances, property interests held under operating leases are classified and accounted for as investment property.

Further, it describes that when a valuation obtained for investment property is adjusted significantly for the purpose of the financial statements, a reconciliation is required between the valuation obtained and the valuation included in the financial statements.

The Standard clarifies that if a property interest held under a lease is classified as investment property, the item accounted for at fair value is that interest and not the underlying property.

As stated in IN10 that comparative information is required for all disclosures.

Latest, IN11 of IAS 40 states that some significant changes have been incorporated into the Standard as a result of amendments that the Board made to IAS 16 Property, Plant and Equipment as part of the Improvement projects :

  1. to specify what costs are included in the cost of investment property and when replaced items should be derecognised;
  2. to specify when exchange transactions (ie. transactions in which investment property is acquired in exchange for non-monetary assets, in whole or in part) have commercial substance and how such transactions, with or without commercial substance, are accounted for; and
  3. to specify the accounting for compensation from third parties for investment property that was impaired, lost or given up.

Thursday, October 21, 2010

The basic concept of Investment Property

IAS 40 Investment Property shall be applied in the recognition, measurement and disclosure of transactions regarding investment property.

What is the definition of Investment Property ?

Based on Para. 5 of IAS 40, Investment Property is property (land or building – or part of a building – or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for (a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business.

Investment Property is the opposite of Owner-occupied property. The Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes.

Investment property is held to earn rentals or for capital appreciation or both. Therefore, an investment property generates cash flows largely independently of the other assets held by an entity. This distinguishes investment property from owner-occupied property. The production or supply of goods or services (or the use of property for administrative purposes) generates cash flows that are attributable not only to property, but also to other assets used in the production or supply process. IAS 16 Property, Plant and Equipment applies to owner-occupied property.

In the step of recognition, investment property shall be recognised as an asset when, and only when :

  1. it is probable that the future economic benefits that are associated with the investment property will flow to the entity; and
  2. the cost of the investment property can be measured reliably.

An investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement. The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure which includes, for example, professional fees for legal services, property transfer taxes and other transactions costs. While, the cost of a self-constructed investment property is its cost at the date when the construction or development is complete. Until that date, an entity applies IAS 16. At that date, the property becomes investment property and IAS 40 applies.

After the initial recognition, an entity may choose as its accounting policy measurement of investment property either the fair value model or the cost model, and shall apply that policy to all of its investment property.

If an entity choose the cost model, it shall measure all of its investment property in accordance with IAS 16’s requirements for that model, other than those that meet the criteria to be classified as held for sale (or are included in a disposal group that is classified as held for sale) in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Regarding the depreciation, if an entity choose the cost model as its investment property measurement, it has to depreciate the property in accordance with IAS 16. While the fair value model was chosen, the property shall not be depreciated (Hrd).

Monday, October 11, 2010

What are the threshold of criteria #3 and #4 of IAS 17 have to be met to be classified as a finance lease ?

IAS 17 Leases stipulates that whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract.

Situations that, individually or in combination, would normally lead to a lease being classified as a finance lease are :

  1. the lease transfers ownership of the asset to the lessee by the end of the lease term;
  2. the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised;
  3. the lease term is for the major part of the economic life of the asset even if title is not transferred;
  4. at the inception of the lease the present value of the minimum lease payments amounts  to at least substantially all of the fair value of the leased assets; and
  5. the leased assets are of such a specialised nature that only the lessee can use them without major modifications.

Of the third criterion, it may stir a question about the threshold of the ‘major part of the economic life of the asset’. IAS 17 was not clearly explained this definition. But, if we refer to the US GAAP of SFAS 13 Accounting for Leases, in paragraph 7c, the standard stated that the lease term is equal to 75 percent or more of the estimated economic life of the leased property. So, if the lease term met the 75% of the estimated economic life of the leased asset, it fulfilled the third criteria and the lease has to be classified as a finance lease.

Besides, a query may also arise from the fourth criterion that defines what are essentially arrangements to fully compensate the lessor for the entire value of the leased property as financing arrangements. Under IAS 17, such quantitative threshold is not provided. While the US GAAP of SFAS 13 in paragraph 7d states that the present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized by him. So, based on the US GAAP, the threshold of the present value of minimum lease payments amounts must be at least 90% of leased asset fair value to be classified as a finance lease (Hrd).