SMEs - Module-02-Concepts and Pervasive Principles

IFRS for SMEs® Standard (2015) + Q&As
IFRS® Foundation—Supporting Material for the IFRS for SMEs Standard
Module 2—Concepts and Pervasive

Principles
al for
IFRS® Foundation
Supporting Material
for the IFRS for SMEs® Standard
including the full text of
Section 2 Concepts and Pervasive Principles
of the IFRS for SMEs Standard
issued by the International Accounting Standards Board in October 2015
with extensive explanations, self-assessment questions
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Contents
INTRODUCTION __________________________________________________________ 1
Which version of the IFRS for SMEs Standard? __________________________________ 1
This module ______________________________________________________________ 1
IFRS for SMEs Standard ____________________________________________________ 2
Introduction to the requirements_______________________________________________ 3
What has changed since the 2009 IFRS for SMEs Standard ________________________ 3
REQUIREMENTS AND EXAMPLES ___________________________________________ 4
Scope of this section _______________________________________________________ 4
Objective of financial statements of small and medium-sized entities __________________ 4
Qualitative characteristics of information in financial statements ______________________ 6
Financial position _________________________________________________________ 17
Performance _____________________________________________________________ 25
Recognition of assets, liabilities, income and expenses ___________________________ 27
Measurement of assets, liabilities, income and expenses __________________________ 29
Pervasive recognition and measurement principles _______________________________ 30
Accrual basis ____________________________________________________________ 30
Recognition in financial statements ___________________________________________ 31
Measurement at initial recognition ____________________________________________ 35
Subsequent measurement __________________________________________________ 36
Offsetting _______________________________________________________________ 37
SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS _________________________ 38
COMPARISON WITH FULL IFRS STANDARDS ________________________________ 40
TEST YOUR KNOWLEDGE ________________________________________________ 41
IFRS Foundation: Supporting Material for the IFRS® for SMEs (version 2019-01) iv
Module 2—Concepts and Pervasive Principles
The accounting requirements applicable to small and medium-sized entities (SMEs)

discussed in this module are set out in the IFRS for SMEs Standard, issued by the
International Accounting Standards Board (Board) in October 2015.
This module has been prepared by IFRS Foundation education staff.
The contents of Section 2 Concepts and Pervasive Principles of the IFRS for SMEs
Standard are set out in this module and shaded grey. The Glossary of terms of the IFRS
for SMEs Standard (Glossary) is also part of the requirements. Terms defined in the
Glossary are reproduced in bold type the first time they appear in the text of Section 2.
The notes and examples inserted by the education staff are not shaded. These notes and
examples do not form part of the IFRS for SMEs Standard and have not been approved by
the Board.
INTRODUCTION
Which version of the IFRS for SMEs® Standard?
When the IFRS for SMEs Standard was first issued in July 2009, the Board said it would
undertake an initial comprehensive review of the Standard to assess entities’ experience of the
first two years of its application and to consider the need for any amendments. To this end, in
June 2012, the Board issued a Request for Information: Comprehensive Review of the IFRS for SMEs.
An Exposure Draft proposing amendments to the IFRS for SMEs Standard was subsequently
published in 2013, and in May 2015 the Board issued 2015 Amendments to the IFRS for SMEs
Standard.
The document published in May 2015 only included amended text, but in October 2015, the
Board issued a fully revised edition of the Standard, which incorporated additional minor
editorial amendments as well as the substantive May 2015 revisions. This module is based on
that version.
The IFRS for SMEs Standard issued in October 2015 is effective for annual periods beginning on
or after 1 January 2017. Earlier application was permitted, but an entity that did so was
required to disclose the fact.
Any reference in this module to the IFRS for SMEs Standard refers to the version issued in
October 2015.
This module
This module focuses on the concepts that underlie financial statements prepared in
accordance with the IFRS for SMEs Standard. The concepts in Section 2 are based on the Board’s
Framework for the Preparation and Presentation of Financial Statements (published in 1989). This
framework was revised and renamed the Conceptual Framework for Financial Reporting (Conceptual
Framework) in 2010 and revised again in 2018. Some notes presented in this module are derived
from the Basis for Conclusions on the Conceptual Framework, and, unless specifically stated
otherwise, come from the 2018 version. References to the Conceptual Framework are not meant
to imply that the users of the IFRS for SMEs Standard should be familiar with the Conceptual
Framework. The references also do not indicate an intention to change the meaning or
application of Section 2 to reflect revisions to the Conceptual Framework.
The module introduces the subject and reproduces the official text along with explanatory
IFRS Foundation: Supporting Material for the IFRS® for SMEs (version 2019-01) 1
notes and examples designed to enhance understanding of the requirements. It identifies the
significant judgements required when considering the concepts and pervasive principles
underpinning the IFRS for SMEs Standard. In addition, the module includes questions designed
to test your understanding of the concepts and pervasive principles underpinning the
IFRS for SMEs Standard.
Upon successful completion of this module, you should, within the context of the IFRS for SMEs
Standard, be able to:
• understand the objective of general purpose financial statements of a small or medium-
sized entity;
• use your judgement in developing and applying an accounting policy that results in
information that is both reliable and relevant to the economic decision-making needs of
users of the financial statements;
• understand qualitative characteristics that make information provided in financial
statements useful to users of those financial statements;
• identify the elements of financial statements and their pervasive recognition and
measurement principles;
• understand how to apply the undue cost or effort exemption; and
• understand the general principle setting out when offsetting is required or permitted.
IFRS for SMEs Standard
The IFRS for SMEs Standard is intended to apply to the general purpose financial statements of
entities that do not have public accountability (see Section 1 Small and Medium-sized Entities).
The IFRS for SMEs Standard is comprised of mandatory requirements and other non-mandatory
material.
The non-mandatory material includes:
• a preface, which provides a general introduction to the IFRS for SMEs Standard and explains
its purpose, structure and authority;
• implementation guidance, which includes illustrative financial statements and a table of
presentation and disclosure requirements;
• the Basis for Conclusions, which summarises the Board’s main considerations in reaching
its conclusions in the IFRS for SMEs Standard issued in 2009 and, separately, in the 2015
Amendments; and
• the dissenting opinion of a Board member who did not agree with the issue of the
IFRS for SMEs Standard in 2009 and the dissenting opinion of a Board member who did not
agree with the 2015 Amendments.
In the IFRS for SMEs Standard, Appendix A: Effective date and transition, and Appendix B:
Glossary of terms, are part of the mandatory requirements.
In the IFRS for SMEs Standard, there are appendices to Section 21 Provisions and Contingencies,
Section 22 Liabilities and Equity and Section 23 Revenue. These appendices provide
non-mandatory guidance.
The IFRS for SMEs Standard has been issued in two parts: Part A contains the preface, all the
mandatory material and the appendices to Section 21, Section 22 and Section 23; and Part B
contains the remainder of the material mentioned above.
Further, the SME Implementation Group (SMEIG), which assists the Board with supporting
implementation of the IFRS for SMEs Standard, publishes implementation guidance as
‘questions and answers’ (Q&As). These Q&As provide non-mandatory, timely guidance on
specific accounting questions raised with the SMEIG by entities implementing the IFRS for SMEs
Standard and other interested parties. At the time of issue of this module (January 2019) the
SMEIG has not issued any Q&As relevant to this module.
Introduction to the requirements
The objective of general purpose financial statements of a small or medium-sized entity is to

provide information about the entity’s financial position, performance and cash flows 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. Such users include, for
example, owners who are not involved in managing the business, existing and potential
creditors and credit rating agencies.
The purpose of the concepts and pervasive principles are primarily to:
(a) assist preparers to develop consistent accounting policies when no Standard applies to a
particular transaction; and
(b) assist all parties to understand and interpret the IFRS for SMEs Standard.
The main concepts in Section 2 that support the objective of general purpose financial
statements are the qualitative characteristics of information in financial statements and the
definitions of the elements of the financial statements (described below). Section 2 also
provides some basic principles for the recognition, measurement and presentation of the
elements of financial statements.
When the IFRS for SMEs Standard does not specifically address a transaction, other event or
condition, an entity’s management uses judgement in developing and applying an accounting
policy that results in information that is both reliable and relevant to the economic decision-
making needs of users. If, in making these judgements, management cannot use the
requirements and guidance in the IFRS for SMEs Standard setting out similar and related issues,
then it must consider the pervasive principles in Section 2 (see paragraphs 10.4 and 10.5) as
well as considering definitions of the elements of the financial statements, recognition criteria
and measurement concepts.
What has changed since the 2009 IFRS for SMEs Standard?
The main change made to Section 2 of the IFRS for SMEs Standard by the 2015 Amendments is
the addition of clarifying guidance on the undue cost or effort exemption used in several
sections of the IFRS for SMEs Standard—based on Q&A 2012/01 Application of ‘undue cost or effort’—
as well as a new requirement within relevant sections for entities to disclose their reasoning
for using such an exemption (see paragraphs 2.14A–2.14D).
There are also minor consequential changes to other paragraphs to reflect changes made to
other sections of the IFRS for SMEs Standard. In addition, this module reproduces other editorial
changes.
REQUIREMENTS AND EXAMPLES
Scope of this section
2.1 This section describes the objective of financial statements of small and medium-
sized entities (SMEs) and the qualities that make the information in the financial
statements of SMEs useful. It also sets out the concepts and basic principles underlying
the financial statements of SMEs.
Notes
Financial reports mainly are based on estimates, judgements and models rather than
on exact depictions. Section 2 of the IFRS for SMEs Standard reflects the 1989
Framework’s definitions of the concepts that underlie those estimates, judgements and
models. By articulating the objectives of financial statements for SMEs, the qualities
that make the information useful and the underlying principles and concepts Section
2 serves two important functions. It:
(a) assist preparers to develop consistent accounting policies when no Standard
applies to a particular transaction or other event, or when a Standard allows a
choice of accounting policy; and
(b) assists all parties to understand and interpret the IFRS for SMEs Standards.
Objective of financial statements of small and medium-sized entities
2.2 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 of the financial
statements who are not in a position to demand reports tailored to meet their particular
information needs.
Notes
The objective of general purpose financial statements is to provide financial

information about the reporting entity that is useful for economic decision-making by
a broad range of users of the financial statements who are not in a position to demand
reports tailored to meet their information needs. Section 2 does not explicitly identify
a group of primary users. Paragraph BC80 of the Basis for Conclusions on the
IFRS for SMEs Standard states that the main groups of external users include:
(a) banks that make loans to SMEs.
(b) vendors that sell to SMEs and use SMEs’ financial statements to make credit and
pricing decisions.
(c) credit rating agencies and others that use SMEs’ financial statements to rate SMEs.
(d) customers of SMEs that use SMEs’ financial statements to decide whether to do
business.
(e) SMEs’ shareholders that are not also managers of their SMEs.
Each of these groups will have different decisions to make regarding an SME. However,
often at the heart of these decisions are an assessment of the amount, timing and
uncertainty of (the prospects for) future net cash inflows to the entity and
management’s stewardship of the entity’s economic resources.
To make these assessments external users need information about (Conceptual
Framework paragraph 1.4):
(a) the economic resources of the entity, claims against the entity and changes in
those resources and claims; and
(b) how efficiently and effectively the entity’s management and governing board have
discharged their responsibilities to use the entity’s economic resources
In establishing standards for the form and content of general purpose financial
statements, the needs of users of financial statements are paramount. Users of
financial statements of SMEs may have less interest in some information in general
purpose financial statements prepared in accordance with full IFRS Standards.
For example, users of financial statements of SMEs may have greater interest in short-
term cash flows, liquidity, strength of the statement of financial position and interest
coverage, and in the historical trends of profit or loss and interest coverage, than they
do in information that is intended to assist in making forecasts of an entity’s long-term
cash flows, profit or loss, and equity value.
External users of financial reports prepared based on full IFRS Standards or the
IFRS for SMEs Standard have similar objectives, irrespective of the type of entities. In
developing the IFRS for SMEs Standard, by making simplifications to full IFRS Standards,
the Board acknowledges that differences in the types and needs of users of SMEs’
financial statements, as well as limitations in, and the cost of, the accounting expertise
available to SMEs, suggested that a separate standard for SMEs is appropriate.
General purpose financial reports do not and cannot provide all of the information
that users (eg owners who are not involved in managing the business, existing and
potential creditors and credit rating agencies) need. Those users need to consider
pertinent information from other sources, for example, general economic conditions
and expectations, political events and political climate, and industry and company
outlooks.
2.3 Financial statements also show the results of the stewardship of management—the
accountability of management for the resources entrusted to it.
Notes
Users make resource allocation decisions as well as decisions as to how efficiently and
effectively the entity’s management and governing board have discharged their
responsibilities to use the entity’s economic resources. That assessment enables users
of financial statements to hold management to account for its actions. Information
designed for resource allocation decisions is also often useful for assessing
management’s performance.
Qualitative characteristics of information in financial statements

Notes
The qualitative characteristics of information in financial statements identify the

characteristics of information that is useful to users for making decisions about the
reporting entity.
Applying the qualitative characteristics is an iterative process that follows no
prescribed order. Sometimes, one enhancing qualitative characteristic may have to be
diminished to maximise another. For example, a temporary reduction in
comparability as a result of prospectively applying an amendment to the IFRS for SMEs
Standard may be worthwhile to improve relevance or reliability of information in the
longer term. Appropriate disclosures may partially compensate for the inability of
users to compare information in some instances.
Understandability
2.4 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.
Notes
Classifying, characterising and presenting information clearly and concisely makes it

understandable. Information that is difficult to understand should be presented and
explained as clearly as possible. Users are responsible for studying reported financial
information with reasonable diligence. In addition, users may need to seek the aid of
advisers to understand economic phenomena that are particularly complex.
Examples—understandability
Ex 1 An entity chooses not to account for deferred tax because its management believes
that the users of its financial statements would not understand that financial
information.
The entity cannot claim compliance with the IFRS for SMEs Standard if it chooses not to
account for deferred tax in accordance with Section 29 Income Tax on the grounds that
management believes the users of its financial statements would not understand that
financial information.
Ex 2 An entity has investment property. Under tax legislation in that jurisdiction, it is

required to submit an annual certified estimate of the fair value of the property.
However, its management believes that users of its financial statements will not
understand the volatility of this information. Consequently, it chooses to use the
undue cost and effort exemption in this chapter and does not account for the fair
value of the property.
The entity cannot claim compliance with the IFRS for SMEs Standard if it chooses not
to account for the investment property at fair value in accordance with Section 16
Investment Property on the grounds that management believes the users of its
financial statements would not understand that financial information.
Relevance
2.5 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.
Notes
It is self-evident that financial information is useful for decision-making only if it is

capable of influencing a decision. Relevance is the term used to describe that
capability. Many decisions by owners, potential owners, lenders and other creditors
are based on implicit or explicit predictions about the amount and timing of the
return on an equity investment, loan or other credit instrument. Consequently,
information is capable of influencing one of those decisions only if it will help users to
make new predictions (predictive value), or help users to confirm or correct prior
predictions (confirmatory value), or both. Information has predictive value if it can be
used in making predictions about the eventual outcomes of past or current events.
The predictive value and confirmatory value of financial information are interrelated.
Information that has predictive value often also has confirmatory value. For example,
revenue information for the current year, which can be used as the basis for predicting
revenue in future years, can also be compared with current-year revenue predictions
made in past years. The results of those comparisons can help a user to correct and
improve the processes used to make those previous predictions.
Information that is “boiler plate”, that is standardised text that is generic in nature,
and applies to all entities in a jurisdiction may not be relevant. This also includes
policy statements that are irrelevant to understanding the entity’s financial
statements. An example may be a statement about the methods and significant
assumptions applied when estimating the fair value of property, plant and equipment
accounted for under the revaluation method (Section 17 Property, Plant and Equipment
paragraph 17.33(c)) when no items are carried at revalued amounts.
Materiality
2.6 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 and nature of the omission or misstatement
judged in the surrounding circumstances. 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.
Notes
Materiality is an aspect of relevance, because immaterial information does not affect a

user’s decision. Financial statement users are assumed to have a reasonable knowledge
of business, economic activities and accounting and a willingness to study financial
information with reasonable diligence (see paragraph 2.4). Omissions or
misstatements of items are material if they could, individually or collectively,
influence the economic decisions of such users made on the basis of the financial
statements.
Materiality is based on the nature, or magnitude, or both, of the items to which the
information relates in the context of an individual entity’s financial report.
Consequently, the Board cannot specify a uniform quantitative threshold for
materiality or predetermine what could be material in a given situation.
An entity need not provide a specific disclosure required by the IFRS for SMEs Standard
if the information is not material. Moreover, an entity need not apply its accounting
policies when the effect of not applying them is immaterial (see paragraph 10.3).
Financial statements result from processing large numbers of transactions or other
events that are aggregated into classes according to their nature or function. The final
stage in the process of aggregation and classification is the presentation of condensed
and classified data, which form line items in the financial statements. If an item is not
individually material, it is aggregated with other items either in those statements or in
the notes. An item that is not sufficiently material to warrant separate presentation in
those statements may warrant separate presentation in the notes.
Examples—immaterial items
Ex 3 In 20X9, after the entity’s 20X8 financial statements were approved for issue, the
entity discovered an error in the calculation of depreciation expense for the year
ended 31 December 20X8. The error meant the entity’s reported profit before tax
for the year ended 31 December 20X8 of CU600,000(1) was understated by CU150 .
The error is probably not material—it is highly unlikely that an error of this magnitude
could influence the economic decisions of users made on the basis of the financial
statements. Hence, the entity may choose not to follow the requirements for
corrections to prior period errors set out in paragraph 10.21.
Examples—material items
Ex 4 The facts are the same as in Example 3. However, in this example, if the error had
been corrected the entity would have breached a borrowing covenant on a
significant long-term liability.
The error is material—it could influence the economic decisions of users made on the
basis of the financial statements.
Ex 5 In 20X9, before the entity’s 20X8 financial statements were approved for issue, the
entity discovered a systemic error in the calculation of its defined benefit
obligation in respect of the employees’ pension scheme. Further investigation
revealed that the calculation had been incorrectly performed since the defined
benefit plan was started in 20X0. The cumulative effect of the error on the
retained earnings of the entity at the beginning of 20X8 is an overstatement of
CU600,000. The entity reported total equity of CU950,000 at 31 December 20X7.
The error is material—it could influence the economic decisions of users made on the
basis of the financial statements.
In all examples above (examples 3 to 5), the entity’s management assesses whether the
size and nature of the omission or misstatement judged in surrounding circumstances
is material.
(1) In this example, and in all other examples in this module, monetary amounts are denominated in ‘currency units (CU)’.
Reliability
2.7 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 judgement in order to achieve a
predetermined result or outcome.
Notes
Financial reports represent economic phenomena in words and numbers. To be useful,

financial information must not only represent relevant phenomena, but it must be
reliable and so also faithfully represent the phenomena that it purports to represent.
Faithful representation does not mean ‘accurate in all respects’. Free from error does
not mean ‘accurate in all respects’. For example, an estimate of an unobservable price
or value cannot be determined to be accurate or inaccurate. However, a representation
of that estimate can be faithful if the amount is described clearly and accurately as an
estimate, the nature and limitations of the estimating process are explained, and no
errors have been made in selecting and applying an appropriate process for developing
the estimate. In other words, reliability does not equal precision.
A neutral depiction is one without bias in the selection or presentation of financial
information. A neutral depiction is not slanted, weighted, emphasised, deemphasised
or otherwise manipulated to increase the probability that financial information will be
received favourably or unfavourably by users.
Substance over form

2.8 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.
Note
Representation on the basis of a legal form that differs from the economic substance of
the underlying economic phenomenon could result in a representation that is not
faithful. The legal form should generally be considered as pervasive evidence of the
economic substance of an underlying phenomenon. However, there are many
circumstances in which this is not the case. For some such phenomenon, an entity
may need to perform an in-depth review of facts and circumstances in arriving at a
judgment that overrides the legal form. In others, the practice is well understood and
regularly applied.
Examples—substance over form
Ex 6 A luxury yacht manufacturer sells a yacht to a bank for CU1,000,000 and

simultaneously enters into an agreement to repurchase the yacht from the bank
for CU1,080,000 one year later.
On the date of entering into the transaction, the fair value of the yacht was
CU2,000,000 and the manufacturer’s incremental borrowing rate approximated
8% per year.
The bank has no right to sell the yacht.
The yacht manufacturer must not recognise revenue from the sale of the yacht.
The substance of the two transactions taken together is that the manufacturer has
borrowed CU1,000,000 from the bank and that borrowing is secured by the
manufacturer’s yacht (inventory asset). Accordingly, the manufacturer must recognise
the CU1,000,000 received from the bank as a secured liability and the yacht must
remain in the manufacturer’s inventory asset.
The CU80,000 (excess of the CU1,080,000 repurchase price over the CU1,000,000 selling
price) is recognised as an expense (finance costs) over the period of the loan using the
effective interest method.
Ex 7 The facts are the same as in example 6. However, in this example, the
manufacturer has an option (not an obligation) to repurchase the yacht from the
bank for CU1,080,000 one year after the sale.
Because the fair value of the yacht is significantly higher than the strike price of the
option to repurchase the yacht, the manufacturer is most unlikely to let the option
lapse. Consequently, the substance of the two transactions taken together is still that
the manufacturer has borrowed CU1,000,000 from the bank and that borrowing is
secured by the manufacturer’s yacht (inventory asset). Accordingly, the manufacturer
must recognise the CU1,000,000 received from the bank as a secured liability and the
yacht must remain in the manufacturer’s inventory asset.
The CU80,000 (excess of the CU1,080,000 repurchase price over the CU1,000,000 selling
price) is recognised as an expense (finance costs) over the period of the loan using the
effective interest method.
Prudence
2.9 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 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.
Notes
Prudence is the exercise of caution when making judgements under conditions of

uncertainty. The exercise of prudence means that assets and income are not overstated
and liabilities and expenses are not understated. Equally, the exercise of prudence
does not allow for the understatement of assets or income or the overstatement of
liabilities or expenses. Such misstatements can lead to the overstatement or
understatement of income or expenses in future periods. Consequently, management
cannot use the concept of prudence to deliberately reflect conservative estimates of
assets, liabilities or income.
Completeness
2.10 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.
Notes
A complete depiction includes all information necessary for a user to understand the
phenomenon being depicted, including all necessary descriptions and explanations.
For example, a complete depiction of a group of assets would include, at a minimum, a
description of the nature of the assets in the group, a numerical depiction of all the
assets in the group, and a description of what the numerical depiction represents (for
example, historical cost or fair value). For some items, a complete depiction may also
entail explanations of significant facts about the quality and nature of the items,
factors and circumstances that might affect their quality and nature, and the process
used to determine the numerical depiction.
Comparability
2.11 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.
Notes
Users’ decisions involve choosing between alternatives, for example, extending credit
to an entity or not. Consequently, information about an SME is more useful if it can be
compared with similar information about other SMEs and with similar information
about the same SME for another period or another date. Comparability is the
qualitative characteristic that enables users to identify and understand similarities in
and differences among items.
Consistency, is related to but not the same as comparability. Consistency refers to the
use of the same methods for the same items, either from period to period within a
reporting entity or in a single period across entities. Comparability is the goal;
consistency helps to achieve that goal.
A faithful representation of a relevant economic phenomenon should naturally possess
some degree of comparability with a faithful representation of a similar relevant
economic phenomenon by another reporting entity.
An important implication of the qualitative characteristic of comparability is that
users must be informed of the accounting policies that have been used in the
preparation of the financial statements, any changes in those policies and the effects of
such changes. Including the disclosure of the accounting policies used by the entity
helps to achieve comparability.
Timeliness
2.12 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.
Notes
Timeliness means making information available to decision-makers in time to be
capable of influencing their decisions. Generally, the older the information is, the less
useful it is. However, some information may continue to be timely long after the end
of a reporting period because, for example, some users may need to identify and assess
trends.
Balance between benefit and cost

2.13 The benefits derived from information should exceed the cost of providing it.
The evaluation of benefits and costs is substantially a judgemental process. Furthermore,
the costs are not necessarily borne by those who enjoy the benefits, and often the
benefits of the information are enjoyed by a broad range of external users.
2.14 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, favourable 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.
Notes
Cost is a pervasive constraint that the Board keeps in mind when considering the
benefits of a possible new financial reporting requirement—reporting financial
information imposes costs, and it is important that those costs are justified by the
benefits of reporting that information.
The Board considers costs from a number of perspectives. Providers of financial
information expend effort involved in collecting, processing, verifying and
disseminating financial information, but users ultimately bear those costs in the form
of reduced returns. Users of financial information also incur the costs of analysing and
interpreting the information provided. If information that users need is not provided,
users incur additional costs to obtain that information elsewhere or to estimate it.
Reporting financial information that reflects the substance of transactions and is
understandable, relevant, material, reliable, prudent, complete and comparable helps
users to make decisions with more confidence. Such confidence results in the more
efficient functioning of the whole economy. An individual user also receives benefits
by making more informed decisions. However, it is not possible for general purpose
financial reports to provide all the information that every user finds relevant.
In developing the IFRS for SMEs Standard the Board made simplifications from full
IFRS Standards on the basis of users’ needs and on cost-benefit analyses. In practice,
the benefits of applying accounting standards differ across reporting entities,
depending primarily on the nature, number and information needs of the users of
their financial statements. Application of the cost constraint can result in
requirements in the Standard that do not maximise the qualitative characteristics or
other main concepts in Section 2. To maintain a cohesive understanding of the
IFRS for SMEs Standard, it is helpful to understand why the Board concluded that for
some requirements it was cost-beneficial not to maximise the qualitative
characteristics. Its reasons are usually set out in the basis for conclusions that
accompanies, but does not form part of the IFRS for SMEs Standard.
Undue cost or effort

2.14A An undue cost or effort exemption is specified for some requirements in this Standard.
This exemption shall not be used for other requirements in this Standard.
2.14B Considering whether obtaining or determining the information necessary to comply with a
requirement would involve undue cost or effort depends on the entity’s specific
circumstances and on management’s judgement of the costs and benefits from applying
that requirement. This judgement requires consideration of how the economic decisions
of those that are expected to use the financial statements could be affected by not having
that information. Applying a requirement would involve undue cost or effort by an SME if
the incremental cost (for example, valuers’ fees) or additional effort (for example,
endeavours by employees) substantially exceed the benefits that those that are expected
to use the SME’s financial statements would receive from having the information. An
assessment of undue cost or effort by an SME in accordance with this Standard would
usually constitute a lower hurdle than an assessment of undue cost or effort by a publicly
accountable entity because SMEs are not accountable to public stakeholders.
2.14C Assessing whether a requirement would involve undue cost or effort on initial recognition
in the financial statements, for example at the date of the transaction, should be based on
information about the costs and benefits of the requirement at the time of initial
recognition. If the undue cost or effort exemption also applies subsequent to initial
recognition, for example to a subsequent measurement of an item, a new assessment of
undue cost or effort should be made at that subsequent date, based on information
available at that date.
2.14D Except for the undue cost or effort exemption in paragraph 19.15, which is covered by the
disclosure requirements in paragraph 19.25, whenever an undue cost or effort exemption
is used by an entity, the entity shall disclose that fact and the reasons why applying the
requirement would involve undue cost or effort.
Notes
Some exemptions from requirements in the IFRS for SMEs Standard are effective when
it would be impracticable to comply with the requirement. For example, paragraph
3.12 requires that when an entity changes the presentation or classification of items in
its financial statements, the entity reclassifies comparative amounts unless
reclassification is impracticable. The Glossary explains that applying a requirement is
impracticable when the entity cannot apply it after making every reasonable effort to
do so. An example when reclassification might be impracticable could be when a fire
destroyed records such that the entity lacks the information to be able to reclassify
items from an earlier year. The impracticability test is a high hurdle.
While not being a low hurdle, the undue cost or effort exemption is a lower hurdle
than the impracticability exemption. The undue cost or effort exemption is a practical
expedient that balances the cost of accounting for an item as required in a Section or
disclosing a piece of information with the benefits to be derived by users from that
accounting or disclosure. An entity is required to carefully weigh the expected effects
of applying the exemption on the users of its financial statements against the cost or
effort of complying with the related requirement. If an entity already has, or could
easily and inexpensively acquire, the information necessary to comply with a
requirement, any undue cost or effort exemption that may otherwise have been
applicable to that requirement would not be applicable. This is because, in that case,
the benefits to the users of the financial statements of having the information would
be expected to exceed any further cost or effort by the entity.
The application of an undue cost or effort exemption necessitates consideration of how
those expected users of the financial statements would be affected if that exemption is
taken. Consequently, it may be easier for an SME to meet the undue cost or effort
exemption than it would be for entities with public accountability, because the
exemption is applied relative to the benefits to users and SMEs are not accountable to
public stakeholders. .
An entity must make a new assessment of whether a requirement will involve undue
cost or effort at each reporting date.
Paragraphs 2.13 and 2.14 of the IFRS for SMEs Standard highlight the balance between
benefits and costs and state the general principle to which the Board refers in making
its standard-setting decisions. Hence, the requirements within the IFRS for SMEs
Standard have been developed by taking into consideration the balance between
benefits and costs. In addition, the IFRS for SMEs Standard allows an undue cost or
effort exemption in certain defined circumstances; the undue cost or effort exemption
cannot be applied throughout the Standard. The exemption can only be used if the
IFRS for SMEs Standard explicitly specifies that it can be applied to a requirement.
Elements
Financial statements portray the financial effects of transactions and other events by
grouping them into broad classes according to their economic characteristics. These
broad classes are called the ‘elements’ of financial statements. The elements directly
related to the measurement of financial position, which is shown in the statement of
financial position (sometimes called the balance sheet), are assets, liabilities and
equity. The elements directly related to the measurement of performance, which is
shown in the statement of comprehensive income, are income and expenses. Income
and expenses are defined with reference to changes in assets and liabilities. The
presentation of the elements in the statement of financial position and the statement
of comprehensive income involves a process of subclassification. For example,
expenses may be classified by their nature or function in the business of the entity to
display information in the manner most useful to users for the purpose of making
economic decisions (see paragraph 5.11) whereas current and non-current assets and
current and non-current liabilities are presented as separate classifications in the
statement of financial position except when a presentation based on liquidity provides
information that is reliable and more relevant (see paragraph 4.4).
Financial position
2.15 The financial position of an entity is the relationship of its assets, liabilities and equity as
of a specific date as presented in the statement of financial position. These are
defined as follows:
(a) an asset is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity;
(b) a liability is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying
economic benefits; and
(c) equity is the residual interest in the assets of the entity after deducting all its liabilities.
Notes
General purpose financial statements provide information about the financial position
of a reporting entity, which is information about the entity’s economic resources
(assets) and the claims against the reporting entity (liabilities and equity). Financial
statements also provide information about the effects of transactions and other events
that change a reporting entity’s economic resources and claims. This information is
useful input for decisions about providing resources to an entity.
Economic resources and claims
Information about the nature and amounts of a reporting entity’s economic resources
and claims can help users to identify the reporting entity’s financial strengths and
weaknesses. That information can help users to assess the reporting entity’s liquidity
and solvency and its needs for additional financing. Such information can also help
users assess how successful the entity is likely to be in obtaining financing.
Information about priorities and payment requirements of existing claims helps users
to predict how future cash flows will be distributed among those with claims against
the reporting entity.
A user’s assessment of the reporting entity’s prospects for future cash flows differs for
different economic resources. Some future cash flows result directly from existing
economic resources, such as accounts receivable. Other cash flows result from using
several resources in combination to produce and market goods or services to
customers. Although those cash flows cannot be identified with individual economic
resources (or claims), users of financial reports need to know the nature and amount of
the resources available for use in a reporting entity’s operations.
2.16 Some items that meet the definition of an asset or a liability may not be recognised as
assets or liabilities in the statement of financial position because they do not satisfy the
criteria for recognition in paragraphs 2.27–2.32. In particular, the expectation that future
economic benefits will flow to or from an entity must be sufficiently certain to meet the
probability criterion before an asset or liability is recognised.
Notes
Paragraphs 18.14 and 18.15 specifically prohibit the recognition of certain intangible
assets such as brands, mastheads, publishing titles, customer lists and items similar in
substance that are internally generated, because internally generated intangible items
of this type would rarely, and perhaps never, meet the recognition criteria.
Section 18 Intangible Assets other than Goodwill also clarifies that expenditure on research,
training, advertising and start-up activities does not result in the creation of an
intangible asset that can be recognised in the financial statements. Some view this
interpretation of the application of the recognition criteria as being too restrictive and
arbitrary. The prohibition also reflects the fact that it is sometimes difficult to
determine whether there is an internally generated intangible asset distinguishable
from internally generated goodwill.
Assets
2.17 The future economic benefit of an asset is its potential to contribute, directly or indirectly,
to the flow of cash and cash equivalents to the entity. Those cash flows may come from
using the asset or from disposing of it.
Notes
An asset could produce economic benefits for an entity by entitling or enabling it to

do, for example, one or more of the following:
(a) receive contractual cash flows or another asset;
(b) exchange assets with another party on favourable terms;
(c) produce cash inflows or avoid cash outflows by, for example:
(i) using the asset either individually or in combination with other assets to
produce goods or provide services;
(ii) using the asset to enhance the value of other assets; or
(iii) leasing the asset to another party;
(d) receive cash or other assets by selling the asset; or
(e) extinguish liabilities by transferring the asset.
2.18 Many assets, for example property, plant and equipment, have a physical form.
However, physical form is not essential to the existence of an asset. Some assets are
intangible.
Notes
Physical form is not essential to the existence of an asset—for example, licences,

patents, copyrights and customer lists are assets if future economic benefits are
expected to flow from them to the entity and if they are controlled by the entity.
Most financial assets (see the Glossary) are contractual rights.
Example—cash
Ex 8 An entity has cash.

The cash is an asset of the entity—the entity determines the purpose to which the cash
is put and thereby expects to generate cash inflows (ie cash renders a service to the
entity because of its command over other resources).
Examples—assets with physical form
Ex 9 An entity owns a machine that manufactures its products.

The machine is a physical asset used in the production of goods that are expected to
generate cash inflows from their sale.
Ex 10 An entity owns a factory building in which it manufactures its products.

The building is a physical asset used in the production of goods that are expected to
generate cash inflows from their sale.
Ex 11 An entity owns a fleet of motor vehicles. The vehicles are used by the sales staff in
the performance of their duties.
The motor vehicles are physical assets used in the supply of goods. The entity expects
to recover the carrying amount of the vehicles out of cash inflows generated from the
sale of goods.
Ex 12 An entity that manufactures goods owns a motor vehicle for the exclusive
business use of its chief financial officer.
The motor vehicle is a physical asset used in the administration of the entity. The
entity expects to recover the carrying amount of the vehicle out of cash inflows
generated from the sale of goods.
Ex 13 An entity owns a herd of cattle that form the breeding stock of its agricultural
activities.
The cattle are tangible assets used in the production of calves. The entity expects to
generate cash inflows from the sale of the calves.
Ex 14 An entity owns a building that it rents to independent third parties under

operating leases in return for rental payments.
The building is a physical asset used by the entity to earn lease rentals. The entity
expects to recover the carrying amount of the building out of the rental cash inflows
that it generates.
Examples—assets without physical form
Ex 15 An entity owns a brand name that it purchased from a competitor. The brand
name is legally protected through registration with the local government of a
trademark.
The brand name (a trademark) is an intangible asset of the entity. It is an asset of the
entity—control is evidenced by the legal right and the entity would have purchased the
brand name with the expectation that the brand would increase the entity’s future
revenues either by selling products or by preventing its competitors from selling
products (future economic benefits). The asset (brand name) is an intangible asset—it is
without physical substance (it is a legal right).
Ex 16 An entity operates 20 taxis under licence in city A. The taxi licences are
transferable to other qualified taxi operators.
The taxi licences are intangible assets of the entity. The licences are assets of the entity
because the entity has control through the legal right to operate 20 taxis in the city to
generate future economic benefits from taxi fares. The assets (taxi licences) are
without physical substance (they are legal rights).
Ex 17 Entity A owns 100 ordinary shares that carry voting rights at a general meeting of
shareholders of Entity B.
The shares in Entity B are an investment asset of Entity A—Entity A has control over the
shares (eg it decides whether to hold or sell them). Entity A would expect future
economic benefits to flow from its holding of shares in B. This could come in a number
of ways, including future dividend cash inflows and/or proceeds from the disposal of
shares and/or strategic or other synergistic or economic benefits from relationship
with B.
2.19 In determining the existence of an asset, the right of ownership is not essential. Thus, for
example, property held on a lease is an asset if the entity controls the benefits that are
expected to flow from the property.
Notes
Refer to Module 20 for more detailed discussion on leases.
Liabilities
2.20 An essential characteristic of a liability is that the entity has a present obligation to act or
perform in a particular way. The obligation may be either a legal obligation or a
constructive obligation. A legal obligation is legally enforceable as a consequence of a
binding contract or statutory requirement. A constructive obligation is an obligation that
derives from an entity’s actions when:
(a) by an established pattern of past practice, published policies or a sufficiently specific
current statement, the entity has indicated to other parties that it will accept certain
responsibilities; and
(b) as a result, the entity has created a valid expectation on the part of those other parties
that it will discharge those responsibilities.
Notes
Many obligations are established by contract, legislation or similar means and are
legally enforceable by the party (or parties) to whom they are owed. Obligations can
also arise, however, from an entity’s customary practices, published policies or specific
statements if the entity has created a valid expectation on the part of those other
parties that it will discharge those responsibilities. The obligation that arises in such
situations is referred to as a ‘constructive obligation’.
In accordance with some jurisdictions’ financial reporting requirements, a liability
called ‘general reserves’ for unspecified potential or future losses is recognised based
on a notion of conservatism. Such reserves are sometimes referred to as provisions.
These reserves do not meet the definition of a liability in the IFRS for SMEs Standard as
there is no present obligation to act or perform in a certain way. Consequently,
recognition as liabilities of such ‘general reserves’ is prohibited.
Similarly, obligations that arise from future actions of the entity, no matter how likely,
are not present obligations and therefore do not meet the definition of a liability.
For example, it is inappropriate to recognise a liability for expected future losses,
because the entity has no present obligation to incur those losses. It is important to
bear in mind, however, that the expectation of losses may be an indicator that some of
the entity’s assets are impaired. Recognition of impairment losses is covered by
Section 27 Impairment of Assets. In addition, if an entity has entered into an onerous
contract (see paragraph 21A.2 in the Appendix to Section 21) under which the entity
has an unavoidable obligation to incur a loss, then recognising a liability for that loss is
appropriate because it arises from a past event—entering into a binding contract.
Examples—liabilities
Ex 18 Entity A has a contractual obligation to pay Entity B CU10,000 for goods that it
purchased on 30 days’ credit from Entity B on 30 December 20X0.
The debt instrument (trade payable) is a financial liability of Entity A—the purchase of
the goods on credit created a contractual obligation (a legal obligation) for Entity A to
pay (expected cash outflow) Entity B.
Ex 19 Waste from an entity’s production process contaminated the groundwater at the

entity’s plant. The entity is required by law to restore the contaminated
environment.
The entity has a liability—at the end of the reporting period it has an obligation by law
to restore the damage caused to the environment (ie the obligating event). Restoring
the environment is expected to result in cash outflows.
Ex 20 An entity has made a written pledge to contribute a substantial sum of money

toward the construction of a new performing arts centre in its community.
Executives of the entity appeared in a press conference to announce the pledge.
With the entity’s consent, the charitable organisation that is building the arts
centre has cited the entity’s pledge in its materials soliciting additional pledges
for construction. Under local law, pledges to charitable organisations are not
legally enforceable.
Although the pledge may not be legally enforceable, by participating in the press
conference and by allowing its name to be used in the solicitation, the entity has
indicated that it has accepted an obligation to honour its pledge and has created a
valid expectation on the part of the arts centre that it will do so (ie its actions have
given rise to a constructive obligation).
The entity has a liability—it has a constructive obligation (ie because of its actions the
entity has no realistic alternative but to contribute the substantial sum of money
toward the construction of the new performing arts centre).
Examples—not liabilities—no obligating event
Ex 21 An entity that operates 10 petrol stations and owns the land and buildings for
those stations chooses not to purchase fire insurance on those buildings but,
rather, to ‘self insure’ in case of fire loss. The entity can estimate reliably the
statistical probability of the occurrence and amount of expected fire loss (loss of
about CU100,000 once every ten years). The entity wants to recognise a liability of
CU10,000 and related expense each year for the next ten years to reflect its
expected loss. The entity reasons that the loss is highly probable, the amount can
be measured reliably, and if it had purchased insurance, it would recognise an
expense in each reporting period.
The fact that the entity bears the risk of fire does not create an obligation that is
recognised as a liability. An entity that purchases insurance has paid to transfer its
risk to a third party, and on the date that it is made, that payment is properly
recognised as an asset (prepayment for services) and is then recognised as an expense
in profit or loss over the period in which the insurance coverage is consumed,
regardless of whether there’s a fire loss.
A fire at one of the stations would be an event that triggers an impairment test on the
fire damaged asset. The impairment test might result in the recognition of an
impairment loss in profit or loss.
Ex 22 A ski resort operator operates in a cyclical business. Its earnings fluctuate from
one year to the next, depending primarily on the weather. The management and
owners of the entity believe that, because of the earnings volatility, it is prudent
to defer recognition of a portion of the profit in a ‘good year’ to the inevitable
‘bad year’ by recognising a provision in good years and reversing the provision in
bad years. Also, the local income tax law allows deferral of a portion of the profit
in a good year to help ensure that ski resort operators have cash to continue
operating in bad years. The entity’s management and owners recognise a
provision in the financial statements equal to the amount that can be deferred for
tax purposes.
At the end of a good year, the entity has no obligation to act or perform in a certain
way in expectation of a bad year. It is not appropriate to recognise a provision under
the IFRS for SMEs Standard because the definition of a liability is not met.
An accrual that is allowed for local income tax purposes is not the same as an expense
or liability to be recognised for financial reporting purposes. These items may result in
a deferred tax asset or liability (see Section 29 Income Taxes).
2.21 The settlement of a present obligation usually involves the payment of cash, the transfer
of other assets, the provision of services, the replacement of that obligation with another
obligation or the conversion of the obligation to equity. An obligation may also be
extinguished by other means, such as a creditor waiving or forfeiting its rights.
Equity
2.22 Equity is the residual of recognised assets minus recognised liabilities. It may be
subclassified in the statement of financial position. For example, in a corporate entity,
subclassifications may include funds contributed by shareholders, retained earnings and
items of other comprehensive income recognised as a separate component of equity.
This Standard does not prescribe how, when or if amounts can be transferred between
components of equity.
Examples—equity
Ex 23 On 31 December 20X0 an entity had equity share capital of CU100,000 in issue. In

20X1, the entity issued 50,000 equity shares at CU5 per share.
At 31 December 20X1 the entity’s equity included CU350,000 funds contributed by its
shareholders (ie CU100,000 at 31 December 20X1 + CU250,000 contributed in 20X1).
Ex 24 On 31 December 20X0 Entity A acquired 75% of Entity B for CU75,000 when the
fair value of Entity B’s net assets was CU100,000.
On 31 December 20X0 in its consolidated financial statements, the group derecognises
a CU75,000 asset (cash outflow for the investment) and recognises the net assets
acquired at CU100,000. It also recognises in equity the CU25,000 non-controlling
interest in the net assets of a subsidiary. Non-controlling interests are the residual
interest held by parties other than Entity A in the net assets of those subsidiaries.
Consequently, it meets the definition of equity (ie the residual interest in the assets of
the entity after deducting its liabilities).
Note: a liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits. An essential characteristic of a liability is that the
entity has a present obligation and that an obligation is a duty or responsibility to act
or perform in a particular way. The NCI holders are typically in the same position as
other shareholders, and the entity therefore has no present obligation to pay. This
would not however always be the case (for example if the NCI have the right to put
their shares to the entity). .
Ex 25 Since its formation, 75% of a subsidiary has been owned by the reporting entity
(parent) and 25% by an independent third party. In the current reporting period
when the subsidiary’s equity was CU100,000 (ie share capital of CU1,000 and
retained earnings of CU99,000) the parent acquired the remaining 25% of the
shares in its subsidiary at their fair value of CU60,000.
From the group’s perspective, the purchase of the shares in its subsidiary from the
third party (a non-controlling interest) is a transaction between equity holders.
Consequently, no gain or loss results from the transaction. However, the group would
derecognise the asset cash (ie CU60,000 paid to the non-controlling interest) and
derecognise the CU25,000 equity item non-controlling interest. Consequently, it would
also reduce another component of equity (eg retained earnings) by CU35,000 (ie a
reallocation within equity).
Ex 26 On the retirement of one of the owner-managers of an entity on 31 December

20X0, the entity repurchased the shares held by the retiree for their fair value
CU1,000.
The distribution of CU1,000 cash to buy back shares is a return of capital to
shareholders, and is therefore recognised as a decrease in equity.
Note: the entity’s own shares are not an asset of the entity. Instead, the shares are an
interest in the entity’s assets. Consequently, the own shares acquired are not
recognised as an asset because they lack the essential feature of an asset—the ability to
provide future economic benefits. The future economic benefits usually provided by
an interest in shares are dividends and an increase in the value of the shares. When a
company has an interest in its own shares, it will receive dividends on those shares
only if it elects to pay them, and such dividends do not represent a gain to the
company, because there is no change in net assets: the flow of funds is simply circular.
The facts are the same as in Example 29. However, in this example, on 1 January
20X2 the entity issued the shares to a previously independent third party who
simultaneously became an owner-manager of the entity in exchange for CU1,200
(the then fair value of the shares).
The entity’s own shares, while held by the entity, are recognised as a decrease of
CU1,000 in equity. On 1 January 20X2 the CU1,200 inflow of cash on the transfer of
those shares to the incoming owner-manager is recognised as an increase in
shareholders’ equity. No revenue or expense would be recognised from the issue of
those shares.
Performance
2.23 Performance is the relationship of the income and expenses of an entity during a
reporting period. This Standard permits entities to present performance in a single
financial statement (a statement of comprehensive income) or in two financial
statements (an income statement and a statement of comprehensive income). Total
comprehensive income and profit or loss are frequently used as measures of
performance or as the basis for other measures, such as return on investment or earnings
per share. Income and expenses are defined as follows:
(a) income is increases in economic benefits during the reporting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from owners; and
(b) expenses are decreases in economic benefits during the reporting period in the form
of outflows or depletions of assets or incurrences of liabilities that result in decreases
in equity, other than those relating to distributions to owners.
Notes
Information about a reporting entity’s financial performance helps users to
understand the return that the entity has produced on its economic resources.
Information about the return the entity has produced can help users to assess
management’s stewardship of the entity’s economic resources. Information about the
variability and components of that return is also important, especially in assessing the
uncertainty of future cash flows. Information about a reporting entity’s past financial
performance and how its management discharged its stewardship responsibilities is
usually helpful in predicting the entity’s future returns on its economic resources.
Income and expenses are the elements of financial statements that relate to an entity’s
financial performance. Users of financial statements need information about both an
entity’s financial position and its financial performance. Hence, although income and
expenses are defined in terms of changes in assets and liabilities, information about
income and expenses is just as important as information about assets and liabilities.
Financial performance is measured as the net of all income and expenses for the
period (total comprehensive income), which are determined by reference to all changes
in assets and liabilities in the period (except for those associated with equity
transactions). The term comprehensive income (rather than profit or loss or net
income) is used because the IFRS for SMEs Standard requires some (and permits other)
specified items of income and expense to be recognised outside of profit or loss in the
statement of comprehensive income.
2.24 The recognition of income and expenses results directly from the recognition and
measurement of assets and liabilities. Criteria for the recognition of income and
expenses are discussed in paragraphs 2.27–2.32.
Notes
Information about a reporting entity’s financial performance during a period,
reflected by changes in its economic resources and claims, other than by obtaining
additional resources directly from investors and creditors, is useful in assessing the
entity’s past and future ability to generate net cash inflows. That information
indicates the extent to which the reporting entity has increased its available economic
resources, and thus its capacity for generating net cash inflows through its operations,
rather than by obtaining additional resources directly from investors and creditors.
Information about a reporting entity’s financial performance during a period can also
help users to assess management’s stewardship of the entity’s economic resources.
Information about a reporting entity’s financial performance during a period may also
indicate the extent to which events such as changes in market prices or interest rates
have increased or decreased the entity’s economic resources and claims, thereby
affecting the entity’s ability to generate net cash inflows.
Income
2.25 The definition of income encompasses both revenue and gains:
(a) revenue is income that arises in the course of the ordinary activities of an entity and is
referred to by a variety of names including sales, fees, interest, dividends, royalties
and rent.
(b) gains are other items that meet the definition of income but are not revenue. When
gains are recognised in the statement of comprehensive income, they are usually
displayed separately because knowledge of them is useful for making economic
decisions.
Examples—revenue or gain?
Ex 27 On 31 December 20X5 an entity sold inventory for CU1,500 when the carrying
amount of the inventory was CU1,000.
On 31 December 20X5 the entity recognises CU1,500 income (revenue from the sale of
goods) and CU1,000 expense (costs of goods sold). (See also paragraph 13.20.)
Ex 28 On 31 December 20X5 an entity sold a machine used by the entity in the

manufacture of goods for CU1,500 when the carrying amount of the machine was
CU1,000.
On 31 December 20X5 the entity recognises a gain on the disposal of the machine of
CU500 (see also paragraphs 17.28 and 17.30).
Calculation: CU1,500 selling price less CU1,000 carrying amount derecognised on sale
equals CU500 gain on disposal of machine. The gain is a net amount (ie income less
expense).
Expenses
2.26 The definition of expenses encompasses losses as well as those expenses that arise in
the course of the ordinary activities of the entity:
(a) expenses that arise in the course of the ordinary activities of the entity include, for
example, cost of sales, wages and depreciation. They usually take the form of an
outflow or depletion of assets such as cash and cash equivalents, inventory or
property, plant and equipment.
(b) losses are other items that meet the definition of expenses and may arise in the
course of the ordinary activities of the entity. When losses are recognised in the
statement of comprehensive income, they are usually presented separately because
knowledge of them is useful for making economic decisions.
Examples—expense or loss?
Ex 29 On 31 December 20X5 an entity sold inventory for CU1,000 when the carrying
amount of the inventory was CU900.
On 31 December 20X5 the entity recognises CU1,000 income (revenue from the sale of
goods) and CU900 expense (costs of goods sold)
Ex 30 On 31 December 20X5 an entity sold a machine used by the entity in the

manufacture of goods for CU900 when the carrying amount of the machine was
CU1,000.
On 31 December 20X5 the entity recognises a loss on the disposal of the machine of
CU100 in profit or loss (see also paragraphs 17.28 and 17.30).
Calculation: CU900 selling price less CU1,000 carrying amount derecognised on sale
equals CU100 loss on disposal of machine. The loss is a net amount.
Recognition of assets, liabilities, income and expenses
2.27 Recognition is the process of incorporating in the financial statements an item that meets
the definition of an asset, liability, income or expense and satisfies the following criteria:
(a) it is probable that any future economic benefit associated with the item will flow to or
from the entity; and
(b) the item has a cost or value that can be measured reliably.
2.28 The failure to recognise an item that satisfies those criteria is not rectified by disclosure of
the accounting policies used or by notes or explanatory material.
The probability of future economic benefit

2.29 The concept of probability is used in the first recognition criterion to refer to the degree of
uncertainty that the future economic benefits associated with the item will flow to or from
the entity. Assessments of the degree of uncertainty attaching to the flow of future
economic benefits are made on the basis of the evidence relating to conditions at the end
of the reporting period available when the financial statements are prepared. Those
assessments are made individually for individually significant items, and for a group for a
large population of individually insignificant items.
Notes
Some requirements in the IFRS for SMEs Standard give effect to this concept of
probability by requiring recognition of an item that meets the definition of an element
only if it is more likely than not that the future economic benefits associated with the
item will flow to or from the entity (eg in determining whether a liability is recognised
for a particular present obligation). In such cases, the outcome is binary—if the
probability of the outflow is greater than 50% a liability is recognised (conversely, if
the probability of the outflow is 50% or less, the obligation is not recognised as a
liability— it is excluded from the entity’s statement of financial position).
Other requirements require recognition of elements that meet the definition of an
element (eg asset or liability) and reflect the uncertainties associated with the
likelihood of cash flows from rights or obligations in the measurement of that asset or
liability—for example, when measuring an item at fair value.
Reliability of measurement
2.30 The second criterion for the recognition of an item is that it possesses a cost or value that
can be measured with reliability. In many cases, the cost or value of an item is known.
In other cases it must be estimated. The use of reasonable estimates is an essential part
of the preparation of financial statements and does not undermine their reliability. When
a reasonable estimate cannot be made, the item is not recognised in the financial
statements.
2.31 An item that fails to meet the recognition criteria may qualify for recognition at a later date
as a result of subsequent circumstances or events.
2.32 An item that fails to meet the criteria for recognition may nonetheless warrant disclosure
in the notes or explanatory material or in supplementary schedules. This is appropriate
when knowledge of the item is relevant to the evaluation of the financial position,
performance and changes in financial position of an entity by the users of financial
statements.
Notes
For example, in Section 21, the recognition criterion for a liability (provision) of a
present obligation is satisfied only when the probability of the outflow is greater than
50%. In accounting for a present obligation under Section 21, if the probability of the
outflow is 50% or less, the present obligation is not recognised as a liability (ie the
‘contingent’ liability is excluded from the entity’s statement of financial position).
However, unless the possibility of the outflow of resources is remote, the contingent
liability is disclosed in the notes (see paragraph 21.12).
Measurement of assets, liabilities, income and expenses
2.33 Measurement is the process of determining the monetary amounts at which an entity
measures assets, liabilities, income and expenses in its financial statements.
Measurement involves the selection of a basis of measurement. This Standard IFRS
specifies which measurement basis an entity shall use for many types of assets, liabilities,
income and expenses.
Notes
Elements recognised in financial statements are quantified in monetary terms. This

requires the selection of a measurement basis. A measurement basis is an identified
feature—for example, historical cost or fair value—of an item being measured.
Applying a measurement basis to an asset or liability creates a measure for that asset
or liability and for related income and expenses.
Consideration of the qualitative characteristics of useful financial information and of
the cost constraint is likely to result in the selection of different measurement bases
for different assets, liabilities, income and expenses.
To a large extent, measurements are based on estimates, judgements and models
rather than on exact depictions. Section 2 establishes the concepts that underlie those
estimates, judgements and models.
2.34 Two common measurement bases are historical cost and fair value:
(a) for assets, historical cost is the amount of cash or cash equivalents paid or the fair
value of the consideration given to acquire the asset at the time of its acquisition.
For liabilities, historical cost is the amount of proceeds of cash or cash equivalents
received or the fair value of non-cash assets received in exchange for the obligation
at the time the obligation is incurred, or in some circumstances (for example, income
tax) the amounts of cash or cash equivalents expected to be paid to settle the liability
in the normal course of business. Amortised historical cost is the historical cost of an
asset or liability plus or minus that portion of its historical cost previously recognised
as expense or income.
(b) fair value is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction. In situations in
which fair value measurement is permitted or required, the guidance in paragraphs
11.27–11.32 shall be applied.
Notes
Other measurement methods required or permitted for assets and liabilities in the
IFRS for SMEs Standard include the equity method for investments in associates,
estimated selling price less costs to complete and sell for impaired inventories and
recoverable amount for impaired non-current assets.
Sometimes individual assets (and liabilities) are measured using a combination of
measurement methods. For example, when the commodity price risk of a commodity
held is hedged, the change in the fair value of the commodity held (related to the
commodity price risk) is adjusted to the carrying amount (cost) of the commodity held.
Paragraphs 11.27–11.32 provide guidance on how to measure the fair value of financial
instruments. That guidance is also useful for measuring the fair value of other assets
and liabilities.
Pervasive recognition and measurement principles

2.35 The requirements for recognising and measuring assets, liabilities, income and expenses
in this Standard are based on pervasive principles that are derived from full IFRS. In the
absence of a requirement in this Standard that applies specifically to a transaction or
other event or condition, paragraph 10.4 provides guidance for making a judgement and
paragraph 10.5 establishes a hierarchy for an entity to follow in deciding on the
appropriate accounting policy in the circumstances. The second level of that hierarchy
requires an entity to look to the definitions, recognition criteria and measurement
concepts for assets, liabilities, income and expenses and the pervasive principles set out
in this section.
Notes
In accordance with paragraph 10.4, when the IFRS for SMEs Standard does not
specifically address a transaction, other event or condition, an entity must select an
accounting policy that results in relevant and reliable information. Paragraph 10.5
directs that, in making that judgement, an entity first considers the requirements and
guidance in the IFRS for SMEs Standard on similar and related issues. Next, the entity
considers definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses and as well as considering the pervasive principles in
Section 2. If the Standard does not provide guidance, the entity may look to the
requirements and guidance in full IFRS Standards, including Interpretations of full
IFRS Standards, dealing with similar and related issues.
Accrual basis
2.36 An entity shall prepare its financial statements, except for cash flow information, using the
accrual basis of accounting. On the accrual basis, items are recognised as assets,
liabilities, equity, income or expenses when they satisfy the definitions and recognition
criteria for those items.
Notes
Accrual accounting depicts the effects of transactions and other events and
circumstances on a reporting entity’s economic resources (assets) and claims
(liabilities) in the periods in which those effects occur, even if the resulting cash
receipts and payments occur in a different period. Accrual accounting is important
because information about a reporting entity’s economic resources and claims and
about changes in its economic resources and claims during a period provides a better
basis for assessing the entity’s past and future performance than does information
solely about cash receipts and payments during that period.
Information about a reporting entity’s financial performance during a period,
reflected by changes in its economic resources and claims other than by obtaining
additional resources directly from investors or creditors, is useful in assessing the
entity’s past and future ability to generate net cash inflows. That information
indicates the extent to which the reporting entity has increased its available economic
resources and thus its capacity for generating net cash inflows through its operations
rather than by obtaining additional resources directly from investors and creditors.
Information about a reporting entity’s financial performance during a period can also
help users to assess management’s stewardship of the entity’s economic resources.
Recognition in financial statements
Assets
2.37 An entity shall recognise an asset in the statement of financial position when it is probable
that the future economic benefits will flow to the entity and the asset has a cost or value
that can be measured reliably. An asset is not recognised in the statement of financial
position when expenditure has been incurred for which it is considered not probable that
economic benefits will flow to the entity beyond the current reporting period. Instead such
a transaction results in the recognition of an expense in the statement of comprehensive
income (or in the income statement, if presented).
Examples—recognition of assets
Ex 31 An entity has developed a formula it uses to manufacture a unique glue. The glue
is the leading adhesive product in the market because of its distinctive mix of
chemicals. The special formula is known only by the entity’s two owner-managers
and hence no competitors have been able to discover and replicate the formula.
The formula is not protected by a patent or by other means. Many competitors
have approached the entity to try to purchase the formula.
The formula meets the definition of an asset of the entity because, although the
formula is not protected by legal rights, the entity has control over the formula by
keeping it a secret from its competitors and future economic benefits are expected to
flow to the entity. Note however, in accordance with Section 18, internally generated
intangible assets are not recognised as assets (see paragraphs 18.4(c), 18.14 and 18.15).
Ex 32 An entity has developed a successful brand that allows the entity to charge a
premium for its products. The entity continues to spend large amounts of money
on maintaining and developing the brand (eg sponsoring local sports events,
sponsoring select cultural events and advertising the brand).
The brand probably meets the first part of the definition of an asset because the entity
has control over the use of the brand and future economic benefits are expected to
flow to the entity. However, due to the ongoing maintenance and development costs,
it may be difficult to reliably measure the cost or value of the brand. Since both
requirements are necessary to recognise an asset, the entity may conclude that the
brand is not an asset as defined.
Note that the internal costs incurred in developing the brand do not satisfy the specific
recognition criteria in paragraph 18.4. The expenditures incurred for sponsorships and
advertising are not recognised as an intangible asset because the brand results from
expenditure incurred internally on an intangible item. The costs are recognised as an
expense as they are incurred (see paragraphs 18.4(c), 18.14 and 18.15).
Ex 33 An entity acquires a competitor’s brand in a separate acquisition for CU100,000.

The entity uses the brand to charge a premium for the products that it
manufactures.
Similar to the previous example, the brand probably meets the first part of the
definition of an asset of the entity because, the entity has control over the use of the
brand and future economic benefits are expected to flow to the entity. In contract to
the previous example, since the entity acquired the brand at a market related price
paid in an arms transaction to another party that had previously developed the brand,
it is possible to reliably measure the cost or value of the brand. Therefore the entity
may conclude that the brand is an asset as defined.
Note: The entity recognises the brand acquired from its competitor as an intangible
asset. The CU100,000 incurred to acquire the brand satisfies the recognition criteria
for an asset (the probability recognition criterion is always considered as being
satisfied for intangible assets separately acquired—see paragraph 18.7).
Amounts incurred subsequently by the entity for maintaining and improving the
brand will be recognised as an expense as incurred (ie expenditures incurred for
sponsorships and advertising relating to the brand cannot be separated from costs
incurred in respect of the business as a whole—see paragraphs 18.4(c), 18.14 and 18.15).
2.38 An entity shall not recognise a contingent asset as an asset. However, when the flow of
future economic benefits to the entity is virtually certain, then the related asset is not a
contingent asset, and its recognition is appropriate.
Notes
A contingent asset is a possible asset that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity. They are discussed in more
detail in Section 21 Provisions and Contingencies (specifically paragraph 21.13). The
requirement that they are only recognised if the flow of future economic benefits is
virtually certain creates a higher hurdle for recognition than other types of assets.
Examples—contingent assets
Ex 34 An entity is taking legal action seeking damages for patent infringement from its
competitor. The outcome of the case is uncertain. However, it is probable that
the court will order the competitor to pay the entity damages.
The entity has a probable future benefit arising from the court ordering the competitor
to pay the entity damages. However, the existence of that benefit will only be
confirmed by the occurrence of a future event outside of the control of the entity (the
court decision). The receipt of the benefit is not virtually certain, so the entity has a
contingent asset. The entity would not recognise an asset. The entity should disclose
the contingent asset as set out in paragraph 21.16 because an inflow of economic
benefits is probable, but not virtually certain.
Ex 35 The facts are the same as in Example 34. However, in this example, it is virtually
certain that the court will order the competitor to pay damages to the entity.
The entity has a virtually certain future benefit arising from the court ordering the
competitor to pay the entity damages. The existence of that benefit will only be
confirmed by the occurrence of a future event outside of the control of the entity (the
court decision). However, the receipt of the benefit is virtually certain, so the entity
will recognise an asset. The entity should recognise an asset. It is not a contingent
asset because the virtual certainty of receiving benefits removes the contingency.
Ex 36 The facts are the same as in Example 34. However, in this example, it is probable
that the court will rule in favour of the competitor (ie it is probable that the
entity’s case will not be successful).
The entity has a future benefit arising from the court ordering the competitor to pay
the entity damages. The existence of that benefit will only be confirmed by the
occurrence of a future event outside of the control of the entity the court decision).
However, the receipt of the benefit is neither virtually certain nor probably, so the
entity has neither an asset nor a contingent asset. The entity would not recognise an
asset, and would not be required to disclose a contingent asset, however the entity may
choose to provide disclosure about the court case.
Note, an outflow of economic benefits might be required to cover the legal fees of the
case. The entity should consider whether it needs to recognise a provision for these
costs.
Liabilities
2.39 An entity shall recognise a liability in the statement of financial position when:
(a) the entity has an obligation at the end of the reporting period as a result of a past
event;
(b) it is probable that the entity will be required to transfer resources embodying
economic benefits in settlement; and
(c) the settlement amount can be measured reliably.
2.40 A contingent liability is either a possible but uncertain obligation or a present obligation
that is not recognised because it fails to meet one or both of the conditions (b) and (c) in
paragraph 2.39. An entity shall not recognise a contingent liability as a liability, except for
contingent liabilities of an acquiree in a business combination (see Section 19 Business
Combinations and Goodwill).
Examples—recognise a liability or disclose a contingent liability
Ex 37 In 20X5 a lawsuit was brought against an entity by a group of people collectively

seeking compensation for damages to their health as a result of contamination to
the nearby land, which they believe to be caused by waste from that entity’s
production process. It is doubtful whether the entity is the source of the
contamination because many entities operate in the same area producing similar
waste and the source of the leak is unclear. The entity denies any wrongdoing
because it has taken precautions to avoid such leaks and is vigorously defending
the case. However, the entity cannot be certain that it has not caused the leak and
the true offender will become known only after extensive testing. The entity’s
lawyers expect a court ruling in approximately two years. Up to the date of
approval (ie authorisation) of the financial statements for the year ended
31 December 20X5, the entity’s lawyers advise that it is probable that the entity
will not be found liable. However, when the entity prepares its financial
statements for the year ended 31 December 20X6, owing to developments in the
case, the entity has been found liable and its lawyers advise it is probable the
entity will be required to pay compensation.
At 31 December 20X5 on the basis of the evidence available when the financial
statements were approved, the entity has a possible but uncertain obligation. No
provision is recognised. The possible obligation is disclosed as a contingent liability
unless the probability of any outflow is regarded as remote.
At 31 December 20X6 the entity has a present obligation and, on the basis of the
evidence available, an outflow of resources embodying economic benefits in settlement
is probable. Therefore, a provision is recognised for the best estimate of the amount
required to settle the obligation. Information about the lawsuit is disclosed in the
financial statements.
Ex 38 The facts are the same as in Example 37. However, in this example, the entity
(subsidiary) was acquired by another entity (parent) on 31 December 20X1. In this
example, taking account of all of the available evidence, it is probable that the
entity will successfully defend the court case (ie an outflow of resources
embodying economic benefits in settlement is not probable and the entity has a
contingent liability).
On 31 December 20X1, in accordance with Section 19, the group (parent and subsidiary
viewed as a single entity) recognises a liability for the possible obligation (contingent
liability) if its fair value can be measured reliably (see paragraph 19.15(d)).
Income
2.41 The recognition of income results directly from the recognition and measurement of
assets and liabilities. An entity shall recognise income in the statement of comprehensive
income (or in the income statement, if presented) when an increase in future economic
benefits related to an increase in an asset or a decrease of a liability has arisen that can
be measured reliably.
Example—income recognition
Ex 39 On 1 January 20X1 an entity acquired a property for CU1,000. It rents the property
to independent third parties under operating leases in return for rental payments.
In 20X1 CU90 lease rentals accrued to the lessee (the tenant paid the CU90 rent to
the entity on 1 January 20X2).
The entity measures investment property, after initial recognition, at fair value.
At 31 December 20X1 the fair value of its investment property was CU1,100.
The entity recognises income in the year ended 31 December 20X1 as follows:
• CU90 rental income (ie the increase in the asset (rent receivable))— CU90 receivable
by the entity from the lessee at 31 December represents an increase in future
economic benefits arising from the increase in a receivable asset. ; and
• CU100 increase in the fair value of its asset (investment property)—CU1,100 at
31 December 20X1 less CU1,000 at 1 January 20X1 represents an increase in the
expected future economics arising from the investment property.
Expenses
2.42 The recognition of expenses results directly from the recognition and measurement of
assets and liabilities. An entity shall recognise expenses in the statement of
comprehensive income (or in the income statement, if presented) when a decrease in
future economic benefits related to a decrease in an asset or an increase of a liability has
arisen that can be measured reliably.
Example—expense recognition
Ex 40 An entity recognised a liability (provision for a lawsuit) at CU40,000 in its

statement of financial position at 31 December 20X1. At 31 December 20X2, the
entity remeasured the liability at CU90,000. CU3,000 of the increase in the
provision is attributable to the unwinding of the discount that had been applied
to account for the time value of money (ie the increase in the CU40,000 because it
is one year closer to settlement) and the remainder of the increase is attributed to
better information becoming available on which to base the estimates.
The increase of CU50,000 is recognised as an expense in profit or loss for the year
ended 31 December 20X2 (ie CU90,000 at 31 December 20X2 less CU40,000 at
31 December 20X1). Of that CU50,000 expense, CU3,000 is a finance cost and the
remaining CU47,000 is a loss from a lawsuit (see paragraph 21.11).
Total comprehensive income and profit or loss

2.43 Total comprehensive income is the arithmetical difference between income and
expenses. It is not a separate element of financial statements and a separate recognition
principle is not needed for it.
2.44 Profit or loss is the arithmetical difference between income and expenses other than
those items of income and expense that this Standard classifies as items of other
comprehensive income. It is not a separate element of financial statements and a
separate recognition principle is not needed for it.
2.45 This Standard does not allow the recognition of items in the statement of financial position
that do not meet the definition of assets or of liabilities regardless of whether they result
from applying the notion commonly referred to as the ‘matching concept’ for measuring
profit or loss.
Measurement at initial recognition
2.46 At initial recognition, an entity shall measure assets and liabilities at historical cost unless
this Standard requires initial measurement on another basis such as fair value.
Subsequent measurement
Financial assets and financial liabilities

2.47 An entity measures basic financial assets and basic financial liabilities, as defined in
Section 11 Basic Financial Instruments, at amortised cost less impairment except for
investments in non-convertible preference shares and non-puttable ordinary or
preference shares that are publicly traded or whose fair value can otherwise be
measured reliably without undue cost or effort, which are measured at fair value with
changes in fair value recognised in profit or loss.
2.48 An entity generally measures all other financial assets and financial liabilities at fair value,
with changes in fair value recognised in profit or loss, unless this Standard requires or
permits measurement on another basis such as cost or amortised cost.
Non-financial assets
2.49 Most non-financial assets that an entity initially recognised at historical cost are
subsequently measured on other measurement bases. For example:
(a) an entity measures property, plant and equipment either at the lower of cost less any
accumulated depreciation and impairment and the recoverable amount (cost model)
or the lower of the revalued amount and the recoverable amount (revaluation model);
(b) an entity measures inventories at the lower of cost and selling price less costs to
complete and sell; and
(c) an entity recognises an impairment loss relating to non-financial assets that are in use
or held for sale.
Measurement of assets at those lower amounts is intended to ensure that an asset is not
measured at an amount greater than the entity expects to recover from the sale or use of
that asset.
2.50 For the following types of non-financial assets, this Standard permits or requires
measurement at fair value:
(a) investments in associates and joint ventures that an entity measures at fair value
(see paragraphs 14.10 and 15.15 respectively);
(b) investment property that an entity measures at fair value (see paragraph 16.7);
(c) agricultural assets (biological assets and agricultural produce at the point of
harvest) that an entity measures at fair value less estimated costs to sell (see
paragraph 34.2); and
(d) property, plant and equipment that an entity measures in accordance with the
revaluation model (see paragraph 17.15B).
Liabilities other than financial liabilities

2.51 Most liabilities other than financial liabilities are measured at the best estimate of the
amount that would be required to settle the obligation at the reporting date.
Offsetting
2.52 An entity shall not offset assets and liabilities, or income and expenses, unless required or
permitted by this Standard:
(a) measuring assets net of valuation allowances is not offsetting. For example,
allowances for inventory obsolescence and allowances for uncollectible receivables.
(b) if an entity’s normal operating activities do not include buying and selling non-current
assets, including investments and operating assets, then the entity reports gains and
losses on disposal of such assets by deducting from the proceeds on disposal the
carrying amount of the asset and related selling expenses.
Examples—offsetting required
Ex 41 On 1 November 20X5 an entity sold an owner-occupied building for CU3.5 million.

The building had a carrying amount of CU2 million at the date of sale. The estate
agent retained a commission of 10% of the sale proceeds. Legal fees in respect of
the sale were CU10,000.
Applying 2.52, on 1 November 20X5 the entity recognises a gain on the disposal of the
building of CU1,140,000 in profit or loss.
Calculation: CU3,500,000 selling price less CU350,000 agent’s commission less
CU10,000 legal fees = CU3,140,000 net disposal proceeds.
CU3,140,000 net disposal proceeds less CU2,000,000 carrying amount = CU1,140,000
gain on disposal of building.
Ex 42 A defined benefit plan provides a monthly pension of 0.2% of final salary for each
year of service. The pension is payable from the age of 65. At 31 December 20X1
the present value of the entity’s obligations under the plan was appropriately
estimated at CU200,000. Furthermore, the fair value of the plan assets out of
which the obligations are to be settled directly was determined at CU180,000 as at
31 December 20X1.
Applying 2.52, and entity would present separately the present value of the entity’s
obligations (liability of 200 000) and the plan assets (asset of 180 000). However,
paragraph 28.15 overrides 2.52. At 31 December 20X1 the entity must, in accordance
with paragraph 28.15, recognise a liability (employee benefit: post-employment
benefits) of CU20,000 for its defined benefit plan (ie CU200,000 obligation less
CU180,000 plan assets set aside to fund the defined benefit obligation).
SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS

Applying the requirements of the IFRS for SMEs Standard to transactions and events often
requires judgement. Information about significant judgements and key sources of estimation
uncertainty are useful in assessing an entity’s financial position, performance and cash flows.
Consequently, in accordance with paragraph 8.6, an entity must disclose the judgements that
management has made in the process of applying the entity’s accounting policies and that
have the most significant effect on the amounts recognised in the financial statements.
Furthermore, in accordance with paragraph 8.7, an entity must disclose information about the
key assumptions concerning the future, and other key sources of estimation uncertainty at the
reporting date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
Other sections of the IFRS for SMEs Standard require disclosure of information about particular
judgements and estimation uncertainties.
In many cases, an entity will not need to engage with the concepts and pervasive principles in
Section 2 of the IFRS for SMEs Standard. However, in some cases significant judgement is
required (eg in particular circumstances, assessments of materiality, economic substance and
the probability of future economic benefit flows might require significant judgements).
Moreover, when the IFRS for SMEs Standard does not specifically address a transaction, other
event or condition, management must use its judgement in developing an accounting policy
for that transaction, or other event or condition, that results in information relevant to the
economic decision-making needs of users and is reliable. The second level of the hierarchy
established in paragraph 10.5 requires that management look to the definitions, recognition
criteria and measurement concepts for assets, liabilities, income and expenses and the
pervasive principles set out in Section 2.
Materiality assessments
Information is material 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 and nature of the omission or misstatement judged in the surrounding circumstances.
The size or nature of the item, or a combination of both, could be the determining factors.
Applying the materiality concept may require significant judgement. When assessing whether
information is material to the financial statements, an entity applies judgement to decide
whether the information could reasonably be expected to influence decisions that users make
on the basis of those financial statements. When applying such judgement, the entity
considers both its specific circumstances and how the information provided in the financial
statements responds to the information needs of users.
Substance over form
When the economic substance differs from that set out in a legal form, transactions and other
events and conditions must be accounted for and presented in accordance with the economic
substance. Examples of the application of this concept are found in:
• Section 20 Leases for contracts that provide rights to capacity but do not take the legal form
of a lease;
• Section 22 Liabilities and Equity, which requires some puttable ordinary shares to be
classified as liabilities of the issuer; and
• Section 23 Revenue for identifying the revenue transaction in multiple-element sales and
for segmenting and combining construction contracts.
Applying the principles developed from the substance-over-form concept may require
significant judgement.
Undue cost or effort
When a specific requirement allows for an undue cost or effort exemption management must
use its judgement to the entity’s specific circumstances. This judgement requires careful
consideration of how the economic decisions of those that are expected to use the financial
statements could be affected by not having the information. These considerations may require
significant judgement.
Probability of future economic benefit
When preparing financial statements, the management of an entity must make an assessment
of the degree of uncertainty over whether the future economic benefits associated with an
item will flow to or from the entity. Those assessments are made individually for individually
significant items, and for a group for a large population of individually insignificant items.
Making those estimates may require significant judgement.
Accounting policies
When the IFRS for SMEs Standard does not specifically address a transaction, or other event or
condition, management must use its judgement in developing an accounting policy for that
transaction, or other event or condition, in accordance with paragraphs 10.4 and 10.5 of the
IFRS for SMEs Standard. If, in making these judgements, management cannot use the
requirements and guidance in the IFRS for SMEs Standard dealing with similar and related
issues, it considers the definitions of the elements of the financial statements, the recognition
criteria and measurement concepts and pervasive principles in Section 2 (see paragraphs 10.4
and 10.5).
COMPARISON WITH FULL IFRS STANDARDS

In 2018 the Board issued the 2018 Conceptual Framework, which replaced the 2010-issued
Conceptual Framework. This revised Conceptual Framework is effective for annual reporting
periods beginning on or after 1 January 2020, with earlier application permitted. Some of the
more significant changes that are relevant to this module include:
• a much-expanded chapter on measurement that considers historical cost and current
value approaches in much greater detail and discusses factors to consider when selecting a
measurement basis;
• a new chapter on presentation and disclosure that outlines objectives and principles,
including when to classify income and expenses in other comprehensive income;
• guidance on when assets and liabilities are derecognised from financial statements;
• updated definitions of an asset and a liability; and
• updated recognition criteria that clarify the role of probability.
It should also be noted that the 2018 Conceptual Framework does not have an equivalent to the
undue cost or effort exemption contained in Section 2. The cost constraint discussed in the
2018 Conceptual Framework is focused on the development of reporting requirements, rather
than the implementation of those requirements.

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IFRS for SMEs® Standard (2015) + Q&As

IFRS® Foundation—Supporting Material for the IFRS for SMEs Standard

Module 2—Concepts and Pervasive

with extensive explanations, self-assessment questions

Telephone: +44 (0)20 7246 6410

Trade mark notice

The accounting requirements applicable to small and medium-sized entities (SMEs)

Which version of the IFRS for SMEs® Standard?

IFRS for SMEs Standard

Introduction to the requirements

The objective of general purpose financial statements of a small or medium-sized entity is to

REQUIREMENTS AND EXAMPLES

Scope of this section

Objective of financial statements of small and medium-sized entities

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

The objective of general purpose financial statements is to provide financial

Qualitative characteristics of information in financial statements

The qualitative characteristics of information in financial statements identify the

Classifying, characterising and presenting information clearly and concisely makes it

Ex 2 An entity has investment property. Under tax legislation in that jurisdiction, it is

It is self-evident that financial information is useful for decision-making only if it is

Materiality is an aspect of relevance, because immaterial information does not affect a

Financial reports represent economic phenomena in words and numbers. To be useful,

Substance over form

Examples—substance over form

Ex 6 A luxury yacht manufacturer sells a yacht to a bank for CU1,000,000 and

Prudence is the exercise of caution when making judgements under conditions of

Balance between benefit and cost

Undue cost or effort

An asset could produce economic benefits for an entity by entitling or enabling it to

Physical form is not essential to the existence of an asset—for example, licences,

Ex 8 An entity has cash.

Examples—assets with physical form

Ex 9 An entity owns a machine that manufactures its products.

Ex 10 An entity owns a factory building in which it manufactures its products.

Ex 14 An entity owns a building that it rents to independent third parties under

Examples—assets without physical form

Refer to Module 20 for more detailed discussion on leases.

Ex 19 Waste from an entity’s production process contaminated the groundwater at the

Ex 20 An entity has made a written pledge to contribute a substantial sum of money

Examples—not liabilities—no obligating event

Ex 23 On 31 December 20X0 an entity had equity share capital of CU100,000 in issue. In

Ex 26 On the retirement of one of the owner-managers of an entity on 31 December

Ex 28 On 31 December 20X5 an entity sold a machine used by the entity in the

Ex 30 On 31 December 20X5 an entity sold a machine used by the entity in the

Recognition of assets, liabilities, income and expenses

The probability of future economic benefit

Measurement of assets, liabilities, income and expenses

Elements recognised in financial statements are quantified in monetary terms. This

Pervasive recognition and measurement principles

Recognition in financial statements

Ex 33 An entity acquires a competitor’s brand in a separate acquisition for CU100,000.

Examples—recognise a liability or disclose a contingent liability

Ex 37 In 20X5 a lawsuit was brought against an entity by a group of people collectively

Ex 40 An entity recognised a liability (provision for a lawsuit) at CU40,000 in its

Total comprehensive income and profit or loss

Measurement at initial recognition

Financial assets and financial liabilities

Liabilities other than financial liabilities