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- 15 Marks
Question
International Financial Reporting Standards (IFRS) for Small and Medium-Sized Entities (SMEs)
International Financial Reporting Standards (IFRS) for small and medium size entities (SMEs) was mandatorily adopted in Nigeria as at January 1, 2014. Entities that do not meet the IFRS for SME criteria shall report using Small and Medium Size Entities Guidelines on Accounting (SMEGA).
Jossy Limited has total costs excluding land of two-hundred million naira. Being a family business, the labor force totaled 150 workers with an annual turnover of N18 million. The management of this company sought your advice to have better understanding of some of the recognition and measurement principles of SMEs.
Required:
(a) Justify the need for IFRS for SMEs financial statements. (6 Marks)
(b) Assess the circumstances of Jossy Limited and advise on the principal recognition and measurement principles that will reduce the company’s reporting burden. (9 Marks)
Answer
(a) Justification for IFRS for SMEs Financial Statements (6 Marks)
The adoption of IFRS for SMEs provides significant benefits to entities like Jossy Limited:
- Simplified Framework:
IFRS for SMEs eliminates unnecessary complexity by focusing on smaller entities, omitting irrelevant topics like earnings per share and segment reporting. - Cost-Effectiveness:
SMEs face reduced compliance costs due to limited disclosure requirements and simplified recognition principles. - Ease of Implementation:
The standards are structured by topics with simpler language, making them practical for implementation without requiring specialized expertise. - Enhances Comparability:
By aligning financial reporting standards for SMEs globally, IFRS for SMEs enhances comparability across jurisdictions, attracting investors. - Reduced Disclosure Requirements:
Smaller entities do not need to disclose detailed, complex information like full IFRS, thus saving resources. - Promotes Accountability:
Helps SMEs like Jossy Limited provide credible financial statements to stakeholders, increasing trust and credibility.
(b) Recognition and Measurement Principles for Jossy Limited (9 Marks)
Based on the circumstances of Jossy Limited, the following recognition and measurement principles under IFRS for SMEs will ease reporting burdens:
- Intangible Assets (IAS 38):
- Internally generated intangible assets are expensed rather than capitalized, eliminating complex criteria evaluation.
- Simplified treatment prevents overstatement of assets and ensures consistency.
- Property, Plant, and Equipment (IAS 16):
- Use the cost model instead of the revaluation model to avoid periodic revaluation complexities.
- Depreciation is applied on a systematic basis over the asset’s useful life.
- Borrowing Costs (IAS 23):
- Borrowing costs are recognized as expenses when incurred, avoiding the need to capitalize them on qualifying assets.
- Goodwill (IFRS 3):
- Amortize goodwill over its useful life, presumed to be 10 years if not reliably estimable, instead of annual impairment testing.
- Government Grants (IAS 20):
- Grants are recognized as income when receivable, instead of complex deferred income treatment or capital offsets.
- Revenue Recognition (IFRS 15):
- Revenue is recognized when control of goods or services is transferred, simplifying deferred revenue handling.
- Impairment Testing (IAS 36):
- Impairment tests are only required when there are specific indicators of impairment, reducing annual assessments.
- Investment Property (IAS 40):
- Apply fair value through profit or loss only if it can be measured reliably and cost-effectively.
- Financial Instruments (IFRS 9):
- Simplified approach to financial instrument classification: amortized cost or fair value through profit or loss.
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