Dissertation

ERP Implementation of IFRS for SMEs

A Dissertation Report

In partial fulfillment of the requirement

Submitted By

Gaurav kumar Kureel

INTERNATIONAL SCHOOL OF BUSINESS & MEDIA

PGDBM

( Finance & System )

Academic Year 2008-2010

Under the guidance of

Prof. Mahesh Ramdasi
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Declaration

I Gaurav kumar Kureel, the student of International School of Business & Media of PGDBM (Finance &
System) hereby declare that I have completed my dissertation, titled ‘ERP Implementation of IFRS for
SMEs’ in academic year 2009-10. The information submitted herein is true & original to the best of my
knowledge.

(Gaurav kumar Kureel)

Signature of the Student
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Acknowledgement

I take this opportunity to acknowledge the efforts of the many individuals who helped me to make this
dissertation possible. This dissertation report could not have been written, if not for the help &
encouragement of various people. Hence for the same reason I would like to thank Mr. Mahesh Ramdasi
(Professor, ERP System) who not only served as my Guide but also encouraged and challenged me
throughout my academic program, never accepting less than my best efforts and last but not the least my
family who gave me paramount support. I would like to express my heartfelt appreciation and gratitude to
all.

I would also thank my college International School of Business & Media, for providing me the
opportunity to do a project.

Gaurav kumar Kureel

February, 2010
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Certificate

This is to certify that Mr. Gaurav kumar L. Kureel student of International School of Business and
Media, Pune has successfully completed the dissertation work titled ‘ERP implementation of IFRS for
SMEs’ in partial fulfillment of requirement for the award of Post Graduate Program in Business
Management prescribed by the International School of Business and Media, Pune. This project is the
record of authentic work carried out during the academic year 2008 – 2010.

Dissertation Guide

Prof. Mahesh Ramdasi

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Executive Summary
As of now, 102 countries have either adopted or are converging to IFRS,
including Australia, New Zealand, Pakistan, Singapore, China, West Asia, Japan, Africa and countries in
the European Union (EU). Now, the ICAI, India’s premier accounting body, has decided to adopt IFRS
with effect from April 1, 2011, for public limited companies and will be extended to other entities in a
phased manner. The numerouno status to IFRS came about after the EU made IFRS mandatory for all its
listed companies starting 2005. Consequently, more than 8,000 EU-listed companies adopted IFRS in one
go.
Adopting the IFRS will be advantageous for all companies who are looking for
raising fund for either expanding or growing their business from the global financial institutions. The
International Financial Reporting Standards (IFRS) are accounting standards which most countries are
adopting so that companies in those countries can have similarities in their presentation of financial status
which allows more investors across the world to understand the financial performance of their
organizations and to invest in their organizations.
As these standards are basically for those companies who are looking for raising
funds from public or have already raised fund for their use i.e. listed companies and have to show their
financial status to their investors and the regulating body. But as these standards are made compulsory to
be followed by every organization in the country by most countries whether they are listed or not listed,
even the unlisted companies have to follow the entire IFRS standards so in this dissertation I have tried to
implement the ERP of IFRS for SMEs who are not listed and do not need to follow all IFRS standards.
How any IT company should proceeds for implementing the ERP of IFRS for
SMEs whose requirements and needs are less than the complete ERP package of IFRS implementation,
and which IFRS standards should be considered for unlisted companies. In this dissertation, I have tried
to focus on the ‘IFRS for SMEs’, ‘ERP for SMEs’ and ‘how ERP can be implemented for IFRS’. As
many IT companies like IBM, TCS have started working on the similar kind of implementations package
for Indian SMEs which are also growing at higher rate and are trying to raise funds by means of private
equity, this dissertation could be useful.
This dissertation will mainly focus on IFRS for SMEs, how we could adopt that,
how will IT technology like ERP will help in implementing this, what difficulties can be faced while
implementing IFRS for SMEs, what are different ways to implement the ERP for IFRS.
 Table Of Contents
Acknowledgement iii
Certification iv
Executive Summary v
1. Introduction 1

1.1. Background 1

1.2. Objective 2

1.3. Significance 2

2. Literature Review 3

3. IFRS for SMEs 4

3.1. IFRS (International Financial Reporting Standards) 6

3.2. SMEs (Small and Medium sized Enterprises) 15

3.3. IFRS for SMEs 18

3.4. IFRS for SMEs in India 36

4. ERP for SMEs 39

4.1. ERP (Enterprise Resource Planning) 40

4.2. ERP for SMEs 44

5. ERP Implementation of IFRS for SMEs 49

5.1. Impact of IFRS on IT of company 50

5.2. Effects of conversion to IFRS on System & Process 52

5.3. ERP Implementation of IFRS for SMEs (Selected Topics) 55

6. Conclusion & Recommendation 61

6.1. Conclusion 61

6.2. Recommendation 61

7. Supplementary Parts 62

7.1. Glossary 62

7.2. References 62
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1. Introduction
1.1. Background

Till 2005, entire world was using their own financial accounting standards for the domestics
companies to show their financial status which was sufficient for the domestic investors but when
companies started looking for fund raising from foreign investors across the world and the investors
started investing in foreign companies, then they started feeling problem of understanding the domestics
financial presentation methods of other countries. This problem was first seen in European countries
which made the need of some standards that would be similar for all countries and by which all investors
across the world could understands the financial status of company in other country and at same time it
will give opportunities to companies, to adopt the standards and become eligible for receiving funds from
investors of various foreign countries.

The need to show financial representation in international standards which would be accepted by all
countries who will adopt the same standards, has generated the IFRS (International Financial Reporting
Standards). It eliminates the work required by the multinational companies to prepare their reports in
various format. The IFRS (International Financial Reporting Standards) are standards, interpretations and
the framework adopted by the International Accounting Standards Board (IASB). Many of the standards
forming part of IFRS are known by the older name of International Accounting Standards (IAS). IASs
were issued between 1973 and 2001 by the Board of the International Accounting Standards
Committee (IASC). On 1 April 2001, the new IASB took over from the IASC the responsibility for
setting International Accounting Standards. During its first meeting the new Board adopted existing IAS
and SICs. The IASB has continued to develop standards calling the new standards IFRS.

The IFRS is mainly for the companies who publicly traded i.e. whose shares are traded in the market and
they have to show their financial reports to shareholders, investors and administration that control the
exchanges where the shares of company are traded. But for the companies which are privately owned i.e.
whose shares are not traded in public and they don’t have to show their financial report to any investor or
administration, adopting the entire IFRS would be no use. Such companies are known as small and
medium sized enterprises (SMEs), needs special financial reporting standards i.e. IFRS for SMEs.

ERP (Enterprise Resource Planning) implementations for IFRS will not just going to be technical
modification for accounting practice which is presently being done by companies but it will be more than
that, it will comprise various adjustment by management. ERP implementation is being going on in India
from decades which help in reducing time consumption and human error in the practices.
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1.2. Objective

The objective of this dissertation is to understand the importance of IFRS for SMEs which would be like
modified version of IFRS for privately owned companies which are important for Indian economy. To
study and prepare the ERP implementation of IFRS for SMEs which means ERP for SME which could
deal with the financial reporting for them as per IFRS but using those standards only which are required
to follow by private companies.

1.3. Significance
 The outcome of this dissertation is about the ERP implementation of IFRS for SMEs i.e.
understanding which standards to include and which standards to exclude for SMEs before
implementing the ERP for SMEs as they are more into cost control.
 As the outcome of this dissertation is related to IFRS implementation for SMEs which would be
compulsory for all companies to implement whether they are privately owned or publically
traded, will be useful for implementing the IFRS.
 As SMEs are looking to implement IT as SaaS (Software as a Solution) which will help in
reducing the cost of manual completion of work and reduce the human error in the work.
 The IT companies can use the outcomes of this dissertation for implementing the ERP for SMEs
which will give them new business line to work as there is more opportunities in SMEs for the IT
companies.
 Even for privately owned SMEs which have to implement the IFRS for financial representation,
need not to go for full version of IFRS but can get the customized IFRS for privately owned
companies which will be less costly and simple to implement.
 Privately owned companies who are adopting IFRS, can use ERP for the real time representation
of financial status of their companies to banks, private investors, merger & acquisition clients and
other publically held companies.
 IFRS will be important in order to access capital markets. Publicly-held companies should find
this attractive as an alternative method of obtaining capital, but if you are a private company, you
are often entirely dependent on commercial lenders for capital. Analysts for these lenders are
always looking at how you are doing, comparing your company against competitors. It is hard to
do that without a uniform measure to compare organizations.
 Manufacturers who are not publicly held often act as suppliers to companies that are public.
These corporations in turn may see IFRS as a way to gain greater visibility into the financial
health of their supply chain partners, which means the ability to communicate through IFRS
could make a vendor more attractive as a trading partner.
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2. Literature Review

This dissertation is about the ERP implementation of IFRS for SMEs which is mainly for privately
owned companies. While regulatory requirements to adopt international financial reporting standards
(IFRS) may appear to be a concern for publicly-traded companies only, there are plenty of reasons
that privately-held entities will want to prepare to adopt IFRS as well. It is for them who have to
adopt the IFRS but adopting the full version of IFRS would be of no use as they don’t have to show
this to their investors. So these can adopt IFRS for SMEs which is specially designed for privately
owned companies.

There are already so many research and innovative changes have been published regarding ERP
implementation for SMEs which are specially designed for SMEs. The increasingly global nature of
business will make IFRS capabilities a business success factor. Some US manufacturers with
subsidiaries in countries that have rolled out IFRS will already have to run at least part of their
business on international standards. Other companies planning to expand globally will want to
develop IFRS capabilities proactively. There are already enough organizational hurdles to hanging a
shingle in a different country without adding a new financial reporting methodology at the same time!
Moreover, potential customers, particularly those located in geographies where IFRS is already
mandated, will use international standards rather than US GAAP to evaluate the financial stability of
their vendors.

The various research papers like

 ‘Why privately-held manufacturers should implement IFRS-ready ERP’ by Christine

Anderson, Partner, Baker Tilly Virchow Krause and Mitch Dwight, CFO, IFS N. America.
 ‘IFRS for SMEs in India’ by Anurag Singal, Chartered Accountant, India.
 ‘Concept Paper on Convergence with IFRSs in India’ issued by the Institute of Charted
Accountants of India.
 ‘Mapping with the Change – IFRS implementation Guide’ issued by PWC, US
 The International Financial Reporting Standards for Small and Medium –sized Entities (IFRS
for SMEs) issued by International Accounting Standards Board.
 Survey for ‘IFRS for private companies’ done by Deloitte Development LLC.

Similarly there are so many research papers related to same topic are have been issued till now
focusing on the ERP implementation of IFRS for SMEs. This dissertation is also focuses on the issues
related with ERP implementation of IFRS which is not just technical but also managerial and
accounting changes.
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3. IFRS for SMEs

Here in chapter, I have discussed about IFRS, like what is it? Why we require these standards? What
would be the advantages of adopting IFRS? And then I have discussed about SMEs, like what is it?
Why they are concentrated more? And why IFRS for SMEs is important? Following are the sub-topic
which will be discussed in details:-

3.1. IFRS (International Financial Reporting Standards)

3.1.1. About IFRS
3.1.2. List of Standards issued under IFRS
3.1.3. Accounting standards in India
3.1.3.1. IGAAP to IFRS
3.1.3.2. An Overview of IFRS roadmap in India
3.1.3.3. Key differences between GAAP and IFRS
3.1.4. Things to be consider for IFRS conversion
3.1.4.1. A strategic conversion for IFRS
3.1.4.2. Potential impact of IFRS
3.1.4.3. IFRS Top 20 checklist
3.2. SMEs (Small and Medium sized Enterprises)
3.2.1. About SMEs
3.2.2. Objective & Qualitative Characteristics of Financial statement of SMEs
3.2.2.1. Objective of Financial statement of SMEs
3.2.2.2. Qualitative characteristics of financial statement of SMEs
3.3. IFRS for SMEs
3.3.1. Financial Statement Presentation
3.3.2. Statement of Financial Position
3.3.3. Statement of Comprehensive Income and Income Statement
3.3.4. Statement of Changes in Equity and Statement of Comprehensive Income and
Retained Earning
3.3.5. Statement of Cash Flows
3.3.6 Notes to the Financial Statements
3.3.7 Consolidated and Separate Financial Statements
3.3.8 Accounting Policies, Estimates and Errors
3.3.9 Basic Financial Instruments
3.3.10 Additional Financial Instruments Issues
3.3.11 Inventories
3.3.12 Investments in Associates
3.3.13 Investments in Joint Ventures
3.3.14 Investment Property
3.3.15 Property, Plant and Equipment
3.3.16 Intangible Assets other than Goodwill
3.3.17 Business Combinations and Goodwill
3.3.18 Lease
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3.3.19 Provisions and Contingencies

3.3.20 Liabilities and Equity
3.3.21 Revenue
3.3.22 Government Grants
3.3.23 Borrowing Costs
3.3.24 Share-based Payment
3.3.25 Impairment of Assets
3.3.26 Employee Benefits
3.3.27 Income Tax
3.3.28 Foreign Currency Translation
3.3.29 Hyperinflation
3.3.30 Events after the End of the Reporting Period
3.3.31 Related Party Disclosures
3.3.32 Specialised Activities
3.3.33 Transition to the IFRS for SMEs
3.4. IFRS for SMEs in India
3.4.1. Basis
3.4.2. Omitted topics
3.4.3. Recognition & measurement simplification
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3.1. IFRS (International Financial Reporting Standards)

3.1.1. About IFRS

International Financial Reporting Standards (IFRS) are the collection of reporting

standards developed by the International Accounting Standards Board (IASB). The IASB is committed to
developing “a single set of high quality, understandable and enforceable accounting standards to help
participants in the world’s capital markets and other users make economic decisions.” IFRS reporting is
now required or permitted in nearly 150 countries, including the European Union and most of Asia
Pacific. India, Japan, and Brazil plan to adopt or converge with IFRS over the next three years.
IFRS is becoming the global language of business. It is how companies will communicate
in the future—not only with investors in public securities, but with bankers, customers, mergers and
acquisitions consultants and other influential parties. It will be a consistent standard that everyone will be
measured against—whether you are in China, the US, Canada, Mexico or anywhere else. As the global
economy begins to encompass more and more middle market manufacturers, and as more of these
companies have trading partners or even subsidiaries overseas, it will be important for them to speak the
same financial language as the rest of the globe.
IAS or the International Accounting Standards were first issued by IASC or the International Accounting
Standards Committee. IASC was set up in 1973 and was in operation till 2000. In 2001 a structural
change was made whereby IASC was restructured into the IASB – International Accounting Standards
Board. The IASB operates under the control of the International Accounting Standards Committee
Foundation. This Foundation was set up in 2001.

WORLDWIDE MOMENTUM:-

The globalization of business and finance has led more than 12,000 companies in more than 100 countries
to adopt IFRS. In 2005, the European Union (EU) began requiring companies incorporated in its member
states whose securities are listed on an EU-regulated stock exchange to prepare their consolidated
financial statements in accordance with IFRS1. Australia, New Zealand and Israel have essentially
adopted IFRS as their national standards. Canada, which previously planned convergence with U.S.
Generally Accepted Accounting Principles (GAAP), now plans to require IFRS for publicly accountable
entities in 2011. The Accounting Standards Board of Japan (ASBJ) and the International Accounting
Standards Board (IASB) plan convergence by 2011. On November 11, 2008, Mexico announced it would
adopt IFRS for all listed entities starting in 2012. In a survey conducted in late 2007 by the International
Federation of Accountants (IFAC), a large majority of accounting leaders from around the world agreed
that a single set of international standards is important for economic growth.
Former AICPA Chairman Randy Fletchall, CPA, and AICPA President and
CEO Barry Melancon, CPA, were among those surveyed. Of the 143 leaders from 91 countries who
responded, 90 percent reported that a single set of international financial reporting standards was “very
important” or “important” for economic growth in their countries
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The term International Financial Reporting Standards (IFRSs) has both a narrow
and a broad meaning. Narrowly, IFRSs refers to the new numbered series of pronouncements that
the IASB is issuing, as distinct from the International Accounting Standards (IASs) series issued
by its predecessor. More broadly, IFRSs refers to the entire body of IASB pronouncements,
including standards and interpretations approved by the IASB and IASs and SIC interpretations
approved by the predecessor International Accounting Standards Committee.
Currently, there are 29 IAS and 8 IFRS which are in force. In addition, there is the The International
Financial Reporting Interpretations Committee which develops interpretations to interpret the application
of International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs)
and provide timely guidance on financial reporting issues not specifically addressed in IASs and IFRSs.
Interpretations are developed by IFRIC, exposed for public comment, approved by IFRIC, and then sent
to the IASB Board for review and approval. Prior to the formation of the IFRIC, there was the SIC or the
Standing Interpretations Committee which was super ceded by the IFRIC in 2002. As on date, there are
11 SICs and 13 IFRICs to provide guidance.
The movement to IFRS being the global benchmark in accounting standards in gaining momentum with
about 100 countries already moving to IFRS as the standard (or at least have converged very close to
IFRS). In EU, IFRS is mandatory since 2005. In 2007 China adopted IFRS within 1 year of announcing
the changeover (there are still some differences in China - disclosure of related party transactions are still
not mandatory). Brazil is expected to adopt IFRS in 2010 with Canada and India setting the deadline for
2011. The United States has also expressed its intent and the implementation is expected to phased over
2014 - 2016.
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3.1.2. LIST OF CURRENT 'IFRS' ISSUED

The following IFRS statements are currently in force:

 IFRS 1 First time Adoption of International Financial Reporting Standards
 IFRS 2 Share-based Payment
 IFRS 3 Business Combinations
 IFRS 4 Insurance Contracts
 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
 IFRS 6 Exploration for and Evaluation of Mineral Resources
 IFRS 7 Financial Instruments: Disclosures
 IFRS 8 Operating Segments
 IAS 1: Presentation of Financial Statements
 IAS 2: Inventories
 IAS 7: Cash Flow Statements
 IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
 IAS 10: Events After the Balance Sheet Date
 IAS 11: Construction Contracts
 IAS 12: Income Taxes
 IAS 16: Property, Plant and Equipment
 IAS 17: Leases
 IAS 18: Revenue
 IAS 19: Employee Benefits
 IAS 20: Accounting for Government Grants and Disclosure of Government Assistance
 IAS 21: The Effects of Changes in Foreign Exchange Rates
 IAS 23: Borrowing Costs
 IAS 24: Related Party Disclosures
 IAS 26: Accounting and Reporting by Retirement Benefit Plans
 IAS 27: Consolidated Financial Statements
 IAS 28: Investments in Associates
 IAS 29: Financial Reporting in Hyperinflationary Economies
 IAS 31: Interests in Joint Ventures
 IAS 32: Financial Instruments: Presentation
 IAS 33: Earnings Per Share
 IAS 34: Interim Financial Reporting
 IAS 36: Impairment of Assets
 IAS 37: Provisions, Contingent Liabilities and Contingent Assets
 IAS 38: Intangible Assets
 IAS 39: Financial Instruments: Recognition and Measurement
 IAS 40: Investment Property
 IAS 41: Agriculture

3.1.3 ACCOUNTING STANDARDS IN INDIA

The ICAI constituted the Accounting Standards Board (ASB) in 1997. The ASB is the apex body for
release of accounting standards in India. The composition of the ASB is broad based to include industry,
representatives of various departments of government and regulatory authorities, financial institutions and
academic and professional bodies. Industry is represented on the ASB by their associations, viz.,
ASSOCHAM, CII and FICCI. As regards government
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departments and regulatory authorities, Reserve Bank of India, Ministry of Company Affairs, Comptroller
& Auditor General of India, Controller General of Accounts and Central Board of Excise and Customs
are represented on the ASB. Besides these, representatives of academic and professional institutions such
as Universities, IIM, ICWAI and ICSI are also represented on the ASB. The Accounting Standards setting
process is an iterative process which includes the following steps:
 Identification of the broad areas by the ASB for formulating the Accounting Standards.
 Constitution of the study groups by the ASB for preparing the preliminary drafts.
 Consideration of the preliminary draft prepared by the study group by the ASB.
 Circulation of the draft among the Council members of the ICAI and 12 specified outside bodies
such as Standing Conference of Public Enterprises (SCOPE), Indian Banks’ Association, CII,
SEBI, CAG, DCA.
 Meeting with representatives of specified outside bodies to ascertain their views on the draft of
the proposed Accounting Standard.
 Finalization of the Exposure Draft of the proposed Accounting Standard on the basis of
comments received and discussion with the representatives of specified outside bodies.
 Issuance of the Exposure Draft inviting public comments.
 Consideration of the comments received and finalization of the draft
 Accounting Standard for submission to the Council of the ICAI for its consideration and
approval for issuance.
 Consideration of the draft Accounting Standard by the Council of the Institute, and if found
necessary, modification of the draft in consultation with the ASB.
 The Accounting Standard, so finalized, is issued under the authority of the Council.

However, the accounting standards prepared and issued by the ICAI were mandatory only for its
members, who, while discharging their audit function, were required to examine whether the said
standards of accounting were complied with. With the amendment of the Companies Act, 1956 through
the Companies (Amendment) Act, 1999, accounting standards as well as the manner in which they were
to be prescribed, were provided a statutory backing. The specific statutory force is provided by Section
211 of the Companies Act, 1956 – sub sections 3A, 3B and 3 C.
Today, in pursuance of the statutory mandate provided under the Companies Act,
1956, the Central Government prescribes accounting standards in consultation with the National Advisory
Committee on Accounting Standards (NACAS), established under Section 210 A (1) the Companies Act,
1956. NACAS, a body of experts including representatives of various regulatory bodies and Government
agencies, has been engaged in the exercise of examining Accounting Standards prepared by ICAI for use
by Indian corporate entities, since its constitution in 2001.
The Central Government notified 28 Accounting Standards (AS 1 to 7 and AS 9 to 29) in
December 2006 in the form of Companies (Accounting Standard) Rules, 2006, after receiving
recommendations of NACAS. These Accounting Standards are to be applied with effect from financial
year 2007-08.
The above amendments have cast a duty on managements to draw up financial statements
based on accounting standards. The corresponding provision to report on the compliance of accounting
standards has been inserted under section 227 of the Companies Act, 1956, thereby casting a duty upon
the auditor of the company to report on such compliance. A new clause (d) under subsection 3 of Section
227 of the Companies Act, 1956 is read as : ‘whether, in his opinion, the profit and loss account and
balance sheet comply with the accounting standards referred to in sub-section (3C) of section 211’ As far
as the reporting of compliance with the Accounting Standards by the management is concerned, Section
217 (2AA) (i) of the Companies Act, 1956, (inserted by the Companies Amendment Act, 2000)
prescribes that the Board’s report should include a Directors’ Responsibility Statement indicating therein
that in the preparation of the annual accounts, the applicable accounting standards had been followed
along with proper explanation relating to material departures.
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3.1.3.1 IGAAP to IFRS

Over the years, specifically from around the year 2000, ICAI has been issuing/ amending accounting
standards based on IFRS with a view to harmonies with IFRS. With the intention of the institute to move
towards IFRS for accounting periods commencing on or after 1st April 2011, the following are the issues
before us:
 Will ICAI adopt IFRS and disband all accounting standards or converge towards IFRS by
approximating all AS to IFRS?
 On the assumption that some entities will be excluded from implementing IFRS on 1st April
2011, will AS still be applicable to them or will they follows the new set of IFRS modified to suit
SMEs – IFSB is expected to release a set of accounting standards for SMEs shortly.
 When will the provisions of SEBI and Company law be amended so as to not override the
provisions of IFRS?
 What will be the position of NACAS post 1st April 2011? Will they have to approve all standards
as per section 210/211 of the Companies Act?
It is expected that there will be a phased rollout IFRS in India. The first wave would cover the following:
 Listed companies
 Banks, insurance companies, mutual funds, and financial institutions
Turnover in preceding year > INR 1 billion
 Borrowing in preceding year > INR 250 million
 Holding or subsidiary of the above

The canvas of the scope and complexity of this change over is not to be underestimated. Internally within
an organization, this will be more than just a technical exercise. It will have ramifications across areas -
changes in the ERP systems across multiple modules, training of employees, tax planning, restructuring
(in areas like ESOPs etc.) in addition to the areas of valuation rules, disclosures and presentation of
financial statements.

3.1.3.2 An overview of IFRS roadmap in India

1. IFRS converged accounting standards (hereinafter referred to as “IFRS”) shall apply to Indian
companies in 3 phases as per the table:
2. The Core Group and its sub-group 1, constituted by the MCA for IFRS convergence, shall
determine IFRS conversion roadmap for banking and insurance companies separately by 28 February
2010.
3. Non-listed companies with net worth of less than INR 500 crore and other small and medium-
sized enterprises (SMEs) have been given an option to continue to either follow non converged
standards (hereinafter referred to as “Indian GAAP”) or to adopt IFRS.
4. The draft of the Companies (Amendments) Bill, proposing for changes to the Companies Act,
1956, will be prepared by February, 2010.
5. The Institute of Chartered Accountants of India (ICAI) has submitted to the MCA revised
Schedule VI to the Companies Act, 1956. The NACAS shall review the draft and submit a revised
Schedule VI to the MCA by 31 January 2010. Amendments to Schedule XIV will also be carried out
in a time bound manner.
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6. Convergence of all the accounting standards with IFRS will be completed by the ICAI by 31
March 2010 and the NACAS will submit its final recommendations to MCA by 30 April 2010.

Phase Date Coverage

Phase 1 Opening balance sheet i. Companies which are part of NSE Index – Nifty 50
as at 1 April 2011* ii. Companies which are part of BSE Sensex – BSE 30
1. Companies whose shares or other securities are
listed on a stock exchange outside India
2. Companies, whether listed or not, having
net worth of more than INR1,000 crore
Phase 2 Opening balance sheet Companies not covered in phase 1 and having networth
as at 1 April 2013* exceeding INR 500 crore
Phase 3 Opening balance sheet Listed companies not covered in the earlier phases
as at 1 April 2014*
* If the financial year of a company commences at a date other than 1 April, then it shall prepare its
opening balance sheet at the commencement of immediately following financial year.

3.1.3.3 Key differences between IFRS and GAAP

There are certain differences between IFRS and GAAP accepted by various countries related to various
standards followed by both set of standards. Let’s see what are these differences are related with
following and understanding of particular standard. IFRS GAAP

Topic IFRS GAAP

Inventories LIFO valuation is prohibited LIFO valuation is allowed
Buildings, property and Regular revaluations of Historical cost is used;
equipment, and intangible assets are required when the revaluations are NOT permitted
Assets revaluation option is chosen

Asset impairments Impairment is assessed Impairment is assessed using

Restructuring allowances
Convertible debt
using discounted cash flows;
reversal of impairment losses is
sometimes allowed
Restructuring allowances
recognition is allowed if a formal
plan has been adopted and
implementation initiated
Amounts are split between debt
and equity
undiscounted cash flows;
reversal of impairment losses
is NOT allowed
Losses are not recognized
unless a liability has been
incurred, and no changes to
the plan will occur
Usually recognized as a liability

Classification of deferred taxes Noncurrent Current or noncurrent based

on underlying asset or liability
Revenue recognition Occurs when the risks and Similar to IFRS in principle, but
rewards of control have been there are numerous specific
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transferred rules for specific types of

Purchased in-process research
Definition of a discontinued
Operation
Comparative prior financial
Statements
Accounting policies of parent
and subsidiaries
May be capitalized and
Amortized
Generally restricted to operating
Units
At least one prior year
comparison required
Must be conformed
transactions and industries
Valued and immediately
Expensed
Less restrictive than IFRS
No requirement for private
companies; SEC requires
comparative statements
No conformity is required

3.1.4 Things to be consider for IFRS conversion

While converging to the IFRS companies should take care of each stage of convergence and before the
conversion they should check the impact of IFRS conversion on the business. There should be particular
check list for the companies to follow for implementing the IFRS

3.1.4.1 A strategic conversion for IFRS

Successful conversion efforts are characterized by a through strategic assessment, creation of a robust
step by step plan, alignment of resources to the efficient execution of the plan, and smooth integration of
the change into normal business operation. In a business-wide conversion, all departments that contribute
to creation of financial information, or that use financial information in their daily activities, should be
involved to ensure a complete assessment and to gain buy-in. The bottom line: An IFRS conversion
should establish sustainable processes the company can repeat and should produce meaningful
information long after the conversion takes place.

Here the phases of conversion may overlap with each other- companies do not need to wait for one phase
to end before beginning another.
13

Phase 1 :- Preliminary study – During this phase, companies perform a broad- based assessment of the
impact of IFRS on financial reporting, long-term contacts, supporting business processes, system and
controls, and income tax compliance, planning and reporting. They also determine a strategy for the road
ahead.

Phase 2 :- Initial Conversion – This phase include much of the legwork of a conversion effort – setting up
and launching the project, thoroughly evaluating the IFRS and IGAAP differences for specific financial
statement line items, evaluating accounting policy alternatives, selecting IFRS accounting policies,
performing the initial conversion, and creating IFRS financial statements during the dual reporting
periods. In-depth assessments of operational issues, such as the IFRS impact on significant business
contracts (e.g. financing, leasing, joint venture agreements) and income tax compliance and reporting
issues also take place during initial conversion. Stakeholder communication should be a constant
consideration throughout this phase.

Phase 3 :- Integrate change – Critical to the conversion process is incorporating OFRS change into day-
to-day operations, processes, and systems of the business ( known as “embedding”). This phase helps to
ensure a smooth transition to the new reporting framework so the company can use its new IFRS
language on a sustainable basis in a well-controlled environment as of the IFRS adoption date.

3.1.4.2 Potential IFRS impact :-

Here the assessment has done by Ernst & Young, which shows the impact on the business done by the
impact of changes in financial statement presentation. It has shown initial assessment of priority by three
ways high, medium and low. High means high conversion risk and effort; management should begin
addressing these items immediately, Medium means medium conversion risk and effort; plans to address
these issues in the next 6-12 months and Low means low conversion risk and effort; plan to address in the
next 12-24 months.

Heat map items Potential financial statement Potential business impact Initial assessment of priority
impact

1 Regulatory assets High High High

2 Impairment of assets High High High

3 Component depreciation Medium High High

4 Decommissioning liabilities Medium Medium Medium

5 Derivatives and hedging Medium High Medium

6 Stock-based compensation Low Low Low

7 Leases High Medium Medium

8 Taxes Medium Medium Medium

14

9 Consolidation High Medium High

10 First-time adoption High Medium High

11 Presentation and disclosure High Medium High

3.1.4.2 IFRS Top20 Checklist table

Here is the checklist which the company can follow while converging to IFRS i.e. they can check whether
the particular standard is relevant to company or not? If yes, then that standard is whether addressed or
not? This checklist helps to understand the follow through which companies can follow the conversion.

Topic Relevant Addressed

1 IAS 1 Presentation issues: judgements and estimates Y/N Y/N

2 IAS 1 Presentation issues: primary statement formats Y/N Y/N
3 IAS 36 Impairment disclosures Y/N Y/N
4 IFRS 3 Goodwill justification disclosure Y/N Y/N
5 IFRS 3 Other business combination issues and disclosures Y/N Y/N
6 IFRS 7 Financial instruments: disclosures Y/N Y/N
7 IAS 12 Deferred tax accounting and disclosure Y/N Y/N
8 Accounting policies general messages Y/N Y/N
9 Accounting policies specific problems: revenue Y/N Y/N
10 Accounting policies specific problems: financial instruments Y/N Y/N
11 IFRS 1 Explanation of transition to IFRS Y/N Y/N
12 IFRS 5 Non-current assets held for sale and discontinued operations Y/N Y/N
13 IAS 14 Segment information Y/N Y/N
14 IAS 37 Provisions disclosure Y/N Y/N
15 IAS 39 Financial instruments: recognition and measurement Y/N Y/N
16 Standards in issue not yet effective Y/N Y/N
17 Operating items and exceptional items Y/N Y/N
18 Comparative information Y/N Y/N
19 IAS 19 Employee Benefit Disclosures Y/N Y/N
20 Detail counts don't forget Y/N Y/N
15

3.2. SMEs (Small and Medium sized Enterprises)

3.2.1. About SMEs

Definition of SME as used by IASB:

Small and medium-sized entities are entities that:
 do not have public accountability, and
 publish general purpose financial statements for external users. Examples of external
users include owners who are not involved in managing the business, existing and potential
creditors, and credit rating agencies. General purpose financial statements are those that present
fairly financial position, operating results, and cash flows for external capital providers and others.
An entity has public accountability if:
 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 (a domestic or foreign stock exchange or
an over-the-counter market, including local and regional markets), or
 It holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary
businesses. This is typically the case for banks, credit unions, insurance companies, securities
brokers/dealers, mutual funds and investment banks. If an entity holds assets in a fiduciary
capacity as an incidental part of its business, that does not make it publicly accountable. Entities
that fall into this category may include public utilities, travel and real estate agents, schools, and
charities.
The standard does not contain a limit on the size of an entity that may use the IFRS for SMEs
provided that it does not have public accountability nor is there a restriction on its use by a public
utility, not-for-profit entity, or public sector entity.
A subsidiary whose parent or group uses full IFRSs may use the IFRS for SMEs if the subsidiary
itself does not have public accountability. The standard does not require any special approval by the
owners of an SME for it to be eligible to use the IFRS for SME. Listed companies, no matter how
small, may not use the IFRS for SMEs
There are many definitions of “small business,” but most of them are similar—usually differing only
in annual revenue levels and employee numbers. These definitions may differ from one information
source to another, and largely depend on the objectives of a grouping process. The revenue and
employee parameters tend to be higher in the United States (US) but lower in Europe or Asia, and
also depend on industry type and other factors. For the purposes of this guide, we categorize small
businesses in the following way (all dollar figures expressed as USD):
• Micro businesses: 1 to 20 employees, with revenues under $5 million
• Small businesses: 20 to 200 employees, with revenues from $5 to 50 million
• Small to medium businesses: 200 to 500 employees, with revenues of $50 million and
over
These three categories of small business typically share the following characteristics:
• They have no full-time in-house IT staff, or they have only a few people tasked with
hardware and network maintenance and office applications support.
• The majority of IT-related decisions are prepared and made by the top managers or business
owners, who are usually not professionals in complex corporate informational systems selection,
deployment, and exploitation.
• Employee knowledge of ERP is minimal or based only on experience with legacy systems.

In a highly competitive business environment, small and medium sized enterprises (SMEs) are
relentlessly challenged by technology complexity and rapid technology obsolescence. The need is
driven by the lack of IT edge among SMEs to build competitive advantage against large and global
players; inability to maintain and sustain a robust IT function and lack of single view of enterprise
information.
16

3.2.2 Objective & Qualitative characteristics of Financial statement of SMEs

3.2.2.1 Objective of financial statements of small and medium-sized entities (SMEs)

The objective of financial statements of a small or medium-sized entity is to provide information

about the financial position, performance and cash flows of the entity that is useful for economic
decision-making by a broad range of users who are not in a position to demand reports tailored to
meet their particular information needs.
Financial statements also show the results of the stewardship of management— the accountability of
management for the resources entrusted to it.

3.2.2.2 Qualitative characteristics of information in financial statements

 Understandability
The information provided in financial statements should be presented in a way that makes it
comprehensible by users who have a reasonable knowledge of business and economic activities
and accounting and a willingness to study the information with reasonable diligence. However,
the need for understandability does not allow relevant information to be omitted on the grounds
that it may be too difficult for some users to understand.
 Relevance
The information provided in financial statements must be relevant to the decision-making needs
of users. Information has the quality of relevance when it is capable of influencing the economic
decisions of users by helping them evaluate past, present or future events or confirming, or
correcting, their past evaluations.
 Materiality
Information is material—and therefore has relevance—if its omission or misstatement could
influence the economic decisions of users made on the basis of the financial statements.
Materiality depends on the size of the item or error judged in the particular circumstances of its
omission or misstatement. However, it is inappropriate to make, or leave uncorrected, immaterial
departures from the IFRS for SMEs to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows.
 Reliability
The information provided in financial statements must be reliable. Information is reliable when it
is free from material error and bias and represents faithfully that which it either purports to
represent or could reasonably be expected to represent. Financial statements are not free from
bias (ie not neutral) if, by the selection or presentation of information, they are intended to
influence the making of a decision or judgment in order to achieve a predetermined result or
outcome.
 Substance over form
Transactions and other events and conditions should be accounted for and presented in
accordance with their substance and not merely their legal form. This enhances the reliability of
financial statements.
 Prudence
The uncertainties that inevitably surround many events and circumstances are acknowledged by
the disclosure of their nature and extent and by the exercise of prudence in the preparation of the
financial statements. Prudence is the inclusion of a degree of caution in the exercise of the
judgements needed in making the estimates required under conditions of uncertainty, such that
assets or income are not overstated and liabilities or expenses are not understated. However, the
17

exercise of prudence does not allow the deliberate understatement of assets or income, or the
deliberate overstatement of liabilities or expenses. In short, prudence does not permit bias.
 Completeness
To be reliable, the information in financial statements must be complete within the bounds of
materiality and cost. An omission can cause information to be false or misleading and thus
unreliable and deficient in terms of its relevance.
 Comparability
Users must be able to compare the financial statements of an entity through time to identify
trends in its financial position and performance. Users must also be able to compare the financial
statements of different entities to evaluate their relative financial position, performance and cash
flows. Hence, the measurement and display of the financial effects of like transactions and other
events and conditions must be carried out in a consistent way throughout an entity and over time
for that entity, and in a consistent way across entities. In addition, users must be informed of the
accounting policies employed in the preparation of the financial statements, and of any changes
in those policies and the effects of such changes.
 Timeliness
To be relevant, financial information must be able to influence the economic decisions of users.
Timeliness involves providing the information within the decision time frame. If there is undue
delay in the reporting of information it may lose its relevance. Management may need to balance
the relative merits of timely reporting and the provision of reliable information. In achieving a
balance between relevance and reliability, the overriding consideration is how best to satisfy the
needs of users in making economic decisions.
 Balance between benefit and cost
The benefits derived from information should exceed the cost of providing it. The evaluation of
benefits and costs is substantially a judgmental process. Furthermore, the costs are not necessarily
borne by those users who enjoy the benefits, and often the benefits of the information are enjoyed
by a broad range of external users.
Financial reporting information helps capital providers make better decisions, which
results in more efficient functioning of capital markets and a lower cost of capital for the
economy as a whole. Individual entities also enjoy benefits, including improved access to capital
markets, favorable effect on public relations, and perhaps lower costs of capital. The benefits may
also include better management decisions because financial information used internally is often
based at least partly on information prepared for general purpose financial reporting purposes.

3.3. IFRS for SMEs

International Financial Reporting Standard for Small and Medium-Sized Entities (‘IFRS for SMEs’)
is a simplified version of full IFRS aimed at responding to the compelling need expressed by both
developed and emerging economies for a rigorous and common set of accounting standards for
smaller and medium-sized businesses that is much simpler than full IFRSs. Prior to its release, the
standard-setters engaged themselves in comprehensive dialogue with SMEs worldwide in order to
ensure that the document finally released would meet the needs and capabilities of small and
medium-sized entities (SMEs), which are estimated to account for over 95% of all companies around
the world.
Application:
The IFRS for SMEs has the potential to revolutionize and harmonies financial reporting by private
companies across the world. It remains a stand-alone product that is separate from the full set of
International Financial Reporting Standards (IFRSs).
18

Thus, it is available for any jurisdiction to adopt whether or not it has adopted the full IFRSs. Also it
is incumbent upon each jurisdiction to determine which entities should use the standard.
In particular, the IFRS for SMEs will :
 provide improved comparability for users of accounts
 enhance the overall confidence in the accounts of SMEs
 reduce the significant costs involved of maintaining standards on a national basis, and
 provide a platform to growing businesses that are contemplating entering the public capital
markets in due course of time and thus give them an opportunity to prepare themselves for
adopting full IFRSs.

South Africa is an example of a country that required all companies to use IFRS and has responded
very positively to benefits for SMEs proposed by the new standard. It had adopted the Exposure Draft
which preceded the IFRS for SMEs in October 2007 as a ‘Statement of Generally Accepted
Accounting Practice for SMEs in South Africa’ in a bid to reduce the reporting burden on SMEs and
provide them with a simpler accounting framework that was easier to understand and apply than full
IFRS. Further, it has quickly published the final version of the IFRS for SMEs (without any change to
the text) as a ‘Statement of Generally Accepted Accounting Practice’ with relevant entities allowed to
apply it for annual financial statements authorized for issue after 13th August 2009.

3.3.1. Financial Statement Presentation

 Fair presentation: presumed to result if the IFRS for SMEs is

followed (may be a need for supplemental disclosures)
 State compliance with IFRS for SMEs only if the financial statements
comply in full
 Does include 'true and fair override' but this should be 'extremely rare'
 IFRS for SMEs presumes the reporting entity is a going concern
 SMEs shall present a complete set of financial statements at least
annually
 At least one year comparative prior period financial statements and
note data
 Presentation and classification of items should be consistent from one
period to the next
o Must justify and disclose any change in presentation or
classification of items in financial statements
 Materiality: an omission or misstatement is material if it could
influence economic
 Complete set of financial statements:
o Statement of financial position
o Either a single statement of comprehensive income, or two
statements: an income statement and a statement of comprehensive income
o Statement of changes in equity
o Statement of cash flows
o Notes
 If the only changes to equity arise from profit or loss, payment of
dividends, corrections of errors, and changes in accounting policy, an entity may present a single
(combined) statement of income and retained earnings instead of the separate statements of
comprehensive income and of changes in equity (see Section 6)
 An entity may present only an income statement (no statement of
comprehensive income) if it has no items of other comprehensive income (OCI)
19

 The only OCI items under the IFRS for SMEs are:
o Some foreign exchange gains and losses relating to a net
investment in a foreign operation
o Some changes in fair values of hedging instruments – in a
hedge of variable interest rate risk of a recognized financial instrument, foreign exchange risk
or commodity price risk in a firm commitment or highly probable forecast transaction, or a
net investment in a foreign operation
o Some actuarial gains and losses
20

3.3.2. Statement of Financial Position

 May still be called 'balance sheet'

 Current/non-current split is not required if the entity concludes that a liquidity approach
produces more relevant information
 Some minimum line items required. These include:
o Cash and equivalents
o Receivables
o Financial assets
o Inventories
o Property, plant, and equipment
o Investment property at fair value
o Intangible assets
o Biological assets at cost
o Biological assets at fair value
o Investment in associates
o Investment in joint ventures
o Payables
o Financial liabilities
o Current tax assets and liabilities
o Deferred tax assets and liabilities
o Provisions
o Non-controlling interest
o Equity of owners of parent
 And some required items may be presented in the statement or in the notes
o Categories of property, plant, and equipment
o Info about assets with binding sale agreements
o Categories of receivables
o Categories of inventories
o Categories of payables
o Employee benefit obligations
o Classes of equity, including OCI and reserves
o Details about share capital
 Sequencing, format, and titles are not mandated

3.3.3. Statement of Comprehensive Income and Income Statement

 One-statement or two-statement approach – either a single statement of comprehensive

income, or two statements: an income statement and a statement of comprehensive income
 Must segregate discontinued operations
 Must present 'profit or loss' subtotal if the entity has any items of other comprehensive
income
 Bottom line ('profit or loss' in the income statement and 'total comprehensive income' in
the statement of comprehensive income) is before allocating those amounts to non-controlling
interest and owners of the parent
 No item may be labeled 'extraordinary'
 But unusual items can be separately presented
21

 Expenses may be presented by nature (depreciation, purchases of materials, transport

costs, employee benefits, etc) or by function (cost of sales, distribution costs, administrative costs,
etc) either on face of the statement of comprehensive income (or income statement) or in the notes

Single statement of comprehensive income:

o Revenue
o Expenses, showing separately:
 finance costs
 profit or loss from associates and
jointly controlled entities
 tax expense
 discontinued operations)
o Profit or loss (may omit if no OCI)
o Items of other comprehensive income
o Total comprehensive income (may label Profit
or Loss if no OCI)
Separate statements of income and comprehensive income:
Income Statement:
o Bottom line is profit or loss (as above)

Statement of Comprehensive Income:

o Begins with profit or loss

o Shows each item of other comprehensive
income
o Bottom line is Total Comprehensive Income

3.3.4. Statement of Changes in Equity and Statement of Comprehensive Income and Retained
Earnings

 Shows all changes to equity including

o total comprehensive income
o owners' investments
o dividends
o owners' withdrawals of capital
o treasury share transactions
 Can omit the statement of changes in equity if the entity has no owner investments or
withdrawals other than dividends and elects to present a combined statement of comprehensive
income and retained earnings

3.3.5. Statement of Cash Flows

 Presents information about an entity's changes in cash and cash equivalents for a period
o Cash equivalents are short-term, highly liquid investments (expected to be converted to
cash in three months) held to meet short-term cash needs rather than for investment or other
purposes
 Cash flows are classified as operating, investing, and financing cash flows
22

 Option to use the indirect method or the direct method to present operating cash flows
 Interest paid and interest and dividends received may be operating, investing, or financing
 Dividends paid may be operating or investing
 Income tax cash flows are operating unless specifically identified with investing or financing
activities
 Separate disclosure is required of some non-cash investing and financing transactions (for
example, acquisition of assets by issue of debt)
 Reconciliation of components of cash

3.3.6. Notes to the Financial Statements

 Notes are normally in this sequence:

o Basis of preparation (ie IFRS for SMEs)
o Summary of significant accounting policies, including
 Information about judgments
 Information about key sources of estimation uncertainty
o Supporting information for items in financial statements
o Other disclosures
 Comparative prior period amounts are required by Section 3 (unless another section allows
omission of prior period amounts)

3.3.7. Consolidated and Separate Financial Statements

 Consolidated financial statements are required when a parent company controls another entity (a
subsidiary).
 Control: Power to govern financial and operating policies to obtain benefits
 More than 50% of voting power: control presumed
 Control exists when entity owns less than 50% but has power to govern by agreement or statute,
or power to appoint majority of the board, or power to cast majority of votes at board meetings
 Control can be achieved by currently exercisable options that, if exercised, would result in control
 A subsidiary is not excluded from consolidation because:
o Investor is a venture capital organization
o Subsidiary's business activities are dissimilar to those of parent or other subs
o Subsidiary operates in a jurisdiction that imposes restrictions on transferring cash or other
assets out of the jurisdiction
 However, consolidated financial statements are not required, even if a parent-subsidiary
relationship exists if:
o Subsidiary was acquired with intent to dispose within one year
o Parent itself is a subsidiary and its parent or ultimate parent uses IFRSs or IFRS for
SMEs
 Must consolidate all controlled special-purpose entities (SPEs)
 Consolidation procedures:
o Eliminate intracompany transactions and balances
o Uniform reporting date unless impracticable
o Uniform accounting policies
o Non-controlling interest is presented as part of equity
o Losses are allocated to a subsidiary even if non-controlling interest goes negative
 Guidance on separate financial statements (but they are not required).
o In a parent's separate financial statements, it may account for subsidiaries, associates, and
joint ventures that are not held for sale at cost or fair value through profit and loss.
23

 Guidance on combined financial statements (but they are not required)

 If investor loses control but continues to hold some investment:
o If the subsidiary becomes an associate, follow 3.3.12
o If the subsidiary becomes a jointly controlled entity, follow 3.3.13
o If investment does not qualify as an associate or jointly controlled entity, treat it as a
financial asset under 3.3.9 and 10

3.3.8. Accounting Policies, Estimates and Errors

 If the IFRS for SMEs addresses an issue, the entity must follow the IFRS for SMEs
 If the IFRS for SMEs does not address an issue:
o Choose policy that results in the most relevant and reliable information
o Try to analogise from standards in the IFRS for SMEs
o Or use the concepts and pervasive principles in 3.3.1
o Entity may look to guidance in full IFRSs (but not required)
 Change in accounting policy:
o If mandated, follow the transition guidance as mandated
o If voluntary, retrospective
 Change in accounting estimate: prospective
 Correction of prior period error: restate prior periods if practicable

3.3.9. Basic Financial Instruments

 IFRS for SMEs has two sections on financial instruments:

o 3.3.9 on Basic Financial Instruments
o 3.3.10 on Other FI Transactions
 Option to follow IAS 39 instead of 3.3.9 and 3.3.10
 Even if IAS 39 is followed, make 3.3.9 and 3.3.10 disclosures (not IFRS 7 disclosures)
 Essentially, 3.3.9 is an amortized historical cost model
o Except for equity investments with quoted price or readily determinable fair value. These
are measured at fair value through profit or loss.
 Scope of 3.3.9 includes:
o Cash
o Demand and fixed deposits
o Commercial paper and bills
o Accounts and notes receivable and payable
o Debt instruments where returns to the holder are fixed or referenced to an observable rate
o Investments in nonconvertible and non-puttable ordinary and preference shares
o Most commitments to receive a loan
 Initial measurement:
o Basic financial assets and financial liabilities are initially measured at the transaction
price (including transaction costs except in the initial measurement of financial assets and
liabilities that are measured at fair value through profit or loss) unless the arrangement
constitutes, in effect, a financing transaction. A financing transaction may be indicated in
relation to the sale of goods or services, for example, if payment is deferred beyond
normal business terms or is financed at a rate of interest that is not a market rate. If the
arrangement constitutes a financing transaction, measure the financial asset or financial
liability at the present value of the future payments discounted at a market rate of interest
for a similar debt instrument.
24

 Measurement subsequent to initial recognition:

o Debt instruments at amortised cost using the effective interest method
o Debt instruments that are classified as current assets or current liabilities are measured at
the undiscounted amount of the cash or other consideration expected to be paid or
received (ie net of impairment) unless the arrangement constitutes, in effect, a financing
transaction. If the arrangement constitutes a financing transaction, the entity shall
measure the debt instrument at the present value of the future payments discounted at a
market rate of interest for a similar debt instrument.
o Investments in non-convertible preference shares and non-puttable ordinary or preference
shares:
 if the shares are publicly traded or their fair value can otherwise be measured
reliably, measure at fair value with changes in fair value recognised in profit or
loss
 measure all other such investments at cost less impairment
 Must test all amortised cost instruments for impairment or uncollectibility
 Previously recognised impairment is reversed if an event occurring after the impairment was first
recognised causes the original impairment loss to decrease
 Guidance is provided on determining fair values of financial instruments
o The most reliable is a quoted price in an active market
o When a quoted price is not available the most recent transaction price provides evidence
of fair value
o If there is no active market or recent market transactions, a valuation technique may be
used
 Guidance is provided on the effective interest method
 Derecognise a financial asset when:
o the contractual rights to the cash flows from the financial asset expire or are settled;
o the entity transfers to another party all of the significant risks and rewards relating to the
financial asset; or
o the entity, despite having retained some significant risks and rewards relating to the
financial asset, has transferred the ability to sell the asset in its entirety to an unrelated
third party who is able to exercise that ability unilaterally and without needing to impose
additional restrictions on the transfer.
 Derecognise a financial liability when the obligation is discharged, cancelled, or expires
 Disclosures:
o Categories of financial instruments
o Details of debt and other instruments
o Details of derecognitions
o Collateral
o Defaults and breaches on loans payable
o Items of income and expense

3.3.10. Additional Financial Instruments Issues

 Financial instruments not covered by 3.3.9 (and, therefore, are within 3.3.10) are measured at fair
value through profit or loss. This includes:
o Investments in convertible and puttable ordinary and preference shares
o Options, forwards, swaps, and other derivatives
o Financial assets that would otherwise be in 3.3.9 but that have 'exotic' provisions that
could cause gain/loss to the holder or issuer
25

 Hedge accounting involves matching the gains and losses on a hedging instrument and hedged
item.
o It is allowed only for the following kinds of risks:
 interest rate risk of a debt instrument measured at amortised cost
 foreign exchange or interest rate risk in a firm commitment or a highly probable
forecast transaction
 price risk of a commodity that it holds or in a firm commitment or highly
probable forecast transaction to purchase or sell a commodity
 foreign exchange risk in a net investment in a foreign operation.
o 3.3.10 defines the type of hedging instrument required for hedge accounting.
o Hedges must be documented up front to qualify for hedge accounting
o 3.3.10 provides guidance for measuring assessing effectiveness
o Special disclosures are required

3.3.11. Inventories

 Inventories include assets for sale in the ordinary course of business, being produced for sale, or
to be consumed in production
 Measured at the lower cost and estimated selling price less costs to complete and sell
 Cost is determined using:
o specific identification is required for large items
o option to choose FIFO or weighted average for others
o LIFO is not permitted
 Inventory cost includes costs to purchase, costs of conversion, and costs to bring the asset to
present location and condition
 Inventory cost excludes abnormal waste and storage, administrative, and selling costs
 If a production process creates joint products and/or by-products, the costs are allocated on a
consistent and rational basis
 A manufacturer allocates fixed production overheads to inventories based on normal capacity
 Standard costing, retail method, and most recent purchase price may be used only if the result
approximates actual cost
 Impairment – write down to net realisable value (selling price less costs to complete and sell

3.3.12. Investments in Associates

 Associates are investments where significant influence exists. Significant influence is defined as
the power to participate in the financial and operating policy decisions of the associate but where
there is neither control nor joint control over those policies. Presumption that significant influence
exists if investor owns 20% or more of the voting shares.
 Option to use:
o Cost-impairment model (except if there is a published quotation – then must use fair
value through profit or loss)
o Equity method (investor recognises its share of profit or loss of the associate – detailed
guidance is provided)
o Fair value through profit or loss
 Investments in associates are always classified as non-current assets

3.3.13.   Investments in Joint Ventures

 For investments in jointly controlled entities, there is an option for the venturer to use:
26

o Cost model (except if there is a published quotation – then must use fair value through
profit or loss)
o Equity method (using the guidance in 3.3.12)
o Fair value through profit or loss
 Proportionate consolidation is prohibited
 For jointly controlled operations, the venturer should recognise assets that it controls and
liabilities it incurs as well as its share of income earned and expenses that are incurred
 For jointly controlled assets, the venturer should recognise its share of the assets and liabilities it
incurs as well as income it earns and expenses that are incurred

3.3.14.   Investment Property

 Investment property is investments in land, buildings (or part of a building), and some property
interests in finance leases held to earn rentals or for capital appreciation or both
 Property interests that are held under an operating lease may be classified as an investment
property provided the property would otherwise have met the definition of an investment property
 Mixed use property must be separated between investment and operating property
 If fair value can be measured reliably without undue cost or effort, use the fair value through
profit or loss model
 Otherwise, an entity must treat investment property as property, plant and equipment using 3.3.15

3.3.15.   Property, Plant and Equipment

 Historical cost-depreciation-impairment model only

 The revaluation model (as in IAS 16) is not permitted
 3.3.15 applies to most investment property as well (but if fair value of investment property can be
measured reliably without undue cost or effort then the fair value model in 3.3.14 applies)
 3.3.15 applies to property held for sale – there is no special section on assets held for sale.
Holding for sale is an indicator of possible impairment.
 Measurement is initially at cost, including costs to get the property ready for its intended
use Subsequent to acquisition, the entity uses the cost-depreciation-impairment model, which
recognises depreciation and impairment of the carrying amount
 The carrying amount of an asset, less estimated residual value, is depreciated over the asset's
anticipated useful life. The method of depreciation shall be the method that best reflects the
consumption of the asset's benefits over its life. Separate significant components should be
depreciated separately.
 Component depreciation only if major parts of an item of PP&E have 'significantly different
patterns of consumption of economic benefits'
 Review useful life, residual value, and depreciation rate only if there is a significant change in the
asset or how it is used. Any adjustment is a change in estimate (prospective).
 Impairment testing and reversal – follow 3.3.25

3.3.16. Intangible Assets other than Goodwill

 No recognition of internally generated intangible assets. Therefore:

o Charge all research and development costs to expense
o Charge the following items to expense when incurred: Costs of internally generated
brands, logos, and masthead, start-up costs, training costs, advertising, and relocating of a
division or entity
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 Amortisation model for intangibles that are purchased separately, acquired in a business
combination, acquired by grant, and acquired by exchange of other assets
 Amortise over useful life. If the entity is unable to estimate useful life, then use 10 years. Review
useful life, residual value, depreciation rate only if there is a significant change in the asset or how
it is used. Any adjustment is a change in estimate (prospective)
 Impairment testing – follow 3.3.25
 Any revaluation of intangible assets is prohibited

3.3.17. Business Combinations and Goodwill

 Section does not apply to combinations of entities under common control

 Acquisition (purchase) method. Under this method:
o An acquirer must always be identified
o The cost of the business combination is measured. Cost is the fair value of assets given,
liabilities incurred or assumed, and equity instruments issued, plus costs directly
attributable to the combination
o At the acquisition date, the cost is allocated to the assets acquired and liabilities and
provisions for contingent liabilities assumed. The identifiable assets acquired and
liabilities and provisions for contingent liabilities assumed are measured at their fair
values. Any difference between cost and amounts allocated to identifiable assets and
liabilities (including provisions) is recognised as goodwill or so-called 'negative goodwill'.
 All goodwill must be amortised. If the entity is unable to estimate useful life, then use 10 years.
 'Negative goodwill' – first reassess original accounting. If that is ok, then immediate credit to
profit or loss
 Impairment testing of goodwill – follow 3.3.25
 Reversal of goodwill impairment is not permitted

3.3.18. Leases

 Scope includes arrangements that contain a lease [IFRIC 4]

 Leases are classified as either finance leases or operating leases.
o Finance leases result in substantially all the risks and rewards incidental to ownership
being transferred between the parties, while operating leases do not.
o Substantially all risks and rewards of ownership are presumed transferred if:
 the lease transfers ownership of the asset to the lessee by the end of the lease
term
 the lessee has a 'bargain purchase option'
 the lease term is for the major part of the economic life of the asset even if title is
not transferred
 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 asset
 the leased assets are of such a specialised nature that only the lessee can use them
without major modifications
 the lessee bears the lessor losses if cancelled
 a secondary rental period at below market rates
 the residual value risk is borne by the lessee.
 Lessees – finance leases:
o The rights and obligations are to be recognised as assets and liabilities at fair value, or, if
lower, the present value of the minimum lease payments. Any direct costs of the lessee are
added to the asset amount recognised. Subsequently, payments are to be spilt between a
28

finance charge and reduction of the liability. The asset should be depreciated either over
the useful life or the lease term.
 Lessees – operating leases:
o Payments are to be recognised as an expense on the straight line basis, unless payments
are structured to increase in line with expected general inflation or another systematic
basis is better representative of the time pattern of the user's benefit.
 Lessors – finance leases:
o The rights are to be recognised as assets held, i.e. as a receivable at an amount equal to
the net investment in the lease. The net investment in a lease is the lessor's gross
investment in the lease (including unguaranteed residual value) discounted at the interest
rate implicit in the lease.
o For finance leases other than those involving manufacturer or dealer lessors, initial direct
costs are included in the initial measurement of the finance lease receivable and reduce the
amount of income recognised over the lease term.
o If there is an indication that the estimated unguaranteed residual value used in computing
the lessor's gross investment in the lease has changed significantly, the income allocation
over the lease term is revised, and any reduction in respect of amounts accrued is
recognised immediately in profit or loss.
 Lessors – finance leases by a manufacturer or dealer:
o A finance lease of an asset by a manufacturer or dealer lessor gives rise to two types of
income:
 profit or loss equivalent to the profit or loss resulting from an outright sale of the
asset being leased, at normal selling prices, reflecting any applicable volume or trade
discounts; and
 finance income over the lease term.
o The sales revenue recognised at the commencement of the lease term by a manufacturer
or dealer lessor is the fair value of the asset or, if lower, the present value of the minimum
lease payments accruing to the lessor, computed at a market rate of interest.
o The cost of sale recognised at the commencement of the lease term is the cost, or carrying
amount if different, of the leased property less the present value of the unguaranteed
residual value. The difference between the sales revenue and the cost of sale is the selling
profit, which is recognised in accordance with the entity's policy for outright sales.
o If artificially low rates of interest are quoted, selling profit shall be restricted to that
which would apply if a market rate of interest were charged. Costs incurred by
manufacturer or dealer lessors in connection with negotiating and arranging a lease shall
be recognised as an expense when the selling profit is recognised.
 Lessors – operating leases:
o Lessors retain the assets on their balance sheet and payments are to be recognised as
income on the straight line basis, unless payments are structured to increase in line with
expected general inflation or another systematic basis is better representative of the time
pattern of the user's benefit.
 Sale and leaseback:
o If a sale and leaseback results in a finance lease, the seller should not recognise any
excess as a profit, but recognise the excess over the lease term
o If a sale and leaseback results in an operating lease, and the transaction was at fair value,
the seller shall recognise any profits immediately.

3.3.19.   Provisions and Contingencies

 Provisions:
29

o Provisions are recognised only when (a) there is a present obligation as a result of a past
event, (b) it is probable that the entity will be required to transfer economic benefits, and
(c) the amount can be estimated reliably
o The obligation may arise due to contract or law or when there is a constructive obligation
due to valid expectations having been created from past events. However, these do not
include any future actions that may create an expectation. Nor can expected future losses
be recognised as provisions.
o Initially recognised at the best possible estimate at the reporting date. This value should
take into any time value of money if this is considered material. When all or part of a
provision may be reimbursed by a third party, the reimbursement is to be recognised
separately only when it is virtually certain payment will be received.
o Subsequently, provisions are to be reviewed at each reporting date and adjusted to meet
the best current estimate. Any adjustments are recognised in profit and loss while any
unwinding of discounts is to be treated as a finance cost.
 Must accrue provisions for (examples):
o Onerous contracts
o Warranties
o Restructuring if legal or constructive obligation to restructure
o Sales refunds
 May NOT accrue provisions for (example):
o Future operating losses, no matter how probable
o Possible future restructuring (plan but not yet a legal or constructive obligation)
 Contingent liabilities:
o These are not recognised as liabilities
o Unless remote, disclose an estimate of the financial effect, indications of the uncertainties
relating to timing or amount, and the possibility of reimbursement
 Contingent assets:
o These are not recognised as assets.
o Disclose a description of the nature and the financial effect.

3.3.20.   Liabilities and Equity

 Guidance on classifying an instrument as liability or equity

 An instrument is a liability if the issuer could be required to pay cash
 Puttable financial instruments are only recognised as equity if it has all of the following features:
o The holder is entitled to a pro rata share of the entity's net assets in the event of
liquidation.
o The instrument is the most subordinate class.
o All financial instruments in the most subordinate class have identical features.
o Apart from the puttable features the instrument includes no other financial instrument
features.
o The total expected cash flows attributable to the instrument over the life of the instrument
are based substantially on the change in the value of the entity.
 Members' shares in co-operative entities and similar instruments are only classified as equity if
the entity has an unconditional right to refuse redemption of the members' shares or the
redemption is unconditionally prohibited by local law, regulation or the entity's governing charter.
If the entity could not refuse redemption, the members' shares are classified as liabilities.
 Covers some material not covered by full IFRSs, including:
o original issuance of shares and other equity instruments. Shares are only recognised as
equity when another party is obliged to provide cash or other resources in exchange for
30

the instruments. The instruments are measured at the fair value of cash or resources
received, net of direct costs of issuing the equity instruments, unless the time value of
money is significant in which case initial measurement is at the present value amount.
When shares are issued before the cash or other resources are received, the amount
receivable is presented as an offset to equity in the statement of financial position and not
as an asset. Any shares subscribed for which no cash is received are not recognised as
equity before the shares are issued.
o sales of options, rights and warrants
o stock dividends and stock splits – these do not result in changes to total equity but, rather,
reclassification of amounts within equity.
 'Split accounting' is required to account for issuance of convertible instruments
o Proceeds on issue of convertible and other compound financial instruments are split
between liability component and equity component. The liability is measured at its fair
value, and the residual amount is the equity component. The liability is subsequently
measured using the effective interest rate, with the original issue discount amortised as
added interest expense.
o A comprehensive example of split accounting is included
 Treasury shares (an entity's own shares that are reacquired) are measured at the fair value of the
consideration paid and are deducted from the equity. No gain or loss is recognised on subsequent
resale of treasury shares.
 Minority interest changes that do not affect control do not result in a gain or loss being recognised
in profit and loss. They are equity transactions between the entity and its owners.
 Dividends paid in the form of distribution of assets other than cash are recognised when the entity
has an obligation to distribute the non-cash assets. The dividend liability is measured at the fair
value of the assets to be distributed.

3.3.21.   Revenue

 Revenue results from the sale of goods, services being rendered, construction contracts income by
the contractor and the use by others of your assets
 Some types of revenue are excluded from this section and dealt with elsewhere:
o leases (3.3.18)
o dividends from equity accounted entities (3.3.12 and 3.3.13)
o changes in fair value of financial instruments (3.3.9 and 3.3.10)
o initial recognition and subsequent re-measurement of biological assets (3.3.32) and initial
recognition of agricultural produce (3.3.32)
 Principle for measurement of revenue is the fair value of the consideration received or receivable,
taking into account any possible trade discounts or rebates, including volume rebates and prompt
settlement discounts
 If payment is deferred beyond normal payment terms, there is a financing component to the
transaction. In that case, revenue is measured at the present value of all future receipts. The
difference is recognised as interest revenue.
 Recognition - sale of goods: An entity shall recognise revenue from the sale of goods when all the
following conditions are satisfied:
o (a) the entity has transferred to the buyer the significant risks and rewards of ownership
of the goods.
o (b) the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold.
o (c) the amount of revenue can be measured reliably.
31

o (d) it is probable that the economic benefits associated with the transaction will flow to
the entity.
o (e) the costs incurred or to be incurred in respect of the transaction can be measured
reliably.
 Recognition - sale of services: Use the percentage of completion method if the outcome of the
transaction can be estimated reliably. Otherwise use the cost-recovery method.
 Recognition - construction contracts: Use the percentage of completion method if the outcome of
the contract can be estimated reliably. Otherwise use the cost-recovery method.
 Recognition - interest: Interest shall be recognised using the effective interest method as
described in 3.3.9
 Recognition - royalties: Royalties shall be recognised on an accrual basis in accordance with the
substance of the relevant agreement.
 Recognition - dividends: Dividends shall be recognised when the shareholder's right to receive
payment is established.
 Appendix of examples of revenue recognition under the principles in 3.3.21
o Award credits or other customer loyalty plan awards need to be accounted for separately.
The fair value of such awards reduces the amount of revenue initially recognised and,
instead, is recognised when awards are redeemed.

3.3.22.   Government Grants

 This section does not apply to any 'grants' in the form of income tax benefits
 All grants are measured at the fair value of the asset received or receivable
 Recognition as income:
o Grants without future performance conditions are recognised in profit or loss when
proceeds are receivable
o If there are performance conditions, the grant is recognised in profit or loss only when the
conditions are met

3.3.23.   Borrowing Costs

 Borrowing costs are interest and other costs arising on an entity's financial liabilities and finance
lease obligations
 All borrowing costs are charged to expense when incurred – none are capitalised

3.3.24.   Share-based Payment

 Basic principle: all share-based payment must be recognised

 Equity-settled:
o Transactions with other than employees are recorded at the fair value of the goods and
services received, if these can be estimated reliably
o Transactions with employees or where the fair value of goods and services received
cannot be reliably measured are measured with reference to the fair value of the equity
instruments granted
 Cash-settled:
o Liability is measured at fair value on grant date and at each reporting date and settlement
date, with each adjustment through profit or loss.
o For employees where shares only vest after a specific period of service has been
completed, recognise the expense as the service is rendered.
 Share-based payment with cash alternatives:
32

o Account for all such transactions as cash settled, unless the entity has a past practice of
settling by issuing equity instruments or the option has no commercial substance because
the cash settlement amount bears no relationship to, and is likely to be lower in value than,
the fair value of the equity instrument.
 Fair value of equity instruments granted:
o (a) Observable market price if available
o (b) If no observable price, use entity-specific market data such as a recent share
transaction or valuation of the entity
o (c) If (a) and (b) are impracticable, directors must use their judgement to estimate fair
value
 Certain government-mandated plans provide for equity investors (such as employees) to acquire
equity without providing goods or services that can be specifically identified (or by providing
goods or services that are clearly less than the fair value of the equity instruments granted). These
are equity-settled share-based payment transactions within the scope of this section.

3.3.25. Impairment of Assets

 Inventories – write down, in profit or loss, to lower of cost and selling price less costs to complete
and sell, if below carrying amount. When the circumstances that led to the impairment no longer
exist, the impairment is reversed through profit or loss.
 Other assets – write down, in profit or loss, to recoverable amount, if below carrying amount.
When the circumstances that led to the impairment no longer exist, the impairment is reversed
through profit or loss.
 Recoverable amount is the greater of fair value less costs to sell and value in use
 If recoverable amount of an individual asset cannot be determined, measure recoverable amount
of that asset's cash generating unit
 If an impairment indicator exists, the entity should review the useful life and the depreciation
methods even though an impairment may not be recognised
 Simplified guidance on computing impairment of goodwill when goodwill cannot be allocated to
cash generating units

3.3.26.   Employee Benefits

 Short-term benefits:
o Measured at an undiscounted rate and recognised as the services are rendered.
o Other costs such as annual leave are recognised as a liability as services are rendered and
expensed when the leave is taken or used.
o Bonus payments are only recognised when an obligation exists and the amount can be
reliably estimated.
 Post-Employment Benefits – Defined Contribution Plans:
o Contributions are recognised as a liability or an expense when the contributions are made
or due.
 Post-Employment Benefits – Defined benefit plans
o Recognise a liability based on the net of present value of defined benefit obligations less
the fair value of any plan assets at balance sheet date.
o The projected unit credit method is only used when it could be applied without undue
cost or effort.
o Otherwise, en entity can simplify its calculation:
 Ignore estimated future salary increases
 Ignore future service of current employees (assume closure of plan)
33

 Ignore possible future in-service mortality

o Plan introductions, changes, curtailments, settlements: Immediate recognition (no
deferrals)
o For group plans, consolidated amount may be allocated to parent and subsidiaries on a
reasonable basis
o Actuarial gains and losses may be recognised in profit or loss or as an item of other
comprehensive income – but...
 No deferral of actuarial gains or losses, including no corridor approach
 All past service cost is recognised immediately in profit or loss
 Other Long-Term benefits:
o The entity shall recognise a liability at the present value of the benefit obligation less any
fair value of plan assets.
 Termination benefits:
o These are recognised in profit and loss immediately as there are no future economic
benefits to the entity.

3.3.27.   Income Tax

 Requires a temporary difference approach, similar to IAS 12

 Current tax:
o Recognise a current tax liability if the current tax payable exceeds the current tax paid at
that point in time. Recognise a current tax asset when current tax paid exceeds current tax
payable or the entity has carried a loss forward from the prior year and this can be used to
recover current tax in the current year.
o Current tax assets and liabilities for current and prior periods are measured at the actual
amount that is owed or the entity owes using the applicable tax rates enacted or
substantively enacted at the reporting date. The measurement must include the effect of
the possible outcomes of a review by the tax authorities.
 Deferred tax:
o If an asset or liability is expected to affect taxable profit if it recovered or settled for its
carrying amount, then a deferred tax asset or liability is recogised
o If the entity expects to recover an asset through sale, and capital gains tax is zero, then no
deferred tax is recognised, because recovery is not expected to affect taxable profit
o Temporary difference arises if the tax basis of such assets or liabilities is different from
carrying amount
o Tax basis assumes recovery by sale. Exception: No deferred tax on unremitted earnings
of foreign subsidiaries and jointly controlled entities
o Recognise deferred tax assets in full, with a valuation allowance
o Criterion is that realisation is probable (more likely than not)
o Take uncertainty into account in measuring all current and deferred taxes – assume tax
authorities will examine reported amounts and have full knowledge of all relevant
information
o Deferred taxes are all presented as non-current
 Recognition of changes in current or deferred tax must be allocated to the related components of
profit or loss, other comprehensive income and equity.

3.3.28.   Foreign Currency Translation

 Functional currency approach similar to that in IAS 21

34

 An entity's functional currency, is the currency of the primary economic environment in which it
operates
 It is a matter of fact, not an accounting policy choice
o A change in functional currency is applied prospectively from the date of the change
 To record a foreign currency transaction in an entity's functional currency:
o On initial recognition, record the transaction by applying the spot rate at the date of the
transaction. An average rate may be used, unless there are significant fluctuations in the
rate.
o At reporting date, translate foreign currency monetary items using the closing rate. For
non-monetary items measured at historical cost, use the exchange at the date of the
transaction. For non-monetary items measured at fair value, use the exchange at the date
when the fair value was determined.
o For monetary and non-monetary item translations, gains or losses are recognised where
they were initially recognised – either in profit or loss, comprehensive income, or equity
 Exchange differences arising from a monetary item that forms part of the net investment in a
foreign operation are recognised in equity and are not 'recycled' through profit or loss on disposal
of the investment
 Goodwill arising on acquisition of a foreign operation is deemed to be an asset of the subsidiary,
and translated at the closing rate at year end
 An entity may present its financial statements in a currency different from its functional currency
(a 'presentation currency'). If the entity's functional currency is not hyperinflationary, translation of
assets, liabilities, income, and expense from functional currency into presentation currency is done
as follows:
o Assets and liabilities for each statement of financial position presented are translated at
the closing rate at the date of that statement of financial position
o Income and expenses are translated at exchange rates at the dates of the transactions
o All resulting exchange differences are recognised in other comprehensive income.

3.3.29.   Hyperinflation

 An entity must prepare general price-level adjusted financial statements when its functional
currency is hyperinflationary
 IFRS for SMEs provides indicators of hyperinflation but not an absolute rate. One indicator is
where cumulative inflation approaches or exceeds 100% over a 3 year period.
 In price-level adjusted financial statements, all amounts are stated in terms of the
(hyperinflationary) presentation currency at the end of the reporting period. Comparative
information and any information presented in respect of earlier periods must also be restated in the
presentation currency.
 All assets and liabilities not recorded at the presentation currency at the end of the reporting
period must be restated by applying the general price index (generally an index published by the
government).
 All amounts in the statement of comprehensive income and statement of cash flows must also be
recorded at the presentation currency at the end of the reporting period. These amounts are
restated by applying the general price index from the dates when they were recorded.
 The gain or loss on translating the net monetary position is included in profit or loss. However,
that gain or loss is adjusted for those assets and liabilities linked by agreement to changes in
prices.

3.3.30.   Events after the End of the Reporting Period

35

 Adjust financial statements to reflect adjusting events – events after the balance sheet date that
provide further evidence of conditions that existed at the end of the reporting period.
 Do not adjust for non-adjusting events – events or conditions that arose after the end of the
reporting period. For these, the entity must disclose the nature of event and an estimate of its
financial effect.
 If an entity declares dividends after the reporting period, the entity shall not recognise those
dividends as a liability at the end of the reporting period. That is a non-adjusting event.

3.3.31.   Related Party Disclosures

 Disclose parent-subsidiary relationships, including the name of the parent and (if any) the
ultimate controlling party.
 Disclose key management personnel compensation in total for all key management.
Compensation includes salaries, short-term benefits, post-employment benefits, other long-term
benefits, termination benefits and share-based payments. Key management personnel are persons
responsible for planning, directing and controlling the activities of an entity, and include executive
and non-executive directors.
 Disclose the following for transactions between related parties:
o Nature of the relationship
o Information about the transactions and outstanding balances necessary to understand the
potential impact on the financial statements
o Amount of the transaction
o Provisions for uncollectible receivables
o Any expense recognised during the period in respect of an amount owed by a related
party
 Government departments and agencies are not related parties simply by virtue of their normal
dealings with an entity

3.3.32.   Specialised Activities

Agriculture:
 If the fair value of a class of biological asset is readily determinable without undue cost or effort,
use the fair value through profit or loss model.
 If the fair value is not readily determinable, or is determinable only with undue cost or effort,
measure the biological assets at cost less and accumulated depreciation and impairment.
 At harvest, agricultural produce is be measured at fair value less estimated costs to sell.
Thereafter it is accounted for an inventory.
Extractive industries:
 Not required to charge exploration costs to expense, but must test for impairment
 Expenditure on tangible or intangible assets used in extractive activities is accounted for under
3.3.15 Property, Plant and Equipment and Section 18Intangible Assets other than Goodwill
 An obligation to dismantle or remove items or restore sites is accounted for using 3.3.15 and
3.3.19 Provisions and Contingencies.
Service concession arrangements:
 Guidance is provided on how the operator accounts for a service concession arrangement. The
operator either recognises a financial asset or an intangible asset depending on whether the grantor
(government) has provided an unconditional guarantee of payment or not.
 A financial asset is recognised to the extent that the operator has an unconditional contractual
right to receive cash or another financial asset from or at the direction of the grantor for the
construction services.
36

 An intangible asset is recognised to the extent that the operator receives a right or license to
charge users for the public service.

3.3.33.   Transition to the IFRS for SMEs

 First-time adoption is the first set of financial statements in which the entity makes an explicit
and unreserved statement of compliance with the IFRS for SMEs: '...in conformity with the
International Financial Reporting Standard for Small and Medium-sized Entities'.
 Can be switching from:
o National GAAP
o Full IFRSs
o Or never published General Purpose Financial Statements in the past
 Date of transition is beginning of earliest period presented
 Select accounting policies based on IFRS for SMEs at end of reporting period of first-time
adoption
o Many accounting policy decisions depend on circumstances – not 'free choice'
o But some are pure 'free choice'
 Prepare current year and one prior year's financial statements using the IFRS for SMEs
 But there are many exceptions from restating specific items
o Some exceptions are optional
o Some exceptions are mandatory
 And a general exemption for impracticability
 All of the special exemptions in IFRS 1 are included in the IFRS for SMEs

3.4. IFRS for SMEs in India

In India, the concept paper on Convergence with IFRS, issued by the Institute of Chartered
Accountants of India aims to converge Indian accounting standards to the equivalent of full IFRS for
all public interest entities effective 1st April 2011. In its present form, companies with turnover
exceeding Rs.100 crores or with borrowings in excess of Rs.25 crores qualify as ‘public interest
entities’. This is expected to include a significant number of unlisted entities. The concept paper refers
to use of IFRS for SMEs only for non-public interest entities.

3.4.1. Basis :
The principles enshrined in this standard have been derived from IFRS foundation itself. However, so
as to ensure that it addresses the specific needs of users of SMEs’ financial statements and cost-benefit
considerations, many of the complexities inherent in the full IFRSs have been removed. Furthermore a
cost-benefit approach has been taken in developing the IFRS for SMEs, with the emphasis being on
easing the financial reporting burden on private companies.
The key differences are enumerated below :
 Topics not relevant to SMEs have been omitted.
 Where full IFRSs allow accounting policy choices, the IFRS for SMEs allows only the easier
option.
 Many of the principles for recognising and measuring assets, liabilities, income and expenses in
full IFRSs have been simplified.
 Significantly fewer disclosures are required.
 The standard has adopted a simplified redrafting so as to facilitate ease of understanding and
translation.
37

 Moreover to further reduce the reporting burden for SMEs, revisions to the IFRS will be limited
to once every three years.

Full IFRS IFRS for SMEs

Numbered by Standard Organised by topic (e.g., inventories)

Around 3,000 potential disclosures Around 300 potential disclosures

Around 2,800 pages in length Less than 230 pages

Updated several times a year Anticipated to be updated on a 3-yearly basis

Unlike full IFRS, the IFRS for SMEs contains illustrative financial statements and a disclosure
checklist. With around only 300 potential disclosure requirements, compared to 3,000 under full IFRS,
the advantages of the IFRS for SMEs in terms of the amount of time to be spent preparing the
financial statements are already clear. The point is underlined however, by the Illustrative Financial
Statements that the IASB has prepared to accompany the Standard. At just 17 pages in length, they
compare favourably to full IFRS financial statements which often run to over 100 pages.
3.4.2. Omitted topics :
The IFRS for SMEs does not address the following topics that are covered in full IFRSs :
 Earnings per share
 Interim financial reporting
 Segment reporting
 Special accounting for assets held for sale.
Examples of options in full IFRSs NOT included in the IFRS for SMEs :
 Financial instrument options, including available for sale, held-to-maturity and fair value options
 The revaluation model for property, plant and equipment, and for intangible assets
 Proportionate consolidation for investments in jointly-controlled entities
 For investment property, measurement is driven by circumstances rather than allowing an
accounting policy choice between the cost and fair value models
 Various options for government grants.

3.4.3. Recognition and measurement simplifications — Examples :

Item Simplication

Goodwill and other Always amortised over estimated useful life (10 years if useful life cannot
38

indefinite-life intangible
be estimated reliably)
assets

Financial instruments The ones meeting specified criteria are measured at cost or amortised cost.
All others are measured at fair value through profit or loss. This avoids the
inherent complexities of classifying financial instruments into four
categories, such as assessing management’s intentions and dealing with
‘tainting provisions’.

Prescribes a simple principle for derecognition.

Much simpler rules on use of Hedge accounting.

Investments in
Can be measured at cost unless there is a published price quotation (when
associates and joint
fair value must be used).
ventures

R&D costs/Borrowing
Must be recognised as expenses.
costs

Property, plant and

Residual value, useful life and depreciation method to be reviewed only
equipment and
upon emergence of certain indicators; not an annual exercise.
intangible assets

Directors’ best estimate of fair value of the equity-settled share-based

Equity-settled share-
payment is used to measure the expense if observable market prices are not
based payment
available.

All past service cost must be recognised immediately in profit or loss.

All actuarial gains and losses must be recognised immediately either in
profit or loss or other comprehensive income.
Defined benefit plans
An entity is required to use the projected unit credit method to measure its
defined benefit obligation and the related expense only if it is possible to do
so without undue cost or effort.
39

4. ERP for SME

Major ERP vendor are targeting towards small and medium scale businesses to sell their solution,
particularly after saturated growth in large businesses. In fact their strategies include to develop cost
effective, easy to implement and easy to upgrade system for small and medium businesses. However,
the reason for increasing demand from SME’s is highly competitive business environment, and the
businesses want to gain competitive edge over their rivals.
Although, small and medium businesses still facing few challenges to implement these systems such
as high costs of system, consultancy issues and future upgrade problems. In contrast, ERP vendors are
constantly focusing on coming up with a solution which overcomes these issues makes the systems
specially designed for small and medium businesses. In this section, I will discuss about following
things:-

4.1. About ERP

4.1.1. ERP (Enterprise Resource Planning)
4.1.2. ERP implementation Steps & approaches
4.2. ERP for SMEs
4.2.1. SMEs for ERP
4.2.2. Reasons for ERP vendors to target SMEs
4.2.3. Strategy focus of ERP vendors
4.2.4. ERP Solutions for SME’s
4.2.5. ERP vendors and their Strategies
4.2.6. Barriers to Implement ERP in SME’s
40

4.1. About ERP

4.1.1. ERP (Enterprise Resources Planning)

Enterprise Resource Planning, informally known as ERP, is a distinction used to describe a

comprehensive software system for automating the daily tasks and planning activities of an
organization. The automation and integration of these tasks can result in substantially increased
efficiencies for the organization. Example of tasks and business processes that can be automated by
ERP systems include but are not limited to:

Accounting, Sales Order Entry, Purchase Order Processing, Supply Chain Management,
Cash Management, Warehouse Management, Bills of Material, Material Requirements, Planning,
Capacity Requirements Planning and Human Resources etc.

The strength of an ERP system and the highest potential ROI for the organization lies in the
integration of the various business processes. An example of this integration would be the flow of
information generated by an order from a customer. Using an ERP system to enter a customer order
can yield many benefits. The system can check the customer's credit status, allocate inventory for the
products ordered, notify manufacturing of product demand, print required shipping documents, invoice
the customer, and post the required entries to accounting.

4.1.2. ERP implementation steps

If you’re thinking about replacing some or all of your existing campus administrative systems with a
more modern Enterprise Resource Planning (ERP) system, it will be helpful to first understand the
steps you need to take and in what order you need to take them. We believe there are seven such steps
that define the best path for an ERP program. These seven steps are shown graphically below.

The table below summarizes the seven steps of the ERP process. By following these steps you will
improve your school’s chances of having a successful ERP implementation.
41

Step Activity Purpose

1 Strategic Plan Provide the rationale and make the business case for the
ERP project
2 Readiness Assessment Determine institutional “preparedness” and achieve
organizational understanding of the ERP process
3 Prepare for vendor selection Document business practices and determine software
requirements in preparation for vendor selection
4 Vendor Selection Choose your technology partners, both the ERP
software and the ERP implementer
5 Plan the implementation Prepare for a successful implementation by developing
a comprehensive plan
6 Implement the ERP solution Work the implementation plan; schedule, track and
control the hundreds of project tasks
7 Post implementation Determine if objectives were met and determine the
Assessment extent of functionality of the software that is being used

4.1.3. There are four basic approaches for implementation of ERP projects are :
 Big Bang Approach
In this approach the installation of ERP system of all the modules happens across the entire
organization at once. Typically, all the business processes or the way of doing things switch
to the new way from a specific date.
The rational was that if the modules were installed in phases, there would be effort and cost
associated with the integration. A view was held that the big bang approach would reduce or
eliminate this cost. These could be the cause of high rate of failures.
 Phased
In this approach project is divided into logical phases and phases are implemented once at a
time. Each phases focus on a particular key area. At the end of project, the system is tested to
ensure that all the modules of system are integrated. Risk can be more easily controlled in
this approach.

 Similarly there are two other approaches i.e. Parallel approach and Process line approach.
42

4.1.4. ERP Implementation Life Cycle

Pre-Selection
Process

Gap Analysis Reengineering

Package Evaluation Configuration

Implementation
Testing End User Training
Team Training Project Planning

Go Live

Post Implementation
Phase

Operation & Maintenance

43

4.1.5. User Requirements / Specifications Definition

 Introduction
· Requirements Definition is the process of collecting/ capturing, analyzing, understanding
and then documenting the user Requirements and Specifications.
· Must understand the current system in term of
· Process
· People
· Technology
· Must understands the
· Problem / pain areas i.e. what is impact of lack of information etc.
· Inadequacies i.e. people, information, finance, poor management etc.
· What business opportunities are being missed
· Rules, policies & standards
· Tasks carried out
· Interviewing the users / management
· Studying documents
· Observing
· Understanding the procedures, policies
· Finding the constraints
 Approaches Used
· Waterfall model
· Iterative waterfall model
· Phased approach
· Proto typing
· RAD (Rapid Application Development)
· Spiral model
 Requirement Definition Document
· Executive Summary
· The existing system
· DFDs (Data Flow Diagrams)
· ER (Entity Relationship) Diagrams
· Data Stores / Data Dictionaries
· Problems / Issues / Opportunities
· The proposed system
· DFDs (Data Flow Diagrams)
· ER (Entity Relationship) Diagrams
· Data Stores / Data Dictionaries
 Way forward
44

4.2. ERP for SMEs

4.2.1. Small and medium Scale Enterprises

Enterprise Resource Planning vendors are concentrating to capture small and medium scale
enterprises, hence developing solutions according to their needs. In business scales small and
medium businesses can be defined as
Small Businesses : A Small businesses is generally an independently owned and control business
under 100 employees. The legal definition of small business may vary by country and industry,
infect small businesses are normally privately owned corporations, partnerships, or sole
proprietorships. (Bitpipe, 2005)
Medium Scale Businesses : According to Data monitor Medium Scale Enterprises can be defined
as the business of100 to 1,000 employees. According to IBM terms, small and medium scale
businesses are collectively called Mid Market and average mid market business is doing dealing for
17 years. In addition to it small and medium businesses have 6 to 10 branch offices. In terms of
Information Technology (IT) average a business with 100 to 249 employees have five IT Staff.
However, Businesses with staff count of 500 to 999 employees have average of Twenty IT
workers. (IBM, 2004)

4.2.2. Reasons for ERP vendors to target SME’s

Most of the Software vendors are increasingly developing strategies to make their position strong
in this segment as it offers significant future growth potential as SME’s has limited resources, but
most of them actually has identical requirements. In Addition to that small and medium scale
businesses never care about extremely decisive functionality, implementation and delivery models
that maintain primary and returning costs low. (Michael Dominy, 2004)
In last few years most of the ERP vendors slightly changed their strategies and focusing more
towards targeting and enhancing their share in Small and Medium scale enterprises. The reasons
for ERP vendors to change their strategies because
 Saturated Large Enterprise Market: Most of the Fortune 500 companies with huge budgets
enough to afford ERP implementations had already installed solutions, and most of the Small
and middle class business in short of the finances, resources and knowledge experience to
implement ERP solutions. (Carol Ellison, 1999) In most of the ERP vendors modified their
business model and change their target market from large businesses to SME’s.
 Secondly, large scale enterprises are no longer ready to pay huge license fee due to
competitive pressures in IT implementation. Moreover, large scale enterprises have reduced
their IT budget in recent years; In fact most of the big companies have avoided large,
enterprise wise technology implementations.(IT-Analysis, 2003)

4.2.3. Strategy focus of ERP vendors

As enterprises resource planning systems are very complex and implementation process is very
lengthy and complicated, ERP vendors are focusing to capture small and medium scale businesses
with number of offering which helps for SME”s to take full advantage of Systems without
spending much time, efforts and manpower.
45

o Application Service Providers

ASP can be defined as “A company that offers individuals or enterprises access over the Internet to
applications and related services that would otherwise have to be located in their own personal or
enterprise computers” (Telus, 2005)
A large number of ASP providers are focusing on small to medium enterprises (SMEs) to manage
their enterprise resource planning systems with implemented modules such as e-commerce, supply
chain and distribution. The significant advantages of ASP includes
 Cost effective method of implementing ERP solutions as investment is not required in
buying software, hardware infrastructure and future up gradation.
 It provides enhanced security and flexibility
 Most of the small and medium scale businesses have very less number of IT staff, and ASP
requires less necessity for IT knowledge in business.
 No issues such as maintenance of system and in house training for employees which
usually prove very expensive.(iStart, 2004)

o Outsource ERP systems

Outsourcing is the latest trend for small and medium scale enterprises and the biggest benefit of
outsourcing ERP is that doing so gives the business ability to provide the attention towards
company's functions rather than solving the issues with ERP software.
Basically, an outsourcer charge monthly fees which depend upon configuration of system, service
and vendor reputation to host ERP server. The advantage for outsource ERP systems for SME”s
are
 No issues related to hire talented IT people.
 Complexity in execution of ERP system.
 No maintenance issues( Barbara DePompa, 2003)

o Pre-Configured ERP Applications for SME”S

Major ERP vendors are providing specialised vertical ERP systems for the industry specific
verticals such as pharmaceuticals, service, utility, financial institutions, and educational institutions
for small and medium scale businesses and infect most of SME’s are appearing to implementation
these solutions. Preconfigured systems actually use the knowledge of the business which already
implemented such as system. Most of the ERP vendors have already started providing solutions in
various industries. (ERP New Insights, 2004)

4.2.4. ERP Solution for SME”s

Due to competitive environment, market pressure and complex business environment lets the small
and medium scale enterprises demands for extra functionality instead of basic features of
accounting and shows interest in buying a modern ERP suite that offers extra features and function
such as customer relationship management (CRM), supply chain and human resources. To take the
full advantage SME’s requires a powerful, integrated business solution that helps them improve
every aspect of their business and should have the following features
46

A complete solution fully integrated with Accounting.

 Fast and low cost implementation
 Easy to deploy
 Low cost of ownership and maintenance
 Internet and wireless device accessibility(Mid Market ERP,2003)

In response, major ERP vendors are taking different approach to developing systems for SME’s,
instead of focusing into too much functionality similar to comprehensive ERP software, most of the
vendors keeping it simple and easy to use. (Christine Murphy, 2005)

4.2.5. Enterprise Resource Planning Vendors and Strategies

All Top ERP vendors designed packaged solutions for small and medium scale business. SME’s
are taking ERP solutions as good investments for future to maintain competitive advantage and
future growth. The key difference between traditional ERP solution and SME ERP is consultancy
costs and man power, as large ERP solutions takes long time and huge sum of money, but for SME
ERP vendors are developing cost effective solution which can be implemented in short time. In
addition, upgrading from a standalone accounting package to an ERP system is becoming possible
as major players in the ERP space, such as Oracle and SAP, are offering software tailored to the
small business.
 SAP :- SAP is leading ERP vendor provides comprehensive range of solutions in number
of area which includes financial, supply chain management, Human resource management,
customer relationship management, and customised solution for different industries.
Strategy :- SAP tends to develop systems for small and medium scale enterprise different
from their traditional solutions as the requirements are dissimilar from the large
companies. Moreover, apart from size of the business, both categories of businesses have
unlike business goals. SAP strategy focus towards building a solution having lower cost,
higher returns, and quicker time to market. (Business First, 2004)
· SAP is focusing on a double strategy to promoting pre-configured systems. mySAP All-in-
One vertical versions are targeted towards higher-end of the mid-market, on the other hand
SAP Business One to aim towards smaller enterprises.
· SAP is also hosting service to its SME’s customers to access SAP ERP applications at very
nominal price. SAP modules for the hosting include human resources management, finance
and sales applications.
· SAP strategy also includes offering easy and simpler tool to its customers who helps them
to implement systems faster and easier. SAP's Accelerated (ASAP) SAP is such a tool
which provides a roadmap, which is a bit by bit guide that integrate experience from many
years of implementing SAP R/3. In Addition to that, Accelerated SAP (ASAP) also contains
a large number of tools, accelerators, files and other useful information which helps the
businesses in SAP implementation process.
· Solutions :-
SAP Business One :- SAP offers their Business one solution for small and medium scale
having less then 100 employees and which has the integrated business functions of
accounting, financial management, inventory management, reporting, logistics and sales
47

force automation. SAP Business is one of the successful tools for SME which is gaining
popularity with time. (Hewlett-Packard, 2005)

 Oracle :- Oracle is second biggest player in ERP market and it strength its position after
overtaking Peoplesoft, JD Edwards and recently Siebel systems to challenge SAP.
Strategy:- To get its market share in ERP SME market Oracle is providing free modules to
small and medium scale businesses. According to ZDnet, Oracle is offering
manufacturing, sales and service management modules to all of its new customers who are
buying its eBusiness Suite of applications. Most of the analysts consider the approach is
required if Oracle look forward to enhance its market share in highly competitive market
for ERP solutions. (Munir Kotadia, 2003)
Product:-
Oracle eBusiness suite special edition
Oracle eBusiness suite special edition is a cost effective, preconfigured solution of
enterprise resource planning system and is purposely designed for small and medium scale
businesses or the division’s of large corporations. The Special Edition suite comes with the
Customer Relationship Management, Accounting and Financials, Distribution and
Manufacturing. Oracle allows the licensing of the software for 10 to 50 users, which also
includes implementation services as well as hardware infrastructure. (Carol Wong, 2003)

4.2.6. Barriers to implementation of ERP systems in SME’s

Although ERP vendors are focusing their strategy towards Small and medium scale enterprises,
still there are number of issues for SME’s to implement ERP systems. All the ERP vendors paid
attention towards capturing maximum market share in Large Business market, but actually start
paying attentions towards SME’s due to number of reasons. Still small and medium businesses
have few obstacles to implement such systems such as business and technology issues.
Business Issues :-
· Complex Project Management:- The one of the major issue for the SME’s is complex
project management to implement system. Typically, an ERP system takes long time from.
Analysis phase to final implementation which includes various teams and huge sum of capital
involved. Small and medium size business can not afford such human and technology related
cost.
· Change Management :- For small and medium businesses looking to advance their
business through new business processes innovation, by the use of an Enterprise Resource
planning systems, business has to actually restructure their business processes to suite actual ERP
system which often requires number of issues for change. In addition, most of the businesses
generally do not change their way of doing things for a system. In Actual change management
help to enhance the business process quickly and efficiently.
· User Resistance and Training :- In fact most of the people in the world are afraid of
changing the ways of doing things. Businesses implement ERP systems to improve the complex
business environment to make the processes efficient and to enhance profitability, but many
48

projects fail to deal in intensity with the scale of the organisation wide changes and user interests
that is necessary to implement ERP systems successfully
· Information Technology Issues / High Infrastructure development costs :- ERP projects
often require high costs of implementation, which includes hardware, actual system, software and
networking costs. Large percentage of ERP costs generally spend in consultancy services, user
training and maintenance. Most of the SME’s ignore to implement these systems because of the
high infrastructure development costs that are associated with ERP.
· IT Skills :- Large businesses have their Information Technology departments, which is
responsible for proper functioning of all IT related activities in organisation. In contrast, Small
and medium business have less number of employees and generally face shortage of IT skills to
maintain such systems. So, such businesses can not afford to hire people with proper IT skills.
· Up gradation Issues :- Generally, ERP vendors come up new versions of their latest
software after one or two years which adds new features and latest technology available in the
market. For small and medium scale businesses, it is very complex and expensive to upgrade to
new system with the change in trend and technology. So, most of the businesses find it really
difficult to change the system with time.
49

5. ERP Implementation of IFRS for SMEs

In this section, I have focused on the implementation part of ERP for IFRS for SMEs. I have
discussed about impact of IFRS on the IT of company, various strategies used for implementation of
ERP for IFRS and etc. The subsections of this section are as follows:-
5.1. Impact of IFRS on IT of company
5.1.1. Global conversion Service Methodology by KPMG
5.2. Effects of conversion to IFRS on System & Process
5.2.1. Parallel accounting and reporting
5.2.2. Multi-GAAP reporting
5.2.3. Management decisions
5.2.4. Transition scenario
5.3. ERP Implementation of IFRS for SMEs
5.3.1. Property, plant and equipment (IAS 16, IAS 23, IFRIC 1)
5.3.2. Leasing (IAS 17, IFRIC 4, SIC-15, SIC-27)Screens of Out Put
5.3.3. Investment property (IAS 40, IAS 17)
5.3.4. Financial instruments (IAS 39, IAS 21, IFRS 7, IFRIC 9, IFRIC 10)
5.3.5. Cash flow statement (IAS 7)
5.3.6. Consolidation (IAS 27, SIC-12)
50

5.1. Impact of IFRS on IT of company

Converting to IFRS poses a significant challenge to organizations globally. Many companies initially
view the conversion process as solely an accounting challenge and fail to take into consideration the
significant role played by IT systems and processes. The impact on information systems from IFRS
conversions arises from the differences between the accounting standards currently applied and IFRS.
This creates a need for additional data and changed calculation tables. To facilitate these challenges,
information systems may need to be modified, remapped, reconfigured or even newly implemented.
One of the major impacts of converting to IFRS is the increased burden placed on the organization to
capture, analyze and report new data in order to comply with the new requirements of IFRS. The more
automated the conversion process is, the less the impact on dayto- day operational activities is likely to
be. One of the ways to achieve this is to understand fully what the potential impact on information
systems will be, and to address this as an integral part of the conversion project. The aim of this paper
is to help companies facing the conversion to IFRS to better understand and prepare for the impact the
project will have on their information systems.

The conversion to IFRS will generally be associated with significant investments, unique risks and
time pressure. For many organizations, IFRS conversion is a complex project that does not just affect
the accounting function and systems. Supporting processes and functions and IT systems and data
structures will also have to be amended, and employees will have to be trained on how to work with
the new systems and IFRS.

The following diagram shows how the things has to be taken care by management.
51

5.1.1. Global Conversion Service Methodology By KPMG

KPMG has developed our own Global Conversion Services Methodology to help our clients perform
IFRS conversions by advising on the assessment, design and implementation of conversions from the
current primary accounting standard to IFRS. The Global Conversion Services (GCS) methodology is
designed to approach the conversion in manageable phases:

The purpose of the Assess phase is to analyze the potential impact of the conversion from current GAAP
to IFRS on the current accounting and reporting functions, systems and processes, business and people.
This phase helps enable senior management to make informed decisions about the impact of the IFRS
conversion and to determine a path forward that is cost effective and reduces disruption to the business.
The purpose of the Design phase is to learn and build the tools needed for the IFRS conversion. During
this phase decisions on accounting and reporting issues are required, accounting manuals are drafted,
system blueprints are created and training plans are drafted.
The purpose of the Implement phase is to conduct training, rollout reporting packages and guidelines,
create opening balance sheet, comparative and interim financial statements and create the full set of
financial statements at reporting date.
During the Design and Implement phases every conversion engagement is different. Factors that impact
on the nature of the conversion engagement include:
• Timetable/ urgency
• Conversion strategy and objectives
• Conversion milestones
• The level of integration and complexity of the IT systems
• Skill level and availability of internal resources
• The nature and extent of accounting and disclosure gaps between the current GAAP and IFRS
• The organizational structure and reporting entities, among other factors.

The following table provides an overview of changes that may be required to an organization’s IT
systems :-

Type of Change Required Description

New data demands
New accounting disclosure and recognition requirements may result in:
more detailed presentation of information; new data elements or fields to
be recorded; information to be calculated on a different basis. The
flagging of the posting or master data with new characteristics, for
instance for reporting (see segment reporting), can result in amendments.
52

Changes to the chart of
accounts
Modifications to existing
systems
Selection and
implementation of new
systems
Interface and mapping
changes
Consolidation of entities
Amendment of the reporting
data
There will almost always be a change to the chart of accounts due to re-
classifications and additional reporting criteria.
If the existing bookkeeping or ERP system has the capability to produce
reports in accordance with IFRS, amendments to the system parameters
will be necessary, which will vary in scope depending on the chosen
technical presentation options.
Where previous financial reporting standards did not require the use
of a system, or the existing system is inadequate for IFRS reporting, it
may be necessary to implement new software.
With the introduction of new source systems and the decommissioning of
old systems, interfaces may need to be changed or developed and there
may be changes to existing mapping tables to the financial system.
Where separate reporting tools are used to generate the financial
statements, the mapping to these tools will require updating to reflect
changes made to the chart of accounts.
Under IFRS, there will potentially be changes to the number and type of
entities that need to be included in the group consolidated financial
statements.
It may be necessary to amend the reporting data if financial
statement data is required from branches or subsidiaries that use a
bookkeeping system which does not offer a possibility for reflecting
parallel accounting and reporting and/or does not have an interface to the
consolidation system.

5.2. Effects of conversion to IFRS on System & Process

5.2.1. Parallel accounting and reporting

A key issue for many organizations facing conversion to IFRS is whether to continue to prepare
financial statements in accordance with local accounting standards (commercial law and/or tax law).
This is likely to be the case in most countries. While the consolidated financial statements will have
to be prepared according to IFRS, local accounting standards will continue to be used for the
preparation of the separate financial statements and/or the financial statements as the tax
measurement basis. The organization will have to decide whether these second sets of financial
statements will be generated in parallel (in the ERP system) or in the form of a manual conversion
(often outside the ERP system). The following alternatives are therefore possible:
Alternatives for the preparation of separate financial statements in accordance with local GAAP and
IFRS
53

Parallel accounting, i.e. the simultaneous recording of the individual business transactions in
accordance with both accounting standards (local GAAP and IFRS) implies the adoption of a
‘system-oriented conversion’ project approach. It is also possible that a manual conversion at the
level of the consolidated or separate financial statements can be prepared in conjunction with an
express conversion, and that parallel accounting is implemented in a second step.

Following Figure shows that the individual consolidation units within a group can also decide
separately whether to employ parallel accounting or manual conversion.

5.2.2. Management Decision

Many major decisions will have to be taken when converting to IFRS. Many of these decisions will
have a significant impact on IT systems. These decisions should be identified and assessed during the
analysis phase.
• Should/must parallel accounting systems be adopted? How can these be implemented in IT
systems?
• Which primary accounting standard will be adopted in the future in the external accounting
system?
In many countries, IFRS provides the basis for the preparation of the consolidated financial
statements, while local accounting regulations or tax rules continue to be used in the preparation of
the single financial statements or as the tax measurement basis.
In such cases, a decision will have to be made regarding which accounting framework to adopt for the
primary recording of transactions. This will also affect the decision as to which accounting
framework to follow in the internal accounting system and for management reporting.
• Which accounting framework will provide the basis for management accounting and
management reporting? How can financial and management accounting be harmonized?
• Which key performance indicators (KPI´s) should be used by management in the future and
which ratios should be used for decision making ?
As a general rule, management accounting and management reporting, which in the past would have
been calculated in accordance with local GAAP regulations, can continue to be maintained at this
level. A significant benefit of the conversion to IFRS however, is the fact that the financial and
management reporting processes of all consolidation units can be standardized in accordance with
54

one uniform accounting framework. Reconciliation and/or interpretation of the accounting data of
foreign subsidiaries will therefore not be necessary.
• Which approach should be adopted for parallel accounting in the current ERP systems?
During the analysis phase, the current ERP systems should be reviewed to identify possible solutions
for parallel accounting in accordance with local GAAP and IFRS requirements. Various options can
generally be found, for example, the use of different accounts and the utilization of separate ledgers to
record individual business transactions. The effect of this on front- and back-end IT systems (e.g. the
consolidation system) must, of course, be taken into account.

Alternatives for the primary accounting framework in the external accounting system and effects on
internal accounting system/management reporting

5.2.3. Transition Scenario

An organization has to prepare an IFRS opening balance sheet as of the date of transition to IFRS. The
accounting policies under IFRS that apply as of the reporting date for the first set of IFRS financial
statements will have to be applied to the IFRS opening balance sheet. At the same time, all assets and
liabilities will have to be measured in the IFRS opening balance sheet in accordance with IFRS.
The following diagram shows the relationship between the IFRS opening balance sheet and the initial
set of IFRS financial statements with comparative information:

Fig. : First-time adoption of IFRS with two comparative years

This requirement results in the necessity to develop a transition scenario. Two issues arising from this
should be taken into consideration:
55

1. The recording of daily transactions in accordance with IFRS This refers to the time at which all
transactions should be recorded in the IT systems for the first time in accordance with IFRS. If this is a
date during the current fiscal year, the transactions recorded so far during the fiscal year in the
bookkeeping system in accordance with local GAAP will also have to be recorded in accordance with
IFRS.
2. Retroactive accounting for, and measurement of, assets and liabilities in accordance with IFRS
Assets and liabilities have to be measured in the IFRS opening balance sheet and in the first complete
IFRS financial statements in accordance with IFRS. In cases where the deemed cost exemption is not
available, the data will have to be developed retroactively for assets and liabilities that were not
recorded for the first time in the year of preparation of the IFRS opening balance sheet. In addition to
this, assets and liabilities will have to be measured in accordance with IFRS from the date on which
they are recorded for the first time. This will impact on the areas of property, plant and equipment and
provisions, for example, additional time and costs should be included when planning an IFRS
conversion project.
The data can be developed retroactively both within and outside the ERP system. If it is developed
retroactively outside the ERP system, it will have to be transferred to the ERP system (for instance via
an interface). If the data is developed retroactively within the ERP system, the IFRS financial
statements can only be published for the first time following the retroactive development of the data.

Fig. The Main Task & results of the projects of phases

5.3. ERP Implementation of IFRS for SMEs

5.3.1. Property, plant and equipment (IAS 16, IAS 23, IFRIC 1)
Property, plant and equipment are tangible items that are held for use in the production or supply of
goods or services, for rental to others, or for administrative purposes, and which are expected to be
used in more than one period.
Because of the requirements on accounting for property, plant and equipment under IFRS, the
differences with local accounting standards can have implications for how these procedures are
handled, and how they are reflected in the system. The following issues require particular attention
under IFRS and local accounting standards:
• Differences in the determination of cost (e.g. the inclusion of the costs of dismantling and removing
the asset and restoring the site on which it is located)
• Differences in the definition of the useful life of assets and depreciation methods
• Performance of an impairment test, if there are indications of impairment
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• Application of the component approach, if an item of property, plant or equipment is made up of

different components with different useful lives.

The differences outlined above generally result in the development of an additional measurement area
within the entity’s plant accounting system. This will enable IFRS carrying amounts to be maintained,
for parallel accounting purposes alongside the existing measurement areas (local accounting standards
and/or the tax view). At the same time, IFRS amounts for the new IFRS measurement area (which has
to be defined) must be determined retrospectively for each item from the date of original recognition
(if deemed cost is not elected), and established in the ERP system as the basis for subsequent
measurement. This can be accomplished either manually or with a programmed conversion. It should,
however, be noted that, depending on the number of fixed asset master records, manual conversion is
not to be recommended due to the amount of time involved. If the existing ERP system is incapable of
incorporating a further depreciation area as an additional view of the fixed assets, it is possible for all
fixed asset master records with measurement differences to be duplicated. This should, however, be
avoided if at all possible because of the significant amount of extra work involved in processing this.

The following diagram illustrates the two alternatives described:

Impairment tests have to be carried out for individual assets. If this is not possible, assets are tested for
impairment as elements of cash-generating units (CGUs). A system-supported procedure should be
designed to carry out the impairment tests.

5.3.2. Leasing (IAS 17, IFRIC 4, SIC-15, SIC-27)Screens of Out Put

A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of
payments the right to use an asset for an agreed period of time. A lease is classified under IFRS either as
an operating lease or a finance lease. In the case of a finance lease, the lessor recognizes a receivable from
the lease and the lessee recognizes the leased asset and a liability for the future lease payments. In an
operating lease, the leased item remains in the lessor’s statement of financial position and the lessee
expenses the lease payments over the term of the lease. Issues can arise regarding the procedural handling
and recording of leases in the IT system in the event of parallel accounting under local law (commercial
and/or tax law) and IFRS, where these regulations differ. This applies both from the point of view of the
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lessor and the lessee. A frequent example is the classification of a lease as a finance lease under IFRS and
an operating lease under local law. The following issues then arise:

• Design of a system to calculate the present value of the minimum lease payments, taking into account
differing lease payments and differing interest rates over the term of the lease

• Creation of a posting process for the recognition of the leased asset as an asset, and the recognition of
the lease payments as a liability, whereby the amount and the timing of the lease payments recorded in the
bookkeeping system should enable an automated payment process.

The recognition of leases classified as finance leases as assets in the books of lessees often results in a
high volume of postings. The recognition of collective assets can be considered, provided these assets are
in the same class, are of similar value and the date of recognition and the useful lives are the same.
Existing leases should therefore be reviewed during the IFRS conversion with the aim of simplifying the
accounting and recording processes.

5.3.3. Investment property (IAS 40, IAS 17)

Investment property is property held to earn rentals or for capital appreciation or both. Investment
property shall be measured initially at cost. Following its initial recognition, all investment property shall
be measured either in accordance with the fair value model or the cost model (amortized cost). Under the
fair value model, gains or losses arising from a change in the fair value shall be recognized in profit or
loss in the period in which they arise. The fair value of all investment property shall be disclosed,
irrespective of the measurement model used. Investment property shall be reported separately.
While real estate companies generally measure their investment property for international comparison
purposes applying the fair value model, other entities generally elect the cost model. From an IT point of
view, the fair value method in particular involves modifications to systems and processes.
The complexity of the reporting of investment property is increased in the event of parallel accounting
under local commercial law (which frequently measures this property at amortized cost) and IFRS:
• Measurement of the investment property as a unit (i.e. the land, the buildings and the integrated
equipment associated with the building are recognized and measured under IFRS as a unit, while these
items have to be recognized and measured as separate assets under local commercial law),
• Measurement of the investment property under IFRS at fair value, and at amortized cost under local
commercial law.
The following diagram illustrates this challenge:
Fig.: Comparison of the maintenance of the measurement and presentation of investment property in the
IT system under local commercial law and IFRS
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The different accounting and measurement methods of recording investment property under IFRS and
local commercial law require a separate approach in ERP systems. Recording and posting costs should be
kept to a minimum.
When applying the cost model for the measurement of investment property, the need to present these
separately (alongside property, plant and equipment) should be taken into account. This usually involves
the restructuring of the classification of fixed assets in the existing systems.
Payables / receivables :-
Entities must, as a matter of principle, present their statement of financial position and therefore all
receivables and payables broken down by current and non-current assets and liabilities. A split of the
receivables and payables is required between the categories, affiliated entities, joint ventures, associates
and third parties.
Presentation of the assets and liabilities in accordance with their liquidity is only permitted if such
presentation provides more reliable and more relevant information. If the existing ERP system does not
offer automatic functionality for the accumulation of the receivables and payables by maturities (for
instance, based on the maturity date), procedural adjustments have to be adopted in the form of a manual
report. The reporting date for each legal entity, or the system for the automatic determination of the
statement of financial position data, will have to be changed, which will usually result in an amendment
being made to the existing chart of accounts. Further accounting variance issues between IFRS and the
local accounting standards can include the prohibition under local accounting standards of the discounting
of long term receivables and payables that are interest free or at off-market interest rates and the
performance of foreign currency transactions in accordance with local principles focusing more on
prudence than IFRS.

5.3.4. Financial instruments (IAS 39, IAS 21, IFRS 7, IFRIC 9, IFRIC 10)

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability
or equity instruments of another entity. Financial instruments are classified on initial recognition into one
of the following categories:
• at fair value through profit or loss,
• held-to maturity investments,
• loans and receivables,
• available-for-sale financial assets, or
• other liabilities.

Financial instruments are recognized initially at fair value. The subsequent measurement of a financial
instrument depends on its classification in one of the following categories:
• Financial instruments at fair value through profit or loss are measured at fair value; all changes in fair
value are recognized immediately in profit or loss.
• Held-to maturity investments and loans and receivables are measured at amortized cost.
• Available-for-sale financial assets are measured at fair value; changes in fair value are recognized in
other comprehensive income.
• Financial liabilities, apart from financial instruments at fair value through profit or loss, are measured at
amortized cost.
• Derivatives are recognized in the statement of financial position and measured at fair value. Changes in
fair value are recognized immediately in profit or loss, unless these stand-alone derivatives or separable
embedded derivatives have to be classified as hedging instruments on a hedging of cash flows or a
hedging of a net investment.
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As a result of the complexity and the large number of differences between local GAAP and IFRS, the
reporting of financial instruments in accordance with the financial instruments standards is generally
accompanied by significant amendments to the organization’s systems and processes, including the
following:
• The need to design a process for the classification of the financial instruments, determination and roll-
forward, and recording in the bookkeeping records of the current fair values in conjunction with the year-
end and interim reporting.
• Amendment of the IT systems so that financial instruments can be measured differently under local
GAAP and IFRS depending on their classification into one of the above categories. In addition, it must be
possible to present the impairment test in the systems. This is frequently done by modifying the existing
ERP system or by implementing a new treasury system. If the associated cost is too high or unreasonable,
simple subsidiary records with a low level of IT support can be used.
• Further development of the IT systems regarding the possibility of reporting hedge relationships. This
implies greater demands on the availability of and access to historical data, in order to substantiate hedge
effectiveness in the future and retrospectively.
• Maintenance and usability of the required data to fulfill the disclosure requirements for financial
instruments in accordance with IFRS 7 in the existing IT systems.

5.3.5. Cash Flow Statement (IAS 7)

The cash flow statement is always an element of IFRS financial statements and is intended to provide
users of financial statements with information about the cash flows of an entity or a group. In the cash
flow statement, the opening balance of cash and cash equivalents (cash funds) is reconciled with the cash
funds at the end of the financial year, showing the cash flows during the period from operating, investing
and financing activities.
In addition to the presentation of the cash flow statement in conformity with IFRS at the level of
the individual entity, a decision has to be taken on whether the cash flow statement should be used as a
management instrument. This involves either separate cash flow statements for internal company units or
the consolidation of the individual cash flows relating to specific companies in the consolidated financial
statements, or the allocation of the group cash flows to individual group entities. In addition, the cash
flow statement (or the determination of the planned cash flows) can be used as a basis for the impairment
test in accordance with IAS 36.
Technical support of the cash flow statement represents a particular challenge, because cash flow
information is not generally recorded in the accounting system in the form and detail that has to be
reported in the cash flow statement. Even if all of the information is available, automated cash flow
reporting must first create a link between cash flows and underlying business transactions. In many cases,
information from various systems (ERP systems, bank offset systems, funds management systems, etc.)
has to be combined for this purpose.
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5.3.6. Consolidation (IAS 27, SIC-12 )

The consolidation obligation under IFRS is based on the control concept. Control is the power to govern
the financial and operating policies of an entity so as to obtain benefits from its activities.
In conjunction with the preparation of the consolidated financial statements in accordance with IFRS, all
subsidiaries and, if appropriate, special purpose entities (SPEs) shall be included in the consolidated
financial statements.
Differences in the composition of the entities included in consolidation within the position plan or group
chart of accounts and in the translation of foreign currencies can necessitate amendments being made to
the consolidation software used.
If it continues to be obligatory for local consolidated financial statements to be prepared in the future so
that the consolidated financial statements in accordance with IFRS serve information purposes only, it
will have to be analyzed whether the consolidation software used offers the functionality of preparing
parallel sets of consolidated financial statements under both accounting standards. If this is not the case,
reconciliation to the IFRS financial statements outside the system (for instance using a spreadsheet
program) will be necessary. This generally results in additional manual work, which has to be taken into
account in the timetable for the preparation of the financial statements. Commensurate procedures and
aids for the reconciliation will have to be defined.
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6. Conclusion & Recommendation

6.1. Conclusion

The potential of this new standard is that SMEs catapult themselves to a position where stakeholders
(lenders and investors) would be able to assess company performance from financial statements that use
directly comparable, authoritative, internationally recognised principles, regardless of the company’s
country of origin. Further this transition to IFRS framework for them would be at a significantly reduced
cost, as the standard has endeavored to reduce the complexities in accounting for transactions and
disclosure of financials as compared to full IFRSs. With the help of ERP the implementation of IFRS
would become easy and accountable also. Various approaches used in ERP implementation for IFRS can
help in not only IT system changes but also changes in managerial approach toward the accounting
strategies.

6.2. Recommendation

In this dissertation, my recommendation would involve following points:-

 For ERP implementation of IFRS for SMEs, we have to consider various approaches by which
ERP can be implemented for SMEs i.e. considering the industry, financial need and the
complications involved in financial calculation of operation process of the company.
 Before buying any ERP solution for the financial operation of company, the company should do
the vendor analysis and the terms involved in doing the business with that vendor.
 Instead of make or buy approach, the SMEs should search new ways like leasing the technology
for operation purpose or outsource their financial calculation process or various other methods like
on-demand Business Intelligence techniques.
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7. Supplementary Parts
7.1. Glossary
· DFD (Data Flow Diagram) - The DFD is a hierarchical graphical model of a system that shows
the different processing activities or functions that the system performs and the data interchange
among these functions.
· Context Level Diagram - The context diagram is also called as the level 0 DFD. The context
diagram is the most abstract data flow representation of a system. It represents the entire system
as a single bubble. This bubble is labeled according to the main function of the system.
· ER (Entity Relationship) Diagram - A detailed, logical representation of the entities, associations
and data elements for an organization or business is known as ER diagram.

7.2. References

· ‘IFRS implementation guide – Mapping the challenge’ issued by PriceWaterHouseCoopers

· ‘IFRS for SMEs’ issued by the International Accounting Standards Board, UK
· ‘IFRS for survey 2009 for private companies’ issued by Deloitte
· ‘International Financial Reporting Standards (IFRS)’ by American Institute of CPAs
· ‘The impact of IFRS on Technology – A Practical Introduction’ issued by KPMG
· ‘ERP for Small Business: A Buyer’s Guide’ issued by Technology Evolution Center(TEC)
· ‘Follow the SAP roadmap to IFRS Compliance’ by Gary Fullmer, SAP Labs
· ‘Why Privately-Held Manufacturers Should Implement IFRS- Ready ERP’ by Mitch Dwight,
CFO, IFS North America