1 Issue 2 September 2009 ACCOUNTING ADVISORY SERVICES Accounting Advisory News Switzerland ADVISORY IFRS for SMEs A standard for Switzerland? In July 2009, one of the longest and most controversial projects of the IASB culminated with the release of the standard IFRS for Small and Mediumsized Entities (IFRS for SMEs). More than 8 years have passed since the issue was added to the IASB s project agenda. During this time fundamental changes were considered in relation to the basic concept of the standard and individual accounting rules. The first draft of the standard was based on cost-benefit considerations for SMEs and provided a slimmed-down version of full IFRSs with simplification to recognition, measurement and disclosure requirements of full IFRSs. The final standard issued by the IASB, however, presents itself as a selfcontained standard for SMEs that contains, to some extent, extensive recognition and measurement simplifications. In Switzerland, the accounting standard IFRS for SMEs competes with the generally accepted accounting principles of Swiss GAAP FER, which are also based on the true and fair view principle. According to the current draft of the new Swiss accounting law, consolidated financial statements will need to be prepared under generally accepted accounting principles. A directive of the Swiss Federal Council will set out which standards are likely to be accepted as generally accepted accounting principles which is likely to include Swiss GAAP FER, IFRS, US GAAP and, potentially, IFRS for SMEs. Hence, a group of entities that has neither equity nor debt instruments listed on a public market and is neither a bank nor an insurance company, theoretically has the choice between four different accounting principles. However, full IFRSs and US GAAP are not likely to constitute a sensible alternative for SMEs given their complexity. In this newsletter, we explain to you the significant simplifications of the SME standard and highlight the major differences to Swiss GAAP FER. Dear Reader, We are pleased to present to you the second issue of our Accounting Advisory News. The aim is to inform you on a regular basis about implications of recent developments in the international accounting community. It supplements KPMG's technical publications (e.g. our IFRS Briefing Sheet) by focusing on practical implications of recent changes. This issue focuses on the new standard IFRS for SMEs and the corresponding impact on the accounting practices of SMEs in Switzerland. We hope that you find this issue helpful in understanding the two different sets of accounting principles available for SMEs and their implications. Oliver Köster Accounting Advisory Services
2 Accounting Advisory News Issue 2 September Structure and content The final IFRS for SMEs is a standalone document, without connections to full IFRSs (except for the reference to IAS 39), which has been developed on the basis of the full IFRSs and its framework. The cross-references to full IFRSs (e.g. for details on applying more complex accounting options or as a source of guidance when the IFRS for SMEs does not address an accounting issue directly) that had been proposed in the exposure draft to this standard were eliminated in the final standard. Example: The IFRS for SMEs does not include any guidance regarding the derecognition of goodwill that has been allocated to a cash-generating unit when an entity disposes of an operation within that unit. Hence, entities that apply the SME standard have the choice of applying IAS 36 (in particular paragraph 86) by analogy or to develop an independent accounting policy. The IASB plans to update the IFRS for SMEs approximately every three years, however urgent matters may need to be considered earlier than in the normal three-year cycle. With this provision, the SME standard remains fairly flexible but is still not considered for amendment as often as full IFRSs. New IFRSs, issued by the IASB since the SME standard was last revised do not automatically apply to the IFRS for SMEs. The IFRS for SMEs is organised by topics, with each topic presented in a separate section. Section 1-10 are general in nature and include the scope of the standard (section 1), the relevant excerpts from the framework and the basic recognition and measurement principles (section 2), which now form part of the mandatory accounting standard unlike full IFRSs. Sections contain topics related to individual balance sheet items and transactions, that have been more or less derived from the corresponding IFRSs. A derivation table in the back of the standard identifies the IASs/IFRSs from which the principles in each section of the IFRS for SMEs were derived. Sections include special topics that are not related to single balance sheet items or transactions, such as Foreign Currency Translation, Hyperinflation and Special Activities (i.e. Agriculture and Exploration of Mineral Resources). Section 35 sets out the requirements for first-time adoption of the SME standard. The requirements apply regardless of whether the transition is from full IFRSs or from another set of accounting principles such as the Swiss Code of Obligations or Swiss GAAP FER. The standard is supplemented by the Basis for Conclusions, Illustrative Financial Statements and a Disclosure Checklist that are not mandatory. Accounting options While the exposure draft granted all accounting options available under full IFRSs to SMEs, the final standard only includes the simpler option for SMEs. The cross-references to full IFRSs that allowed SMEs to apply the more complex options included in full IFRSs, were eliminated in the final standard in order to allow a stand-alone IFRS for SMEs standard. Hence, in contrast to the original intention of the IASB, the final standard includes considerably less accounting options than full IFRSs. Example: The exposure draft of the SME standard allowed the subsequent measurement of property, plant and equipment either at cost less any accumulated depreciation and impairment losses or at fair value. While the first (simpler) option was explicitly set out in the exposure draft, SMEs would have had the option to apply the more complex option via a crossreference to full IFRSs (IAS ff.). Further significant accounting options in full IFRSs that are not available for SMEs, include the following: Recognition of actuarial gains and losses from defined benefit plans in line with the corridor method (IAS 19.92) or by adopting any systematic method that results in faster recognition (IAS 19.93), Proportionate consolidation for investments in jointly controlled entities (IAS ff.), Subsequent measurement of intangible assets at fair value (IAS ff.), Deducting government grants from the carrying amount of the corresponding asset (IAS 20.24), Subsequent measurement of investment properties at cost less any accumulated depreciation and impairment losses (IAS 40.30). In contrast, SMEs still have the option to prepare the cash flow statement by using either the direct or indirect method. Further, the SME standard provides the following additional accounting options: Financial instruments can be accounted for by either applying the requirements of sections 11 and 12 of the IFRS for SMEs or by applying the recognition and measurement requirements of IAS 39,
3 Accounting Advisory News Issue 2 September Investments in associates and jointly controlled entities can be accounted for in the consolidated financial statements at cost, at fair value through profit or loss or by applying the equity method. Significant simplifications The final IFRS for SMEs contains several recognition and measurement simplifications compared to full IFRSs and to the exposure draft. Financial instruments The most far going separation from full IFRSs becomes obvious in the financial instruments section. In this section, an independent approach has been developed, which was also used as a starting point for the discussions around the revision of accounting for financial instruments in full IFRSs. In contrast to full IFRSs, there are only two instead of four categories of financial instruments: (1) basic financial instruments and (2) other financial instruments. Basic financial instruments comprise, for example, debt instruments at fixed or variable rates with common terms, bank deposits, trade receivables and payables, bills and others. These financial instruments shall be measured at amortised cost using the effective interest method less any impairment losses. Basic financial instruments also comprise investments in non-convertible preference shares and non-puttable ordinary and preference shares. These financial instruments shall be measured at fair value with changes in fair value recognised in profit or loss, if the shares are publicly traded or their fair value can otherwise be measured reliably. All other such investments shall be measured at cost less impairment. Other financial instruments, including all derivatives, that are not part of a hedge relationship, shall be measured at fair value with changes in fair value to be recognised in profit or loss. Under Swiss GAAP FER, only securities as part of the current assets for which a fair value exists and derivatives that are not part of a hedge relationship, shall be measured at fair values. Hence, more financial instruments tend to be measured at fair values under IFRS for SMEs than under Swiss GAAP FER. The future will show whether this will lead to significant divergence in practice as most SMEs are likely to have only basic financial instruments. The complex requirements for embedded derivatives set out in IAS 39 have not been transferred to the IFRS for SMEs. As per IFRS for SMEs financial instruments with embedded derivates (such as convertible bonds) are classified as other financial instruments and hence measured in their entirety at fair value. Contracts to buy or sell non-financial items that include risks that are not in accordance with the entity s expected purchase, sale or usage requirements are also classified as other financial instruments and measured in their entirety at fair value. Hence, the separation of the embedded derivative is not necessary. Swiss GAAP FER does not set out detailed requirements for embedded derivatives, which probably shows that the issue is not as relevant for the users of Swiss GAAP FER. In general, Swiss GAAP FER requires the recognition of a derivative as soon as it constitutes an asset or a liability. Embedded derivatives are treated together with the basic instrument, with separation as an allowed alternative. Components of non-financial contracts that are in accordance with the entity s expected purchase, sale or usage requirements are not likely to fulfil the definition of an asset or a liability and hence would not be separable. Thus, there are no significant differences between the SME standard and Swiss GAAP FER. In addition, the requirements for hedge accounting have been simplified but are still relatively complex. The SME standard still requires relevant documentation and prospective effectiveness testing of the hedge relationship. Only retrospective effectiveness testing of the hedge relationship is not required as the termination of the hedge relationship is accounted for prospectively unlike IAS 39. Example: An entity prepares year-end and half-year financial statements. The effectiveness of the hedge relationship is tested at each reporting date (i.e. 30/06 and 31/12). The hedge was expected to be highly effective (prospective effectiveness) at 31/12/01 and 30/06/02. At 31/12/02 the hedge is determined to be neither retrospectively nor prospectively highly effective. According to IAS 39, the hedge relationship would be terminated at 30/06/02, while IFRS for SMEs require the hedge relationship to be terminated from the reporting period beginning after 31/12/02.
4 Accounting Advisory News Issue 2 September As a trade-off for these simplifications, hedge accounting is restricted to certain risks and hedging instruments under the SME standard. For example, options do not qualify as hedging instruments for SMEs. However, if this is desired SMEs would need to make use of the accounting policy choice provided in IFRS for SMEs to apply IAS 39 in full. The presentation of hedge relationships under IFRS for SMEs is in line with the requirements set out in IAS 39 for Fair Value Hedges and Cash Flow Hedges without using these terms explicitly. The hedge accounting requirements under Swiss GAAP FER are more general in nature. There are no explicit requirements to document or to test the effectiveness of hedge relationships. However, from a risk management or a corporate governance point of view, it is likely that some minimum requirements exist. An entity would have the choice to present the hedge relationship either as a fair value hedge, cash flow hedge (similar to IFRSs) or on the basis of the reduced net approach, under which the hedge relationship is only accounted for to the extent that the underlying hedged item is accounted for under the general measurement requirements. Overall, hedge accounting is considerably simpler and more flexible under Swiss GAAP FER than under IFRS for SMEs. Financial assets are derecognised under IFRS for SMEs when either substantially all of the risks and rewards or control of the financial asset have been transferred. Complex issues that would require the pass-through and/or the continuing involvement test as set out in IAS 39, do not lead to derecognition of a financial instrument under IFRS for SMEs. These tests might be applicable for certain factoring arrangements. If SMEs intend to derecognise these instruments, they would need to apply IAS 39 in full. The derecognition requirements for derivatives under Swiss GAAP FER are quite general in nature. In principle, the criteria set out in the framework and the definition of assets should be considered in relation to derecognition. Derivatives should be derecognised at the end of the maturity or as soon as, due to disposal or breakdown of the counterparty, no further claim on future payments exists. In the case of complex issues, the entities would need to determine their own accounting policy. Impairment, intangible assets and goodwill The requirements regarding impairment of non-financial assets are based on the requirements of full IFRSs with noticeable less detail. While the SME exposure draft only required the calculation of impairment losses using the fair value less costs to sell, which caused extensive criticism by the public, the final standard also requires to consider the value in use, like full IFRSs. Based on cost-benefit considerations the conceptual link to full IFRSs has been disrupted with regard to goodwill and intangible assets with indefinite useful lives. They are generally amortised over their estimated useful lives. If the useful lives cannot be estimated reliably, the useful life is presumed to be 10 years. Impairment tests are only required if, at reporting date, indicators for an impairment exist. As per Swiss GAAP FER, intangible assets are amortised over their useful life. If the useful life cannot be clearly determined, an amortisation period of five years is applied, in justified cases an amortisation period of 20 years at most can be applied. While the amortisation of intangible assets and goodwill is more restrictive under Swiss GAAP FER than under the SME standard, there is more flexibility in terms of the initial recognition of goodwill. Acquired goodwill may be offset with equity at the date of the acquisition. However, Swiss GAAP FER still requires an impairment test for goodwill that has been offset with equity as any impairment is to be presented in the notes. The concept of cash-generating units, that is applicable if indicators for an impairment exist, is consistent with full IFRSs. Similarly, impairment losses must first be allocated to any goodwill and then to the other assets proportionally to their carrying amounts. An impairment loss for goodwill may not be reversed in subsequent periods. The identification of cash-generating units for goodwill impairment testing purposes has been simplified for SMEs. As the IFRS for SMEs does not require the presentation of segment information, SMEs are not limited to operating segments when identifying their cash-generating units. In rare cases, goodwill could be tested for impairment on the basis of the whole entity being one cash-generating unit.
5 Accounting Advisory News Issue 2 September Conceptually, the Swiss GAAP FER requirements in relation to impairment are very close to IFRSs, including the concept of cashgenerating units. If the impairment loss is greater than the carrying amount of the cash-generating unit a provision of the remaining difference needs to be recognised. Under IFRS, a provision would only be recognised if an obligation exists. Swiss GAAP FER does not provide any specific requirements in relation to the identification of cash-generating units. Depending on the specific circumstances, an impairment test on the level of the entire business (one cash-generating unit) seems to be possible. SMEs would need to develop individual accounting policies in relation to the details on impairment that are not set out in the SME standard. Example: The SME standard does not set out any requirements in relation to value in use calculations if cash flows are in foreign currencies or in relation to the allocation of corporate assets to cash-generating units (included in IAS 36). Internally generated intangible assets cannot be capitalised by SMEs. The accounting policy choice to capitalise development costs, which was set out in the exposure draft, was not transferred to the final SME standard. Internally-generated intangible assets can be recognised under Swiss GAAP FER if certain conditions are met at the time of the initial recognition. The conditions are similar to the ones set out in IAS 38. Defined benefit obligations While the basics of accounting for defined benefit obligations have been taken from full IFRSs, the IFRS for SMEs provides several simplifications regarding the measurement of defined benefit plans. For example, SMEs may ignore future salary progressions and other dynamic parameters in relation to the measurement of defined benefit obligations, if the information cannot be obtained without undue cost or effort. Further, any changes to a defined benefit plan are recognised in profit or loss in the current period. Hence, the sometimes complex differentiation between past service costs and plan curtailments and settlements is not necessary. An accounting policy choice is available to recognise actuarial gains or losses either in profit or loss or in other comprehensive income in the period in which they occur. Swiss GAAP FER does not mandate the use of certain methods of measurement to determine the defined benefit obligation. Whether an entity would recognise an asset (or a liability) for any surpluses (or deficits) is dependent on the financial statements of the pension institutions, which are allowed to use static and dynamic methods of measurement. There is an accounting policy choice under Swiss GAAP FER to recognise the benefits from a surplus as an asset, while obligations arising from a deficit need to be recognised as a liability under Swiss GAAP FER 23. Changes are recognised immediately in profit or loss. Alternatively, Swiss GAAP FER allows the application of internationally accepted principles, such as IFRS or US GAAP. Borrowing costs SMEs shall recognise borrowing costs as an expense in profit or loss using the effective interest rate method. The capitalisation of borrowing costs in relation to the acquisition or construction of qualifying assets is not allowed. As per Swiss GAAP FER, borrowing costs can be capitalised as acquisition or production costs during the construction phase of property, plant and equipment. Assets held for sale and discontinued operations The exposure draft required the separate disclosure and measurement of assets held for sale and the separate disclosure of discontinued operations. However, this area has not been transferred to the final SME standard as it was not regarded as relevant for typical SMEs. Swiss GAAP FER does not contain any separate disclosure and/or measurement requirements for assets held for sale and discontinued operations. Topics without major simplifications The following accounting topics, which are considered to be complex in practice, are consistent with full IFRSs without major simplifications for SMEs: Leases, Revenue recognition, Share-based payments, Income taxes and Business combinations.
6 Accounting Advisory News Issue 2 September While the guidance on income taxes in the IFRS for SMEs anticipates future changes to full IFRSs, such as the definition of the tax base and the accounting for uncertain tax positions, the requirements for business combinations are not based on the current IFRS 3 (2008) but on the previous version issued in Accounting for leases as lessees is comparable with IFRS. However, accounting for leases as lessors is not specified in Swiss GAAP FER. There is only one general requirement in the framework regarding revenue recognition, however, the results are likely to be comparable to the SME standard. As accounting for share-based payments is not set out under Swiss GAAP FER, recognition as an expense is not inevitable. The concept of accounting for deferred taxes is comparable to the IFRS for SMEs, but there are significant differences in relation to the detailed requirements. Under Swiss GAAP FER, the temporary differences concept is not followed as strictly as under the SME standard. For example, deferred taxes are not recognised for temporary differences of income and expenses that do not affect the results (such as translation differences that have been recognised in equity). Accounting for business combinations is generally comparable with the SME standard but the requirements are significantly less detailed. Disclosures The final SME standard still requires detailed disclosures in some areas, although the overall quantity of disclosures has been significantly reduced compared to full IFRSs. For example, the disclosure of a tax rate reconciliation is not required for SMEs. However, disclosures are required in relation to the significant differences in tax amounts presented in the statement of comprehensive income and amounts reported to tax authorities. Overall, the disclosure requirements under Swiss GAAP FER are significantly less than under the IFRS for SMEs. The disclosure requirements in relation to defined benefit obligations under Swiss GAAP FER are similar to IFRS for SMEs. The disclosures required for transactions with related parties are also comparable. However, Swiss GAAP FER does not require the disclosure of key management personnel compensation. First-time adoption IFRS for SMEs should be applied retrospectively when adopted for the first time, i.e. recognition and measurement of all assets and liabilities as if the standard would have been applied in the past. However, the standard grants several exemptions from the retrospective application requirement some of them are mandatory and others are optional. An entities first financial statements prepared under the IFRS for SMEs would require the disclosure of comparative information in respect of the previous comparable period for all statements. Further, the first financial statements under the IFRS for SMEs require the disclosure of a reconciliation of the entity s equity and profit or loss determined in accordance with its previous financial reporting framework to its equity determined in accordance with the SME standard. Swiss GAAP FER requires only the disclosure of an opening balance sheet upon first time adoption for the current reporting period (closing balance at the end of the previous financial year).the retrospective application of the standard is not explicitly set out in Swiss GAAP FER. Hence, there are no exemptions from the retrospective application comparable to the ones included in the SME standard. Adoption in Switzerland The comparison between IFRS for SMEs and Swiss GAAP FER shows that, despite the sometimes significant simplifications to full IFRSs, the requirements of the SME standard are more detailed than Swiss GAAP FER. Further, due to the significant larger quantity of disclosures under IFRS for SMEs, the compilation of financial statements under the SME standard is likely to take more time and effort. However, the accuracy of this statement will depend on the individual circumstances. However, Swiss GAAP FER often does not set out any, or only general, requirements for certain important accounting areas. In addition, the frequency of changes to the standards is likely to be higher under IFRS for SMEs than under Swiss GAAP FER due to the planned regular revisions of the SME standard. This might require costly changes to the current accounting processes and systems.
7 Accounting Advisory News Issue 2 September On the other hand, Swiss GAAP FER users are in practice often required to develop and consistently apply their individual accounting policies in accounting areas with no or only general requirements, if applicable to the company. This might involve substantial costs and coordination effort especially for multinational groups of companies with a certain size. In addition, the comparability of Swiss GAAP FER financial statements might be limited from the point of view of users of financial statements, due to the necessity to develop individual accounting policies in accounting areas with no or only general requirements. Financial statements under IFRS for SMEs might potentially be more comparable than under Swiss GAAP FER resulting from the more detailed requirements of the SME standard. This is also the case in relation to financial statements under full IFRSs given the fewer accounting options included in the IFRS for SMEs. A disadvantage of the IFRS for SMEs is that the scope of application is considerably more restricted. Swiss GAAP FER can be applied by all entities that are not listed on the Main Standard of the SIX (and hence are required to apply full IFRSs or US GAAP anyway). However, entities that are listed in the Domestic Standard of the SIX or whose debt instruments are traded in a public market, are not allowed to apply the SME standard. Even a change of the SIX s listing rules would not change the applicability of the SME standard to entities whose debt and equity instruments are traded in public market, as it was the IASB s intention that financial statements of these entities shall not be described as conforming to the IFRS for SMEs. The individual circumstances of Swiss entities and the international acceptance of the SME standard will determine whether Swiss entities will be prepared to accept the higher costs and time effort to prepare financial statements under the IFRS for SMEs. In this regard, one of the key considerations is likely to be the endorsement of the SME standard by the EU, which is still pending. Important note: The information contained in this publication is based on our initial observations and these observations may change as practice develops.
8 kpmg.ch Your contacts Accounting Advisory Services Advisory Accounting Advisory Services (AAS) offers assistance in dealing with the practical application of accounting regulations and the implications on financial reporting processes. We can assist you in implementing new accounting standards as well as converting accounting systems and processes to comply with international standards (IFRS, US GAAP, IFRS for SMEs or IPSAS) or national standard (Swiss GAAP FER). Whether you have accounting queries about individual transactions or want to restructure and streamline your entire system of internal and external financial reporting, our professionals are ready to assist you. We would be pleased to become your first point of contact for all accounting considerations. For more information please visit our website under Oliver Köster Zurich Tel Audit Bianka Wilson Zurich Tel Thomas Schmid Zurich Tel Reto Eberle Zurich Tel The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG AG, a Swiss corporation, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Switzerland.