Financial Reporting on Small- and Medium-Sized Entities

Description
The FRF for SMEs accounting framework has been developed for smallto medium-sized entities that require reliable non-GAAP financial statements for internal use and external uses. The task force believes that this framework can be used by entities in many industry groups and may also be used by unincorporated, as well as incorporated, entities.

Financial Reporting
Framework for Small-
and Medium-Sized Entities
Copyright © 2013 by
American Institute of Certified Public Accountants, Inc.
e! "or#, " 1003$%&''(
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missions .epartment, AICPA, 220 /eigh *arm 0oad, .urham, C 2''0'%&110.
1he *inancial 0eporting *rame!or# for 2mall% and 3edium%2i4ed 5ntities re%
produces substantial portions of the CICA 6andboo# © 2012, published by 1he
Canadian Institute of Chartered Accountants, 1oronto, Canada 7CICA8, used un%
der licence from CICA.
iii
Notice to Readers
Financial Reporting Framework for Small- and Medium-Sized Entities
!as de)eloped by a tas# force of CPA practitioners and professionals ser)% ing and
!or#ing at small% and medium%si4ed entities and the staff of the AICPA. Financial
Reporting Framework for Small- and Medium-Sized Enti- ties has not been appro)ed,
disappro)ed, or other!ise acted upon by any tech% nical committee of the AICPA or
the *inancial Accounting 2tandards 9oard and has no official or authoritati)e status.
AICPA FRF for SMEs Task Force
(2012-2013)
.a)id 3organ, Chair
1heresa 9ible
.eAnn 6ill
:aren :erber
:enneth 0. -dom
3arc Par#inson
Pat Piteo
1homas A. 0atcliffe
5ric P. ;allace
AICPA Staff
Charles 5. /andes
Vice President
Professional Standards and Services
0obert .ura#
Director, Private ompan! Financial Reporting
"ccounting Standards
.aniel oll
Director
"ccounting Standards
FRF-SME
v
Preface
About Financial Reporting Framework for Small- and
Medium-Sized Entities
1he *0* for 235s
13
accounting frame!or# has been de)eloped by the
AICPA *0* for 235s 1as# *orce 7tas# force8 and the staff of the AICPA as a
special purpose frame!or# for small% and medium%si4ed entities. It is a self%
contained financial reporting frame!or# not based on account% ing principles
generally accepted in the ception of the contractual basis of accounting, are
commonly referred to as ot#er compre#ensive $ases of accounting or -C9-A.
2pecial purpose frame!or#s include cash basis, modified cash basis, ta> basis,
regulatory basis, contractual basis, and other non%=AAP bases of accounting that
utili4e a definite set of logical, reasonable criteria that is applied to all material
items appearing in the financial statements.
1he *0* for 235s accounting frame!or# dra!s upon a blend of tradition%
al accounting principles and accrual income ta> methods of accounting. It utili4es
historical cost as its primary measurement basis. In addition, it pro)ides
management !ith a suitable degree of optionality !hen choosing accounting
policies to better meet the needs of the end users of the finan% cial statements. 1he
frame!or# esche!s prescripti)e, detailed standards and )oluminous disclosure
re+uirements. 9eing a more intuiti)e and un% derstandable frame!or# for small
business o!ners and the users of their financial statements, the frame!or# lays
out principles that encourage the use of professional ?udgment in the particular
circumstances of a transac% tion or e)ent.
1he *0* for 235s reporting option is a cost%beneficial solution for man%
agement, o!ners, and others !ho re+uire financial statements that are prepared in
a consistent and reliable manner in accordance !ith a non% =AAP frame!or#
that has undergone public comment and profession% al scrutiny. 1he accounting
principles comprising it are appropriate for the preparation of small% and
medium%si4ed entity financial statements, based on the needs of the financial
statement users and cost and benefit considerations.
1he tas# force that de)eloped the *0* for 235s accounting frame!or#
!ith AICPA staff consisted of professionals !ho ha)e an abundance of e>% perience
ser)ing smaller% to medium%si4ed entities.
1he tas# force and staff belie)e that the *0* for 235s accounting
frame!or# is criteria suitable for the preparation of general use finan% cial
statements and e>ternal use of the statements in situations that do not re+uire
=AAP financial statements. As such, the frame!or# has the
follo!ing attributes@
A %$&ectivit!' 1he frame!or# is free from bias.
A Measura$ilit!' 1he frame!or# permits reasonably consistent mea%
surements.
A ompleteness' 1he frame!or# is sufficiently complete so that those
rele)ant factors that !ould alter a conclusion about the financial
statements are not omitted.
A Relevance' 1he frame!or# is rele)ant to financial statement
users.
FRF-SME
v
i
Scope an C!aracter"st"cs of Ent"t"es #t"$"%"n& t!e FRF
for
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accounting frame!or# has been de)eloped for small%
to medium%si4ed entities that re+uire reliable non%=AAP financial state% ments
for internal use and e>ternal uses. 1he tas# force belie)es that this frame!or#
can be used by entities in many industry groups and may also be used by
unincorporated, as !ell as incorporated, entities. 1he frame% !or# is not
intended to be a substitute for =AAP !hen =AAP%based fi% nancial statements
are necessary, as determined by the management of a pri)ate company and its
financial statement users.
A standard definition of small- and medium-sized entities does not e>ist in
the t. 1hese
characteristics are not all%inclusi)e and are not presented as a list of re+uired
characteristics an entity must possess in order to uti% li4e the frame!or#. 1he
AICPA has no authority to pre)ent or re+uire the use of a special purpose
frame!or# li#e the *0* for 235s accounting frame!or#. 1hese
characteristics are presented as helpful guidelines for management and other
sta#eholders !hen determining the appropriate% ness and suitability of the
*0* for 235s accounting frame!or# in the preparation of financial
statements. pectedF
and
1 Italici4ed terms are defined in the glossary.
FRF-SME 1.07
2 Financial
Reporting Framework for Small- and Medium-Sized Entities
d' the financial statements meeting the preceding re+uirements
ha)e been appro)ed in accordance !ith the entityBs process to finali4e
its financial statements.
/b5ect"+e of F"nanc"a$ State'ents
1.08 1he ob?ecti)e of financial statements is to communicate infor%
mation that is useful to management, creditors, and other users 7users8 !hen
ma#ing their resource allocation decisions or assessing management ste!ardship,
or both. Conse+uently, financial statements pro)ide informa%
tion about
a' an entityBs economic resources, obligations, and e+uityF
$' changes in an entityBs economic resources, obligations, and
e+uityF and
c' the economic performance of the entity.
Mater"a$"t*
1.09 ample, the predicti)e )alue of the statement of
operations is enhanced if abnormal items are sepa% rately disclosed.
Information that confirms or corrects pre)ious predictions has
feedbac# )alue. Information often has both pre% dicti)e )alue and
feedbac# )alue.
$' *imeliness' *or information to be useful for decision ma#ing, it
must be recei)ed by the user before it loses its capacity to influ% ence
decisions. 1he usefulness of information for decision ma#% ing declines
as time elapses.
Re$"ab"$"t*
1.13 *or the information pro)ided in financial statements to be use%
ful, it must be reliable. Information is reliable !hen it is in agreement !ith the
actual underlying transactions and e)entsF the agreement is capable of independent
)erificationF and the information is reasonably free from er% ror and bias.
0eliability is achie)ed through representational faithfulness, )erifiability, and
neutrality. eutrality is affected by the use of conser)a%
tism !hen ma#ing ?udgments under conditions of uncertainty@
a' Representational fait#fulness' 0epresentational faithfulness is
achie)ed !hen transactions and e)ents affecting the entity are
presented in financial statements in a manner that is in agree% ment
!ith the actual underlying transactions and e)ents. 1hus, transactions
and e)ents are accounted for and presented in a manner that con)eys
their substance rather than necessarily their legal or other form.
1he substance of transactions and e)ents may not al!ays be
consistent !ith the substance apparent from their legal or other form.
1o determine the substance of a transaction or e)ent, it may be
necessary to consider a group of related transactions and e)ents as a
!hole. 1he determination of the substance of a transaction or e)ent
!ill be a matter of professional ?udgment in the circumstances.
$' Verifia$ilit!' 1he financial statement representation of a trans%
action or e)ent is )erifiable if #no!ledgeable and independent
obser)ers concur that it is in agreement !ith the actual under% lying
transaction or e)ent !ith a reasonable degree of precision. Gerifiability
focuses on the correct application of a basis of mea% surement rather
than its appropriateness.
c' +eutralit!' Information is neutral !hen it is free from bias that
!ould lead users to!ard ma#ing decisions that are influenced by the
!ay the information is measured or presented. 9ias in measurement
occurs !hen a measure tends to consistently o)er% state or understate
the items being measured. In the selection of accounting principles,
bias may occur !hen the selection is made !ith the interests of
particular users or !ith particular economic or political ob?ecti)es in
mind.
FRF-SME 1.13
4 Financial
Reporting Framework for Small- and Medium-Sized Entities
*inancial statements that do not include e)erything necessary
for faithful representation of transactions, and e)ents affect% ing the
entity !ould be incomplete and, therefore, potentially biased.
d' onservatism' ists, esti% mates of a
conser)ati)e nature attempt to ensure that assets, re)enues, and gains
are not o)erstated and, con)ersely, that lia% bilities, e>penses, and
losses are not understated. 6o!e)er, con% ser)atism does not
encompass the deliberate understatement of assets, re)enues, and gains
or the deliberate o)erstatement of liabilities, e>penses, and losses.
Co'parab"$"t*
1.14 ompara$ilit! is a characteristic of the relationship bet!een t!o
pieces of information, rather than of a particular piece of information by itself. It
enables users to identify similarities in, and differences bet!een, the information
pro)ided by t!o sets of financial statements. Comparabil% ity is important !hen
comparing the financial statements of t!o different entities and !hen comparing
the financial statements of the same entity o)er multiple periods or at different
points in time.
1.15 Comparability in the financial statements of an entity is enhanced
!hen the same accounting policies are used consistently from period to period.
Consistency helps pre)ent misconceptions that might result from the application of
different accounting policies in different periods. ;hen a change in accounting
policy is deemed to be appropriate, disclosure of the effects of the change may be
necessary to maintain comparability.
8ua$"tat"+e C!aracter"st"cs Trae-off
1.16 In practice, a trade%off bet!een +ualitati)e characteristics is of%
ten necessary, particularly bet!een rele)ance and reliability. *or e>ample, there is
often a trade%off bet!een the timeliness of producing financial statements and the
reliability of the information reported in the state% ments. =enerally, the aim is to
achie)e an appropriate balance among the characteristics in order to meet the
ob?ecti)e of financial statements. 1he relati)e importance of the characteristics in
different cases is a matter of professional ?udgment.
E$e'ents of F"nanc"a$ State'ents
1.17 Elements of financial statements are the basic categories of items
portrayed therein in order to meet the ob?ecti)e of financial statements. 1!o types
of elements are those that describe the economic resources, ob% ligations, and
e+uity of an entity at a point in time and those that describe changes in economic
resources, obligations, and e+uity o)er a period of time. otes to financial
statements, !hich are useful for the purpose of clarification or further
e>planation of the items in financial statements, although an integral part of
financial statements, are not considered to be an element.
FRF-SME 1.14
Financial Statement Concepts
1.18 +et income is the residual amount after e>penses and losses
are deducted from re)enues and gains. et income generally includes all
transactions and e)ents increasing or decreasing the e+uity of the entity, e>cept
those that result from e+uity contributions and distributions.
Assets
1.19 "ssets are economic resources controlled by an entity as a result
of past transactions or e)ents and from !hich future economic benefits may be
obtained.
1.20 Assets ha)e three essential characteristics@
a' 1hey embody a future benefit that in)ol)es a capacity, singly or
in combination !ith other assets, to contribute directly or indi% rectly
to future net cash flo!s.
$' 1he entity can control access to the benefit.
c' 1he transaction or e)ent gi)ing rise to the entityBs right to, or
control of, the benefit has already occurred.
1.21 It is not essential for control of access to the benefit to be legally
enforceable for a resource to be an asset, pro)ided the entity can control its use by
other means.
1.22 A close association e>ists bet!een incurring e>penditures and
generating assets, but the t!o do not necessarily coincide. 1herefore, !hen an
entity incurs an e>penditure, this may pro)ide e)idence that future economic
benefits !ere sought but is not conclusi)e proof that an item satisfying the
definition of an asset has been obtained. 2imilarly, the ab% sence of a related
e>penditure does not preclude an item from satisfying the definition of an asset
and, thus, becoming a candidate for recognition in the statement of financial
position. *or e>ample, items that ha)e been donated to the entity may satisfy the
definition of an asset.
."ab"$"t"es
1.23 ,ia$ilities are obligations of an entity arising from past transac%
tions or e)ents, the settlement of !hich may result in the transfer or use of assets,
pro)ision of ser)ices, or other yielding of economic benefits in the future.
1.24 /iabilities ha)e three essential characteristics@
a' 1hey embody a duty or responsibility to others that entails set%
tlement by future transfer or use of assets, pro)ision of ser)ices, or
other yielding of economic benefits, at a specified or determin% able
date, on occurrence of a specified e)ent, or on demand.
$' 1he duty or responsibility obligates the entity, lea)ing it little or
no discretion to a)oid it.
c' 1he transaction or e)ent obligating the entity has already oc%
curred.
1.25 /iabilities do not ha)e to be legally enforceable, pro)ided that
they other!ise meet the definition of liabilitiesF they can be based on e+% uitable
or constructi)e obligations. A constructi)e obligation is one that can be inferred
from the facts in a particular situation, as opposed to a contractually%based
obligation.
FRF-SME 1.2
! Financial
Reporting Framework for Small- and Medium-Sized Entities
E:u"t*
1.26 E(uit! is the o!nership interest in the assets of an entity after
deducting its liabilities. Although e+uity of an entity in total is a residual, it
includes specific categories of items 7for e>ample, types of capital stoc#, additional
paid%in capital, and retained earnings8. As used in the *0* for 235s accounting
frame!or#, the term retained earnings also refers to o!nersB capital accounts,
depending on the nature of the entity.
Re+enues
1.27 Revenues are increases in economic resources, either by !ay of
inflo!s or enhancements of assets or reductions of liabilities, resulting from the
ordinary acti)ities of an entity. 0e)enues of entities normally arise from the sale
of goods, the rendering of ser)ices, or the use by others of entity resources yielding
rent, interest, royalties, or di)idends.
E;penses
1.28 E-penses are decreases in economic resources, either by !ay of
outflo!s or reductions of assets or incurrence of liabilities, resulting from an
entityBs ordinary re)enue%generating or ser)ice deli)ery acti)ities.
tent and clarity of presentation and disclosure in the financial statements.
1his chapter establishes general principles of financial statement presentation.
2.02 .ecisions about presentation and disclosure in specific situations
re+uire the e>ercise of professional ?udgment, consideration of the *0* for 235s
accounting frame!or#, and recognition of specific pro)isions in go)% erning
statutes or regulations. 5ffecti)e reporting also gi)es recognition to ne! problems
as they arise and changes in the re+uirements of in)estors, creditors, go)ernments,
and other applicable sta#eholders.
Fa"r Presentat"on "n Accorance ="t! t!e FRF for SMEs
Account"n& Fra'e(ork
2.03 *inancial statements should present fairly in accordance !ith
the *0* for 235s accounting frame!or#, the financial position, results of
operations, and cash flo!s of an entity 7that is, represent faithfully the substance
of transactions and other e)ents in accordance !ith the ele% ments of financial
statements and the recognition and measurement crite% ria set out in chapter 1,
C*inancial 2tatement ConceptsC8.
2.04 A fair presentation in accordance !ith the frame!or# is achie)ed
by
a' applying the frame!or#F
$' pro)iding sufficient information about transactions or e)ents
ha)ing an effect on the entityBs financial position, results of op%
erations, and cash flo!s for the periods presented that are of such
si4e, nature, and incidence that their disclosure is neces%
sary to understand that effectF and
c' pro)iding information in a manner that is clear and
understandable.
2.05 3anagement e>ercises professional ?udgment to pro)ide suffi%
cient information about the e>tent and nature of transactions or e)ents ha)ing an
effect on the entityBs financial position, results of operations, and cash flo!s for
the periods presented that are of such si4e, nature, and incidence that their
disclosure is necessary to understand that effect. 1his information should include
the significant terms and conditions of such transactions, as !ell as the nature of
such e)ents and their financial ef% fects on the periods presented.
FRF-SME 2.0
10 Financial
Reporting Framework for Small- and Medium-Sized Entities
2.06 3anagement pro)ides information in a manner that clearly con%
)eys the nature and e>tent, and significant terms and conditions, of the related
transactions. *inancial statements are prepared in such form and use such
terminology and classification of items that significant informa% tion is readily
understandable. Items not significant in themsel)es are grouped !ith other items
closest to their nature.
ercised 7that is, !hen there is
a choice bet!een alternati)es8. Accounting principles, and the methods used in
their application, may differ from one industry to an% other, and it cannot be
assumed that a user of the financial statements is familiar !ith these differences.
2.24 At a minimum, disclosure of information on accounting policies
should be pro)ided in the follo!ing situations@
a' ;hen a selection has been made from alternati)e acceptable ac%
counting principles and methods
$' ;hen accounting principles and methods used are specific to
an industry in !hich an entity operates, e)en if such account% ing
principles and methods are predominantly follo!ed in that industry
75>amples of items re+uiring disclosure of accounting
FRF-SME 2.1"
Principles of Financial Statement Presentation 13
policies include the recognition of re)enue from long%term con%
tracts and franchising and leasing operations.8
2.25 In order to pro)ide an o)er)ie! of the accounting policies of an
entity, it is particularly useful that these be disclosed together in the form of a
summary rather than in indi)idual notes to the financial statements. 1herefore, the
disclosure of a summary of accounting policies should gen% erally be the first note
to the financial statements. 2uitable titles include
C2ummary of 2ignificant Accounting PoliciesC or CAccounting Policies.C
2.26 1he *0* for 235s accounting frame!or# addresses !hat the
tas# force and staff belie)e to be the most important disclosures needed for most
users of small% and medium%si4ed entity financial statements. -ther users,
depending on the industry, may re+uest additional information to be included as
part of the basic financial statements or as supplemental information. *or e>ample,
bonding agencies may re+uest a schedule of con% tracts in progress as additional
supplemental information.
FRF-SME 2.2!
14 Financial Reporting Framework for Small- and Medium-Sized Entities
Chapter 3
!ransition
Purpose an Scope
3.01 1he purpose of this chapter is to ensure that !hen an entity
transitions to the *0* for 235s accounting frame!or# its financial state% ments
pro)ide a suitable starting point for accounting under the frame% !or# and
contains high%+uality, transparent, and comparable information o)er all periods
presented.
3.02 An entity should apply this chapter to its financial statements
upon transitioning to the frame!or#. If an entity using the frame!or# stops using
it for one or more reporting periods and then decides to again prepare its financial
statements under the frame!or#, the e>emptions from certain principles allo!ed
by this chapter do not apply.
/pen"n& State'ent of F"nanc"a$ Pos"t"on
3.03 An entity should prepare an opening statement of financial posi%
tion at the date of transition to t#e FRF for SMEs accounting framework'1 1his
opening statement of financial position is the starting point for the entityBs
accounting under the frame!or#.
3.04 5>cept as noted in paragraphs 3.0& and 3.13, an entity, in its
opening statement of financial position prepared using the frame!or#
a' recogni4es all assets and liabilities !hose recognition is re%
+uired by the frame!or#F
$' does not recogni4e items as assets or liabilities if the frame!or#
does not permit such recognitionF
c' reclassifies items that it recogni4ed pre)iously as one type of as%
set, liability, or component of e+uity but are no! recogni4ed as a
different type of asset, liability, or component of e+uity under
the frame!or#F and
d' applies the frame!or# !hen measuring all recogni4ed assets
and liabilities.
Account"n& Po$"c"es
3.05 3anagement should use the same accounting policies in its open%
ing statement of financial position and throughout all periods presented in its first
financial statements prepared using the frame!or#. 1hose ac% counting policies
should comply !ith the accounting policies effecti)e at the end of the year the
entity adopts the frame!or#, e>cept as other!ise specified in this chapter.
3.06 1he accounting policies that management uses in its opening
statement of financial position prepared in accordance !ith the *0* for 235s
accounting frame!or# may differ from those that it used for the same date under
its pre)ious accounting policies. *or e>ample, an entity
1 Italici4ed terms are defined in the glossary.
FRF-SME 3.01
Transition 1
may ha)e pre)iously reported other comprehensi)e income, !hereas there
is no such concept in the frame!or#. Any resulting ad?ustments arise from e)ents
and transactions before the date of transition to the frame!or#. An entity should
recogni4e such ad?ustments directly in e+uity at the date of transition to the *0*
for 235s accounting frame!or#.
3.07 In some cases, management may elect to use certain e>emptions
to the principle that an entityBs opening statement of financial position should
comply !ith the frame!or#. 1hose e>emptions relate to the ap% plication of
certain chapters !ithin Financial Reporting Framework for Small- and Medium-
Sized Entities, as set out in paragraph 3.0&. In ad% dition, principles in certain
chapters are prohibited from being applied retrospecti)ely to the opening
statement of financial position. 2ee para% graph 3.13.
E$ect"on of E;e'pt"ons Fro' Certa"n Pr"nc"p$es "n t!e FRF for
SMEs Account"n& Fra'e(ork #pon Trans"t"on
3.08 3anagement may elect to use e>emptions related to one or more
of the follo!ing@
a' 9usiness combinations 7see paragraphs 3.0H%.108
$' *inancial assets and liabilities 7see paragraphs 3.118
c' Asset retirement obligations 7see paragraph 3.128
"usiness Com#inations
3.09 ;hen transitioning to the frame!or#, management may elect
not to apply chapter 2&, C9usiness Combinations,C retrospecti)ely to past business
combinations 7business combinations that occurred before the date of transition
to the *0* for 235s accounting frame!or#8. 6o!e)er, !hen transitioning to the
frame!or#, if management restates any busi% ness combination to comply !ith
chapter 2&, it restates all subse+uent business combinations and also should apply
chapter 23, CConsolidated *inancial 2tatements and oncontrolling Interests,C
from that same date.
3.10 ;hen transitioning to the frame!or#, if management does not
apply chapter 2& retrospecti)ely to a past business combination, it has the
follo!ing conse+uences for that business combination@
a' 1he entity retains the same classification as in its pre)ious fi%
nancial statements.
$' At the date of transition to the *0* for 235s accounting
frame!or#, the entity recogni4es all its assets and liabilities that !ere
ac+uired or assumed in a past business combination, e>cept for
financial assets and liabilities derecogni4ed in prior periods 7see
paragraph 3.1K8. Any resulting change is account% ed for by ad?usting
e+uity, unless the change results from the recognition of an intangible
asset that !as pre)iously included !ithin good!ill.
c' 1he entity e>cludes from its opening statement of financial po%
sition any item recogni4ed under pre)ious financial reporting
principles that does not +ualify for recognition as an asset or liability
under the *0* for 235s accounting frame!or#. Any resulting change
is accounted for by ad?usting opening e+uity,
FRF-SME 3.10
1
!
Financial Reporting Framework for Small- and Medium-Sized
Entities
unl
ess
the
ch
an
ge results from an intangible asset that is reclas%
sified as part of good!ill.
d' If an asset ac+uired, or liability assumed, in a past business com%
bination !as not recogni4ed under the pre)ious basis of account% ing
but should be under the frame!or#, the ac+uirer recogni4es and
measures the item in its statement of financial position on the basis
that the principles !ould re+uire in the statement of financial
position of the ac+uiree.
Financial Assets and $ia#ilities
3.11 Chapter $, C2pecial Accounting Considerations for Certain *i%
nancial Assets and /iabilities,C re+uires an entity to classify separately the
component parts of a financial instrument that contains both a lia% bility and
an e+uity component. 6o!e)er, under this chapter, an entity transitioning to
the frame!or# need not separate the components if the liability component is
no longer outstanding at the date of transition to the *0* for 235s accounting
frame!or#.
Asset Retirement %#ligations
3.12 An entity that has not pre)iously recogni4ed asset retirement
obligations on a basis consistent !ith the section, CAsset 0etirement -b%
ligations,C in chapter 1', CContingencies,C may measure the obligation at the
date of transition to the *0* for 235s accounting frame!or# and estimate the
amount that should be included in the carrying amount of the related asset
based on the original and remaining life of the asset. 1he difference bet!een
the change in the obligation and the change to the carrying amount of the asset
is charged to opening e+uity at the date of transition to the *0* for 235s
accounting frame!or#.
E;cept"ons to Retrospect"+e App$"cat"on of Certa"n
Pr"nc"p$es
="t!"n t!e FRF for SMEs Account"n& Fra'e(ork
3.13 1his chapter prohibits retrospecti)e application of some aspects
of other principles relating to
a' derecognition of financial assets and financial liabilities 7see
paragraph 3.1K8F
$' estimates 7see paragraphs 3.1$%.1'8F and
c' noncontrolling interests 7see paragraph 3.1&8.
&erecognition of Financial Assets and Financial
$ia#ilities
3.14 5>cept as permitted by paragraph 3.1(, an entity transitioning
to the *0* for 235s accounting frame!or# should apply the derecogni% tion
re+uirements in chapter $ prospecti)ely for transactions occurring on or after
the date of transition to the *0* for 235s accounting frame!or#.
3.15 3anagement may apply the derecognition re+uirements in
chapter $ retrospecti)ely from a date of the entityBs choosing, pro)ided that the
information needed to apply chapter $ to financial assets and financial
liabilities derecogni4ed as a result of past transactions !as obtained at the time
of initially accounting for those transactions.
FRF-SME 3.11
Transition 17
Estimates
3.16 3anagementBs estimates in its opening statement of financial
position prepared using the *0* for 235s accounting frame!or# should be
consistent !ith estimates in its statement of financial position for the same date
prepared using its pre)ious accounting policies 7after ad?ust% ments to reflect any
difference in accounting policies8, unless ob?ecti)e e)i% dence e>ists that those
estimates !ere in error.
3.17 3anagement may need to ma#e estimates for purposes of its
opening statement of financial position prepared using the frame!or# that !ere
not re+uired for the statement of financial position for that date using its pre)ious
accounting policies. 1hose estimates should reflect con% ditions that e>isted at the
date of the opening statement of financial posi% tion prepared using the
frame!or#.
'oncontrolling (nterests
3.18 An entity transitioning to the frame!or# should apply the fol%
lo!ing re+uirements of chapter 23 prospecti)ely from the date of transi%
tion to the *0* for 235s accounting frame!or#@
a' 1he re+uirements in paragraphs 23.2(%.2$ for accounting for
changes in the parentBs o!nership interest in a subsidiary that
do not result in a loss of control
$' 1he re+uirements in paragraphs 23.2'%.30 for accounting for a
loss of control o)er a subsidiary
c' 1he re+uirement in paragraph 23.3K that income is attributed
to the owners of the parent and the noncontrolling interests, e)en if
this results in the noncontrolling interests ha)ing a defi%
cit balance
6o!e)er, if an entity transitioning to the frame!or# elects to apply chap%
ter 2& retrospecti)ely to past business combinations, it also should apply chapter
23, in accordance !ith paragraphs 3.0H%.10.
,"sc$osure
3.19 A entity should disclose the amount of each charge or credit to
e+uity at the date of transition to the *0* for 235s accounting frame!or#
resulting from the adoption of these principles and the reasons therefor. If the date
of transition is earlier than the current period so that prior period financial
statements can be presented, those prior year financial state% ments need to be
restated to conform to the frame!or#.
3.20 ;hen an entity elects to use one or more of the e>emptions in
paragraphs 3.0&%.12, it should disclose the e>emptions used.
3.21 5ntities should also comply !ith the disclosure re+uirements of
paragraph H.2H of chapter H, CAccounting Changes, Changes in Accounting
5stimates, and Correction of 5rrors.C
FRF-SME 3.21
18 Financial Reporting Framework for Small- and Medium-Sized Entities
Chapter 4
Statement of Financial osition
Purpose an Scope
4.01 1his chapter establishes the line items to be separately present%
ed in the statement of financial position. In accordance !ith chapter 2, C=eneral
Principles of *inancial 2tatement Presentation and Accounting Policies,C
management also considers !hether additional line items should be presented in
order to pro)ide a fair presentation in accordance !ith the *0* for 235s
accounting frame!or#.
Presentat"on
4.02 1he statement of financial position should present fairly, in ac%
cordance !ith the *0* for 235s accounting frame!or#, the financial posi% tion at
the period end.
4.03 If a classified statement of financial position is presented, man%
agement should distinguish the follo!ing@
a' Current assets 7see chapter (, CCurrent Assets and Current
/iabilitiesC8
$' /ong%term assets
c' 1otal assets
d' Current liabilities 7see chapter (8
e' /ong%term liabilities
f' 1otal liabilities
g' 5+uity
#' 1otal liabilities and e+uity
4.04 -rdinarily, the follo!ing assets are separately presented. 2ome
of these items may be set out more readily in notes to the financial state% ments or
attached schedules. ;hen this approach is used, the statement of financial position
caption that contains these items should be identified. 3ore detailed information
about the follo!ing assets is presented in the
chapters referenced@
a' Cash and cash e+ui)alents 7see chapter (8
$' 1rade and other recei)ables 7see chapter (8
c' Prepaid e>penses 7see chapter (8
d' -ther financial assets 7see chapter $, C2pecial Accounting Con%
siderations for Certain *inancial Assets and /iabilitiesC8
e' In)entories 7see chapter 12, CIn)entoriesC8
f' In)estments in nonconsolidated subsidiaries and nonpropor%
tionately consolidated ?oint )entures 7see chapter 22, C2ubsid%
iariesC and chapter 2K, CInterests in Loint GenturesC8
g' All other in)estments sho!ing separately
FRF-SME 4.01
Statement of Financial Position 1"
i. in)estments measured using the cost method 7see chapter
11, C5+uity, .ebt, and -ther In)estmentsC8
ii. in)estments measured using the e+uity method 7see chap%
ter 118
iii. in)estments measured at mar#et )alue 7see chapter 118
#' Property, plant, and e+uipment 7see chapter 1K, CProperty, Plant,
and 5+uipmentC8
i' Intangible assets 7see chapter 13, CIntangible AssetsC8
&' Assets for current income ta>es 7see chapter 21, CIncome 1a>esC8
k' Assets for deferred income ta>es 7see chapter 218
l' /ong%li)ed assets and disposal groups classified as held for sale
7see chapter 1(, C.isposal of /ong%/i)ed Assets and .iscontin%
ued -perationsC8
m' Accrued benefit assets 7see chapter 20, C0etirement and -ther
Postemployment 9enefitsC8
4.05 -rdinarily, the follo!ing liabilities should be separately
presented@
a' 3ain classes of current liabilities in accordance !ith paragraph
(.0H
$' /iabilities for deferred income ta>es 7see chapter 218
c' /iabilities of disposal groups classified as held for sale 7see chap%
ter 1(8
d' -bligations under capital leases 7see chapter 2(, C/easesC8
e' Accrued benefit liability 7see chapter 208
f' /ong%term debt 7see chapter $8
g' Asset retirement obligations 7see chapter 1'8
#' -ther financial liabilities
4.06 5+uity should be presented in accordance !ith the re+uirements
of chapter 1&, C5+uity.C
FRF-SME 4.0!
20 Financial Reporting Framework for Small- and Medium-Sized Entities
Chapter
Current Assets and Current $ia#ilities
Purpose an Scope
5.01 1his chapter establishes presentation and disclosure principles
for current assets and current liabilities. -ther chapters pro)ide addition% al
presentation and disclosure re+uirements for specific current assets and liabilities.
5.02 Assets and liabilities are normally segregated bet!een current
and noncurrent. 6o!e)er, the segregation of assets and liabilities bet!een current
and noncurrent may not be appropriate in financial statements of entities in certain
industries.
Current Assets
5.03 As a statement of financial position classification, current assets
should include those assets ordinarily reali4able !ithin one year from the date of
the statement of financial position or !ithin the normal operating cycle, !hen the
normal operating cycle is longer than a year.
5.04 Current assets should be segregated among the ma?or classes,
such as cash, in)estments, accounts and notes recei)able, in)entories, pre% paid
e>penses, costs and estimated earnings in e>cess of billings on un% completed
contracts, and deferred income ta> assets 7see chapter K, C2tate% ment of *inancial
PositionC8.
5.05 1he cash surrender )alue of life insurance, unless con)erted to
cash prior to the date the financial statements are a)ailable to be issued, should be
e>cluded from current assets.
Current ."ab"$"t"es
5.06 As a statement of financial position classification, current liabili%
ties should include amounts payable !ithin one year from the date of the
statement of financial position or !ithin the normal operating cycle, !hen the
normal operating cycle is longer than a year. 1he normal operating cycle should
correspond !ith that used for current assets.
5.07 1he current liability classification should also include amounts
recei)ed or due from customers or clients !ith respect to goods to be de% li)ered
or ser)ices to be performed !ithin one year from the date of the statement of
financial position 7that is, deferred re)enue8.
5.08 -bligations that !ould other!ise be classified as current liabili%
ties should be e>cluded from the current liability classification to the e>% tent that
contractual arrangements ha)e been made for settlement from other than current
assets.
5.09 Current liabilities should be segregated among the ma?or class%
es, such as ban# loans, trade creditors and accrued liabilities, loans pay% able,
billings in e>cess of costs and estimated earnings on uncompleted contracts, ta>es
payable, di)idends payable, deferred re)enues, current payments on long%term
debt, and deferred income ta> liabilities 7see chap% ter K8. Amounts o!ing on loans
from directors, officers, and shareholders
FRF-SME .01
Current Assets and Current Liabilities 21
and amounts o!ing to parent and other affiliated companies, !hether on
account of a loan or other!ise, should be sho!n separately.
,ebt
5.10 1he current liability classification should include only that por%
tion of long%term debt obligations, including sin#ing%fund re+uirements, payable
!ithin one year from the date of the statement of financial position.
5.11 oncurrent classification of debt is based on facts e>isting at the
statement of financial position date, rather than on e>pectations regard% ing future
refinancing or renegotiation. If the creditor has, at that date, or !ill ha)e !ithin
one year 7or operating cycle, if longer8 from that date, the unilateral right to
demand immediate repayment of any portion or all the debt under any pro)ision of
the debt agreement, the obligation 7or a
portion thereof, as appropriate8 is classified as a current liability unless
a' the creditor has !ai)ed, in !riting, or subse+uently lost, the
right to demand payment for more than one year 7or operating
cycle, if longer8 from the statement of financial position dateF
$' the obligation has been refinanced on a long%term basis before
the financial statements are a)ailable to be issuedF or
c' the debtor has entered into a noncancellable agreement to refi%
nance the short%term obligation on a long%term basis before the
financial statements are a)ailable to be issued, and there is no
impediment to the completion of the refinancing.
5.12 /ong%term debt !ith a co)enant )iolation is classified as a cur%
rent liability unless
a' as of the date the financial statements are a)ailable to be is%
sued, the creditor has !ai)ed, in !riting, or subse+uently lost, the
right, arising from )iolation of the co)enant at the statement of
financial position date, to demand repayment for a period of more than
one year from the statement of financial position date
or
$' the debt agreement contains a grace period during !hich the
debtor may cure the )iolation, and contractual arrangements ha)e
been made that ensure the )iolation !ill be cured !ithin
the grace period
and a )iolation of the debt co)enant gi)ing the creditor the right to de%
mand repayment at a future compliance date !ithin one year of the state% ment of
financial position date is remote.
FRF-SME .12
22 Financial Reporting Framework for Small- and Medium-Sized Entities
Chapter !
Special Accounting Considerations for
Certain Financial Assets and $ia#ilities
Purpose an Scope
6.01 1his chapter establishes principles for
a' recogni4ing and measuring financial assets
1
7e>cept for e+uity
in)estments and debt in)estments held for sale, !hich are ad% dressed
in chapter 11, C5+uity, .ebt, and -ther In)estments,C
and financial liabilitiesF
$' the presentation of liabilities and e+uityF
c' the circumstances in !hich financial assets and financial liabili%
ties are offsetF
d' the derecognition of certain financial assets and liabilitiesF and e'
disclosures about financial assets and financial liabilities.
Reco&n"t"on
6.02 5>cept for derivatives, an entity should recogni4e a financial as%
set or a financial liability !hen the entity becomes a party to the contract.
.eri)ati)es are accounted for by recogni4ing the net cash paid or recei)ed at
settlement.
Measure'ent
6.03 5>cept for deri)ati)es, !hen a financial asset is originated or
ac+uired or a financial liability is issued or assumed in an armBs length transaction,
an entity should measure it at its transaction amount ad% ?usted by financing fees
and transaction costs that are directly attributable to its origination, ac+uisition,
issuance, or assumption.
Presentat"on
."ab"$"t"es an E:u"t*
6.04 1he issuer of a financial instrument should classify the instru%
ment, or its component parts, as a liability or as e+uity in accordance !ith the
substance of the contractual arrangement on initial recognition and the definitions
of a financial lia$ilit! and an e(uit! instrument.
/ffsett"n& of a F"nanc"a$ Asset an a F"nanc"a$ ."ab"$"t*
6.05 A financial asset and a financial liability should be offset, and
the net amount should be reported in the statement of financial position,
only !hen an entity
1 Italici4ed terms are defined in the glossary.
FRF-SME !.01
Accounting Considerations for Certain Financial Assets and Liabilities 23
a' currently has a legally enforceable right to set off the recogni4ed
amounts and
$' intends either to settle on a net basis or reali4e the asset and
settle the liability simultaneously.
,ereco&n"t"on
Transfers of F"nanc"a$ Assets) Inc$u"n& Rece"+ab$es
6.06 An entity should derecogni4e financial assets transferred to an%
other entity only !hen control has been surrendered.
F"nanc"a$ ."ab"$"t"es
6.07 An entity should remo)e a financial liability 7or a part of a fi%
nancial liability8 from its statement of financial position !hen it is e>tin% guished
7that is, !hen the obligation is discharged or cancelled or e>pires8.
6.08 A transaction bet!een a borro!er and lender to replace a debt
instrument !ith another instrument ha)ing substantially different terms is
accounted for as an e>tinguishment of the original financial liability and the
recognition of a ne! financial liability. 2imilarly, a substantial modification of
the terms of an e>isting financial liability or a part of it 7regardless of !hether
attributable to the financial difficulty of the debtor8 is accounted for as an
e>tinguishment of the original financial liability and the recognition of a ne!
financial liability.
6.09 1he difference bet!een the carrying amount of a financial liabil%
ity 7or part of a financial liability8 e>tinguished or transferred to another party and
the mar#et )alue of the consideration paid, including any non% cash assets
transferred, liabilities assumed, or e+uity instruments issued, should be recogni4ed
in net income for the period. 5>tinguishment trans%
actions bet!een related entities may be, in essence, capital transactions.
6.10 ;hen an issuer of a debt instrument repays or settles that in%
strument, the debt is e>tinguished. If an entity repays a part of a financial liability,
the entity allocates the carrying amount of the financial liability at the date of
repayment based on their relati)e mar#et )alues bet!een the part that continues
to be recogni4ed and the part that is derecogni4ed. 1he difference bet!een the
carrying amount allocated to the part derec% ogni4ed and the consideration paid to
e>tinguish that part, including any noncash assets transferred, liabilities assumed,
or e+uity instruments is% sued, is recogni4ed in net income.
,"sc$osure
F"nanc"a$ Assets
6.11 An entity should disclose the carrying amounts of financial as%
sets either on the face of the statement of financial position or in the notes.
6.12 Accounts and notes recei)able should be segregated to sho!
separately trade accounts, amounts o!ing by related parties, and other unusual
items of significant amount. 1he amounts, and, !hen practicable, maturity dates
of accounts maturing beyond one year should be disclosed separately.
FRF-SME !.12
24 Financial
Reporting Framework for Small- and Medium-Sized Entities
Transfers of F"nanc"a$ Assets (Inc$u"n& Rece"+ab$es)
6.13 If an entity transfers financial assets during the period and ac%
counts for the transfer as a sale, it should disclose
a' the gain or loss from all sales during the periodF
$' the accounting policies for
i. initially measuring any retained interest 7including the
methodology used !hen determining its mar#et )alue8 and
ii. subse+uently measuring the retained interestF and
c' a description of the transferorBs continuing in)ol)ement !ith
the transferred assets, including, but not limited to, ser)icing, recourse,
and restrictions on retained interests.
6.14 If an entity has transferred financial assets in a !ay that does
not +ualify for derecognition, it should disclose
a' the nature and carrying amount of the assetsF
$' the nature of the ris#s and re!ards of o!nership to !hich the
entity remains e>posedF and
c' the carrying amount of the liabilities assumed in the transfer.
F"nanc"a$ ."ab"$"t"es
6.15 *or bonds, debentures, and similar securities, mortgages, and
other long%term debt, an entity should disclose
a' the title or description of the liabilityF
$' the interest rateF
c' the maturity dateF
d' significant terms 7for e>ample, co)enant details8F
e' the amount outstanding, separated bet!een principal and ac%
crued interestF
f' the currency in !hich the debt is payable, if it is not repayable in
the currency in !hich the entity measures items in its financial
statementsF and
g' the repayment terms, including the e>istence of sin#ing fund,
redemption, and con)ersion pro)isions.
6.16 An entity should disclose the carrying amount of any financial
liabilities that are secured. An entity should also disclose
a' the carrying amount of assets it has pledged as collateral for
liabilities and
$' the terms and conditions relating to its pledge.
6.17 An entity should disclose the aggregate amount of payments es%
timated to be re+uired in each of the ne>t fi)e years to meet repayment, sin#ing
fund, or retirement pro)isions of financial liabilities.
6.18 *or financial liabilities recogni4ed at the statement of financial
position date, an entity should disclose
FRF-SME !.13
Accounting Considerations for Certain Financial Assets and Liabilities 2
a' !hether any financial liabilities !ere in default or in breach of
any term or co)enant during the period that !ould permit a
lender to demand accelerated repayment and
$' !hether the default !as remedied or the terms of the liability
!ere renegotiated before the financial statements !ere a)ail% able to
be issued.
6.19 An entity should disclose the follo!ing items@
a' Interest capitali4ed
$' ercise date or dates of the con)ersion optionF
ii. the maturity or e>piry date of the optionF
iii. the con)ersion ratio or the stri#e priceF
i). conditions precedent to e>ercising the optionF and
). any other terms that could affect the e>ercise of the option,
such as the e>istence of co)enants that, if contra)ened, !ould
alter the timing or price of the option.
*or an instrument that is inde>ed to the entityBs e+uity or an identified
factor, an entity should disclose information that enables users of the fi% nancial
statements to understand the nature, terms, and effects of the in% de>ing featureF
the conditions under !hich a payment !ill be madeF and the e>pected timing of
any payment.
,er"+at"+es
6.21 *or deri)ati)es, an entity should disclose the follo!ing@
a' 1he face or contract amount 7or notional principal amount, if
there is no face or contract amount8
$' 1he nature and terms, including a discussion of the credit and
mar#et ris# and the cash re+uirements of those deri)ati)es
c' A description of the entityBs ob?ecti)es for holding the
deri)ati)es
d' 1he net settlement amount of the deri)ati)e at the statement of
financial position date
FRF-SME !.21
2! Financial
Reporting Framework for Small- and Medium-Sized Entities
Ite's of Inco'e
6.22 An entity should disclose the follo!ing items of income, e>pense,
gains, or losses either on the face of the statements or in the notes to the
financial statements@
a' et gains or net losses recogni4ed on financial assets and li%
abilities
$' 1otal interest income
c' 1otal interest e>pense, separately identifying amorti4ation of
premiums, discounts, transaction costs, and financing fees
FRF-SME !.22
Statement of Operations 27
Chapter 7
Statement of %perations
Purpose an Scope
7.01 1his chapter establishes the line items to be separately present%
ed in the statement of operations. In accordance !ith chapter 2, C=eneral
Principles of *inancial 2tatement Presentation and Accounting Policies,C
management also considers !hether additional line items should be pre% sented in
order to pro)ide a fair presentation in accordance !ith the *0* for 235s
accounting frame!or#.
Presentat"on
7.02 1he statement of operations should present fairly, in accordance
!ith the *0* for 235s accounting frame!or#, the results of operations for the
period.
7.03 1he statement of operations should distinguish the follo!ing@
a' Income or loss before discontinued operations
$' 0esults of discontinued operations 7see chapter 1(, C.isposal of
/ong%/i)ed Assets and .iscontinued -perationsC8
c' et income or loss for the period
;hen arri)ing at the income or loss before discontinued operations, the
statement of operations should present ma?or elements, such as re)enue, cost of
goods sold, operating e>penses, other re)enues and gains, and other e>penses and
losses.
7.04 1ypical items that are distinguished in the statement of opera%
tions are presented in the follo!ing te>t. 2ome of these items may be set out more
readily in notes to the financial statements or attached sched% ules. ;hen this is
done, the statement of operations caption that contains
these items should be identified in the notes@
a' 0e)enue recogni4ed 7see chapter 1H, C0e)enueC8. $'
Income from in)estments, disclosing income from
i. nonconsolidated subsidiaries and nonproportionately con%
solidated ?oint )entures 7see chapter 22, C2ubsidiariesC and
chapter 2K, CInterests in Loint GenturesC8
ii. all other in)estments sho!ing separately
718 in)estments measured using the cost method 7see
chapter 11, C5+uity, .ebt, and -ther In)estmentsC8
728 in)estments measured using the e+uity method 7see
chapter 118
738 in)estments measured at mar#et )alue 7see chapter 118
c' 1he amount charged for depreciation of property, plant, and
e+uipment 7see chapter 1K, CProperty, Plant, and 5+uipmentC8.
d' 1he amount charged for amorti4ation of intangible assets 7see
chapter 13, CIntangible AssetsC8.
FRF-SME 7.04
2 8
F
i
n
a
n
c
i
a
l Reporting Framework for Small- and Medium-Sized Entities
e' 1he amount of e>change gain or loss included in net income 7see
chapter 31, C*oreign Currency 1ranslationC8.
f' 0e)enue, e>penses, gains, or losses resulting from transactions
or e)ents that are not e>pected to occur fre+uently o)er se)eral years
or do not typify normal business acti)ities of the entity 7see chapter 28.
g' Income ta>es. Income ta> e>pense or benefit included in the
determination of income or loss before discontinued operations should
be presented separately in the statement of operations 7see chapter 21,
CIncome 1a>esC8.
FRF-SME 7.04
Statement of Cash Flows 2"
Chapter 8
Statement of Cash Flows
Purpose an Scope
8.01 Information about an entityBs cas# flows
1
enables users of fi%
nancial statements to assess the capability of the entity to generate cas# and cas#
e(uivalents and the needs of the entity for cash resources. 1he ade+uacy of
e>pected cash inflo!s, ta#ing into consideration their timing and certainty of
generation, is e)aluated against cash resources re+uired to repay maturing
financial obligations, finance the gro!th of producti)e assets, and ma#e
distributions to o!ners. 6istorical cash flo! information is often used as an
indicator of the amount, timing, and certainty of future cash flo!s. 1he purpose of
this chapter is to re+uire the pro)ision of infor% mation about the historical changes
in cash and cash e+ui)alents of an entity by means of a statement of cash flo!s
that classifies cash flo!s dur% ing the period arising from operating, in)esting, and
financing activities.
8.02 A statement of cash flo!s is re+uired as an integral part of a
complete set of financial statements for each period for !hich financial statements
are presented. othing in the *0* for 235s accounting frame% !or# precludes
management from using it to prepare a single financial statement, rather than a
complete set of financial statements. 6o!e)er, if a statement of financial position
and a statement of operations are pre% pared, a statement of cash flo!s should also
be prepared.
8.03 ample, !hen the cash repayment of a liability includes both
interest and principal, the interest component is classified as an oper% ating
acti)ity and the principal component as a financing acti)ity.
/perat"n& Act"+"t"es
8.14 1he amount of cash flo!s arising from operating activities is a
#ey indicator of the e>tent to !hich the operations of the entity ha)e gen% erated
sufficient cash flo!s to repay loans, maintain the operating capabil% ity of the
entity, ma#e ne! in)estments, and pro)ide distributions to o!n% ers !ithout
recourse to e>ternal sources of financing. Information about the specific
components of historical operating cash flo!s is useful in con% ?unction !ith other
information in forecasting future operating cash flo!s.
8.15 Cash flo!s from operating acti)ities are primarily deri)ed from
the principal re)enue%producing acti)ities of the entity. 1herefore, they generally
result from the transactions and other e)ents that enter into the determination of
net income or loss. 5>amples of cash flo!s from operating
acti)ities are
FRF-SME 8.07
Statement of Cash Flows 31
a' cash receipts from the sale of goods and the rendering of ser)icesF
$' cash receipts from royalties, fees, commissions, and other
re)enueF
c' cash payments to suppliers for goods and ser)icesF
d' cash payments to, and on behalf of, employeesF
e' cash receipts and payments of interest and di)idends recei)ed
included in the determination of net incomeF
f' cash payments and refunds of income and other ta>esF and
g' cash receipts and payments from contracts held for trading pur%
poses or related to normal in)entory purchase or sales.
2ome transactions, such as the sale of a capital asset, may gi)e rise to a
gain or loss that is included in the determination of net income or loss. 6o!e)er,
the cash flo!s relating to such transactions are cash flo!s from in)esting
acti)ities.
8.16 An entity may ac+uire securities and loans for trading purposes
7that is, specifically for resale in the near term8, in !hich case, they are similar to
in)entory ac+uired specifically for resale. 1herefore, cash flo!s arising from the
purchase and sale of such trading assets are classified as operating acti)ities.
In+est"n& Act"+"t"es
8.17 1he separate presentation of cash flo!s arising from in)est%
ing acti)ities is important because the cash flo!s represent the e>tent to !hich
e>penditures ha)e been made for resources intended to generate future income
and cash flo!s. 5>amples of cash flo!s arising from in)est%
ing acti)ities are
a' cash payments to ac+uire capital assets and other long%term as%
sets 7these payments include those relating to capitali4ed de%
)elopment costs and self%constructed capital assets, including interest
paid and capitali4ed before the assets are substantially
complete and ready for producti)e use8F
$' cash receipts from sales of capital assets and other long%term
assetsF
c' cash payments to ac+uire e+uity or debt instruments of other
entities 7other than payments for those instruments considered to be
cash e+ui)alents or those held for trading purposes8 and
interests in ?oint )enturesF
d' cash receipts from sales of e+uity or debt instruments of other
entities 7other than receipts for those instruments considered to be
cash e+ui)alents and those held for trading purposes8 and
interests in ?oint )enturesF
e' cash ad)ances and loans made to other partiesF
f' cash receipts from the repayment of ad)ances and loans made
to other partiesF
g' cash payments for futures contracts, for!ard contracts, option
contracts, and s!ap contracts, e>cept !hen the contracts are
FRF-SME 8.17
3
2
Financial Reporting Framework for Small- and Medium-Sized
Entities
hel
d
for
tra
ding purposes, related to normal in)entory purchas%
es or sales, or the payments are classified as financing acti)itiesF
and
#' cash receipts from futures contracts, for!ard contracts, option
contracts, and s!ap contracts, e>cept !hen the contracts are held
for trading purposes, related to normal in)entory purchas%
es or sales, or the receipts are classified as financing acti)ities.
F"nanc"n& Act"+"t"es
8.18 1he separate presentation of cash flo!s arising from financing
acti)ities is important because it is useful !hen predicting claims on fu% ture
cash flo!s by pro)iders of capital and debt financing to the entity.
5>amples of cash flo!s arising from financing acti)ities are
a' cash proceeds from issuing e+uity instrumentsF
$' cash payments to o!ners to ac+uire or redeem the entityBs
sharesF
c' cash proceeds from issuing debentures, loans, notes, bonds,
mortgages, and other short% or long%term borro!ingsF
d' cash repayments of amounts borro!edF
e' cash payments by a lessee for the reduction of the outstanding
liability relating to a capital leaseF and
f' cash payments of di)idends and interest charged to retained
earnings.
Cas! F$o(s Fro' /perat"n& Act"+"t"es
8.19 An entity should report cash flo!s from operating acti)ities
using either the direct method or the indirect method. 5>amples of the ma?or
classes of cash flo!s from operating acti)ities are contained in paragraph
&.1(.
8.20 pense,
and other items in the statement of operations for
i. noncash itemsF
ii. changes during the period in in)entories and operating re%
cei)ables and payablesF
iii. other deferrals or accruals of past or future operating cash
receipts or paymentsF and
i). items for !hich the cash effects are in)esting or financing
cash flo!s.
8.21 ;hen the direct method is used, a separate schedule that recon%
ciles net income to net cash flo!s from operating acti)ities should also be
presented.
FRF-SME 8.18
Statement of Cash Flows 33
8.22 penses, gains, or losses associated !ith in)esting or
financing cash flo!s.
Cas! F$o(s Fro' In+est"n& an F"nanc"n& Act"+"t"es
8.23 An entity should present separately ma?or classes of gross cash
receipts and gross cash payments arising from in)esting and financing acti)ities.
8.24 5>amples of the ma?or classes of in)esting acti)ities are con%
tained in paragraph &.1'. 5>amples of the ma?or classes of financing ac% ti)ities
are contained in paragraph &.1&.
Cas! F$o(s on a 0et -as"s
8.25 Cash receipts and payments for items in !hich the turno)er is
+uic#, the amounts are large, and the maturities are short may be reported on a net
basis. An e>ample of such items is cash receipts and payments related to short%
term borro!ings 7for e>ample, those that ha)e a maturity period of three months
or less8 and re)ol)ing credit lines.
Fore"&n Currenc* Cas! F$o(s
8.26 Cash flo!s arising from transactions in a foreign currency
should be recorded in an entityBs reporting currency by applying to the for% eign
currency amount the e>change rate bet!een the reporting currency and the foreign
currency at the date of the cash flo!.
Interest an ,"+"ens
8.27 Cash inflo!s from interest and di)idends recei)ed should be
classified as cash flo!s from operating acti)ities. Cash outflo!s related to interest
paid should be classified as an operating acti)ity, unless capital% i4ed. Cash
outflo!s related to di)idends paid should be classified as cash flo!s used in
financing acti)ities. Cash outflo!s from di)idends paid by subsidiaries to
noncontrolling interests should be presented separately as cash flo!s used in
financing acti)ities.
8.28 ;hen an entity ac+uires a financial asset or issues a financial li%
ability at a discount, the amorti4ation of the discount o)er the term of the
instrument does not reflect a cash flo!.
8.29 ;hen an entity ac+uires a financial asset or issues a financial
liability at a premium, the e>cess of the periodic interest payments, based
FRF-SME 8.2"
34 Financial
Reporting Framework for Small- and Medium-Sized Entities
on the stated rate, o)er the effecti)e yield recogni4ed in income is, in sub%
stance, a repayment of principal. Cash flo!s from operating acti)ities should
reflect interest income or e>pense recogni4ed in income. 1he e>cess of actual cash
flo!s o)er amounts recogni4ed in income should be classi% fied as cash flo!s from
in)esting or financing acti)ities.
Inco'e Ta;es
8.30 Cash flo!s arising from income ta>es should be classified as cash
flo!s from operating acti)ities unless they can be specifically identified !ith
financing and in)esting acti)ities.
-us"ness Co'b"nat"ons an ,"sposa$s of -us"ness #n"ts
8.31 1he aggregate cash flo!s arising from each of the business com%
binations accounted for using the ac+uisition method and disposals of business
units should be presented separately and classified as cash flo!s from in)esting
acti)ities.
8.32 1he separate presentation of the cash flo! effects of business
combinations accounted for as ac+uisitions and disposals of business units, together
!ith the separate disclosure of the total amounts of assets and li% abilities ac+uired
or disposed of, helps to distinguish those cash flo!s from the cash flo!s arising
from the other operating, in)esting, and financing acti)ities. 1he cash flo! effects
of disposals are not deducted from those of ac+uisitions.
8.33 1he aggregate amount of the cash paid or recei)ed as purchase
or sale consideration is presented in the statement of cash flo!s net of cash and
cash e+ui)alents ac+uired or disposed of.
0oncas! Transact"ons
8.34 In)esting and financing transactions that do not re+uire the use
of cash or cash e+ui)alents should be e>cluded from a statement of cash flo!s but
should be disclosed in accordance !ith paragraph &.K0.
8.35 3any in)esting and financing acti)ities do not ha)e a direct
impact on current cash flo!s, although they do affect the capital and as% set
structure of an entity. 1he e>clusion of noncash transactions from the statement of
cash flo!s is consistent !ith the ob?ecti)e of a statement of cash flo!s because
these items do not in)ol)e cash flo!s in the current
period. 5>amples of noncash transactions are
a' the ac+uisition of assets by assuming directly related liabilitiesF
$' the ac+uisition of assets by means of a capital leaseF
c' the ac+uisition of an entity in e>change for shares of the
ac+uirerF and
d' the con)ersion of debt to e+uity.
FRF-SME 8.30
Statement of Cash Flows 3
,"sc$osure
Cas! an Cas! E:u"+a$ents
8.36 An entity should disclose the policy it adopts !hen determining
the composition of cash and cash e+ui)alents.
8.37 Any amounts of cash for !hich use is restricted should not be
included in the composition of cash and cash e+ui)alents. 3aterial restric% tions
on cash should be disclosed.
8.38 As discussed in paragraph &.0', in certain circumstances, an
entity may classify in)estments that +ualify to be treated as cash e+ui)a% lents as
in)estments. In such circumstances, the policy for determining components of
cash and cash e+ui)alents should be disclosed. Any change in the policy for
determining the components of cash and cash e+ui)alents should be disclosed in
accordance !ith chapter H, CAccounting Changes,
Changes in Accounting 5stimates, and Correction of 5rrors.C
-us"ness Co'b"nat"ons an ,"sposa$s of -us"ness #n"ts
8.39 An entity should disclose, in aggregate, in respect of both busi%
ness combinations and disposals of business units during the period
a' the total purchase or disposal considerationF
$' the portion of the purchase or disposal consideration composed
of cash and cash e+ui)alentsF
c' the amount of cash and cash e+ui)alents ac+uired or disposed
ofF and
d' the total assets, other than cash or cash e+ui)alents, and total
liabilities ac+uired or disposed of.
0oncas! Transact"ons
8.40 In)esting and financing transactions that do not re+uire the use
of cash or cash e+ui)alents should either be presented on the face of the statement
of cash flo!s as Cnoncash in)esting or financing acti)itiesC or disclosed in the
notes to the financial statements in a !ay that pro)ides all the rele)ant information
about these in)esting and financing acti)ities.
FRF-SME 8.40
3! Financial Reporting Framework for Small- and Medium-Sized Entities
Chapter "
Accounting Changes) Changes in
Accounting Estimates) and Correction
of Errors
Purpose an Scope
9.01 1he purpose of this chapter is to prescribe the criteria for chang%
ing accounting policies, together !ith the accounting treatment and dis% closure of
changes in accounting policies, changes in accounting estimates, and corrections of
errors.
9.02 .isclosure re+uirements for accounting policies, e>cept those for
changes in accounting policies, are set out in chapter 2, C=eneral Prin%
ciples of *inancial 2tatement Presentation and Accounting Policies.C
9.03 1he ta> effects of corrections of prior period errors
1
and retro%
specti)e ad?ustments made to apply changes in accounting policies are accounted
for and disclosed in accordance !ith chapter 21, CIncome 1a>es.C
C!an&es "n Account"n& Po$"c"es
9.04 3anagement should change an accounting policy only if the
change
a' is re+uired by the *0* for 235s accounting frame!or# or
$' results in the financial statements pro)iding reliable and more
rele)ant information about the effects of transactions, other e)ents, or
conditions on the entityBs financial position, financial performance, or
cash flo!s.
9.05 t, unless a change in
accounting policy meets one of the criteria in paragraph H.0K.
9.06 1he follo!ing are not changes in accounting policies@
a' 1he application of an accounting policy for transactions, other
e)ents, or conditions that differ in substance from those pre)i%
ously occurring
$' 1he application of a ne! accounting policy for transactions,
other e)ents, or conditions that did not occur pre)iously or !ere
immaterial
1 Italici4ed terms are defined in the glossary.
FRF-SME ".01
Changes in Accounting Estimates and Correction of Errors 37
App$*"n& C!an&es "n Account"n& Po$"c"es
9.07 2ub?ect to paragraph H.0H
a' an entity should account for a change in accounting policy
resulting from the initial application of the *0* for 235s accounting
frame!or# in accordance !ith the specific transitional
pro)isions, if any, described in chapter 3, C1ransition.C
$' an entity should account for a change in accounting policy ret%
rospecti)ely !hen
i. management changes an accounting policy upon initial ap%
plication of the *0* for 235s accounting frame!or# that does
not include specific transitional pro)isions applying to
that change 7see chapter 38F
ii. management changes an accounting policy )oluntarilyF or
iii. management is re+uired to change an accounting policy by
the *0* for 235s accounting frame!or#.
Retrospect"+e App$"cat"on
9.08 2ub?ect to paragraph H.0H, !hen a change in accounting policy is
applied retrospecti)ely in accordance !ith paragraph H.0'7a8 or 7b8, man% agement
should ad?ust the opening balance of each affected component of e+uity for the
earliest prior period presented and the other comparati)e amounts disclosed for
each prior period presented, as if the ne! account% ing policy had al!ays been
applied.
."'"tat"ons on Retrospect"+e App$"cat"on
9.09 ;hen retrospective application is re+uired by paragraph H.0'7a8
or 7b8, a change in accounting policy should be applied retrospecti)ely, e>% cept to
the e>tent that it is impractica$le to determine either the period% specific effects or
the cumulati)e effect of the change.
9.10 ;hen it is impracticable to determine the period%specific effects
of changing an accounting policy on comparati)e information for one or more
prior periods presented, management should apply the ne! account% ing policy to
the carrying amounts of assets and liabilities at the begin% ning of the earliest
period for !hich retrospecti)e application is practi% cable, !hich may be the
current period, and should ma#e a corresponding ad?ustment to the opening
balance of each affected component of e+uity for that period.
9.11 At the beginning of the current period, !hen it is impracticable
to determine the cumulati)e effect of applying a ne! accounting policy to all prior
periods, management should apply the ne! accounting policy prospecti)ely from
the earliest date practicable.
9.12 ;hen an entity applies a ne! accounting policy retrospecti)ely,
it applies the ne! accounting policy to comparati)e information for prior periods
as far bac# as is practicable. 0etrospecti)e application to a prior period is not
practicable unless the entity can determine the cumulati)e effect on the amounts in
both the opening and closing statement of finan% cial position for that period. 1he
amount of the resulting ad?ustment relat% ing to periods before those presented in
the financial statements is made
FRF-SME ".12
38 Financial
Reporting Framework for Small- and Medium-Sized Entities
to the opening balance of each affected component of e+uity of the earliest
prior period presented. Any other information presented about prior peri% ods,
such as historical summaries of financial data, is also ad?usted as far bac# as is
practicable.
9.13 ;hen it is impracticable for an entity to apply a ne! accounting
policy retrospecti)ely because it cannot determine the cumulati)e effect of
applying the policy to all prior periods, the entity, in accordance !ith para% graph
H.11, applies the ne! policy prospecti)ely from the start of the earli% est period
practicable. 1herefore, it disregards the portion of the cumula% ti)e ad?ustment to
assets, liabilities, and e+uity arising before that date. Changing an accounting
policy is permitted, e)en if it is impracticable to apply the policy retrospecti)ely
for any prior period. Paragraphs H.2(%H.2& pro)ide guidance on !hen it is
impracticable to apply a ne! accounting policy to one or more prior periods.
C!an&es "n Account"n& Est"'ates
9.14 As a result of the uncertainties inherent in business acti)ities,
many items in financial statements cannot be measured !ith precision but can
only be estimated. 5stimation in)ol)es ?udgments based on the latest a)ailable,
reliable information. *or e>ample, estimates may be re+uired of
a' bad debtsF
$' in)entory obsolescenceF
c' the useful li)es of, or e>pected pattern of consumption of the fu%
ture economic benefits embodied in, depreciable assets 7see the
e>ample in paragraph H.208F
d' progress on uncompleted contracts under the percentage%of%
completion methodF and
e' !arranty obligations.
9.15 1he use of reasonable estimates is an essential part of the prepa%
ration of financial statements and does not undermine their reliability.
9.16 An estimate may need re)ision if changes occur in the circum%
stances on !hich the estimate !as based or as a result of ne! information or more
e>perience. 9y its nature, the re)ision of an estimate does not relate to prior
periods and is not the correction of an error.
9.17 .istinguishing bet!een a change in an accounting principle and
an accounting estimate is sometimes difficult. In some cases, a c#ange in
accounting estimate is effected by a change in accounting principle. 1he effect of
the change in accounting principle, or the method of applying it, may be
inseparable from the effect of the change in accounting estimate. Changes of that
type often are related to the continuing process of obtain% ing additional
information and re)ising estimates and, therefore, should be considered changes in
estimates for purposes of applying this guidance.
9.18 1he effect of a change in an accounting estimate should be recog%
ni4ed prospecti)ely by including it in net income in
a' the period of the change, if the change affects that period only or $' the
period of the change, and future periods, if the change affects
both.
FRF-SME ".13
Changes in Accounting Estimates and Correction of Errors 3"
9.19 1o the e>tent that a change in an accounting estimate gi)es rise
to changes in assets and liabilities or relates to an item of e+uity, it should be
recogni4ed by ad?usting the carrying amount of the related asset, liabil% ity, or
e+uity item in the period of the change.
9.20 Prospecti)e recognition of the effect of a change in an accounting
estimate means that the change is applied to transactions, other e)ents, and
conditions from the date of the change in estimate. A change in an accounting
estimate may affect only the current periodBs net income or the net income of both
the current period and future periods. *or e>ample, a change in the estimate of the
amount of bad debts affects only the cur% rent periodBs net income and, therefore, is
recogni4ed in the current period. 6o!e)er, a change in the estimated useful life of,
or the e>pected pattern of consumption of the future economic benefits embodied
in, a depreciable asset affects depreciation e>pense for the current period and each
future period during the assetBs remaining useful life. In both cases, the effect of
the change relating to the current period is recogni4ed as income or e>pense in
the current period. 1he effect, if any, on future periods is recog% ni4ed as income or
e>pense in those future periods.
Errors
9.21 5rrors can arise regarding the recognition, measurement, pre%
sentation, or disclosure of elements of financial statements. *inancial statements
do not comply !ith the *0* for 235s accounting frame!or# if they contain
either material errors or immaterial errors made intention% ally to achie)e a
particular presentation of an entityBs financial position, financial performance, or
cash flo!s. Potential current period errors dis% co)ered in that period are
corrected before the financial statements are a)ailable to be issued. 6o!e)er,
material errors are sometimes not disco)% ered until a subse+uent period, and these
prior period errors are corrected in the comparati)e information presented in the
financial statements for that subse+uent period 7see paragraphs H.22%.238.
9.22 3anagement should correct material prior period errors retro%
specti)ely in the first set of financial statements a)ailable to be issued
after their disco)ery by
a' restating the comparati)e amounts for the prior period7s8 pre%
sented !hen the error occurred or
$' if the error occurred before the earliest prior period presented,
restating the opening balances of assets, liabilities, and e+uity for the
earliest prior period presented.
9.23 1he correction of a prior period error is e>cluded from net income
for the period !hen the error is disco)ered. Any information presented about
prior periods, including any historical summaries of financial data, is restated.
9.24 Corrections of errors are distinguished from changes in account%
ing estimates. Accounting estimates, by their nature, are appro>imations that may
need re)ision as additional information becomes #no!n. *or e>% ample, the gain
or loss recogni4ed on the outcome of a contingency is not the correction of an
error.
FRF-SME ".24
40 Financial Reporting Framework for Small- and Medium-Sized Entities
I'pract"cab"$"t* Re&ar"n& Retrospect"+e App$"cat"on
9.25 In some circumstances, it is impracticable to ad?ust compara%
ti)e information for one or more prior periods to achie)e comparability !ith the
current period. *or e>ample, data may not ha)e been collected in the prior
period7s8 in a !ay that allo!s retrospecti)e application of a ne! accounting policy
7including, for the purpose of paragraphs H.2$%H.2&, its prospective application to
prior periods8, and it may be impracticable to re% create the information. 2ee
paragraph H.13 for additional guidance.
9.26 It is fre+uently necessary to ma#e estimates !hen applying an
accounting policy to elements of financial statements recogni4ed or dis% closed
regarding transactions, other e)ents, or conditions. 5stimation is inherently
sub?ecti)e, and estimates may be de)eloped after the statement of financial
position date. .e)eloping estimates is potentially more dif% ficult !hen
retrospecti)ely applying an accounting policy or ma#ing a ret- rospective
restatement to correct a prior period error because of the longer period of time that
might ha)e passed since the affected transaction, other e)ent, or condition
occurred. 6o!e)er, the ob?ecti)e of estimates related to prior periods remains the
same as for estimates made in the current period, namely, for the estimate to
reflect the circumstances that e>isted !hen the transaction, other e)ent, or
condition occurred.
9.27 1herefore, retrospecti)ely applying a ne! accounting policy re%
+uires distinguishing information that
a' pro)ides e)idence of circumstances that e>isted on the date7s8
the transaction, other e)ent, or condition occurred and
$' !ould ha)e been a)ailable !hen the financial statements for
that prior period !ere a)ailable to be issued
from other information. *or some types of estimates, it is impracticable
to distinguish these types of information. ;hen retrospecti)e application !ould
re+uire ma#ing a significant estimate for !hich it is impossible to distinguish
these t!o types of information, it is impracticable to apply the ne! accounting
policy retrospecti)ely.
9.28 6indsight is not used !hen applying a ne! accounting policy to,
or correcting amounts for, a prior period, either in ma#ing assumptions about
!hat managementBs intentions !ould ha)e been in a prior period or estimating the
amounts recogni4ed, measured, or disclosed in a prior period. 1he fact that
significant estimates are fre+uently re+uired !hen amending comparati)e
information presented for prior periods does not pre)ent reliable ad?ustment or
correction of the comparati)e information.
,"sc$osure
C!an&es "n Account"n& Po$"c"es
9.29 ;hen initial application of the *0* for 235s accounting frame%
!or#, or a re+uired change in accounting policy, has an effect on the cur% rent
period or any prior period, or !ould ha)e such an effect, e>cept that it is
impracticable to determine the amount of the ad?ustment, an entity
should disclose
FRF-SME ".2
Changes in Accounting Estimates and Correction of Errors 41
a' !hen applicable, that the change in accounting policy is made in
accordance !ith its transitional pro)isionsF
$' the nature of the change in accounting policyF
c' !hen applicable, a description of the transitional pro)isionsF
d' for the current period, to the e>tent practicable, the amount of
the ad?ustment for each financial statement line item affectedF
e' the amount of the ad?ustment relating to periods before those
presented to the e>tent practicableF and
f' if retrospecti)e application re+uired by paragraph H.0'7a8 or 7b8
is impracticable for a particular prior period or for periods be% fore
those presented, the circumstances that led to the e>istence of that
condition and a description of ho!, and from !hen, the change in
accounting policy has been applied.
*inancial statements of subse+uent periods need not repeat these disclo%
sures, unless comparati)e financial statements are presented.
9.30 ;hen a )oluntary change in accounting policy has an effect on
the current period or any prior period, or !ould ha)e an effect on that pe% riod,
e>cept that it is impracticable to determine the amount of the ad?ust%
ment, an entity should disclose
a' the nature of the change in accounting policyF
$' the reasons !hy applying the ne! accounting policy pro)ides
reliable and more rele)ant information 7see paragraph H.0K8F
c' for the current period, to the e>tent practicable, the amount of
the ad?ustment for each financial statement line item affectedF
d' the amount of the ad?ustment relating to periods before those
presented to the e>tent practicableF and
e' if retrospecti)e application is impracticable for a particular prior
period or for periods before those presented, the circumstances that led
to the e>istence of that condition and a description of ho!, and from
!hen, the change in accounting policy has been applied.
*inancial statements of subse+uent periods need not repeat these
disclosures.
C!an&es "n Account"n& Est"'ates
9.31 3anagement should disclose the nature and amount of a change
in an accounting estimate that has an effect in the current period. .isclo% sure of
those effects is not necessary for estimates made each period in the ordinary
course of accounting for items such as uncollectible accounts, progress on
uncompleted contracts, or in)entory obsolescenceF ho!e)er, disclosure is re+uired
if the effect of a change in the estimate is material.
FRF-SME ".31
42 Financial Reporting Framework for Small- and Medium-Sized Entities
Errors
9.32 ;hen applying paragraph H.22, management should disclose the
follo!ing@
a' 1he nature of the prior period error
$' *or each prior period presented, the amount of the correction for
each financial statement line item affected
c' 1he amount of the correction at the beginning of the earliest
prior period presented
*inancial statements of subse+uent periods need not repeat these
disclosures.
FRF-SME ".32
Risks and Uncertainties 43
Chapter 10
Risks and Uncertainties
Purpose an Scope
10.01 Golatility and uncertainty in the business and economic en)i%
ronment result in the need to disclose information about the ris#s and un%
certainties that reporting entities face. 1his chapter establishes disclosure
principles for certain ris#s and uncertainties in the financial statements. 1he ris#s
and uncertainties addressed can stem from any of the follo!ing@
A ature of operations
A ceed one year
from the date of the financial statements8, and 7$8 the effect of the change !ill be
material. 1he estimate of the effect of a change in a condi% tion, situation, or set of
circumstances that e>isted at the date of the finan% cial statements should be
disclosed, and the e)aluation should be based on #no!n information a)ailable
before the financial statements are a)ailable to be issued.
10.05 1he follo!ing are e>amples of assets and liabilities and gain
and loss contingencies that may be based on estimates that are particular% ly
sensiti)e to change in the near term and, therefore, re+uire disclosure if
they meet the criteria in paragraph 10.0K@
1 Italici4ed terms are defined in the glossary.
FRF-SME 10.0
4
4
Financial Reporting Framework for Small- and Medium-Sized Entities
a' In)entory sub?ect to rapid technological obsolescence
$
'

2
p
e
c
i
a
l
i
4ed e+uipment sub?ect to technological obsolescence
c' Galuation allo!ances for deferred ta> assets based on future
ta>able income
d' Capitali4ed computer soft!are costs
e' Galuation allo!ances for commercial and real estate loans
f' 5n)ironmental remediation%related obligations
g' /itigation%related obligations
#' Contingent liabilities for obligations of other entities
i' Amounts reported for long%term obligations, such as amounts
reported for pensions and postemployment benefits
&' 5stimated net proceeds reco)erable, the pro)isions for e>pected
loss to be incurred, or both, on disposition of a business or assets
k' Amounts reported for long%term contracts
Concentrat"ons
10.06 Gulnerability from concentrations arises because an entity is
e>posed to ris# of loss greater than it !ould ha)e had it mitigated its ris# through
di)ersification. An entity should disclose in the financial state% ments certain
concentrations if, based on information #no!n to manage% ment before the
financial statements are a)ailable to be issued, all the
follo!ing criteria are met@
a' 1he concentration e>ists at the date of the financial statements. $' 1he
concentration ma#es the entity )ulnerable to the ris# of a
near%term se)ere impact.
c' It is at least reasonably possible that the e)ents that could cause
the se)ere impact !ill occur in the near term.
10.07 1he follo!ing are e>amples of concentrations that re+uire dis%
closure if they meet the preceding criteria@
a' Concentrations in the )olume of business transacted !ith a par%
ticular customer, supplier, or lender
$' Concentrations in re)enue from particular products or ser)ices c'
Concentrations in the a)ailable sources of supply of materials,
labor, or ser)ices or of licenses or other rights used in the entityBs
operations
d' Concentrations in the mar#et or geographic area !here an en%
tity conducts its operations
e' Concentrations in credit ris# 7for e>ample, funds deposited in
financial institutions in e>cess of *ederal .eposit Insurance
Corporation insurance limits8
f' Concentrations in the !or#force co)ered by collecti)e bargain%
ing agreements
FRF-SME 10.0!
Equity, Debt, and Other Investments 4
Chapter 11
E*uit+) &e#t) and %ther (n,estments
Purpose an Scope
11.01 1his chapter establishes principles for accounting for and mea%
suring and disclosing e+uity and debt in)estments and certain other in% )estments
7such as !or#s of art and other tangible assets held for in)est% ment purposes8.
11.02 1his chapter applies to in)estments, e>cept subsidiaries of enti%
ties that are consolidated 7see chapter 22, C2ubsidiariesC8.
Account"n& for In+est'entsEReco&n"t"on an
Measure'ent
11.03 An in)estor may be able to e>ercise significant influence o)er
the strategic operating, in)esting, and financing policies of an in)estee, e)en !hen
the in)estor does not control, or ?ointly control, the in)estee. *or e>ample, the
ability to e>ercise significant influence may be indicated by representation on the
board of directors, participation in policy%ma#ing processes, material
intercompany transactions, interchange of managerial personnel, or technological
dependency. If the in)estor holds 20 percent or more of the )oting interest in the
in)estee, a rebuttable presumption is that the in)estor has the ability to e>ercise
significant influence. If the in% )estor holds less than 20 percent of the )oting
interest in the in)estee, it is presumed that the in)estor does not ha)e the ability to
e>ercise significant influence, unless such influence is clearly demonstrated.
11.04 An in)estor that is able to e>ercise significant influence o)er an
in)estee that is not a subsidiary as defined in chapter 22 should account for the
in)estment using the e+uity method. An in)estor that is not able to e>ercise
significant influence o)er an in)estee should account for the in)estment using the
cost met#od,
1
e>cept for in)estments in securities held for sale.
11.05 5+uity method in)estees normally should follo! the same ba%
sis of accounting 7that is, the *0* for 235s accounting frame!or#8 as the
in)estor. Accordingly, financial statements of e+uity%method in)estees should be
ad?usted, if necessary, to conform !ith principles in the frame% !or#, unless it is
impracticable to do so. As stated in chapter 22, a material difference in the basis of
accounting bet!een a parent and a subsidiary precludes the use of the e+uity
method.
11.06 5+uity and debt in)estments held for sale should be recogni4ed
and measured at mar#et )alue. Changes in mar#et )alue should be recog% ni4ed in
net income in the period incurred. In)estments held for sale are securities that
management is currently attempting to sell.
11.07 ;hen an in)estor ceases to be able to e>ercise significant in%
fluence o)er an in)estee, the in)estment should be accounted for in ac% cordance
!ith the cost method, unless the in)estor has obtained control
1 Italici4ed terms are defined in the glossary.
FRF-SME 11.07
4! Financial
Reporting Framework for Small- and Medium-Sized Entities
7as that term is used in chapter 228, in !hich case the in)estor applies
chapter 22.
E:u"t* Met!o
11.08 In)estment income, as calculated by the e(uit! met#od, should
be the in)estorBs share of the income or losses of the in)estee.
11.09 ;hen accounting for an in)estment by the e+uity method, the
in)estorBs proportionate share of the in)esteeBs discontinued operations, changes in
accounting policy, corrections of errors relating to prior period financial
statements, and capital transactions should be presented in the in)estorBs financial
statements according to their nature.
11.10 In those situations in !hich the in)estor has the ability to e>er%
cise significant influence, shareholders !ould be informed of the results of
operations of the in)estee, and it is appropriate to include in the results of
operations of the in)estor its share of the income or losses of the in)estee. 1he
e+uity method of accounting for the in)estment pro)ides this informa% tion.
11.11 .epreciation and amorti4ation of in)estee assets are based on
the assigned costs of such assets at the date7s8 of ac+uisition. 1he portion of the
difference bet!een the in)estorBs cost and the amount of its under% lying e+uity in
the net assets of the in)estee that is similar to good!ill 7e+uity method good!ill8
is amorti4ed. ercise significant influ%
ence, cost is deemed to be the carrying amount of the in)estment at that time.
11.16 An in)estor generally should discontinue applying the e+uity
method if the in)estment, and net ad)ances, is reduced to 4ero. An in)es% torBs
share of losses in e>cess of the carrying amount and net ad)ances of
the in)estment should be recorded if
a' the in)estor has guaranteed the obligations of the in)esteeF
$' the in)estor is other!ise committed to pro)ide further financial
support to the in)esteeF or
c' the in)estee seems assured of imminently returning to profit%
ability.
If the in)estee subse+uently reports net income, the in)estor should re%
sume applying the e+uity method only after its share of net income e+uals the
share of net losses not recogni4ed during the period !here the e+uity method of
accounting !as suspended.
Cost Met!o
11.17 1he cost method should be used !hen accounting for in)est%
ments !ithin the scope of this chapter other than for those for !hich the in)estor
is able to e>ercise significant influence o)er an in)estee and e+% uity and debt
in)estments held for sale.
11.18 1hese types of in)estments include certain other in)estments,
such as !or#s of art and other tangible assets held for in)estment purposes.
pense, including any !rite%do!n to net realiza$le
value. It also pro)ides guidance on the cost formulas that are used to assign costs
to in)entories.
12.02 Certain speciali4ed industries typically ha)e their o!n uni+ue
in)entory accounting policies 7for e>ample, agricultural acti)ities8, and this
chapter does not preclude the use of those policies, as long as they are generally
used and accepted in the industry and the disclosure re+uire% ments of paragraphs
12.2&%12.2H are complied !ith.
12.03 1nventories encompass goods purchased and held for resale 7for
e>ample, merchandise purchased by a retailer and held for resale or land and other
property held for resale8. In)entories also encompass finished goods produced or
!or# in progress being produced by the entity and in% clude materials and supplies
a!aiting use in the production process.
Measure'ent of In+entor"es
12.04 In)entories should be measured at the lo!er of cost or net
reali4able )alue.
Cost of In+entor"es
12.05 1he cost of in)entories should comprise all costs of purchase,
costs of con)ersion, and other costs incurred !hen bringing the in)entories to their
present location and condition.
Costs of urchase
12.06 1he costs of purchase of in)entories comprise the purchase
price, import duties, and other ta>es 7other than those subse+uently reco)% erable
by the entity from the ta>ing authorities8 and transport, handling, and other costs
directly attributable to the ac+uisition of finished goods, materials, and ser)ices.
1rade discounts, rebates, and other similar items are deducted !hen determining
the costs of purchase.
Costs of Con,ersion
12.07 1he costs of con)ersion of in)entories include costs directly re%
lated to the units of production, such as direct labor. 1hey also include a
systematic allocation of fi>ed and )ariable production o)erheads that are incurred
!hen con)erting materials into finished goods. *i>ed production o)erheads are
those indirect costs of production that remain relati)ely
1 Italici4ed terms are defined in the glossary.
FRF-SME 12.07
0 Financial
Reporting Framework for Small- and Medium-Sized Entities
constant, regardless of the )olume of production, such as depreciation and
maintenance of factory buildings and e+uipment and the cost of factory
management and administration. Gariable production o)erheads are those indirect
costs of production that )ary directly, or nearly directly, !ith the )olume of
production, such as indirect materials and indirect labor.
12.08 1he allocation of fi>ed production o)erheads to the costs of con%
)ersion is based on the normal capacity of the production facilities. +ormal
capacit! is the production e>pected to be achie)ed on a)erage o)er a num% ber of
periods or seasons under normal circumstances, ta#ing into account the loss of
capacity resulting from planned maintenance. 1he actual le)el of production may
be used if it appro>imates normal capacity. 1he amount of fi>ed o)erhead
allocated to each unit of production is not increased as a conse+uence of lo!
production or idle plant. pense in
the period in !hich they are incurred. In pe% riods of abnormally high production,
the amount of fi>ed o)erhead allo% cated to each unit of production is decreased so
that in)entories are not measured abo)e cost. Gariable production o)erheads are
allocated to each unit of production on the basis of the actual use of the production
facilities.
12.09 A production process may result in more than one product
being produced simultaneously. *or e>ample, this is the case !hen ?oint products
are produced or !hen there is a main product and a by%product. ;hen the costs of
con)ersion of each product are not separately identifi% able, they are allocated
bet!een the products on a rational and consistent basis. *or e>ample, the
allocation may be based on the relati)e sales )alue of each product either at the
stage in the production process !hen the products become separately identifiable
or at the completion of production. 3ost by%products are immaterial. ;hen this is
the case, they are often measured at net reali4able )alue, and this )alue is
deducted from the cost of the main product. As a result, the carrying amount of the
main product is not materially different from its cost.
%ther Costs
12.10 -ther costs are included in the cost of in)entories only to the
e>tent that they are incurred !hen bringing the in)entories to their pres% ent
location and condition. *or e>ample, it may be appropriate to include
nonproduction o)erheads or the costs of designing products for specific customers
in the cost of in)entories.
12.11 5>amples of costs e>cluded from the cost of in)entories and rec%
ogni4ed as e>penses in the period in !hich they are incurred are
a' abnormal amounts of !asted materials, labor, or other produc%
tion costsF
$' storage costs, unless those costs are necessary in the production
process before a further production stageF
c' administrati)e o)erheads that do not contribute to bringing in%
)entories to their present location and conditionF and
d' selling costs.
12.12 1he cost of in)entories that re+uire a substantial period of time
to get them ready for their intended use or sale includes interest costs, !hen the
entityBs accounting policy is to capitali4e interest costs. 1he cost
FRF-SME 12.08
Inventories 1
of in)entories that are ready for their intended use or sale !hen ac+uired
does not include interest costs.
12.13 An entity may purchase in)entories on deferred settlement
terms. ;hen the arrangement effecti)ely contains a financing element, that
element 7for e>ample, a difference bet!een the purchase price for nor% mal credit
terms and the amount paid8 is recogni4ed as interest e>pense o)er the period of the
financing.
!echni*ues for the Measurement of Cost
12.14 1echni+ues for the measurement of the cost of in)entories, such
as the standard cost method or the retail method, may be used for con)e% nience if
the results appro>imate cost. 2tandard costs ta#e into account normal le)els of
materials and supplies, labor, efficiency, and capacity uti% li4ation. 1hey are
regularly re)ie!ed and, if necessary, re)ised in the light of current conditions.
12.15 1he retail method is often used in the retail industry for mea%
suring in)entories of large numbers of rapidly changing items !ith similar
margins for !hich it is impracticable to use other costing methods. 1he cost of the
in)entory is determined by reducing the sales )alue of the in% )entory by the
appropriate percentage gross margin. 1he percentage used ta#es into consideration
in)entory that has been mar#ed do!n to belo! its original selling price. An
a)erage percentage for each retail department is often used.
Cost For'u$as
12.16 1he cost of in)entories of items that are not ordinarily inter%
changeable, and goods or ser)ices produced and segregated for specific pro?ects,
should be assigned by using specific identification of their indi% )idual costs.
12.17 Specific identification of cost means that specific costs are at%
tributed to identified items of in)entory. 1his is the appropriate treatment for items
that are segregated for a specific pro?ect, regardless of !hether they ha)e been
bought or produced. 6o!e)er, specific identification of costs is inappropriate
!hen large numbers of items of in)entory are or% dinarily interchangeable. In
such circumstances, the method of selecting those items that remain in in)entories
could be used to obtain predeter% mined effects on net income.
12.18 1he cost of in)entories, other than those dealt !ith in para%
graph 12.1$, should be assigned by using the first in, first out 7*I*-8, last in, first
out 7/I*-8, or !eighted a)erage cost formulas.
12.19 In)entories used in one business segment may ha)e a use to
the entity different from the same type of in)entories used in another busi% ness
segment. 6o!e)er, a difference in geographical location of in)entories 7or in the
respecti)e ta> rules8, by itself, is not sufficient to ?ustify the use of different cost
formulas.
12.20 1he *I*- formula assumes that the items of in)entory that
!ere purchased or produced first are sold first and, conse+uently, the items
remaining in in)entory at the end of the period are those most recently purchased
or produced. 1he /I*- formula assumes that the items of
FRF-SME 12.20
2 Financial
Reporting Framework for Small- and Medium-Sized Entities
in)entory that !ere most recently purchased or produced are sold first
and, conse+uently, the items remaining in in)entory at the end of the period are
those purchased or produced first. istence of future economic benefits8. If an item !ithin the scope of this chapter
does not meet the definition of an intangible asset or good!ill, e>penditure to
ac+uire it or generate it internally is recogni4ed as an e>% pense !hen it is
incurred.
Ient"f"ab"$"t*
13.09 1he definition of an intangible asset re+uires an intangible as%
set to be identifiable to distinguish it from good!ill. =ood!ill ac+uired in a
business combination represents a payment made by the ac+uirer in anticipation
of future economic benefits from assets that are not capable of being indi)idually
identified and separately recogni4ed. 1he future eco% nomic benefits may result
from synergy bet!een the identifiable assets ac+uired or from assets that,
indi)idually, do not +ualify for recognition in the financial statements but for
!hich the ac+uirer is prepared to ma#e a payment in the business combination.
13.10 An asset meets the identifiability criterion in the definition of
an intangible asset !hen it
a' is separable 7that is, is capable of being separated or di)ided
from the entity and sold, transferred, licensed, rented, or e>% changed,
either indi)idually or together !ith a related contract, identifiable
asset, or liability, regardless of !hether the entity
intends to do so8 or
$' arises from contractual or other legal rights, regardless of
!hether those rights are transferable or separable from the en% tity or
from other rights and obligations.
FRF-SME 13.10
! Financial Reporting Framework for Small- and Medium-Sized Entities
Contro$
13.11 An entity controls an asset if the entity has the po!er to obtain
the future economic benefits flo!ing from the underlying resource and to restrict
the access of others to those benefits. 1he capacity of an entity to control the
future economic benefits from an intangible asset !ould nor% mally stem from
legal rights that are enforceable in a court of la!. In the absence of legal rights, it
is more difficult to demonstrate control. 6o!% e)er, legal enforceability of a right
is not a necessary condition for control because an entity may be able to control
the future economic benefits in some other !ay.
13.12 3ar#et and technical #no!ledge may gi)e rise to future eco%
nomic benefits. An entity controls those benefits if, for e>ample, the #no!l% edge is
protected by legal rights through copyrights, through a restraint of trade
agreement 7!hen permitted8, or by a legal duty on employees to maintain
confidentiality.
13.13 An entity may ha)e a portfolio of customers or a mar#et share
and e>pect that, because of its efforts in building customer relationships and
loyalty, the customers !ill continue to conduct business !ith the en% tity.
6o!e)er, in the absence of legal rights to protect or other !ays to control the
relationships !ith customers or the loyalty of the customers to the entity, the entity
usually has insufficient control o)er the e>pected eco% nomic benefits from
customer relationships and loyalty for such items 7for e>ample, portfolio of
customers, mar#et shares, customer relationships, and customer loyalty8 to meet
the definition of intangible assets. In the ab% sence of legal rights to protect
customer relationships, e>change transac% tions for the same or similar
noncontractual customer relationships 7other than as part of a business
combination8 pro)ide e)idence that the entity is, nonetheless, able to control the
e>pected future economic benefits flo!% ing from the customer relationships.
9ecause such e>change transactions also pro)ide e)idence that the customer
relationships are separable, those customer relationships meet the definition of an
intangible asset.
Future Econo'"c -enef"ts
13.14 1he future economic benefits flo!ing from an intangible asset
may include re)enue from the sale of products or ser)ices, cost sa)ings, or other
benefits resulting from the use of the asset by the entity. *or e>% ample, the use of
intellectual property in a production process may reduce future production costs,
rather than increase future re)enues.
Reco&n"t"on an Measure'ent
13.15 1he recognition of an item as an intangible asset re+uires an
entity to demonstrate that the item meets
a' the definition of an intangible asset 7see paragraphs 13.0'%.1K8
and
$' the recognition criteria 7see paragraphs 13.1&%.208.
1his re+uirement applies to costs incurred initially to ac+uire or internally
generate an intangible asset.
13.16 Paragraphs 13.22%.2' deal !ith the application of the recog%
nition criteria to separately ac+uired intangible assets, and paragraphs
FRF-SME 13.11
Intangible Assets 7
13.2&%.30 deal !ith the treatment of internally%generated good!ill. Para%
graphs 13.31%.K$ deal !ith the initial recognition and measurement of internally%
generated intangible assets.
13.17 1he nature of intangible assets is such that, in many cases,
there are no additions or replacements to such an asset or any part of it.
Accordingly, most subse+uent e>penditures are li#ely to maintain the e>% pected
future economic benefits embodied in an e>isting intangible asset, rather than
meet the definition of an intangible asset and the recognition criteria in this
chapter. In addition, it is often difficult to attribute subse% +uent e>penditure
directly to a particular intangible asset rather than to the business as a !hole.
1herefore, only rarely !ill subse+uent e>pen% ditureEe>penditure incurred after
the initial recognition of an ac+uired intangible asset or after completion of an
internally%generated intangible assetEbe recogni4ed in the carr!ing amount of an
asset. Consistent !ith paragraph 13.K3, subse+uent e>penditure on brands,
mastheads, publish% ing titles, customer lists, and items similar in substance
7!hether e>ter% nally ac+uired or internally generated8 is al!ays recogni4ed in net
income as incurred because such e>penditure cannot be distinguished from e>pen%
diture to de)elop the business as a !hole.
13.18 An intangible asset should be recogni4ed if, and only if
a' it is probable that the e>pected future economic benefits that
are attributable to the asset !ill flo! to the entityF
$' the cost of the asset can be measured reliablyF and c' the
useful life of the asset can be estimated.
13.19 3anagement should assess the probability of e>pected future
economic benefits using reasonable and supportable assumptions that represent
managementBs best estimate of the set of economic conditions that !ill e>ist o)er
the useful life of the asset.
13.20 3anagement uses ?udgment to assess the degree of certainty
attached to the flo! of future economic benefits that are attributable to the use of
the asset on the basis of the e)idence a)ailable at the time of initial recognition,
gi)ing greater !eight to e>ternal e)idence.
13.21 An intangible asset should be measured initially at cost. If an
intangible asset is ac+uired in a business combination and separately rec% ogni4ed,
the cost of that intangible asset is its mar#et )alue at the ac+uisi% tion date.
Separate Ac*uisition
13.22 ormally, the price an entity pays to ac+uire separately an in%
tangible asset reflects e>pectations about the probability that the e>pected future
economic benefits embodied in the asset !ill flo! to the entity. In other !ords, the
effect of probability is reflected in the cost of the asset. 1herefore, the probability
recognition criterion in paragraph 13.1&7a8 is al!ays considered to be satisfied for
separately ac+uired intangible assets.
13.23 1he cost of a separately ac+uired intangible asset can usually
be measured reliably, particularly !hen the purchase consideration is in the form
of cash or other monetar! assets.
FRF-SME 13.23

8
Financial Reporting Framework for Small- and Medium-Sized
Entities
1
3
.
2
4

1
h
e
cost of a separately ac+uired intangible asset comprises
a' its purchase price, including import duties and nonrefundable
purchase ta>es, after deducting trade discounts and rebates, and
$' any directly attributable cost of preparing the asset for its in%
tended use.
13.25 5>amples of directly attributable costs are
a' costs of salaries, !ages, and employee benefits arising directly
from bringing the asset to its !or#ing conditionF
$' professional fees arising directly from bringing the asset to its
!or#ing conditionF and
c' costs of testing !hether the asset is functioning properly.
13.26 5>amples of e>penditures that are not part of the cost of an
intangible asset are
a' costs of introducing a ne! product or ser)ice 7including costs of
ad)ertising and promotional acti)ities8F
$' costs of conducting business in a ne! location or !ith a ne!
class of customer 7including costs of staff training8F and
c' administration and other general o)erhead costs.
13.27 0ecognition of costs in the carrying amount of an intangible as%
set ceases !hen the asset is in the condition necessary for it to be capable of
operating in the manner intended by management. 1herefore, costs in% curred
!hen using or redeploying an intangible asset are not included in the carrying
amount of that asset. *or e>ample, the follo!ing costs are not
included in the carrying amount of an intangible asset@
a' Costs incurred !hile an asset capable of operating in the man%
ner intended by management has yet to be brought into use
$' Initial operating losses, such as those incurred !hile demand for
the assetBs output builds up
(nternall+-Generated Goodwill
13.28 Internally%generated good!ill should not be recogni4ed as an
asset.
13.29 In some cases, e>penditure is incurred to generate future eco%
nomic benefits, but it does not result in the creation of an intangible asset that
meets the recognition criteria in this chapter. 2uch e>penditure is often
described as contributing to internally%generated good!ill. Internal% ly%
generated good!ill is not recogni4ed as an asset because it is not an
identifiable resource 7that is, it is not separable, nor does it arise from
contractual or other legal rights8 controlled by the entity that can be mea% sured
reliably at cost.
13.30 .ifferences bet!een the mar#et )alue of an entity and the car%
rying amount of its identifiable net assets at any time may capture a range of
factors that affect the )alue of the entity. 6o!e)er, such differences do not
represent the cost of intangible assets controlled by the entity.
FRF-SME 13.24
Intangible Assets "
(nternall+-Generated (ntangi#le Assets
13.31 It is sometimes difficult to assess !hether an internally%gener%
ated intangible asset +ualifies for recognition because of problems !hen
a' identifying !hether and !hen there is an identifiable asset that
!ill generate e>pected future economic benefits and
$' determining the cost of the asset reliably. In some cases, the
cost of generating an intangible asset internally cannot be dis%
tinguished from the cost of maintaining or enhancing the en% tityBs
internally%generated good!ill or of running day%to%day operations.
1herefore, in addition to complying !ith the general re+uirements for
the recognition and initial measurement of an intangible asset, an entity should
apply the re+uirements and guidance in paragraphs 13.32%.K$ to all internally%
generated intangible assets.
13.32 1o assess !hether an internally%generated intangible asset
meets the criteria for recognition, an entity classifies the generation of the
asset into
a' a research phase and $' a
de)elopment phase.
Although the terms researc# and development are defined, the terms
researc# p#ase and development p#ase ha)e a broader meaning for the purpose of
this chapter.
13.33 If management cannot distinguish the research phase from the
de)elopment phase of an internal pro?ect to create an intangible asset, the entity
treats the e>penditure on that pro?ect as if it !ere incurred in the research phase
only.
Research hase
13.34 o intangible asset arising from research 7or from the research
phase of an internal pro?ect8 should be recogni4ed. 5>penditure on re% search 7or
on the research phase of an internal pro?ect8 should be recog% ni4ed as an e>pense
!hen it is incurred.
13.35 In the research phase of an internal pro?ect, an entity cannot
demonstrate that an intangible asset e>ists that !ill generate probable future
economic benefits. 1herefore, this e>penditure is recogni4ed as an e>pense !hen
it is incurred.
13.36 5>amples of research phase acti)ities are
a' acti)ities aimed at obtaining ne! #no!ledgeF
$' the search for, e)aluation, and final selection of applications of
research findings or other #no!ledgeF
c' the search for alternati)es for materials, de)ices, products, pro%
cesses, systems, or ser)icesF and
d' the formulation, design, e)aluation, and final selection of pos%
sible alternati)es for ne! or impro)ed materials, de)ices, prod% ucts,
processes, systems, or ser)ices.
FRF-SME 13.3!
!0 Financial
Reporting Framework for Small- and Medium-Sized Entities
&e,elopment hase
13.37 ;hen accounting for e>penditures on internally%generated in%
tangible assets during the de)elopment phase, management should ma#e
an accounting policy choice to either
a' e>pense such e>penditures as incurred or
$' capitali4e such e>penditures as an intangible asset 7pro)ided
the criteria in paragraph 13.3& are met8.
1his accounting policy choice should be applied consistently to e>pendi%
tures on all internal pro?ects in the de)elopment phase.
13.38 An intangible asset arising from de)elopment 7or from the de%
)elopment phase of an internal pro?ect8 is recogni4ed if, and only if, an
entity can demonstrate all of the follo!ing@
a' 1he technical feasibility of completing the intangible asset so
that it !ill be a)ailable for use or sale.
$' Its intention to complete the intangible asset and use or sell it. c' Its
ability to use or sell the intangible asset.
d' 1he a)ailability of ade+uate technical, financial, and other re%
sources to complete the de)elopment and to use or sell the in% tangible
asset.
e' Its ability to measure reliably the e>penditure attributable to
the intangible asset during its de)elopment.
f' 6o! the intangible asset !ill generate probable future economic
benefits. Among other things, the entity can demonstrate the e>istence
of a mar#et for the output of the intangible asset or the intangible
asset itself or, if it is to be used internally, the usefulness of the
intangible asset.
13.39 In the de)elopment phase of an internal pro?ect, in some in%
stances, an entity can identify an intangible asset and demonstrate that the asset
!ill generate probable future economic benefits because the de% )elopment phase
of a pro?ect is further ad)anced than the research phase.
13.40 5>amples of de)elopment phase acti)ities are
a' the design, construction, and testing of preproduction or preuse
prototypes and modelsF
$' the design of tools, ?igs, molds, and dies in)ol)ing ne! technologyF c'
the design, construction, and operation of a pilot plant that is
not of a scale economically feasible for commercial productionF
and
d' the design, construction, and testing of a chosen alternati)e for
ne! or impro)ed materials, de)ices, products, processes, sys% tems, or
ser)ices.
13.41 A)ailability of resources to complete, use, and obtain the ben%
efits from an intangible asset can be demonstrated by, for e>ample, a busi% ness
plan sho!ing the technical, financial, and other resources needed and the entityBs
ability to secure those resources. In some cases, an entity demonstrates the
a)ailability of e>ternal finance by obtaining a lenderBs indication of its !illingness
to fund the plan.
FRF-SME 13.37
Intangible Assets !1
13.42 An entityBs costing systems can often measure reliably the cost
of generating an intangible asset internally, such as salary and other e>% penditure
incurred in securing copyrights or licenses or de)eloping com% puter soft!are.
13.43 Internally%generated brands, mastheads, publishing titles, cus%
tomer lists, and items similar in substance should not be recogni4ed as intangible
assets.
Cost of an (nternall+-Generated (ntangi#le Asset
13.44 1he cost of an internally%generated intangible asset for the
purpose of paragraph 13.21 is the sum of e>penditures incurred from the date
!hen the intangible asset first meets the recognition criteria in para% graphs
13.1&%.1H and 13.3&. Paragraph 13.(2 prohibits reinstatement of e>penditures
pre)iously recogni4ed as an e>pense.
13.45 1he cost of an internally%generated intangible asset comprises
all directly attributable costs necessary to create, produce, and prepare the asset to
be capable of operating in the manner intended by management.
5>amples of directly attributable costs are
a' costs of materials and ser)ices used or consumed !hen generat%
ing the intangible assetF
$' costs of employee salaries, !ages, and benefits arising from the
generation of the intangible assetF
c' fees to register a legal rightF
d' amortization of patents and licenses that are used to generate
the intangible assetF and
e' interest costs !hen the entityBs accounting policy is to capitali4e
interest costs.
13.46 1he follo!ing are not components of the cost of an internally%
generated intangible asset@
a' 2elling, administrati)e, and other general o)erhead e>pendi%
ture, unless this e>penditure can be directly attributed to pre%
paring the asset for use
$' Identified inefficiencies and initial operating losses incurred be%
fore the asset achie)es planned performance
c' 5>penditure on training staff to operate the asset
Reco&n"t"on of an E;pense
13.47 5>penditure on an intangible item should be recogni4ed as an
e>pense !hen it is incurred unless
a' for an internally%generated intangible asset in the de)elopment
phase, management has made an accounting policy choice to
capitali4e such e>penditures 7see paragraph 13.3'8, and
$' it forms part of the cost of an intangible asset that meets the
recognition criteria 7see paragraphs 13.1(%.K$8.
13.48 In some cases, e>penditure is incurred to pro)ide future
economic benefits to an entity, but no intangible asset or other asset is
FRF-SME 13.48
!2 Financial
Reporting Framework for Small- and Medium-Sized Entities
ac+uired or created that can be recogni4ed. In the case of the supply of
goods, the entity recogni4es such e>penditure as an e>pense !hen it has a right to
access those goods. In the case of the supply of ser)ices, the entity recogni4es the
e>penditure as an e>pense !hen it recei)es the ser)ices. 5>amples of
e>penditures that are recogni4ed as an e>pense !hen it is
incurred include e>penditure on
a' training acti)itiesF
$' ad)ertising and promotional acti)ities 7including mail%order
catalogs and other similar documents intended to ad)ertise
goods, ser)ices, or e)ents to customers8F and
c' relocating or reorgani4ing part or all of an entity.
13.49 An entity has a right to access goods !hen it o!ns them. 2imi%
larly, it has a right to access goods !hen they ha)e been constructed by a supplier
in accordance !ith the terms of a supply contract, and the entity can demand
deli)ery of them in return for payment. 2er)ices are recei)ed !hen they are
performed by a supplier in accordance !ith a contract to deli)er them to the
entity and not !hen the entity uses them to deli)er
another ser)ice 7for e>ample, to deli)er an ad)ertisement to customers8.
13.50 Paragraph 13.K& does not preclude recogni4ing a prepayment
as an asset !hen payment for the deli)ery of goods has been made in ad)ance of
the entity obtaining a right to access those goods. 2imilarly, paragraph 13.K& does
not preclude an entity from recogni4ing a prepay% ment as an asset !hen payment
for ser)ices has been made in ad)ance of the entity recei)ing those ser)ices.
Start-#p Costs
13.51 2tart%up costs may consist of establishment costs, such as legal
and other administrati)e costs incurred !hen establishing a legal entity,
e>penditure to open a ne! facility or business 7that is, preopening costs8, or
e>penditures for starting ne! operations or launching ne! products or processes
7that is, preoperating costs8. 3anagement should ma#e an accounting policy
election to either e>pense start%up costs as incurred or capitali4e start%up costs and
amorti4e the amount o)er 1( years.
Past E;penses 0ot to -e Reco&n"%e as Assets
13.52 5>penditure on an intangible item that !as initially recogni4ed
as an e>pense should not be recogni4ed as part of the cost of an intangible asset at
a later date.
Subse:uent Measure'ent
13.53 A recogni4ed intangible asset should be amorti4ed o)er its use%
ful life. *or the purpose of the *0* for 235s accounting frame!or#, all
intangible assets should be considered to ha)e a finite useful life. 1he use% ful life
of an intangible asset that arises from contractual or other legal rights should not
e>ceed the period of the contractual or other legal rights but may be shorter
depending on the period o)er !hich the entity e>pects to use the asset. If the
contractual or other legal rights are con)eyed for a limited term that can be
rene!ed, the useful life of the intangible asset should include the rene!al
period7s8 only if there is e)idence to support rene!al by the entity !ithout
significant cost.
FRF-SME 13.4"
Intangible Assets !3
13.54 1he amorti4ation method and estimate of the useful life of an
intangible asset should be re)ie!ed on a regular basis.
13.55 ;hen the precise length of an intangible assetBs useful life is
not #no!n, the intangible asset is amorti4ed o)er the best estimate of its useful
life. =uidance for determining the useful life of an intangible asset is pro)ided in
paragraph 13.(&.
13.56 1he amount of an intangible asset to be amorti4ed is the amount
initially assigned to that asset less any residual value. 1he residual )alue of an
intangible asset is assumed to be 4ero unless, at the end of its useful life to the
reporting entity, the asset is e>pected to continue to ha)e a use%
ful life to another entity, and
a' the reporting entity has a commitment from a third party to
purchase the asset at the end of its useful life, or
$' the residual )alue can be determined by reference to an e>%
change transaction in an e>isting mar#et for that asset, and that mar#et
is e>pected to e>ist at the end of the assetBs useful life.
13.57 1he method of amorti4ation !ill reflect the pattern in !hich the
economic benefits of the intangible asset are consumed or other!ise used up. 1he
guidance in chapter 1K related to identifying an appropriate de% preciation method
for a tangible asset is also conceptually rele)ant !hen identifying an appropriate
amorti4ation method for an intangible asset. ;hen the pattern of economic
benefits cannot be reliably determined, a straight%line amorti4ation method is
used.
&etermining the Useful $ife of an (ntangi#le Asset
13.58 1he estimate of the useful life of an intangible asset is based on
an analysis of all pertinent factors, in particular
a' the e>pected use of the asset by the entityF
$' the e>pected useful life of another asset or a group of assets to
!hich the useful life of the asset may relateF
c' any legal, regulatory, or contractual pro)isions that may limit
the useful lifeF
d' any legal, regulatory, or contractual pro)isions that enable re%
ne!al or e>tension of the assetBs legal or contractual life !ithout
substantial cost 7pro)ided there is e)idence to support rene!al or
e>tension, and rene!al or e>tension can be accomplished !ithout
material modifications to the e>isting terms and condi%
tions8F
e' the effects of obsolescence, demand, competition, and other eco%
nomic factors 7such as the stability of the industry, #no!n tech%
nological ad)ances, legislati)e action that results in an uncer% tain or
changing regulatory en)ironment, and e>pected changes
in distribution channels8F and
f' the le)el of maintenance e>penditures re+uired to obtain the e>%
pected future cash flo!s from the asset.
FRF-SME 13.8
!4 Financial
Reporting Framework for Small- and Medium-Sized Entities
tent to !hich the asset is usedF
$' a change in the manner in !hich the asset is usedF
c' remo)al of the asset from ser)ice for an e>tended period of timeF
d' physical damageF
e' significant technological de)elopmentsF and
f' a change in the la!, en)ironment, or consumer styles and tastes
affecting the period of time o)er !hich the asset can be used.
FRF-SME 14.1"
!8 Financial
Reporting Framework for Small- and Medium-Sized Entities
Asset Ret"re'ent /b$"&at"ons
14.20 -bligations associated !ith the retirement of property, plant,
and e+uipment are accounted for in accordance !ith the section, CAsset
0etirement -bligations,C in chapter 1', CContingencies.C
,"sc$osure
14.21 *or each ma?or category of property, plant, and e+uipment, the
cost and the depreciation method used, including the depreciation period or rate,
should be disclosed.
14.22 1he carrying amount of an item of property, plant, and e+uip%
ment not being depreciated because it is under construction or de)elop% ment or
has been remo)ed from ser)ice for an e>tended period of time should be
disclosed.
14.23 1he amount of depreciation of property, plant, and e+uipment
charged to income for the period should be disclosed 7see chapter ', C2tate% ment of
-perationsC8. In addition, total accumulated depreciation should be disclosed.
14.24 3a?or categories of property, plant, and e+uipment are deter%
mined by reference to type 7for e>ample, land, buildings, machinery, lease% hold
impro)ements8 or nature of operations 7for e>ample, manufacturing, processing,
distribution8.
14.25 1he financial statements should disclose the follo!ing informa%
tion in the period in !hich the carrying )alue of a long-lived asset is re% duced
7other than for depreciation8 due to the cessation of the assetBs use
or !rite do!n in the carrying )alue of the asset@
a' A description of the long%li)ed asset
$' A description of the facts and circumstances leading to the re%
duction in carrying )alue
c' If not separately presented on the face of the statement of opera%
tions, the amount of the reduction in carrying )alue and the cap%
tion in the statement of operations that includes that amount
14.26 .isclosure should be made of interest costs capitali4ed !hen
the entityBs accounting policy is to capitali4e interest costs.
FRF-SME 14.20
Disposal of Long-Lived Assets and Discontinued Operations !"
Chapter 1
&isposal of $ong-$i,ed Assets and
&iscontinued %perations
Purpose an Scope
15.01 1his chapter establishes principles for the recognition, mea%
surement, presentation, and disclosure of the disposal of long-lived assets.1 It also
establishes principles for the presentation and disclosure of discon% tinued
operations, regardless of !hether they include long%li)ed assets.
15.02 1his chapter applies to the disposal of nonmonetary long%li)ed
assets, including property, plant, and e+uipmentF intangible assetsF and
long%term prepaid assets. It does not apply to
a' the disposal of good!ill 7e>cept in the case of a disposal group
that constitutes a business8F
$' in)estments, including e+uity method accounted in)estments
7see chapter 11, C5+uity, .ebt, and -ther In)estmentsC8F and
c' financial assets, financial liabilities, and contracts to buy or sell
nonfinancial items accounted for in accordance !ith chapter $,
C2pecial Accounting Considerations for Certain *inancial As%
sets and /iabilities.C
.on&-."+e Assets to -e ,"spose of b* Sa$e
Reco&n"t"on
15.03 A long%li)ed asset to be sold should be classified as held for sale
in the period !hen all the follo!ing criteria are met@
a' 3anagement, ha)ing the authority to appro)e the action, com%
mits to a plan to sell.
$' It is a)ailable for immediate sale in its present condition, sub%
?ect only to terms that are usual and customary for sales of such assets.
c' An acti)e program to locate a buyer and other actions re+uired
to complete the sale plan ha)e been initiated.
d' 1he sale is probable and is e>pected to +ualify for recognition as
a completed sale !ithin one year, e>cept as permitted by para% graph
1(.0K.
e' It is being acti)ely mar#eted for sale at a price that is reasonable. f'
Actions re+uired to complete the plan indicate that it is not
probable that significant changes to the plan !ill be made or that the
plan !ill be !ithdra!n.
1 Italici4ed terms are defined in the glossary.
FRF-SME 1.03
70 Financial
Reporting Framework for Small- and Medium-Sized Entities
15.04 5)ents or circumstances beyond an entityBs control may e>tend
the period re+uired to complete the sale beyond one year. An e>ception to the one%
year re+uirement in paragraph 1(.037d8 applies in the follo!ing
situations in !hich such e)ents or circumstances arise@
a' At the date an entity commits to a plan to sell a long%li)ed as%
set, it reasonably e>pects that others 7not a buyer8 !ill impose
conditions on the transfer that !ill e>tend the period re+uired
to complete the sale, and
i. actions necessary to respond to the conditions cannot be ini%
tiated until after a firm purchase commitment is obtained,
and
ii. a firm purchase commitment is probable !ithin one year.
$' An entity obtains a firm purchase commitment and, as a result, a
buyer or others une>pectedly impose7s8 conditions on the trans% fer of
a long%li)ed asset pre)iously classified as held for sale that
!ill e>tend the period re+uired to complete the sale, and
i. actions necessary to respond to the conditions ha)e been
initiated or !ill be initiated in a timely manner, and
ii. a fa)orable resolution of the delaying factors is e>pected.
c' .uring the initial one%year period, circumstances arise that pre%
)iously !ere considered not probable and, as a result, a long% li)ed
asset pre)iously classified as held for sale is not sold by the
end of that period, and
i. during the initial one%year period, the entity initiated ac%
tions necessary to respond to the change in circumstancesF
ii. the asset is being acti)ely mar#eted at a price that is rea%
sonable, gi)en the change in circumstancesF and
iii. the criteria in paragraph 1(.03 are met.
15.05 A firm purc#ase commitment is an agreement !ith an unre%
lated party, binding on both parties and usually legally enforceable, that
a' specifies all the significant terms, including the price and timing
of the transaction and
$' includes a disincenti)e for nonperformance that is sufficiently
large to ma#e performance probable.
15.06 A long%li)ed asset that is ne!ly ac+uired and !ill be sold, rath%
er than held and used, is classified as held for sale at the ac+uisition date only if
the one%year re+uirement in paragraph 1(.037d8 is met 7e>cept as permitted by
paragraph 1(.0K8, and any other criteria in paragraph 1(.03 that are not met at that
date are probable of being met !ithin a short pe% riod follo!ing the ac+uisition
7usually !ithin 3 months8.
15.07 If the criteria in paragraph 1(.03 are met after the statement
of financial position date but before the financial statements are a)ailable to be
issued, a long%li)ed asset continues to be classified as held and used in those
financial statements, and the information re+uired by paragraph 1(.2K7a8 is
disclosed in the notes to the financial statements 7see chapter 2', C2ubse+uent
5)entsC8.
FRF-SME 1.04
Disposal of Long-Lived Assets and Discontinued Operations 71
15.08 A gain or loss recogni4ed that results from the sale of a long%
li)ed asset is recogni4ed at the date of sale.
Measure'ent
15.09 A long%li)ed asset classified as held for sale should be measured
at its carr!ing amount. Any costs to sell the asset are recorded as a period e>pense
!hen the asset is sold. A long%li)ed asset should not be amorti4ed !hile it is
classified as held for sale. Interest and other e>penses attribut% able to the
liabilities of a disposal group classified as held for sale should continue to be
accrued.
15.10 ;hen a disposal group constitutes a business, good!ill is allo%
cated to the disposal group and included in its carrying amount.
C!an&es to a P$an of Sa$e
15.11 If a long%li)ed asset no longer meets the criteria to be classified
as held for sale, it should be reclassified as held and used. A long%li)ed asset that
is reclassified should be measured indi)idually at the carrying amount before it
!as classified as held for sale, ad?usted for any deprecia% tion 7amorti4ation8
e>pense that !ould ha)e been recogni4ed had it been continuously classified as
held and used.
15.12 Any re+uired ad?ustment to the carrying amount of a long%li)ed
asset that is reclassified as held and used is included in income before dis%
continued operations in the period of the subse+uent decision not to sell. If a
component of an entity 7see paragraph 1(.218 is reclassified as held and used, the
results of operations of the component pre)iously reported in discontinued
operations in accordance !ith paragraph 1(.22 are reclassi% fied and included in
income before discontinued operations for all periods presented.
15.13 If an entity remo)es an indi)idual asset or liability from a dis%
posal group pre)iously classified as held for sale, the remaining assets and
liabilities of the disposal group to be sold continue to be measured as a group
only if the criteria in paragraph 1(.03 are met.
State'ent of F"nanc"a$ Pos"t"on Presentat"on
15.14 A long%li)ed asset classified as held for sale should be presented
separately in the entityBs statement of financial position. 1he assets and liabilities
of a disposal group classified as held for sale should be presented separately in the
asset and liability sections, respecti)ely, of the statement of financial position.
15.15 Assets and liabilities of a disposal group classified as held for
sale are not offset, other than financial assets and liabilities that meet the
conditions for offsetting 7see chapter $8. Current and long%term assets 7and
liabilities8 are presented separately unless the entityBs statement of financial
position is unclassified.
15.16 /ong%li)ed assets classified as held for sale are not reclassified
as current assets unless the entity has sold the assets prior to the date the financial
statements are a)ailable to be issued, and the proceeds of the sale !ill be reali4ed
!ithin a year of the date of the statement of financial position or !ithin the normal
operating cycle if that is longer than a year.
FRF-SME 1.1!
72 Financial
Reporting Framework for Small- and Medium-Sized Entities
If the assets ha)e been classified as current assets due to the subse+uent
sale, any liabilities to be assumed by the purchaser or re+uired to be dis% charged
on disposal of the assets are classified as current liabilities.
.on&-."+e Assets to -e ,"spose of /t!er T!an
b* Sa$e
15.17 A long%li)ed asset to be disposed of other than by sale should
continue to be classified as held and used until it is disposed of. .isposal other
than by sale includes, for e>ample, abandonment and a distribution to o!ners in a
spin%off.
15.18 A long%li)ed asset to be abandoned is disposed of !hen it ceases
to be used. If an entity commits to a plan to abandon a long%li)ed asset be% fore the
end of its pre)iously estimated useful life, depreciation estimates are re)ised to
reflect the use of the asset o)er its shortened useful life. 1he continued use of a
long%li)ed asset demonstrates the presence of ser)ice potential.
15.19 A gain or loss recogni4ed that results from the disposal of a
long%li)ed asset other than by sale is recogni4ed at the date of disposal. A long%
li)ed asset to be distributed to o!ners in a spin%off is disposed of !hen it is
distributed.
,"scont"nue /perat"ons
15.20 1he results of operations of a component of an entity that either
has been disposed of 7by sale, abandonment, or spin%off8 or is classified as held for
sale should be reported in discontinued operations if both of the
follo!ing conditions are met@
a' 1he operations and cash flo!s of the component ha)e been 7or
!ill be8 eliminated from the ongoing operations of the entity as a result
of the disposal transaction.
$' 1he entity !ill not ha)e any significant continuing in)ol)ement
in the operations of the component after the disposal transaction.
-nly items meeting the preceding criteria should be reported in discontin%
ued operations.
15.21 A component of an entity comprises operations and cash flo!s
that can be clearly distinguished, operationally and for financial reporting
purposes, from the rest of the entity.
15.22 1he results of discontinued operations, less applicable income
ta>es, should be reported as a separate element of income for both current and
prior periods 7see chapter ', C2tatement of -perationsC8.
15.23 Ad?ustments to amounts pre)iously reported in discontinued
operations that are directly related to the disposal of a component of an entity in a
prior period are classified separately in the current period in discontinued
operations. 5>amples of circumstances in !hich those types
of ad?ustments may arise include the follo!ing@
a' 1he resolution of contingencies that arise pursuant to the terms
of the disposal transaction, such as the resolution of purchase price
ad?ustments and indemnification issues !ith the purchaser
FRF-SME 1.17
Disposal of Long-Lived Assets and Discontinued Operations 73
$' 1he resolution of contingencies that arise from, and are directly
related to, the operations of the component prior to its disposal, such as
en)ironmental and product !arranty obligations re%
tained by the seller
c' 1he settlement of employee benefit plan obligations 7pension,
postemployment benefits other than pensions, and other post%
employment benefits8, pro)ided that the settlement is directly related
to the disposal transaction 7that is, there is a demon% strated direct
cause%and%effect relationship, and the settlement occurs no later than
one year follo!ing the disposal transaction, unless it is delayed by
e)ents or circumstances beyond an en%
tityBs control, as permitted by paragraph 1(.0K.8
,"sc$osure
15.24 1he financial statements should disclose the follo!ing informa%
tion in the period in !hich a long%li)ed asset 7or disposal group8 either has been
disposed of by sale or other than by sale or is classified as held for
sale@
a' A description of the facts and circumstances leading to the dis%
posal or e>pected disposal
$' If not separately presented on the face of the statement of opera%
tions, the amount of the gain or loss on disposal and the caption
in the statement of operations that includes that gain or loss
c' If applicable, amounts of re)enue and preta> profit or loss re%
ported in discontinued operations
15.25 In a period !hen a decision is made not to sell an asset pre)i%
ously classified as held for sale, the change in accounting treatment should be
disclosed.
FRF-SME 1.2
74 Financial Reporting Framework for Small- and Medium-Sized Entities
Chapter 1!
Commitments
Purpose an Scope
16.01 1his chapter establishes disclosure re+uirements !ith respect
to commitments.
,"sc$osure
16.02 Commitments that are material in relation to the current
financial position or future operations should be disclosed. 5>amples
include
a' commitments to purchase or construct ne! facilitiesF
$' a commitment to reduce debtsF
c' an obligation to maintain !or#ing capitalF
d' commitments to ac+uire assetsF and
e' unconditional purchase obligations and firm purchase
commitments.
16.03 *or commitments in)ol)ing related parties, see also chapter 2$,
C0elated Party 1ransactions.C 7;ith reference to disclosures about guaran%
tees, see also chapter 1', CContingencies.C8
FRF-SME 1!.01
Contingencies 7
Chapter 17
Contingencies
Purpose an Scope
17.01 1his chapter establishes principles for the treatment of con%
tingencies in financial statements. 1he issues discussed concern both the accrual
for, and the disclosure of, contingencies !hen presenting the fi% nancial position
and results of operations of an entity. 7;ith reference to contingencies in)ol)ing
related parties, see also chapter 2$, C0elated Party
1ransactions.C8
17.02 Contingencies !ould include, but are not limited to, pending or
threatened litigation, threat of e>propriation of assets, guarantees of the
indebtedness or performance of others, and possible liabilities arising from
discounted bills of e>change or promissory notes.
17.03 In the preparation of the financial statements of an entity, es%
timates are re+uired for many ongoing and recurring acti)ities. 6o!e)er, the mere
fact that an estimate is in)ol)ed does not, of itself, constitute the type of
uncertainty that characteri4es a contingenc!.
1
*or e>ample, amounts o!ed for
goods or ser)ices recei)ed but not billed are not con% tingencies, e)en though the
amounts may be estimated. o uncertainties e>ist about the fact that these
obligations ha)e been incurredF any uncer% tainty is related solely to the amounts
thereof.
17.04 Although allo!ances for doubtful accounts, as !ell as nondis%
cretionary )endor rebates and pro)isions for !arranties, ha)e many of the
characteristics of contingencies, such estimates are not regarded as contin% gencies,
and for the purposes of this chapter, are e>cluded.
Measure'ent of #ncerta"nt*
17.05 1he uncertainty relating to the occurrence or nonoccurrence of
the future e)ent7s8, !hich determines the outcome of a contingency, can be
e>pressed by a range of probabilities that pro)ide a basis for establishing the
appropriate accounting treatment. 1his chapter identifies three areas
of this range by a general description as follo!s@
A Pro$a$le' 1he chance of the occurrence 7or nonoccurrence8 of the fu%
ture e)ent7s8 is li#ely to occur. Probable is a higher le)el of li#eli% hood
than Cmore li#ely than not.C Probable does not mean )irtually certain.
A Remote' 1he chance of the occurrence 7or nonoccurrence8 of the fu%
ture e)ent7s8 is slight.
A Reasona$l! possi$le' 1he chance of the occurrence 7or nonoccur%
rence8 of the future e)ent7s8 is more than remote but less than li#ely.
17.06 Prediction of the outcome of contingencies, including estimation
of the financial effects, is a matter for ?udgment by those responsible for preparing
financial statements, ta#ing into account the particular circum% stances. ;hen
identifying contingencies and determining their amount,
1 Italici4ed terms are defined in the glossary.
FRF-SME 17.0!
7! Financial
Reporting Framework for Small- and Medium-Sized Entities
consideration should be gi)en to all information a)ailable prior to the date
the financial statements are a)ailable to be issued 7see chapter 2', C2ubse% +uent
5)entsC8, supplemented by e>perience in similar transactions and, in some cases,
reports from independent e>perts.
Account"n& Treat'ent
Cont"n&ent .osses
17.07 1he treatment of contingent losses in financial statements de%
pends upon the li#elihood that a future e)ent !ill confirm that the )alue of an asset
has diminished or a liability incurred at the financial statement date.
17.08 1he amount of a contingent loss should be accrued in the finan%
cial statements by a charge to income !hen both of the follo!ing condi%
tions are met@
a' It is probable that a future e)ent !ill confirm that the )alue of
an asset has diminished or a liability incurred at the date of the
financial statements.
$' 1he amount of the loss can be reasonably estimated.
17.09 If it is probable that a contingency e>isting at the financial
statement date !ill result in a loss and the loss can be reasonably esti% mated,
accrual of its financial effects is re+uired. 1his accounting treat% ment recogni4es
that the probable diminishment of the )alue of an asset or incurrence of a liability
is related to a condition or situation e>isting at the end of the reporting period and
not to the confirming future e)ent.
17.10 A probable loss to an entity may be reduced or a)oided by a
counterclaim or a claim against a third party 7for e>ample, an insurance claim8. In
such a case, the amount of the probable reco)ery is an element of the contingent
loss and, therefore, should be ta#en into account in de% termining the amount to be
recogni4ed in the statement of operations. 6o!e)er, if the probability of success
in the related action is not )irtually certain, a potential reco)ery should not be
ta#en into account. 1he amount of the probable reco)ery should be presented as a
gross amount.
17.11 1he estimation of the amount of a contingent loss to be accrued
in the financial statements may be based on information that pro)ides a range of
the amount of loss. ;hen a particular amount !ithin such a range appears to be a
better estimate than any other, that amount should be accrued. 6o!e)er, !hen no
amount !ithin the range is indicated as a better estimate than any other, the
minimum amount in the range should be accrued.
Cont"n&ent penditure re+uired to settle the pres% ent
obligation at the statement of financial position date.
17.25 1he best estimate of the e>penditure re+uired to settle the pres%
ent obligation is the amount that an entity !ould rationally pay to settle the
obligation at the statement of financial position date or to transfer it to a third
party at that time. It !ill often be impossible or prohibiti)ely e>pensi)e to settle
or transfer an obligation at the statement of financial position date. 1herefore, the
estimate of the amount that an entity !ould rationally pay to settle or transfer the
obligation is reported.
17.26 1he estimate of the e>penditure re+uired to settle the present
obligation is determined by the ?udgment of the management of the entity,
FRF-SME 17.20
Contingencies 7"
supplemented by e>perience of similar transactions and, in some cases,
reports from independent e>perts.
17.27 *uture e)ents that may affect the amount re+uired to settle
an obligation are reflected in its measurement !hen there is sufficient, ob?ecti)e
e)idence that they !ill occur. 5>pected future e)ents may be par% ticularly
important !hen measuring an asset retirement obligation. *or e>ample, an entity
may belie)e that the cost of cleaning up a site at the end of its life !ill be reduced
by future changes in technology. 1he amount recogni4ed reflects a reasonable
e>pectation of technically +ualified, ob?ec% ti)e obser)ers, ta#ing account of all
a)ailable e)idence about the technolo% gy that !ill be a)ailable at the time of the
clean%up. 1hus, it is appropriate to include e>pected cost reductions associated
!ith increased e>perience !hen applying e>isting technology, or the e>pected cost
of applying e>ist% ing technology, to a larger or more comple> clean%up operation
than has pre)iously been carried out. 6o!e)er, an entity does not anticipate the
de)elopment of a completely ne! technology for cleaning up unless it is
supported by sufficient, ob?ecti)e e)idence.
17.28 1he effect of possible ne! legislation is ta#en into consideration
!hen measuring an e>isting obligation !hen the ne! legislation is en% acted. Any
ne! legislation that is enacted after the statement of financial position date but
before the financial statements are a)ailable to be issued !ould be sub?ect to
subse+uent e)ent disclosure as re+uired by chapter 2'.
17.29 A present )alue techni+ue is often the best a)ailable techni+ue
!ith !hich to estimate the e>penditure re+uired to settle the present ob% ligation at
the statement of financial position date. ;hen a present )al% ue techni+ue is used,
an entity estimates future cash flo!s used in that techni+ue on a basis consistent
!ith the ob?ecti)e of measuring the asset retirement obligation. penditure re+uired to settle the
obligation.
17.30 Asset retirement obligations are re)ie!ed at each statement of
financial position date and ad?usted to reflect the current best estimate. Changes
in an asset retirement obligation may be due to the passage of time, re)isions to
the timing or amount of cash flo!s, or the interest rate used !hen determining the
best estimate of the e>penditures re+uired to
settle the present obligation at the statement of financial position date.
Reco&n"t"on an A$$ocat"on of an Asset Ret"re'ent Cost
17.31 pense using
a systematic and rational method o)er its useful life.
17.32 Application of a systematic and rational allocation method does
not preclude an entity from capitali4ing an amount of asset retirement cost and
allocating an e+ual amount to e>pense in the same accounting period. *or
e>ample, assume an entity ac+uires a long%li)ed asset !ith an estimated life of 10
years. As that asset is operated, the entity incurs addi% tional asset retirement
obligations of e+ual amount each year. Application of a systematic and rational
allocation method !ould not preclude that entity from capitali4ing, and then
e>pensing, the asset retirement costs incurred each year.
FRF-SME 17.32
80 Financial
Reporting Framework for Small- and Medium-Sized Entities
17.33 In periods subse+uent to initial measurement, an entity should
recogni4e period%to%period changes in the liability for an asset retirement
obligation resulting from
a' the passage of time and
$' re)isions to either the timing, the amount of the original esti%
mate of undiscounted cash flo!s, or the discount rate.
An entity should measure and incorporate changes due to the passage of
time into the carrying amount of the liability before measuring changes resulting
from a re)ision to either the timing or the amount of estimated cash flo!s.
17.34 An entity measures changes in the liability for an asset retire%
ment obligation due to passage of time by applying an interest method of
allocation to the amount of the liability at the beginning of the period. 1he interest
rate used to measure that change is the discount rate applied to measure the
liability at the beginning of the period. 1hat amount is recogni4ed as an increase
in the carrying amount of the liability and an e>pense. 1he e>pense is classified
as an operating item in the statement of operations, not as interest e>pense. It is
referred to in this section as ac- cretion e-pense, but an entity may use any
descriptor, as long as it con)eys the underlying nature of the e>pense.
17.35 Changes resulting from re)isions to the timing or the amount
of the original estimate of undiscounted cash flo!s or re)isions to the dis% count
rate are recogni4ed as an increase or a decrease in the carrying amount of the
liability for an asset retirement obligation and the related asset retirement cost
capitali4ed as part of the carrying amount of the related long%li)ed asset. ;hen
asset retirement costs change as a result of a re)ision to estimated cash flo!s, an
entity ad?usts the amount of asset retirement cost allocated to e>pense in the
period of change if the change affects that period only or in the period of change,
and future periods, if the change affects more than one period 7in accordance !ith
chapter H, CAccounting Changes, Changes in Accounting 5stimates, and Correction
of 5rrorsC for a change in estimate8. Changes in asset retirement costs that affect
future periods !ill result in ad?ustments of capitali4ed asset retire% ment costs and
!ill affect subse+uent depreciation of the related asset. 2uch ad?ustments are
depreciated on a prospecti)e basis.
Effects of Fun"n& an Assurance Pro+"s"ons
17.36 Pro)iding assurance that an entity !ill be able to satisfy its
asset retirement obligation does not satisfy or e>tinguish the related li% ability.
3ethods of pro)iding assurance include surety bonds, insurance policies, letters of
credit, guarantees by other entities, and establishment of trust funds or
identification of other assets dedicated to satisfy the asset retirement obligation.
2etting assets aside to satisfy an asset retirement obligation does not satisfy the
criteria for offsetting the assets and the li% ability on the statement of financial
position. *or a pre)iously recogni4ed asset retirement obligation, changes in
funding and assurance pro)isions ha)e no effect on the measurement of that
liability. Costs associated !ith complying !ith funding or assurance pro)isions
are accounted for sepa% rately from the asset retirement obligation.
FRF-SME 17.33
Contingencies 81
,"sc$osure
17.37 An entity should disclose the follo!ing information about its
asset retirement obligations@
a' A general description of the asset retirement obligations and the
associated long%li)ed assets
$' 1he amount of the asset retirement obligation at the end of the
year
c' 1he total amount paid to!ards the liability during the year
d' 1he carrying amount of assets legally restricted for purposes of
settling asset retirement obligations
;hen a reasonable estimate of the amount of an asset retirement obliga%
tion cannot be made, that fact, and the reasons therefor, should be dis% closed.
imum potential amount of future payments 7undis%
counted8 the guarantor could be re+uired to ma#e under the guarantee
before any amounts that may possibly be reco)ered under recourse or
collaterali4ation pro)isions in the guarantee 7see IdJ and IeJ that
follo!8. ;hen the terms of the guarantee pro)ide for no limitation to
the ma>imum potential future pay% ments under the guarantee, that fact
should be disclosed. ;hen the guarantor is unable to de)elop an
estimate of the ma>imum potential amount of future payments under
its guarantee, the guarantor should disclose that it cannot ma#e such an
estimate.
c' 1he current carrying amount of the liability, if any, for the guar%
antorBs obligations under the guarantee, regardless of !hether the
guarantee is freestanding or embedded in another contract.
d' 1he nature of any recourse pro)isions that enable the guarantor
to reco)er from third parties any of the amounts paid under the
guarantee.
e' 1he nature of any assets held as collateral or by third parties
that, upon the occurrence of any triggering e)ent or condition under
the guarantee, the guarantor can obtain and li+uidate to reco)er all, or
a portion of, the amounts paid under the guarantee.
FRF-SME 17.3"
82 Financial
Reporting Framework for Small- and Medium-Sized Entities
17.40 2ome guarantees are issued to benefit entities that meet the
definition of a related party in chapter 2$, such as ?oint )entures and e+ui% ty
method in)estees. In those cases, the disclosures re+uired by this chap% ter may be
in addition to the disclosures re+uired by chapter 2$.
FRF-SME 17.40
Equity 83
Chapter 18
E*uit+
Purpose an Scope
18.01 1his chapter establishes principles for the presentation of
e(uit!,
1
changes in e+uity during the reporting period, and capital transac% tions. It
also establishes principles for the ac+uisition and redemption of shares and
disclosure of capital stoc#. 1his chapter establishes principles for the presentation
and disclosure of the e+uity and capital accounts of unincorporated businesses,
partnerships, and limited liability entities.
18.02 Capital transactions include items such as
a' changes in capital, including premiums, discounts, and e>penses
relating to the issue, redemption, or cancellation of capital stoc#F
$' e>cess or deficiency of proceeds
i. on purchase and resale by a company of its o!n issued com%
mon shares or
ii. on purchase and cancellation by a company of its o!n is%
sued common sharesF
c' contributions by o!ners or othersF
d' di)idends 7including stoc# di)idends8F e'
distributionsEcash and propertyF and
f' ta>es arising at the time of changes in shareholder status or
capital stoc# transactions.
Ac:u"s"t"on or Ree'pt"on of S!ares
18.03 ;hen a company redeems or ac+uires its o!n shares, the cost
!ill usually be different from their par, stated, or assigned )alues. 9ecause such
transactions are usually capital transactions, this difference should be e>cluded
from the determination of net income.
Ac:u"s"t"on of S!ares
18.04 1his chapter allo!s t!o methods of accounting for the ac+uisi%
tion by an entity of its o!n shares@ the cost method and the constructi)e retirement
method. ote that the treatment of treasury stoc# can )ary depending on state
la!s and regulations.
18.05 penses of the
o!ners should be disclosed.
."'"te ."ab"$"t* Ent"t"es
18.34 A limited liability entity should present information related to
changes in o!nersB 7membersB8 e+uity for the period. 1his information may be
presented as a separate statement, combined !ith the statement of operations, or
in the notes to financial statements.
18.35 1he e+uity section in the statement of financial position of a
limited liability entity should be titled C-!nersB 7or 3embersB8 5+uity.C If more than
one class of members e>ists, each ha)ing )arying rights, prefer% ences, and
pri)ileges, the limited liability entity is encouraged to report the e+uity of each
class separately !ithin the e+uity section.
18.36 If a limited liability entity records amounts due from o!ners
for capital contributions, such amounts should be presented as deductions from
o!nersB e+uity.
18.37 5)en though an o!nerBs liability may be limited, if the total
balance of the o!nersB e+uity account or accounts is less than 4ero, a deficit should
be reported in the statement of financial position.
,"sc$osure
18.38 If a limited liability entity does not report the amount of e+uity
of each class of o!ners 7members8 separately !ithin the e+uity section, it should
disclose those amounts in the notes to financial statements.
FRF-SME 18.38
88 Financial Reporting Framework for Small- and Medium-Sized Entities
18.39 If a limited liability entity maintains separate accounts for
components of o!nersB e+uity 7for e>ample, undistributed earnings, earn% ings
a)ailable for !ithdra!al, or unallocated capital8, disclosure of those components,
either on the face of the statement of financial position or in the notes to financial
statements, is permitted.
18.40 2ignificant differences in the rights, preferences, and pri)ileges
of different classes of members should be disclosed.
FRF-SME 18.3"
Revenue 8"
Chapter 1"
Re,enue
Purpose an Scope
19.01 1his chapter establishes principles for the timing of recognition
of revenue
1
in the financial statements of entities. It addresses the recog% nition of
re)enue during the course of the ordinary acti)ities of an entity, normally from the
sale of goods, the rendering of ser)ices, a combination of both, and the use by
others of entity resources yielding interest, royalties, and di)idends. It does not
comprehensi)ely deal !ith the measurement of re)enue. 6o!e)er, !hen
uncertainties e>ist regarding the determination of the amount of re)enue, these
uncertainties may influence the timing of re)enue recognition.
19.02 1he timing of recognition of the follo!ing types of re)enue is
dealt !ith else!here in other chapters@
a' 0e)enue arising from in)estments accounted for under the
e+uity method 7see chapter 11, C5+uity, .ebt, and -ther
In)estmentsC8
$' 0e)enue arising from lease agreements 7see chapter 2(,
C/easesC8
Reco&n"t"on
19.03 0e)enue from sales and ser)ice transactions should be rec%
ogni4ed !hen the re+uirements regarding performance set out in para% graphs
1H.0K%.0( are satisfied, pro)ided that at the time of performance, ultimate
collection is reasonably assured.
19.04 In a transaction in)ol)ing the sale of goods, performance should
be regarded as ha)ing been achie)ed !hen the follo!ing conditions ha)e
been fulfilled@
a' 1he seller of the goods has transferred to the buyer the signifi%
cant ris#s and re!ards of o!nership in that all significant acts ha)e
been completed, and the seller retains no continuing man% agerial
in)ol)ement in, or effecti)e control of, the goods trans% ferred to a
degree usually associated !ith o!nership.
$' 0easonable assurance e>ists regarding the measurement of the
consideration that !ill be deri)ed from the sale of goods and the e>tent
to !hich goods may be returned.
19.05 In the case of rendering of ser)ices and long%term contracts
and modifications to those contracts, performance should be determined using
either the percentage of completion met#od or the completed contract met#od,
!hiche)er relates the re)enue to the !or# accomplished. 2uch performance
should be regarded as ha)ing been achie)ed !hen reasonable assurance e>ists
regarding the measurement of the consideration that !ill be deri)ed from
rendering the ser)ice or performing the long%term contract.
1 Italici4ed terms are defined in the glossary.
FRF-SME 1".0
"0 Financial
Reporting Framework for Small- and Medium-Sized Entities
19.06 Performance should be regarded as being achie)ed under para%
graphs 1H.0K%.0( !hen all the follo!ing criteria ha)e been met@
a' Persuasi)e e)idence of an arrangement e>ists.
$' .eli)ery has occurred, or ser)ices ha)e been rendered. c' 1he
sellerBs price to the buyer is fi>ed or determinable.
19.07 2ome of the items management should consider !hen deter%
mining if persuasi)e e)idence of an arrangement e>ists are as follo!s@
a' Customary business practices and past dealings bet!een parties
$' 2ide arrangements
c' Consignment arrangements d'
0ights to return the product
e' 0e+uirements to repurchase the product
-ther characteristics may e>ist. Accordingly, ?udgment is necessary
!hen assessing !hether the substance of a transaction is a consignment, a
financing, or other arrangement for !hich re)enue recognition is not appropriate.
19.08 =enerally, deli)ery is not considered to ha)e occurred unless
the product has been deli)ered to the customerBs place of business or an% other site
specified by the customer. 2ome of the aspects of the re)enue arrangement
management should consider !hen determining if deli)ery
has occurred or ser)ices ha)e been rendered are as follo!s@
a' 9ill and hold arrangements.
$' Customer acceptance of product. c'
/aya!ay sales arrangements.
d' onrefundable fee arrangements.
e' /icensing and similar fee arrangements. f' 0is#
of loss has passed to the buyer.
19.09 ;hen determining if the sellerBs price to the buyer is fi>ed or
determinable, management should consider the impact of the follo!ing
factors@
a' Cancellable sales arrangements
$' 0ight of return arrangements
c' Price protections or in)entory credit arrangements, or both
d' 0efundable fee for ser)ice arrangements
19.10 1he recognition criteria in this chapter are usually applied
separately to each transaction. 6o!e)er, in certain circumstances, it is necessary
to apply the recognition criteria to the separately identifiable components of a
single transaction to reflect the substance of the transac% tion. A single sales
transaction may in)ol)e the deli)ery or performance of multiple products, ser)ices,
or rights to use assets, and performance may occur at different points in time or
o)er different periods of time. In some cases, the arrangements include initial
installation, initiation, or acti)a% tion ser)ices and in)ol)e consideration in the
form of a fi>ed fee or a fi>ed
FRF-SME 1".0!
Revenue "1
fee coupled !ith a continuing payment stream. *or e>ample, !hen the sell%
ing price of a product includes an identifiable amount for subse+uent ser% )icing,
that amount is deferred and recogni4ed as re)enue o)er the period during !hich
the ser)ice is performed. Con)ersely, the recognition criteria are applied to t!o or
more transactions together !hen they are lin#ed in such a !ay that the commercial
effect cannot be understood !ithout refer% ence to the series of transactions as a
!hole. *or e>ample, an entity may sell goods and, at the same time, enter into a
separate agreement to repur% chase the goods at a later date, thus, negating the
substanti)e effect of the transaction. In such a case, the t!o transactions are dealt
!ith together.
19.11 0e)enue arising from othersB use of entity resources yielding
interest, royalties, and di)idends should be recogni4ed !hen reasonable assurance
e>ists regarding measurement and collectability. 1hese re)e%
nues should be recogni4ed on the follo!ing bases@
a' Interest, on a time proportion basis
$' 0oyalties, as they accrue, in accordance !ith the terms of the
rele)ant agreement
c' .i)idends, !hen the shareholderBs right to recei)e payment is
established
19.12 0e)enue from a transaction in)ol)ing the sale of goods should
be recogni4ed !hen the seller has transferred to the buyer the significant ris#s and
re!ards of o!nership of the goods sold. ;hen the seller retains significant ris#s of
o!nership, it is normally inappropriate to recogni4e the transaction as a sale.
5>amples of a significant ris# of o!nership being retained by a seller are !hen a
liability for unsatisfactory performance is not co)ered by normal !arranty
pro)isionsF !hen the purchaser has the right to rescind the transactionF and !hen
the goods are shipped on consignment.
19.13 Assessing !hen the ris#s and re!ards of o!nership are trans%
ferred to the buyer !ith sufficient certainty re+uires an e>amination of the
circumstances of the transaction. In most cases, re)enue is recogni4ed on the
passing of possession of the goods. In retail sales, this is usually coinci% dent !ith
the passing of legal title. In other cases, the passing of legal title may occur at a
different time from the passing of possession or of the ris#s and re!ards of
o!nership.
19.14 1he percentage of completion method is used !hen perfor%
mance consists of the e>ecution of more than one act, and re)enue !ould be
recogni4ed proportionately by reference to the performance of each act. 0e)enue
recogni4ed under this method should be determined on a rational and consistent
basis, such as on the basis of sales )alue, associated costs, e>tent of progress, or
number of acts. *or practical purposes, !hen ser)ices are pro)ided by an
indeterminate number of acts o)er a specific period of time, re)enue should be
recogni4ed on a straight%line basis o)er the period, unless there is e)idence that
some other method better reflects the pattern of performance. 1he amount of !or#
accomplished should be assessed by reference to measures of performance that
are reasonably determinable and relate as directly as possible to the acti)ities
critical to the completion of the contract. 73easures of performance include output
measures, such as units produced and pro?ect milestones, or input measures, such
as cost, labor hours, or machine use.8 Amounts billed are not an appropriate basis
of measurement unless they reflect the !or# accomplished.
FRF-SME 1".14
"2 Financial
Reporting Framework for Small- and Medium-Sized Entities
19.15 1he completed contract method is used !hen the entity cannot
reasonably estimate the e>tent of progress to!ard completion. 1he com% pleted
contract method may also be used if both of the follo!ing conditions
are met@
a' 1he completed contract method is used for income ta> reporting
purposes.
$' 1he financial position and results of operations of the entity
!ould not )ary materially from those resulting from the use of the
percentage of completion method 7for e>ample, in circum% stances in
!hich an entity has primarily short%term contracts8.
Account"n& for Contract-Re$ate C$a"'s
19.16 0ecognition of amounts of additional contract re)enue relat%
ing to contract%related claims is appropriate only if it is probable that the claims
!ill result in additional contract re)enue and if amounts can be
reliably estimated, as e)idenced by satisfying the follo!ing conditions@
a' 1here is a legal basis for the claims.
$' Additional costs are caused by circumstances that !ere unfore%
seen at the contract date and are not the result of contractor
performance deficiencies.
c' Costs associated !ith the claims are identifiable or other!ise
determinable and are reasonable in )ie! of the !or# performed.
d' 5)idence supporting the claims is ob?ecti)e and )erifiable.
19.17 If the foregoing re+uirements are met, re)enue from contract%
related claims should be recorded only to the e>tent that contract costs relating to
the claims ha)e been incurred. Costs attributable to claims should be treated as
costs of contract performance as incurred.
19.18 A practice such as recording re)enues from claims only !hen
the amounts ha)e been recei)ed or a!arded may be used.
Effect of #ncerta"nt"es
19.19 0ecognition of re)enue re+uires that the re)enue is measurable
and that ultimate collection is reasonably assured. ;hen there is reason% able
assurance of ultimate collection, re)enue is recogni4ed, e)en though cash receipts
are deferred. ;hen there is uncertainty about ultimate col% lection, it may be
appropriate to recogni4e re)enue only as cash is recei)ed.
19.20 ;hen the uncertainty relates to collectability and arises sub%
se+uent to the time re)enue !as recogni4ed, a separate pro)ision to re% flect the
uncertainty should be made. 1he amount of re)enue originally recorded should
not be ad?usted.
19.21 ample, !hen payment relating to goods sold
depends on the resale of the goods by the buyer, re)enue should not be
recogni4ed.
FRF-SME 1".1
Revenue "3
$' Returns' 0e)enue should not be recogni4ed !hen an entity is
sub?ect to material and unpredictable amounts of returns, 7for e>ample,
!hen the mar#et for a returnable good is untested8. If an entity is
e>posed to material and predictable amounts of returns, it may be
sufficient to pro)ide for an allo!ance for returns.
19.22 Consideration may include a note or other financial instru%
ment issued by the purchaser to be settled in cash and, under the terms of the
note, the seller effecti)ely has recourse only against the assets sold. 1he
transaction is considered to be a sale because the total amount of the
consideration recei)ed is determinable !ithin reasonable limits 7see paragraph
1H.218. 6o!e)er, income from the sale is only recogni4ed !hen
a' a substantial commitment by the purchaser e>ists, demonstrat%
ing its intent to honor its obligations under the note, and
$' the seller has reasonable assurance of collecting the note.
A commitment !ould include, for e>ample, nonrefundable cash consider%
ation from resources other than those transferred from the seller or the
assumption of an obligation of the seller to a third party !hen the third party
thereby releases the seller from that obligation.
Report"n& Re+enue es and goods and ser)ices ta>es, are not
economic benefits that flo! to the entity and do not result in increases in e+uity.
1herefore, they are e>cluded from re)enue. 2imilarly, in an agency relationship,
the gross inflo!s of economic benefits include amounts collected on behalf of the
principal that do not result in increases in e+uity for the entity. 1he amounts
collected on behalf of the principal are not re)enue. Instead, re)enue is the amount
of commission.
19.24 An entity is acting as a principal 7and not as an agent8 !hen it
is e>posed to the significant ris#s and re!ards associated !ith the sale of goods or
the rendering of ser)ices. *eatures that indicate that an entity is
acting as a principal include the follo!ing@
a' 1he entity has the primary responsibility for pro)iding the goods
or ser)ices to the customer or for fulfilling the order 7for e>am% ple, by
being responsible for the acceptability of the products or ser)ices
ordered, contracted, or purchased by the customer8.
$' 1he entity has in)entory ris# before or after the customer order,
during shipping, or on return.
c' 1he entity has latitude in establishing prices, either directly
or indirectly 7for e>ample, by pro)iding additional goods or ser)ices8.
d' 1he entity bears the customerBs credit ris# for the amount re%
cei)able from the customer.
-ne feature indicating that an entity is acting as an agent is that the
amount the entity earns is predetermined, !hether it is either a fi>ed fee per
transaction or a stated percentage of the amount billed to the customer.
FRF-SME 1".24
"4 Financial
Reporting Framework for Small- and Medium-Sized Entities
Presentat"on
19.25 1he amount of re)enue recogni4ed during the period should be
presented separately in the statement of operations.
,"sc$osure
19.26 An entity should disclose its re)enue recognition policy. If an
entity has different policies for different types of re)enue transactions, the policy
for each material type of transaction should be disclosed. If sales transactions
ha)e multiple elements, such as a product and ser)ice, the entity should clearly
state the accounting policy for each element, as !ell as ho! multiple elements are
determined and measured.
19.27 If sales transactions ha)e multiple elements, the policy may
contain items such as a description and nature of such an arrangement, in% cluding
performance, cancellation, termination, or refund%type pro)isions.
19.28 If the completed contract method is used, the entity should dis%
close the reasons !hy that method, and not the percentage of completion method,
is used.
19.29 Additional re)enue from a contract%related claim that is record%
ed by the entity should be disclosed. In addition, if the entity has claims related to
additional contract re)enue and the re+uirements of paragraph 1H.1$ are not met
or if those re+uirements are met but the claim e>ceeds the recorded contract costs,
a contingent asset should be disclosed in ac%
cordance !ith chapter 1', CContingencies.C
19.30 If the practice of recording re)enues from claims only !hen the
amounts ha)e been recei)ed or a!arded is follo!ed, the amounts should be
disclosed in the notes to the financial statements.
19.31 An entity should disclose separately, either on the face of the
statement of operations or in the notes to the financial statements, the ma?or
categories of re)enue recogni4ed during the period.
19.32 1he ob?ecti)e of this disclosure is to assist the reader !ith
understanding the sources of re)enue and their effect on the financial statements.
19.33 Ludgment is necessary to determine the categories that an
entity uses. An entity may separate out sources based on life e>pectancy 7for
e>ample, initial and ongoing franchise fees8 and significantly differing profit
margins or sources that differ from the standard operation of the business 7for
e>ample, a manufacturing business that has material in)estment income8.
FRF-SME 1".2
Retirement and Other Postemployment Benefts "
Chapter 20
Retirement and %ther ostemplo+ment
"enefits
Purpose an Scope
20.01 1his chapter establishes principles for the recognition, mea%
surement, and disclosure of the cost of retirement and other postemploy% ment
benefits. It re+uires an entity to recogni4e the cost of retirement benefits and
certain postemployment benefits o)er the periods in !hich employees render
ser)ices to the entity in return for the benefits. -ther postemployment benefits are
recogni4ed !hen the e)ent that obligates the entity occurs.
20.02 1his chapter applies to benefits earned by active emplo!ees1
and e>pected to be pro)ided to them !hen they are no longer pro)iding acti)e
ser)ice, pursuant to the terms of an entityBs underta#ing to pro)ide
such benefits. 1hese benefits include the follo!ing@
a' Pension and other retirement benefits e>pected to be pro)ided
after retirement to employees and their beneficiaries, such as pension
income, health care benefits, life insurance, and other
miscellaneous benefits pro)ided to employees after retirement
$' Postemployment benefits e>pected to be pro)ided after employ%
ment but before retirement to employees and their beneficiaries, such
as long% and short%term disability income benefits 7includ% ing !or#ersB
compensation8, se)erance benefits, salary continu% ation, supplemental
unemployment benefits, ?ob training and counseling, and continuation
of benefits, such as health care
benefits and life insurance
c' 1ermination benefits
20.03 An entityBs arrangements to pro)ide future benefits to employ%
ees may ta#e a )ariety of forms and may be financed in different !ays. *uture
benefits may be pro)ided either directly by an entity or through an intermediary,
such as a pension plan or an insurance entity. 1his chapter applies to any
arrangement that is, in substance, a benefit plan, regardless of its form or the
manner or timing of its funding. Absent e)idence to the contrary, it is presumed
that an entity that has pro)ided benefits in the past and is currently promising
those benefits to employees !ill continue to pro)ide those benefits in the future.
1his chapter applies to the future benefits for !hich an entity pays all or part of
the cost.
20.04 1his chapter does not apply to benefits pro)ided by an entity to
employees during their acti)e employment. 5>amples of these benefits are
a' salaries, !ages, bonuses, fringe benefits, and similar items that
are pro)ided by an entity in the current reporting period or !ithin 12
months thereafter, in e>change for ser)ices rendered
by employees in the current reporting periodF
1 Italici4ed terms are defined in the glossary.
FRF-SME 20.04
"
!
Financial Reporting Framework for Small- and Medium-Sized Entities
$' occasional sic# days and )acation days that do not )est or ac%
cu
m
ul
ate beyond 12 months after the current reporting periodF
and
c' benefits pro)ided under stoc#%based compensation arrangements.
-as"c Pr"nc"p$es
20.05 An o$ligation for retirement and ot#er postemplo!ment $enefits
possesses all the characteristics of liabilities. *irst, an entity has a respon% sibility
to its employees to pro)ide the benefits at a specified time in the future 7that is,
!hen an employee retires or lea)es the entity8. 2econd, although the
responsibility is not al!ays contractual, the obligation is con% structi)e or e+uitable
in almost all cases, thereby lea)ing an entity little or no discretion to a)oid it.
*inally, an entity is obligated either by the rendering of ser)ice by the employee
or, in the case of certain postemploy% ment benefits, by an e)ent such as an
application for long%term disability benefits.
20.06 1he t!o basic types of pension plans are defined contribution
and defined benefit.
20.07 If deferred compensation contracts, as a group, are e+ui)alent
to a pension plan, they are accounted for the same as a pension plan. -ther deferred
compensation contracts should be accounted for on an indi)idual basis for each
employee.
Reco&n"t"on) Measure'ent) an ,"sc$osureE,ef"ne
Contr"but"on P$ans
Reco&n"t"on an Measure'ent
20.08 An entity should recogni4e pension cost for its defined contri$u-
tion plans as an e>pense for the period. 1he pension cost to be recorded as
e>pense for an accounting period should normally be the contribution that applies
to that period accounted for on the accrual basis.
,"sc$osure
20.09 An entity should disclose the follo!ing information about de%
fined contribution plans@
a' A general description of each plan
$' 1he amount of cost recogni4ed in the period
Reco&n"t"on) Measure'ent) an ,"sc$osureE
Mu$t"e'p$o*er P$ans
Reco&n"t"on an Measure'ent
20.10 An entity should recogni4e pension cost for multiemplo!er plans
it participates in as an e>pense for the period. Pension cost consists solely of the
contribution re+uired for the year, unless termination of participa% tion in the plan
is probableF then, any amounts due should be accrued.
FRF-SME 20.0
Retirement and Other Postemployment Benefts "7
,"sc$osure
20.11 An entity should disclose the follo!ing information about sig%
nificant multiemployer plans@
a' 1he name of the plan and a description of the type of plan
$' If !ithdra!al from the plan is probable or reasonably pos%
sible, !hether !ithdra!al from the plan !ould gi)e rise to an
obligation
c' 1he amount of cost recogni4ed in the period
Reco&n"t"on) Measure'ent) an ,"sc$osureEIn"+"ua$
,eferre Co'pensat"on Contracts
Reco&n"t"on an Measure'ent
20.12 If the contract is based on current and future employment, only
the cost of benefits attributable to current employment should be accrued.
20.13 If benefits e>pected in the future are attributable to more than
one year of ser)ice, the cost of those benefits should be accrued o)er the period of
the employeeBs ser)ice. At the end of that ser)ice period, the total amount accrued
should e+ual the present )alue of the benefits e>pected to be pro)ided.
,"sc$osure
20.14 An entity should disclose the follo!ing information in aggre%
gate about indi)idual deferred compensation contracts@
a' A general description of the contracts, including e>pected tim%
ing of benefit payments and the discount rate used to determine
present )alue
$' 1he liability at the statement of financial position date and the
amount charged to e>pense in the current period
Reco&n"t"on) Measure'ent) an ,"sc$osureE,ef"ne
-enef"t P$ans
20.15 An entity should ma#e an accounting policy choice to account
for defined $enefit plans 7e>cept multiemployer plansF see paragraph
20.108 using either
a' the current contribution payable method or
$' one of the accrued $enefit o$ligation methods.
Current Contr"but"on Pa*ab$e Met!o
20.16 pensed.
20.17 cess of the
benefit obligation o)er mar#et )alue of plan assets at the end of
the reporting period
c' 1he current yearBs contribution and e>pected contribution for
the subse+uent year
d' 1he planBs e>pected rate of return on plan assets and the dis%
count rate used to determine the accrued benefit obligation.
Accrue -enef"t /b$"&at"on Met!os
20.18 1he accrued benefit obligation methods re+uire the record%
ing of the accrued benefit obligation. 1his alternati)e permits an entity to
account for its defined benefit plans using the immediate recognition approach
or the deferral and amorti4ation approach discussed in the fol% lo!ing
paragraphs. 1he entity should apply the same approach to all of its
defined benefit plans@
a' imation of the detailed computations.
Recognition
20.31 *or a defined benefit plan, an entity should recogni4e a liability
and a cost for retirement and other postemployment benefits, other than
postemployment benefits and compensated absences that do not )est or
accumulate, in the period in !hich employees render ser)ices to the entity in
return for the benefits. An entity should recogni4e a liability and a cost for
postemployment benefits and compensated absences that do not )est or accumulate
!hen the e)ent that obligates the entity occurs.
Measurement
Actuar"a$ >a$uat"on Met!o
20.32 An entity should determine its accrued benefit obligation using
a' the pro&ected $enefit met#od prorated on ser)ices, !hen future
salary le)els or cost escalation affect the amount of the retire%
ment and other postemployment benefits or
$' the accumulated $enefit met#od, !hen future salary le)els and
cost escalation do not affect the amount of the retirement and other
postemployment benefits.
20.33 An accrued benefit method attributes a distinct unit of future
benefit to each year of credited ser)ice, and the actuarial present )alue of that unit
is computed separately for the period in !hich it is deemed to ha)e been earned.
20.34 1he amount of an obligation for retirement and other postem%
ployment benefits is determined from actuarial )aluations performed peri%
odically. In the years bet!een )aluations, an e>trapolation of the actuarial
)aluation of the obligation is used. 5ach year, management re)ie!s mat% ters such
as changes to the plan, the actuarial assumptions, occurrence of settlements and
curtailments, changes to the employee group, and the rate of return on plan assets
and determines !hether such matters necessitate any ad?ustments to the
e>trapolations. ;hen the effect of any change is significant, a ne! )aluation may
be necessary.
FRF-SME 20.34
102 Financial Reporting Framework for Small- and Medium-Sized Entities
Measure'ent ,ate of P$an Assets an Accrue -enef"t
/b$"&at"on
20.35 1he plan assets and the accrued benefit obligation should be
measured as of the date of the annual financial statements, e>cept that they may
be measured as of a date not more than three months prior to that date, pro)ided
the entity adopts this practice consistently from year to year.
,"scount Rate
20.36 1he discount rate used to determine the accrued benefit obliga%
tion should be an interest rate determined by reference to
a' mar#et interest rates at the measurement date on high%+uality
debt instruments, !ith cash flo!s that match the timing and
amount of e>pected benefit payments or
$' the interest rate inherent in the amount at !hich the accrued
benefit obligation could be settled.
20.37 1he discount rate is ree)aluated at each measurement date.
;hen long%term interest rates rise or decline, the discount rate changes in a
similar manner.
P$an Assets
20.38 Plan assets should be measured at mar#et )alue. ;hen mar%
#et )alues are not readily a)ailable for certain assets, such as real estate
in)estments, a method that pro)ides an appro>imation of mar#et )alue is used. *or
e>ample, an entity may obtain independent appraisals or re)ie! mar#et )alues of
similar assets.
&etermination of Cost for the eriod
20.39 Cost for a period should comprise
a' the current ser)ice costF
$' the interest cost on the accrued benefit obligationF
c' the e>pected return on plan assetsF
d' the amorti4ation of prior ser)ice costs arising from a plan initia%
tion or amendmentF
e' the amorti4ation of a net actuarial gain 7loss8F
f' the amount recogni4ed as a result of a temporary de)iation from
the planF
g' the increase or decrease in a )aluation allo!ance against the
carrying amount of an accrued benefit assetF
#' the gain or loss on a settlement or curtailmentF and i' the
e>pense recogni4ed for a termination benefit.
FRF-SME 20.3
Retirement and Other Postemployment Benefts 103
Entities .ith !wo or More lans
20.40 An entity that has t!o or more defined benefit plans accounted
for using the deferral and amorti4ation approach should determine a cost, an
accrued benefit obligation, and plan assets by applying paragraphs 20.30%.3H to
each separately measured plan or aggregation of plans.
20.41 *or purposes of paragraph 20.K0, each funded benefit plan is a
separately measured plan. ceeds the mar#et )alue of the plan assets and another benefit plan in
!hich the mar#et )alue of the plan assets e>ceeds the accrued benefit obligation,
the amounts in the t!o plans are generally not netted. etting in such
circumstances is appropriate only !hen the entity has a clear right to use the
assets of one plan to pay for the benefits to be pro% )ided by the other plan.
20.43 An entity that has t!o or more defined benefit plans accounted
for using the deferral and amorti4ation approach should present separate% ly in the
statement of financial position an accrued benefit asset of one defined benefit
plan and an accrued benefit liability of another defined
benefit plan, e>cept !hen the entity
a' has a right to use the assets of one plan to pay for the benefits to
be pro)ided by the other plan and
$' intends to e>ercise that right.
$imit on the Carr+ing Amount of an Accrued "enefit Asset
20.44 ;hen a defined benefit plan gi)es rise to an accrued benefit
asset, the asset should be recogni4ed in the statement of financial position only to
the e>tent it is e>pected to be reco)erable by the entity, !hether through reduced
contributions in the future or through refunds from the plan.
Settlements) (nsurance Contracts and Arrangements)
and Curtailments
Sett$e'ents an Curta"$'ents
20.45 An entity should account for a settlement or curtailment in the
current period by decreasing 7increasing8 the accrued benefit obligation and
recogni4ing any gain or loss in income for the period.
Insurance Contracts an Arran&e'ents
20.46 ;hen an entity has settled an accrued benefit obligation
through the purchase of an insurance contract, the benefits pro)ided or funded by
the insurance contract are e>cluded from the accrued benefit
FRF-SME 20.4!
104 Financial
Reporting Framework for Small- and Medium-Sized Entities
obligation, and the insurance contract is e>cluded from plan assets, e>cept
for any participation right 7see paragraph 20.K'8.
20.47 1he purchase price of a participating insurance policy ordinar%
ily is higher than the price of an e+ui)alent policy !ithout a participating right.
1he difference represents the cost of the participating right, !hich is recogni4ed
separately at the date of purchase as an in)estment.
&isclosure
20.48 An entity should disclose the follo!ing information about de%
fined benefit plans@
a' A description of the plan, including plan participants and the
nature of determining benefits
$' Information about the funded status of the plan, including ben%
efit obligation, mar#et )alue of plan assets, and the plan deficit
or e>cess, at the end of the reporting period
c' 1he e>pected rate of return on plan assets and the discount rate
used to determine the accrued benefit obligation
Ter'"nat"on -enef"ts
20.49 1ermination benefits should be recogni4ed as a liability and e>%
pense !hen it is probable that employees !ill be entitled to benefits, and the
amount can be reasonably estimated.
20.50 ;hen determining !hether the payment of termination ben%
efits is probable, one of the follo!ing conditions should be met@
a' 1he termination benefits are contractually re+uired to be pro%
)ided to employees.
$' 3anagement has appro)ed and committed to a detailed plan of
termination, and !ithdra!al from the plan is not realistically possible.
,"sc$osure
20.51 An entity should disclose the nature and effect of any termina%
tion benefits pro)ided in the period.
FRF-SME 20.47
Income Taxes 10
Chapter 21
(ncome !a/es
Purpose an Scope
21.01 1his chapter establishes principles for the recognition, mea%
surement, presentation, and disclosure of income and refundable ta>es in an
entityBs financial statements.
Account"n& Po$"c*
21.02 An entity should ma#e an accounting policy choice to account
for income ta-es
1
using either
a' the ta-es pa!a$le met#od or
$' the deferred income ta-es method.
Ent"t"es 0ot Sub5ect to Inco'e Ta;es
21.03 Certain entities 7for e>ample, unincorporated businesses and
subchapter 2 corporations8 are not liable for income ta>es on income earned.
Although its income or losses do affect the ta> liability of the o!n% ers, any
calculation of the o!nersB ta> liability relating specifically to the business !ould
necessarily be arbitrary because it !ould be affected by factors completely
unrelated to the operations of the business.
21.04 o pro)ision for income ta>es should be made in the financial
statements of businesses for !hich income is ta>ed directly to the o!ners.
Ta;es Pa*ab$e Met!o
21.05 es payable method, only current income ta> as%
sets and liabilities are recogni4ed.
Reco&n"t"on
21.06 Current income ta>es, to the e>tent unpaid or refundable,
should be recogni4ed as a liability or asset.
21.07 1he benefit relating to a ta> loss arising in the current peri%
od that !ill be carried bac# to reco)er income ta>es of a pre)ious period should be
recogni4ed as a current asset. ;hen a ta> loss is used to reco)er income ta>es
pre)iously paid, the benefit is recogni4ed in the period in !hich the ta> loss
occurs because the benefit !ill be reali4ed.
21.08 1he liability for current income ta>es included in the statement
of financial position is the amount due for current and prior periods, less amounts
already paid in respect of these income ta>es. ;hen the amount already paid for
current income ta>es for a period e>ceeds the liability for that period, any e>cess
amount is sho!n as an asset.
1 Italici4ed terms are defined in the glossary.
FRF-SME 21.08
10! Financial
Reporting Framework for Small- and Medium-Sized Entities
Measure'ent
21.09 Income ta> liabilities and income ta> assets should be mea%
sured in accordance !ith paragraphs 21.K3%.K'.
Intraper"o A$$ocat"on
21.10 1he rele)ant intraperiod allocation pro)isions of paragraphs
21.K&%.(2 should be applied !hen using the ta>es payable method.
,eferre Inco'e Ta;es Met!o
T!e -as"c Pr"nc"p$es of ,eferre Inco'e Ta;es
21.11 1he fundamental principle upon !hich the deferred income
ta>es method is based is that an entity recogni4es a deferred income ta> liability
!hene)er reco)ery or settlement of the carrying amount of an as% set or liability
!ould result in deferred income ta> outflo!s. 2imilarly, an entity recogni4es a
deferred income ta> asset !hene)er reco)ery or settle% ment of the carrying
amount of an asset or liability !ould generate de% ferred income ta> reductions.
An e>tension of this fundamental principle is that in the case of unused ta> losses,
income ta> reductions, and certain items that ha)e a ta> basis but cannot be
identified !ith an asset or li% ability on the statement of financial position, the
recognition of deferred income ta> benefits is determined by reference to the
probable reali4ation of a deferred income ta> reduction.
Reco+er* or Sett$e'ent of t!e Carr*"n& A'ount of an Asset
or ."ab"$"t*
21.12 1he rules established by the ta>ation authorities to determine
the ta-a$le income that !ill arise from the reco)ery or settlement of an asset or
liability are often different from the accounting policies follo!ed by an entity in
the preparation of its financial statements that go)ern the amounts included in
income or e>pense from the reco)ery or settlement of an asset or liability. 1he
determination of !hether reco)ery or settle% ment of an asset or liability !ill result
in deferred income ta> outflo!s or benefits is determined by reference to the
difference bet!een the carrying amounts and ta> bases of assets and liabilities.
1he ta> basis of an asset or liability is the amount, determined !ith reference to
the rules established by the ta>ation authorities, that could be deducted in the
determination of ta>able income if the asset !as reco)ered or the liability !as
settled for its carrying amount. At any point in time, there may be a difference
bet!een the ta> basis of an asset or liability and its carrying amount. 2uch
differences are temporar! differences. 1emporary differences may be either ta>able
or deductible. *a-a$le temporar! differences gi)e rise to de- ferred income ta-
lia$ilities' Deducti$le temporar! differences gi)e rise to deferred income ta-
assets.
21.13 1o determine the e>tent of any temporary differences, it is first
necessary to establish the ta> basis of the assets and liabilities. 1he fol% lo!ing
guidance assists in determining the ta> basis of an asset for the
purposes of this chapter@
a' ;hen an amount related to an asset is deductible !hen deter%
mining ta>able income o)er one or more periods, the ta> basis
FRF-SME 21.0"
Income Taxes 107
at the end of a period is that amount less all amounts already
deducted !hen determining ta>able income of the current and prior
periods.
$' ;hen an amount related to an asset is deductible !hen deter%
mining ta>able income only !hen the asset is disposed of or per%
manently !ithdra!n from use, the ta> basis of the asset is that amount.
c' ;hen the cost of an asset is not deductible !hen determining
ta>able income, but any proceeds of a disposal of the asset !ould not be
included in the determination of ta>able income, the ta> basis of the
asset is e+ual to the carrying amount.
d' ;hen the amount related to an asset that !ill be deductible
!hen determining future ta>able income depends on !hether the asset
is utili4ed or sold, the ta> basis of the asset is the greater of those
amounts.
21.14 1he ta> basis of a liability is its carrying amount less any
amount that !ill be deductible for income ta> purposes in respect of that liability
in future periods. In the case of amounts recei)ed but not yet rec% ogni4ed as
re)enue, the ta> basis of the resulting liability is its carrying amount less any
amount that !ill not be ta>able in future periods. ;hen a liability can be settled
for its carrying amount !ithout ta> conse+uences, the ta> basis of the liability is
considered to be the same as its carrying amount.
21.15 As discussed pre)iously, the difference bet!een the carrying
amount of an asset or liability and its ta> basis !ill determine the e>tent of any
temporary differences, and these differences !ill, in turn, determine the e>tent of
deferred income ta> assets or liabilities. 1he follo!ing guid% ance assists in
determining the nature of any temporary differences for
the purposes of this chapter@
a' ;hen the carrying amount of an asset and its ta> basis are the
same, the amount included in ta>able income on the reco)ery of the
asset is offset by the amount allo!ed as a deduction in the
determination of ta>able income. 1herefore, there is no tempo% rary
difference because the reco)ery of the carrying amount has no effect
on ta>able income of the entity.
$' ;hen the carrying amount of an asset is greater than its ta>
basis, the reco)ery of the carrying amount in a future period !ill
result in a ta>able amount in e>cess of the future amount allo!ed as a
deduction in the determination of ta>able income. 1herefore, a ta>able
temporary difference e>ists that gi)es rise to a deferred income ta>
liability in respect of the income ta>es that !ill be payable in future
periods.
c' ;hen the carrying amount of an asset is less than its ta> basis,
the amount allo!ed as a deduction in the determination of ta>% able
income in respect of that asset !ill be greater than the ta>% able amount
arising from the reco)ery of the carrying amount. 1herefore, a
deductible temporary difference e>ists that gi)es rise to a deferred
income ta> asset in respect of the income ta> that !ill be reco)erable
in future periods.
FRF-SME 21.1
1
08
Financial Reporting Framework for Small- and Medium-Sized
Entities
d'
;he
n the
carr
ying
amo
unt of a liability is e+ual to its ta> basis,
there !ill be no ta> conse+uences associated !ith settling the
liability. 1herefore, there is no temporary difference.
e' ;hen an amount related to a liability is deductible for income
ta> purposes in future periods !hen the liability is settled, it has a
ta> basis of 4ero. 1he settlement of the liability !ill re% sult in a
deduction for ta> purposes. 1herefore, the difference bet!een the
carrying amount of the liability and its ta> basis is a deductible
temporary difference that gi)es rise to a deferred income ta> asset.
#nuse Ta; .osses) Inco'e Ta; Reuct"ons) an Certa"n
/t!er Ite's
21.16 losses and income ta> reductions that are not re%
lated to particular assets or liabilities in the statement of financial posi% tion
may generate benefits that meet the conceptual definition of assets and should
be recogni4ed if appropriate criteria are met. In addition, some items ha)e a ta>
basis but cannot be identified !ith a particular asset or
liability in the statement of financial position, such as the follo!ing@
a' 0esearch costs are recogni4ed as an e>pense in the financial
statements in the period in !hich they are incurred but might not
be deducted !hen determining ta>able income until a lat% er
period. 1he difference bet!een the ta> basis of the research costs
7that is, the amount the ta>ation authorities !ill permit as a
deduction in the future8 and the carrying amount of 4ero is a
deductible temporary difference that gi)es rise to a deferred income
ta> asset.
$' *or financial statement purposes, an entity might recogni4e prof%
its on a long%term contract using the percentage of completion
method but use the completed contract method !hen determin% ing
ta>able income. Income is deferred for ta> purposes, !ith no
corresponding amount being deferred for accounting purposes. 1he
income deferred for ta> purposes represents a ta>able tem%
porary difference that gi)es rise to a deferred ta> liability.
-us"ness Co'b"nat"ons
21.17 In consolidated financial statements, temporar! differences are
the differences bet!een the carrying amounts in the consolidated financial
statements of assets and liabilities of each entity and the appropriate ta> basis.
1he ta> bases of the assets and liabilities are determined by refer% ence to the
indi)idual entities in the group.
21.18 In a business combination, temporary differences might e>%
ist bet!een the assigned mar#et )alues and the ta> bases of the related assets
and liabilities. 2uch temporary differences can be either ta>able temporary
differences or deductible temporary differences and, therefore, result in either
deferred income ta> liabilities or assets. *or e>ample, !hen the carrying amount
of an asset is increased to mar#et )alue but the ta> basis of the asset is not
ad?usted, a ta>able temporary difference arises, resulting in a deferred income
ta> liability. ;hen a liability is recogni4ed on the ac+uisition but the related
costs are not deductible !hen determin% ing ta>able income until a later period,
a deductible temporary difference
FRF-SME 21.1!
Income Taxes 10"
arises, resulting in a deferred income ta> asset. 1hese deferred income ta>
assets and liabilities are treated as identifiable assets and liabilities as of the
ac+uisition date.
Reco&n"t"on
Current (ncome !a/ $ia#ilities and Current (ncome !a/ Assets
21.19 Current income ta> liabilities and current income ta> assets
are recogni4ed in accordance !ith paragraphs 21.0$%.0& and should not be included
in deferred income ta> assets and deferred income ta> liabilities.
&eferred (ncome !a/ $ia#ilities and &eferred (ncome !a/ Assets
!a/a#le and &educti#le !emporar+ &ifferences) Unused !a/
$osses) and (ncome !a/ Reductions
21.20 At each statement of financial position date, e>cept as pro)ided
in paragraphs 21.2& and 21.30, a deferred income ta> asset or liability should be
recogni4ed for all deductible and ta>able temporary differences, unused ta> losses,
and income ta> reductions. 1he amount recogni4ed as a deferred income ta> asset
should be limited to the amount that is more likel! t#an not to be reali4ed.
21.21 *uture reali4ation of the ta> benefit of an e>isting deductible
temporary difference, unused ta> loss, or unused income ta> reduction ul% timately
depends on the e>istence of sufficient ta>able income of an appro% priate nature,
relating to the same ta>able entity and the same ta>ation authority, !ithin the
carrybac# and carryfor!ard periods a)ailable under the ta> la!. 1he follo!ing
sources of ta>able income may be a)ailable un% der the ta> la! to reali4e a ta>
benefit for deductible temporary differ%
ences, unused ta> losses, or income ta> reductions@
a' *uture re)ersals of e>isting ta>able temporary differences
$' *uture ta>able income before the effects of re)ersing temporary
differences, unused ta> losses, and income ta> reductions
c' 1a>able income in prior year7s8 if carrybac# is permitted under
the ta> la!
d' 1a>%planning strategies that, if necessary, !ould be implement%
ed to reali4e a deferred income ta> asset
21.22 An entity !ould consider ta>%planning strategies !hen deter%
mining the e>tent to !hich it is more li#ely than not that a deferred in%
come ta> asset !ill be reali4ed. 1a>%planning strategies are actions that
a' are prudent and feasibleF
$' an entity ordinarily might not ta#e, but !ould ta#e, to pre)ent a
ta> loss or income ta> reduction from e>piring unusedF and
c' !ould result in reali4ation of deferred income ta> assets.
1he carrying amount of any deferred income ta> asset recogni4ed as a
result of a ta>%planning strategy !ould reflect the cost of implementing that
strategy.
FRF-SME 21.22
110 Financial
Reporting Framework for Small- and Medium-Sized Entities
21.23 *orming a conclusion that it is appropriate to recogni4e a de%
ferred income ta> asset is difficult !hen unfa)orable e)idence e>ists, such as
cumulati)e losses in recent years. -ther e>amples of unfa)orable e)i%
dence include
a' a history of ta> losses or income ta> reductions e>piring unusedF $'
losses e>pected in early future years 7by a currently profitable
entity8F
c' unsettled circumstances that, if unfa)orably resol)ed, !ould ad%
)ersely affect future operations and profit le)els on a continuing
basis in future yearsF and
d' a carrybac# or carryfor!ard period that is so brief that it !ould
limit reali4ation of ta> benefits, particularly if the entity oper% ates in a
traditionally cyclical business.
21.24 5>amples of fa)orable e)idence that might support a conclu%
sion that recognition of a deferred income ta> asset is appropriate despite
the e>istence of unfa)orable e)idence include
a' e>isting sufficient ta>able temporary differences relating to the
same ta>able entity and the same ta>ation authority that result in
ta>able amounts against !hich the unused ta> losses or in%
come ta> reductions can be utili4edF
$' e>isting contracts or firm sales bac#log that !ill produce more
than enough ta>able income to reali4e the deferred income ta>
asset based on e>isting sales prices and cost structuresF
c' an e>cess of mar#et )alue o)er the ta> basis of the entityBs net
assets in an amount sufficient to reali4e the deferred income ta>
assetF or
d' a strong earnings history e>clusi)e of the loss that created the
future deductible amount 7unused ta> loss carryfor!ard or deductible
temporary difference8, together !ith e)idence indi% cating that the loss
is an aberration, rather than a continuing condition.
21.25 An entity must use ?udgment !hen considering the relati)e im%
pact of unfa)orable and fa)orable e)idence on the recognition of a deferred income
ta> asset. 1he !eight gi)en to the potential effect of unfa)orable and fa)orable
e)idence is commensurate !ith the e>tent to !hich it can be )erified ob?ecti)ely.
1he more unfa)orable e)idence that e>ists, the more fa)orable e)idence is
necessary, and the more difficult it is to support a conclusion that recognition of
some portion of, or all of, the deferred income ta> asset is appropriate.
21.26 An entity should recogni4e a deferred income ta> asset for all
deductible temporary differences, unused ta> losses, and income ta> re% ductions,
reduced by a )aluation allo!ance to the e>tent that it is more li#ely than not that
some portion of, or all, the assets !ill not be real% i4ed. 1he )aluation allo!ance
reduces the deferred income ta> asset to the amount that is more li#ely than not to
be reali4ed. 1his results in the same net asset as that determined in accordance
!ith paragraph 21.20 and after applying the considerations described in
paragraphs 21.21%.2( !hen determining the amount of the )aluation allo!ance.
FRF-SME 21.23
Income Taxes 111
Reassessment of &eferred (ncome !a/ Assets
21.27 At each statement of financial position date, an entity reas%
sesses recogni4ed and unrecogni4ed deferred income ta> assets. ;hen it is more
li#ely than not that sufficient future ta>able income !ill be a)ail% able to allo! a
pre)iously unrecogni4ed deferred income ta> asset to be reali4ed, the deferred
income ta> asset is recogni4ed to the e>tent of that ta>able income. *or e>ample,
an impro)ement in e>isting contracts or firm sales bac#log may increase the
probability of the entityBs ability to gener% ate future ta>able income such that the
deferred income ta> asset meets the recognition criteria in paragraphs 21.20%.2(.
Con)ersely, a significant !ea#ening of an entityBs financial position may indicate
that the entity !ill not be able to generate sufficient ta>able income to allo!
recogni4ed deferred income ta> assets to be reali4ed, in !hich case, the deferred
in% come ta> asset is reduced by a )aluation allo!ance to the amount that is
considered more li#ely than not to be reali4ed.
(ntragroup !ransfers
21.28 ;hen an asset is transferred bet!een entities !ithin a consoli%
dated group, a deferred income ta> liability or asset should not be recog% ni4ed in
the consolidated financial statements for a temporary difference arising bet!een
the ta> basis of the asset in the buyerBs ta> ?urisdiction and its cost as reported in
the consolidated financial statements. Any ta>es paid or reco)ered by the
transferor as a result of the transfer should be recorded as an asset or liability in
the consolidated financial statements until the gain or loss is recogni4ed by the
consolidated entity.
21.29 A transfer of assets, such as the sale of in)entory or depreciable
assets bet!een entities !ithin a consolidated group, is a ta>able e)ent that might
establish a ne! ta> basis for those assets in the buyerBs ta> ?urisdiction. 1he ne!
ta> basis of those assets is deductible on the buyerBs income ta> return !hen the
cost of those assets, as reported in the consoli% dated financial statements, is
reco)ered. 6o!e)er, from the point of )ie! of the consolidated financial
statements, no profit or loss has been reali4ed, and there !ill be no change in net
assets until such time as that asset is transferred, by sale or other!ise, outside the
consolidated group. Although the difference bet!een the buyerBs ta> basis and the
cost of transferred as% sets as reported in the consolidated financial statements
technically meets the definition of a temporary difference, the substance of
accounting for it as such !ould be to recogni4e income ta>es related to
intercompany gains or losses that are not recogni4ed in accordance !ith chapter
23, CConsoli% dated *inancial 2tatements and oncontrolling Interests.C 2imilar
prin% ciples apply to in)estments sub?ect to significant influence and interests in
?oint )entures.
(n,estments in Su#sidiaries) (nterests in 0oint 1entures) and
E*uit+ Method (n,estments
21.30 At each statement of financial position date, a deferred income
ta> liability or deferred income ta> asset should be recogni4ed for all tem% porary
differences arising from in)estments in subsidiaries and interests in ?oint )entures,
e>cept !ith respect to the difference bet!een the carry% ing amount of the
in)estment and the ta> basis of the in)estment, !hen it
FRF-SME 21.30
112 Financial
Reporting Framework for Small- and Medium-Sized Entities
is apparent that this difference !ill not re)erse in the foreseeable future.
Any deferred income ta> asset should be recogni4ed only to the e>tent that it is
more li#ely than not that the benefit !ill be reali4ed.
21.31 1emporary differences may arise from in)estments in subsid%
iaries and interests in ?oint )entures in a number of different circumstanc%
es. 5>amples include
a' differences bet!een the carrying amounts 7in the consolidated
financial statements8 of indi)idual assets and liabilities of sub%
sidiaries and ?oint )entures and their ta> basis 7inside basis dif%
ferences8 or
$' differences bet!een the carrying amount of an in)estment in
a subsidiary or an interest in a ?oint )enture and its ta> basis 7outside
basis differences8 because of items such as the e>istence of
undistributed income of subsidiaries and ?oint )entures.
2uch temporary differences are differences bet!een the carrying amounts
of assets and liabilities of each entity in the financial statements of the in)estor
and the appropriate ta> basis, e)en !hen they are eliminated on consolidation. 1he
ta> basis of the assets and liabilities is determined by reference to the indi)idual
entities in the group.
21.32 In consolidated financial statements, the ta>able temporary
difference arising from an in)estment in a subsidiary reflects the parentBs share of
the undistributed income of the subsidiary and differences arising from other
transactions and e)ents that affect the carrying amount of the parentBs in)estment.
21.33 As a parent controls the di)idend policy of its subsidiary, it is
able to control the timing of the re)ersal of temporary differences associ% ated
!ith its in)estment. ;hen the parent considers the rein)estment of a subsidiaryBs
profits as part of its permanent in)estment in the subsidiary, and it has determined
that those profits !ill not be distributed for the fore% seeable future, a deferred
income ta> liability is not recogni4ed. ;hen it is apparent that all or part of the
temporary difference !ill re)erse in the foreseeable future, a deferred income ta>
liability is recogni4ed.
21.34 A venturer is a party to a ?oint )enture and has ?oint control
o)er that ?oint )enture. 2oint control is the contractually agreed sharing of the
continuing po!er to determine the strategic, operating, in)esting, and financing
policies of the ?oint )enture. .ecisions relating to distributions from the ?oint
)enture usually re+uire the )enturersB consent in such a manner as defined in the
terms of the contractual arrangement. 1herefore, !hen the )enturer can e>ercise
?oint control o)er distributions and it is apparent that distributions !ill not be
made for the foreseeable future, a deferred income ta> liability is not recogni4ed.
21.35 1he temporary differences described in paragraph 21.31 might
also e>ist for in)estments sub?ect to significant influence accounted for by the
e+uity method. A deferred income ta> liability or asset is recorded for such
temporary differences because the in)estor is not normally able to control the
timing of their re)ersal.
Assets Ac*uired %ther !han in a "usiness Com#ination
21.36 In some circumstances, an asset ac+uired, other than an asset
ac+uired in a business combination, has a ta> basis that is less than its
FRF-SME 21.31
Income Taxes 113
cost. 1his gi)es rise to a ta>able temporary difference that results in the
recognition of a deferred income ta> liability. Adding the cost of deferred
income ta-es to the cost of the asset reflects the follo!ing@
a' 1he carrying amount of the asset !ill include the cost to ac+uire
the asset and the una)oidable income ta> conse+uences of utili4% ing the
asset.
$' 1he carrying amount !ill represent the minimum future cash
flo!s necessary to reco)er the in)estment in the asset, including any ta>
conse+uences associated !ith the asset.
21.37 1here may be circumstances in !hich an asset ac+uired, other
than an asset ac+uired in a business combination, has a ta> basis in e>cess of its
cost. 1his chapter re+uires the recognition of a deferred income ta> asset in
respect of the origination or re)ersal of the resulting temporary difference. 1he
most appropriate manner of recogni4ing this deferred in% come ta> asset is to
reduce the cost of the asset by the deferred income ta> benefit in order to reflect
the consideration paid for the asset and ta#e into account the effect of the ta>
treatment applied by the ta>ation authorities to the difference bet!een the cost of
the asset and its ta> basis.
"usiness Com#inations) 'ew "asis 2ush-&own3 Accounting)
(n,estments Su#4ect to Significant (nfluence) and (nterests in
0oint 1entures
21.38 In certain circumstances, an ac+uirer may consider it more
li#ely than not that, as a result of a business combination, it !ill be able to reali4e a
deferred income ta> asset of its o!n or its subsidiaries that !as unrecogni4ed
immediately before the ac+uisition. *or e>ample, the ac+uir% er may be able to
utili4e the benefits of its unused ta> losses against the future ta>able income of the
ac+uiree or through the use of ta>%planning strategies. Alternati)ely, as a result of
the business combination, it might no longer be more li#ely than not that future
ta>able profit !ill allo! the deferred income ta> asset to be reco)ered. In such
cases, the ac+uirer rec% ogni4es a change in the deferred income ta> asset in the
period of the busi% ness combination but does not include it as part of the
accounting for the business combination. 1herefore, the ac+uirer does not ta#e the
deferred income ta> asset into account !hen measuring the good!ill or bargain
purchase gain it recogni4es in the business combination.
21.39 ;hen a deferred income ta> asset ac+uired in a business com%
bination that !as not recogni4ed as an identifiable asset by the ac+uirer at the date
of the ac+uisition is subse+uently recogni4ed by the ac+uirer
!ithin the measurement period, the benefit should be applied
a' first to reduce to 4ero any unamorti4ed good!ill related to the
ac+uisition and
$' then to reduce income ta> e>pense.
21.40 1he measurement period is the period after the ac+uisition date
during !hich the ac+uirer may ad?ust the pro)isional amounts recogni4ed for a
business combination 7see chapter 2&, C9usiness CombinationsC8.
21.41 ;hen a deferred income ta> asset ac+uired in a business com%
bination that !as not recogni4ed as an identifiable asset by the ac+uirer at the date
of the ac+uisition is recogni4ed by the ac+uirer after the mea% surement period, the
benefit should be recogni4ed in income ta> e>pense.
FRF-SME 21.41
114 Financial
Reporting Framework for Small- and Medium-Sized Entities
21.42 1he principles in paragraphs 21.3&%.3H and 21.K1 should be
applied
a' !hen accounting for an in)estment sub?ect to significant influ%
ence or an interest in a ?oint )enture and
$' !hen recogni4ing deferred income ta> assets in periods subse%
+uent to the application of push%do!n accounting 7see chapter 2H,
Ce! 9asis IPush%.o!nJ AccountingC8.
Measurement
21.43 Income ta> liabilities and income ta> assets should be mea%
sured using the income ta> rates and income ta> la!s that, at the state% ment of
financial position date, are e>pected to apply !hen the liability is settled or the
asset is reali4ed, !hich are those enacted at the statement of financial position
date.
21.44 .eferred income ta> liabilities and deferred income ta> assets
should not be discounted.
21.45 *or changes in income ta> rates and ta> la!s enacted after the
date of the financial statements but before the date they are a)ailable to be issued,
disclosure as a subse+uent e)ent may be appropriate in accordance
!ith chapter 2', C2ubse+uent 5)ents.C
21.46 ;hen the effecti)e ta> rate that applies to capital gains and
losses differs from the ta> rate that applies to other ta>able income, the rate used
to measure deferred income ta> assets and liabilities reflects the e>pected manner
of reco)ery of the asset.
21.47 ;hen different income ta> rates apply to different le)els of ta>%
able income, deferred income ta> assets and liabilities are measured using the
rates that are e>pected to apply to the ta>able income of the periods in !hich the
temporary differences are e>pected to re)erse. ;hen income ta> rate reductions
must be allocated among companies in a related group, deferred income ta>
liabilities and deferred income ta> assets are mea% sured in the financial
statements of the indi)idual companies based on the allocations of these
reductions e>pected to occur in the future, regardless of the actual allocations in
the current year.
(ntraperiod Allocation
21.48 1he cost 7benefit8 of current and deferred income ta>es should
be recogni4ed as income ta> e>pense included in the determination of net
income or loss for the period before discontinued operations, e>cept that
a' any portion of the cost 7benefit8 of current and deferred income
ta>es related to discontinued operations of the current period should
be included in the statement of operations !ith the re%
sults of discontinued operationsF
$' any portion of the cost 7benefit8 of current and deferred income
ta>es relating to capital transactions in the current period, or relating
to items that are credited or charged directly to e+uity in the current
period, should be charged or credited directly to
e+uityF
c' any portion of the cost 7benefit8 of current and deferred in%
come ta>es arising at the time of changes in shareholder status
FRF-SME 21.42
Income Taxes 11
should be treated as a capital transaction 7see paragraph 21.(2
and chapter 1&, C5+uityC8F
d' any portion of the cost of deferred income ta>es arising at the
time an entity renounces the deductibility of e>penditures to an
in)estor should be treated as a cost of issuing the security to the
in)estorF
e' any portion of the cost 7benefit8 of deferred income ta>es aris%
ing at the time of ac+uisition of an asset, other than an asset ac+uired
in a business combination, should be recogni4ed in ac%
cordance !ith paragraphs 21.3$%.3'F
f' any portion of the cost 7benefit8 of deferred income ta>es rec%
ogni4ed at the time of a business combination should be recog%
ni4ed in accordance !ith paragraph 21.1&F
g' any other portion of the cost 7benefit8 of deferred income ta>es
related to a business combination, in)estment in a significantly
influenced in)estee, interest in a ?oint )enture, or comprehen% si)e
re)aluation of assets and liabilities should be recogni4ed in
accordance !ith paragraphs 21.3H and 21.K1%.K2F
#' any portion of the cost 7benefit8 of current and deferred income
ta>es relating to the correction of an error or a change in ac% counting
policy should be recogni4ed in a manner consistent !ith the
underlying item 7see chapter H, CAccounting Changes, Changes in
Accounting 5stimates, and Correction of 5rrorsC8.
21.49 Changes in deferred income ta> balances recogni4ed in accor%
dance !ith paragraph 21.K3 as a result of changes in ta> la!s or rates should be
included in deferred income ta> e>pense reported in income be% fore discontinued
operations because such changes are considered to be a result of normal business
acti)ities.
21.50 1he cost 3$enefit4 of current income ta-es represents the amount
of income ta>es payable or reco)erable in respect of the period. 1he cost 7benefit8
of deferred income ta>es represents the amount of deferred in% come ta> liabilities
and deferred income ta> assets recogni4ed in the pe% riod. 1he cost 7benefit8 of
current and deferred income ta>es is recogni4ed in a manner consistent !ith the
transaction or e)ent that ga)e rise to the current or deferred income ta> liability or
asset. 1herefore, the cost 7benefit8 of current and deferred income ta>es is
recogni4ed as income ta> e>pense, e>cept for any portions allocated else!here in
accordance !ith paragraph 21.K&.
21.51 1he ta> benefit of an unused ta> loss or income ta> reduction,
to the e>tent recogni4ed in the year of the loss, is reported in the same manner as
the related loss. ;hen included in net income, the ta> benefit of a loss
carryfor!ard recogni4ed in a period, after the period of the loss, is reported in
income before discontinued operations, regardless of the clas% sification of the loss
in the prior period.
21.52 .eferred income ta> liabilities and assets may change because
of changes in shareholder status or capital stoc# transactions that affect the entityBs
ta> status 7for e>ample, changes in the residence of sharehold% ers and changes in
control8. 1he changes in deferred income ta> assets and liabilities related to the
shareholdersB action or the in?ection of ne! e+uity are recorded as capital
transactions. 1he effects of changes in ta> status related to the entityBs actions or
decisions, such as a change in the entityBs
FRF-SME 21.2
11! Financial
Reporting Framework for Small- and Medium-Sized Entities
residency, are included in income ta> e>pense, !hich is included in the
determination of net income before discontinued operations.
Alternati,e Minimum !a/
21.53 Any amounts of income ta> payable currently that may reduce
income ta>es of a future period should be recorded as a deferred income ta> asset
if it is more li#ely than not that income ta>es !ill be sufficient to reco)er the
amounts payable currently. Any amounts not more li#ely than not to be reco)ered
should be included in current income ta> e>pense.
Presentat"on
Inco'e Ta; E;pense
21.54 Income ta> e>pense included in the determination of net in%
come or loss before discontinued operations should be presented on the face of the
statement of operations.
Inco'e Ta; ."ab"$"t"es an Inco'e Ta; Assets
21.55 Income ta> liabilities and income ta> assets should be present%
ed separately from other liabilities and assets. Current income ta> liabili% ties and
current income ta> assets should be presented separately from deferred income
ta> liabilities and deferred income ta> assets.
21.56 ;hen an entity segregates assets and liabilities bet!een cur%
rent and noncurrent assets and liabilities, the current and noncurrent portions of
deferred income ta> liabilities and deferred income ta> assets should also be
segregated. 1he classification bet!een current and noncur% rent should be based
on the classification of the liabilities and assets to !hich the deferred income ta>
liabilities and deferred income ta> assets relate. A deferred income ta> liability or
deferred income ta> asset that is not related to a liability or asset recogni4ed for
accounting purposes should be classified according to the e>pected re)ersal date
of the tempo% rary difference. .eferred income ta> assets related to unused ta>
losses and income ta> reductions should be classified according to the date that
the benefit is e>pected to be reali4ed.
21.57 Current income ta> liabilities and current income ta> assets
should be offset if they relate to the same ta>able entity and the same ta>ation
authority. .eferred income ta> liabilities and deferred income ta> assets should be
offset if they relate to the same ta>able entity and the same ta>ation authority.
6o!e)er, !hen an entity classifies assets and li% abilities as current and
noncurrent, the current portion of deferred income ta> balances should not offset
any deferred income ta> balances classified as noncurrent.
21.58 ;hen entities in a group are ta>ed separately by the same
ta>ation authority, a deferred income ta> asset recogni4ed by one entity in the
group should not be offset against a deferred income ta> liability of another entity
in the group unless ta>%planning strategies could be imple% mented to satisfy the
re+uirements of paragraph 21.(' !hen the deferred income ta> liability becomes
payable.
FRF-SME 21.3
Income Taxes 117
21.59 Although current income ta> assets and current income ta> li%
abilities are separately recogni4ed and measured, they may be offset in the
statement of financial position to the e>tent that they relate to income ta>es le)ied
on the same ta>able entity by the same ta>ation authority. 2imilarly, deferred
income ta> assets and deferred income ta> liabilities are offset to the e>tent that
they relate to income ta>es le)ied on the same ta>able entity by the same ta>ation
authority. 6o!e)er, current and non% current income ta> balances are not offset by
an entity that ma#es a dis% tinction bet!een current and noncurrent assets and
liabilities, irrespecti)e of !hether the balances relate to income ta>es le)ied by the
same ta>ation authorities. In addition, current income ta> liabilities and current
income ta> assets are not offset !ith deferred income ta> liabilities and deferred
income ta> assets, irrespecti)e of !hether the balances relate to income ta>es
le)ied by the same ta>ation authorities. 6o!e)er, it is appropriate to consider
a)ailable ta> planning strategies that can be implemented. A ta> planning strategy
is assumed only !hen it is practical and !hen management has both the ability
and the intent to employ the strategy, if necessary, to offset ta> balances. An
e>ample of a ta> planning strategy that might result in an offset of deferred
income ta> assets and liabilities in a consolidated group is an amalgamation of
companies in the group.
,"sc$osure
21. 60 An entity that is not sub?ect to income ta>es because its income
is ta>ed directly to its o!ners should disclose that fact.
21.61 An entity should disclose !hich of the follo!ing accounting
methods !ere chosen to account for income ta>es@
a' 1he ta>es payable method
$' 1he deferred income ta>es method
21.62 ;hen an entity applies the ta>es payable method of accounting
for income ta>es, the financial statements should disclose the follo!ing@
a' Income ta> e>pense 7benefit8 included in the determination of
income or loss before discontinued operations.
$' A discussion of the differences of income ta> rate or e>pense
related to income or loss for the period before discontinued op%
erations to the statutory income ta> rate or the dollar amount that
!ould result from its application, including the nature of each
significant reconciling item. 1he entity may include or omit a numerical
reconciliation.
c' 1he amount of unused income ta> losses carried for!ard and
unused income ta> credits.
d' 1he portion of income ta> e>pense 7benefit8 related to transac%
tions charged 7or credited8 to e+uity.
21.63 ;hen an entity applies the deferred income ta>es method of
accounting for income ta>es, the follo!ing should be disclosed separately@
a' Current income ta> e>pense 7benefit8 included in the determina%
tion of income or loss before discontinued operations.
$' .eferred income ta> e>pense 7benefit8 included in the determi%
nation of income or loss before discontinued operations.
FRF-SME 21.!3
1
18
Financial Reporting Framework for Small- and Medium-Sized
Entities
c'
1he
porti
on
of
the
cost
7ben
efit8
of
current and deferred income
ta>es related to capital transactions or other items that are charged
or credited to e+uity.
d' 1he total amount of unused ta> losses and income ta> reduc%
tions and the amount of deductible temporary differences for !hich
no deferred income ta> asset has been recogni4ed.
e' A discussion of the differences of income ta> rate or e>pense
related to income or loss for the period before discontinued op%
erations to the statutory income ta> rate or the dollar amount that
!ould result from its application, including the nature of each
significant reconciling item. 1he entity may include or omit a
numerical reconciliation.
f' 1he amount of unused income ta> losses carried for!ard and
unused income ta> credits.
FRF-SME 21.!3
Subsidiaries 11"
Chapter 22
Su#sidiaries
Purpose an Scope
22.01 1his chapter establishes principles for accounting for subsid%
iaries in the general purpose financial statements. 1his chapter is closely related to
chapter 2&, C9usiness Combinations,C !hich sets out the basis of accounting for
transactions by !hich subsidiaries are ac+uiredF chap% ter 23, CConsolidated
*inancial 2tatements and oncontrolling Interests,C !hich describes the
preparation of consolidated financial statements and the accounting for a
noncontrolling interest in a su$sidiar!
1
subse+uent to a business combinationF and
chapter 2$, C0elated Party 1ransactions,C !hich establishes principles for the
disclosure of related party transac% tions in the financial statements.
22.02 1his chapter does not deal !ith accounting for in)estments,
!hich is co)ered in chapter 11, C5+uity, .ebt, and -ther In)estments.C
Reco&n"t"on an Presentat"on
22.03 An entity should ma#e an accounting policy choice to either
a' consolidate its subsidiaries or
$' account for its subsidiaries using the e+uity method.
An entity choosing the e+uity method should pro)ide the disclosures re%
+uired by chapter 11. All subsidiaries should be accounted for using the same
method. A material difference in the basis of accounting bet!een a parent and a
subsidiary precludes the preparation of consolidated finan% cial statements and the
use of the e+uity method.
Conso$"ate F"nanc"a$ State'ents
22.04 Consolidated financial statements recogni4e that e)en though
the parent and its subsidiaries may be separate legal entities, together, they
constitute a single economic unit. 2uch financial statements pro)ide an
appropriate basis for informing users of the parentBs financial state% ments about
the resources and results of operations of the parent and its subsidiaries as a
group. 6o!e)er, some users are more interested in fi% nancial statements on a
nonconsolidated basis. *or e>ample, lenders may !ant information only about the
entity to !hich they ha)e made a loan. Consolidated financial statements may
include cash flo!s, assets, and li% abilities for entities that are separate from the
entity to !hich the lender has made the loan and, thus, may be less informati)e
than nonconsoli% dated financial statements.
22.05 ;hen an entity prepares consolidated financial statements, it
should describe these financial statements as being prepared on a consoli% dated
basis, and each statement should be labeled accordingly.
1 Italici4ed terms are defined in the glossary.
FRF-SME 22.0
120 Financial
Reporting Framework for Small- and Medium-Sized Entities
22.06 A holding of an interest in an entity that is not a subsid%
iary +ualifies as an in)estment and is sub?ect to the re+uirements of chapter 11.
22.07 Consolidation of a subsidiary commences at the date the par%
ent ac+uires control and continues as long as control e>ists. Accordingly, a parent
does not retroacti)ely consolidate a subsidiary for periods prior to its ac+uisition
of control.
22.08 ;hen an entity ceases to meet the definition of a subsidiary,
the former parent ceases to consolidate the entity from that time. Amounts
reported on a consolidated basis for periods prior to the cessation of con%
solidation are not retroacti)ely restated on a nonconsolidated basis.
22.09 2ubse+uent to a decision to dispose of a subsidiary, and prior
to the disposal date, the pro)isions of chapter 1(, C.isposal of /ong%/i)ed Assets
and .iscontinued -perations,C apply to a business of the subsidiary that meets the
criteria in that chapter to be classified as held for sale. Ap% plication of the
re+uirements of that chapter does not result in cessation of consolidation.
0onconso$"ate F"nanc"a$ State'ents
22.10 ;hen an entity applies the accounting policy choice as set out
in paragraph 22.037b8, it should describe its financial statements as be% ing
prepared on a nonconsolidated basis, and each statement should be labeled
accordingly.
22.11 In)estments in nonconsolidated subsidiaries should be pre%
sented separately from other in)estments in the statement of financial position.
Income or loss from those in)estments may be presented as a gross or net amount
in the statement of operations.
,"sc$osure
Conso$"ate F"nanc"a$ State'ents
22.12 3anagement should pro)ide a listing and description of all
subsidiaries, including their names, income from each subsidiary, and the
proportion of o!nership interests held in each subsidiary.
0onconso$"ate F"nanc"a$ State'ents
22.13 An entity that prepares nonconsolidated financial statements
should disclose the basis used to account for its subsidiaries.
22.14 An entity that prepares nonconsolidated financial statements
should pro)ide a listing and description of all subsidiaries, including their names,
carrying amounts, income from each subsidiary, and the proportion of o!nership
interests held in each subsidiary.
FRF-SME 22.0!
Consoli d
ated Financial
Statements and
Noncontrolling
Interests
Chapter 23
Consolidated Financial Statements and
'oncontrolling (nterests
Purpose an Scope
121
23.01 1his chapter establishes principles for the preparation of con%
solidated financial statements and for accounting for a noncontrolling interest
1
in
a subsidiary in consolidated financial statements. *i)e other
chapters deal !ith closely related matters, as follo!s@
a' Chapter 2&, C9usiness Combinations,C deals !ith the application
of the ac+uisition method of accounting for business combina% tions. In
particular, this chapter addresses the determination of the carrying
amount of the assets and liabilities of a subsidiary entity, good!ill, and
accounting for a noncontrolling interest at the time of the business
combination.
$' Chapter 22, C2ubsidiaries,C deals !ith the circumstances in
!hich consolidation is used in the general purpose financial
statements and pro)ides an accounting policy choice for an en% tity to
either consolidate its subsidiaries or account for them using the e+uity
method.
c' Chapter 11, C5+uity, .ebt, and -ther In)estments,C deals !ith
the circumstances in !hich the e+uity method of accounting is used.
d' Chapter 13, CIntangible Assets,C addresses accounting for good%
!ill subse+uent to a business combination.
e' Chapter 2$, C0elated Party 1ransactions,C establishes principles
for the disclosure of related party transactions in the financial
statements.
23.02 Consolidated financial statements recogni4e that the separate
legal entities are components of one economic unit and distinguishable from the
separate parent and subsidiary company statements and com% bined statements of
affiliated companies. 1he distinction is based both on the nature of such
statements and the difference in circumstances ?ustify% ing their use.
Co'b"ne F"nanc"a$ State'ents
23.03 Combined financial statements 7as distinguished from con%
solidated financial statements8 may be useful in certain circumstances, although
they are not a substitute for consolidated financial statements. Combined financial
statements could be useful !hen one indi)idual, or a group of indi)iduals, o!ns a
controlling interest in se)eral entities. 1hey could also be used to present the
financial position and the results of op% erations of a group of subsidiaries or to
combine the financial statements of entities under common management.
1 Italici4ed terms are defined in the glossary.
FRF-SME 23.03
122 Financial
Reporting Framework for Small- and Medium-Sized Entities
23.04 ;hen combined financial statements are prepared, similar
principles to those used !hen preparing consolidated financial statements apply.
Preparat"on of Conso$"ate F"nanc"a$ State'ents
23.05 1he accounting principles that apply to the preparation of con%
solidated financial statements can be presented in three segments@
a' 1hose that apply to the initial preparation of consolidated finan%
cial statements at the date of an ac+uisition
$' 1hose that apply to transactions reported in subse+uent consoli%
dated financial statements
c' 1hose that apply to miscellaneous transactions or relationships
bet!een the parent and subsidiary company
At t!e ,ate of Ac:u"s"t"on
23.06 ;hen consolidated financial statements are prepared, the in%
)estment account of the parent should be replaced by the identifiable as% sets and
liabilities of the subsidiary, any noncontrolling interest therein, and any good!ill
arising as a result of the in)estment. Preparation of such financial statements
re+uires that appropriate carrying amounts at the date of ac+uisition be
determined for each asset and liability for the non% controlling interest and
good!ill 7see chapter 2&8.
(ntercompan+ "alances
23.07 Consolidated financial statements present t!o or more distinct
legal entities as one single economic unit. 1o the e>tent that the t!o legal entities
ha)e recei)ables or payables from or to the other, intercompany balances should
be eliminated upon consolidation.
Consolidated Retained Earnings
23.08 1he retained earnings or deficit of a subsidiary company at the
date7s8 of ac+uisition by the parent should be e>cluded from consolidated retained
earnings.
23.09 2ometimes the carrying amount of the assets of the parent
company or the subsidiary company includes gains or losses arising from
transactions bet!een the t!o companies prior to the date of ac+uisition. 9ecause
transactions that too# place prior to the date of ac+uisition are ordinarily assumed
to ha)e ta#en place at armBs length, the amounts in% )ol)ed in such transactions
constitute ob?ecti)e e)idence of )alue. Accord% ingly, such gains or losses should
not be eliminated in the preparation of consolidated financial statements unless
the transactions !ere made in contemplation of ac+uisition. 6o!e)er, gains and
losses arising as a result of a business combination bet!een related parties are
eliminated on con% solidation.
At ,ates Subse:uent to an Ac:u"s"t"on
23.10 Consolidated financial statements prepared on dates subse%
+uent to the date of an ac+uisition are based on the amount assigned to
FRF-SME 23.04
Consolidated Financial Statements and Noncontrolling Interests 123
assets, liabilities, and noncontrolling interest at the date of ac+uisition
and, in addition, indicate the effects of transactions subse+uent to that date.
'ormal %perating !ransactions Su#se*uent to an Ac*uisition
23.11 1he e>istence of intercompany sales and purchases of goods
and ser)ices, including in)entory and fi>ed asset items and intercompany lending
and borro!ing transactions, !ill re+uire the ad?ustment in the consolidated
financial statements of the amounts included in the indi)id% ual company financial
statements.
23.12 A transaction bet!een a parent and a subsidiary that results
in a difference bet!een the carrying amount in the subsidiary and the amount at
!hich the item or ser)ice recei)ed is measured re+uires ad?ust% ment on
consolidation.
Interco'pan* -a$ances) pense in
the statements of operations of the indi)idual companies. 2uch transactions often
result in the creation of intercompany recei)able and payable balances. 1hese
assets, liabilities, re)enues, and e>pense amounts are eliminated in the preparation
of consolidated finan% cial statements.
,eprec"at"on an A'ort"%at"on
23.14 1he assets and liabilities of the subsidiary company that !ere
consolidated at the date of ac+uisition are deemed to ha)e been purchased by the
consolidated entity on that date. 1he amounts determined at that date are the basis
for subse+uent accounting for these assets and liabili% ties 7such as calculation of
depreciation charges8. 1herefore, the sum of the depreciation charges in the parent
and subsidiary company records may not e+ual the appropriate depreciation
charge to be presented in the con% solidated financial statements, and ad?ustments
may be necessary. 2imi% larly, interest recogni4ed on financial assets and
liabilities measured at amortized cost may differ from the sum of interest amounts
recorded by the parent and subsidiary.
23.15 1he depreciation, depletion, and amorti4ation of the assets of a
subsidiary company should be computed for the purposes of consolidated
financial statements on the basis of the amounts determined at the date of
ac+uisition by the parent company.
S!are!o$ers? E:u"t* Transact"ons ="t! Interests /uts"e t!e
Conso$"ate ample, the sale by the parent company of
some of its holdings in the subsidiary company, the issue by the subsidiary
company of some of its o!n shares, and the repurchase by a subsidiary company
of its o!n shares. -ther e+uity transactions of the consolidated group !ith outside
interests are similar in nature and may be accounted for accordingly.
23.17 ;hen a parent company ac+uires additional shares in a subsid%
iary, that transaction !ill be accounted for in accordance !ith the guide% lines
pro)ided in paragraphs 23.2(%.2$. .eclaration of a stoc# di)idend by a subsidiary
company !ill also affect the number of shares held but not the relati)e positions
of the parent and noncontrolling interests.
23.18 ;hen the parent company sells part of its shareholdings in a
subsidiary company to outside interests or the subsidiary company issues its o!n
shares to outside interests, the shares sold or issued reduce the parentBs interest
and increase the noncontrolling interest. =uidance on ac% counting for changes in
an o!nership interest in a subsidiary is pro)ided in paragraphs 23.2(%.30.
Ac*uisition #+ a Su#sidiar+ of (ts %wn Shares From (nterests
%utside the Group
23.19 ;hen a subsidiary ac+uires its o!n shares for cancellation from
outside interests, the proportionate interest of the parent company after the
transaction is increased. 9ecause the transaction is similar in effect to the situation
!hen the parent company ac+uires an additional interest in a subsidiary, it is
accounted for in accordance !ith paragraphs 23.2(%.2$.
M"sce$$aneous
"asis of Accounting
23.20 A material difference in the basis of accounting bet!een a par%
ent and a subsidiary precludes the preparation of consolidated financial
statements.
23.21 *inancial statements of foreign operations are ad?usted, if nec%
essary, to conform to standards in the *0* for 235s accounting frame% !or#
!hen incorporating them in the financial statements of the reporting entity.
Statements at &ifferent &ates
23.22 A difference in fiscal periods of a parent and a subsidiary does
not, of itself, ?ustify the e>clusion of the subsidiary from consolidation.
0oncontro$$"n& Interests
Proceures
23.23 ;hen preparing consolidated financial statements, an entity
identifies noncontrolling interests in the net income of consolidated sub% sidiaries
for the reporting period and noncontrolling interests in the net assets of
consolidated subsidiaries separately from the parentBs o!nership interests in them.
oncontrolling interests in the net assets consist of the
FRF-SME 23.17
Consolidated Financial Statements and Noncontrolling Interests 12
amount of those noncontrolling interests at the date of the original com%
bination calculated in accordance !ith chapter 2& and the noncontrolling
interestsB share of changes in e+uity since the date of the combination.
23.24 ;hen potential )oting rights e>ist, the proportions of net in%
come and changes in e+uity allocated to the parent and noncontrolling interests
are determined on the basis of present o!nership interests and do not reflect the
possible e>ercise or con)ersion of potential )oting rights.
C!an&e "n /(ners!"p Interest "n a Conso$"ate Subs""ar*
23.25 Changes in a parentBs o!nership interest in a consolidated sub%
sidiary that do not result in a loss of control should be accounted for as e+uity
transactions 7that is, transactions !ith o!ners in their capacity as o!ners8.
23.26 In such circumstances, the carrying amounts of the control%
ling and noncontrolling interests should be ad?usted to reflect the changes in their
relati)e interests in the subsidiary. Any difference bet!een the amount by !hich
the noncontrolling interests are ad?usted and the mar#et )alue of the consideration
paid or recei)ed should be recogni4ed directly in e+uity and attributed to the
o!ners of the parent.
.oss of Contro$ of a Conso$"ate Subs""ar*
23.27 A parent might lose control of a consolidated subsidiary in t!o
or more arrangements 7transactions8. 6o!e)er, sometimes circumstanc% es
indicate that the multiple arrangements should be accounted for as a single
transaction. ;hen determining !hether to account for the arrange% ments as a
single transaction, a parent should consider all the terms and conditions of the
arrangements and their economic effects. -ne or more of the follo!ing may
indicate that the parent should account for the multiple
arrangements as a single transaction@
a' 1hey are entered into at the same time or in contemplation of
each other.
$' 1hey form a single transaction designed to achie)e an o)erall
commercial effect.
c' 1he occurrence of one arrangement is dependent on the occur%
rence of at least one other arrangement.
d' -ne arrangement considered on its o!n is not economically ?us%
tified, but it is economically ?ustified !hen considered together !ith
other arrangements. An e>ample is !hen one disposal of shares is
priced belo! mar#et )alue and is compensated for by a subse+uent
disposal priced abo)e mar#et )alue.
23.28 If a parent loses control of a consolidated subsidiary, it should
a' derecogni4e the assets 7including any good!ill8 and liabilities
of the subsidiary at their carrying amounts at the date !hen
control is lostF
$' derecogni4e the carrying amount of any noncontrolling interests
in the former subsidiary at the date !hen control is lost 7includ%
ing any components of e+uity attributable to them8F
c' recogni4e
FRF-SME 23.28
1
2!
Financial Reporting Framework for Small- and Medium-Sized
Entities
i
. the
mar
#et
)alu
e of
the
cons
ideration recei)ed, if any, from
the transaction, e)ent, or circumstances that resulted in the
loss of control and
ii. if the transaction that resulted in the loss of control in)ol)es
a distribution of shares of the subsidiary to o!ners in their
capacity as o!ners, that distributionF
d' recogni4e any in)estment retained in the former subsidiary at
its carrying amount at the date !hen control is lostF and
e' recogni4e any resulting difference as a gain or loss in net income
attributable to the parent.
23.29 -n the loss of control of a consolidated subsidiary, any in)est%
ment retained in the former subsidiary and any amounts o!ed by or to the
former subsidiary should be accounted for in accordance !ith other chapters
from the date !hen control is lost.
23.30 1he carrying amount of a consolidated subsidiary is the carry%
ing amount in the nonconsolidated financial statements of the parent. 1his !ill
be the cost of the subsidiary. 1he carrying amount of the retained in% )estment
is a proportionate share of the carrying amount of the subsidiary at the date of
loss of control.
Presentat"on of Conso$"ate F"nanc"a$ State'ents
an
0oncontro$$"n& Interests
23.31 Consolidated financial statements adhere to the disclosure and
presentation re+uirements for all financial statements. Also, certain dis% closure
re+uirements are specific to consolidated financial statements.
State'ent of /perat"ons Presentat"on "n a Per"o of
an
Ac:u"s"t"on or ,"sposa$
23.32 -nly postac+uisition and predisposal income of a subsidiary
company is included in consolidated net income. 1he guidelines for deter%
mining the date of disposal may be inferred from the guidelines for deter%
mining the date of ac+uisition contained in chapter 2&.
0oncontro$$"n& Interests
23.33 If an entity consolidates its subsidiaries, noncontrolling inter%
ests should be presented in the consolidated statement of financial posi% tion
!ithin e+uity, separately from the e+uity of the o!ners of the parent.
23.34 et income is attributed to the o!ners of the parent and the
noncontrolling interests. 1otal income is attributed to the o!ners of the parent
and the noncontrolling interests, e)en if this results in the noncon% trolling
interests ha)ing a deficit balance.
,"sc$osure
23.35 1he entityBs consolidation policy should be disclosed.
FRF-SME 23.2"
Consolidated Financial Statements and Noncontrolling Interests 127
23.36 ;hen, for purposes of consolidation, it is not possible to use
financial statements for a period that substantially coincides !ith that of the
in)estorBs financial statements, this fact, and the period co)ered by the financial
statements used, should be disclosed.
23.37 ;hen the fiscal periods of a parent and a subsidiary, the in%
)estment in !hich is accounted for by the consolidation method, are not the same,
e)ents relating to, or transactions of, the subsidiary that ha)e occurred during the
inter)ening period that significantly affect the finan% cial position or results of
operations of the group should be recorded or disclosed, as appropriate.
FRF-SME 23.37
128 Financial Reporting Framework for Small- and Medium-Sized Entities
Chapter 24
(nterests in 0oint 1entures
Purpose an Scope
24.01 1his chapter establishes principles for accounting for interests
in &oint ventures
1
and the reporting of ?oint )enture assets, liabilities, re)% enue,
and e>penses in the financial statements of venturers, regardless of the structures
and forms under !hich the ?oint )enture acti)ities ta#e place. 6o!e)er, this
chapter does not deal !ith accounting by the ?oint )enture itself.
24.02 1his chapter applies !hen economic acti)ities meet the defi%
nitions and criteria outlined in the glossary and paragraphs 2K.03%.13, e)en
though such acti)ities may not be referred to as &oint ventures. 6o!% e)er, this
chapter does not apply !hen economic acti)ities do not meet the definitions and
criteria set out in the glossary definitions and para% graphs 2K.03%.13, e)en though
they may sometimes be referred to as &oint ventures. Accounting for in)estments
in such acti)ities is go)erned by the nature of the in)estments 7see chapter 11,
C5+uity, .ebt, and -ther In)estmentsC8.
,ef"n"t"ons
24.03 A distincti)e characteristic common to all ?oint )entures is that
t!o or more )enturers are bound by a contractual arrangement that estab% lishes
that the )enturers ha)e &oint control o)er the ?oint )enture, regard% less of the
difference that may e>ist in their o!nership interest. one of the indi)idual
)enturers is in a position to e>ercise unilateral control o)er the ?oint )enture.
.ecisions in all areas essential to the accomplishment of the ?oint )enture re+uire
the consent of the )enturers in such manner as defined in the terms of the
contractual arrangement.
24.04 Interests in an economic acti)ity, as described pre)iously, may
e>ist !ithout entitling all the in)estors to share in ?oint control. In such cases, this
!ould not be considered an interest in a ?oint )enture for those in)estors !ho do
not share in ?oint control, e)en though the economic ac% ti)ity may be )ie!ed as a
?oint )enture by those in)estors !ho do ha)e ?oint control. 1he interest of an
in)estor !ho does not ha)e ?oint control o)er the ?oint )enture +ualifies as an
in)estment and is sub?ect to the re% +uirements of chapter 11.
24.05 A )enturer has ?oint control o)er a ?oint )enture and has the
right and ability to obtain future economic benefits from the resources of the ?oint
)enture and is e>posed to related ris#s. *uture economic benefits normally include
cash flo!s or other forms of output generated by the ?oint )enture, and related ris#s
normally include e>posure to losses of the ?oint )enture or the direct e>posure of
the )enturer to loss. An in)estor !ho has made a loan to a ?oint )enture does not
ha)e similar e>posure to the ben% efits and related ris#s of the ?oint )enture. *or
e>ample, an arrangement !hereby an in)estor is not entitled to share in the net
income of the ?oint )enture and has recourse to assets of the other )enturers
!ould suggest
1 Italici4ed terms are defined in the glossary.
FRF-SME 24.01
Interests in Joint Ventures 12"
that the ris#s and re!ards of the in)estor are similar to those associated
!ith a loan. Accordingly, the in)estor should account for the arrangement as a
loan.
24.06 1he contractual arrangement that binds the )enturers may
ta#e different forms. *or e>ample, it may be e)idenced by a contract be% t!een the
)enturers or, in some cases, the arrangement may be incorpo% rated in the articles
or other byla!s of the ?oint )enture. In other cases, the arrangement may be
e)idenced by a contract bet!een the )enturers and an outside entity. ;hate)er its
form, the contractual arrangement is usually in !riting and co)ers matters such as
the acti)ities, duration, poli% cies, and procedures of the ?oint )entureF the
allocation of o!nershipF the decision%ma#ing processF the capital contributions by
the )enturersF and the sharing by the )enturers of the output, re)enue, e>penses, or
results of the ?oint )enture.
24.07 1he contractual arrangement may designate a )enturer as the
manager or the operator of the ?oint )enture. 1he operator does not control the
?oint )enture but acts !ithin the financing and operating policies that ha)e been
agreed to by the )enturers in accordance !ith the contractual arrangement and
delegated to the operator.
24.08 -ften, the acti)ities of a ?oint )enture are an e>tension of, or
complementary to, those of the )enturers. *or e>ample, ?oint )entures are often
formed to access ne! mar#ets, gain economies of scale, perform a contract, or
access ne! s#ills and resources. Loint )entures may ta#e )ari% ous forms and
structures, such as partnerships, co%tenancies, corporate or unincorporated entities,
or undi)ided interests. ;hate)er the form, ?oint )entures may fall into one of the
follo!ing broad categories, !hich are commonly described as, and meet the
definition of, ?oint )entures@ ?oint% ly controlled operations, ?ointly controlled
assets, and ?ointly controlled entities.
24.09 Loint )enture agreements can and often designate different al%
locations among the )enturers of 7a8 the profits and losses, 7$8 the specified costs
and e>penses or re)enues, 7c8 the distributions of cash from opera% tions, 7d8 the
distributions of cash proceeds from li+uidation, and 7e8 prices for determination of
sales or rentals to the ?oint )enture 7such as prices for the use of each )enturerBs
e+uipment used to perform the )enture con% tractual obligations8. 2uch agreements
may also pro)ide for changes in the allocations at specified future dates or on the
occurrence of specified future e)ents. *or the purpose of determining the amount
of income or loss to be recogni4ed by the )enturer, the percentage of o!nership
interest should be based on the percentage by !hich costs and profits !ill
ultimately be shared by the )enturers. An e>ception to this general rule may be
appro% priate if changes in the percentages are scheduled or e>pected to occur so
far in the future that they become meaningless for current reporting pur% poses. In
those circumstances, the percentage interest specified in the ?oint )enture
agreement should be used !ith appropriate disclosures.
@o"nt$*-Contro$$e /perat"ons
24.10 1he operations of some ?oint )entures in)ol)e the use of the as%
sets and other resources of the )enturers, rather than the establishment of a
corporation, partnership, or other entity, or a financial structure that is separate
from the )enturers themsel)es. 5ach )enturer uses its o!n prop% erty, plant, and
e+uipment for the purposes of the ?oint )enture acti)ities.
FRF-SME 24.10
130 Financial
Reporting Framework for Small- and Medium-Sized Entities
1he assets remain under the o!nership and control of each )enturer. 5ach
)enturer also incurs its o!n e>penses and liabilities and raises its o!n fi% nancing,
!hich represents its o!n obligations. 1he ?oint )enture acti)ities may be carried
out by the )enturerBs employees alongside the )enturerBs similar acti)ities. 1he
contractual arrangement usually pro)ides a means by !hich the re)enue from the
sale of goods or performance of ser)ices by the ?oint )enture, and any e>penses
incurred in common are shared among the )enturers.
@o"nt$*-Contro$$e Assets
24.11 2ome ?oint )entures in)ol)e ?oint control, and often, ?oint o!n%
ership, by the )enturers of one or more assets contributed to, or ac+uired for, the
purpose of a ?oint )enture and dedicated to the purposes of a ?oint )enture. Lointly%
controlled assets are used to obtain benefits for the )en% turers. 5ach )enturer may
ta#e a share of the output from the assets, and each bears an agreed share of the
e>penses incurred. 2uch a ?oint )enture does not in)ol)e the establishment of a
corporation, partnership, or other entity or a financial structure that is separate
from the )enturers themsel)es.
@o"nt$*-Contro$$e Ent"t"es
24.12 A &ointl!-controlled entit! is a ?oint )enture that in)ol)es the
establishment of a corporation, partnership, or other entity in !hich each )enturer
has an interest. 1he entity operates in the same !ay as other entities, e>cept that a
contractual arrangement bet!een the )enturers es% tablishes ?oint control o)er the
economic acti)ity of the entity.
24.13 In a ?ointly%controlled entity, each )enturer usually contributes
cash or other resources to the ?oint )enture. 1he ?ointly%controlled entity o!ns the
assets of the ?oint )enture, incurs liabilities and e>penses, and earns re)enue. It
may enter into contracts in its o!n name and raise fi% nancing for the purposes of
the ?oint )enture acti)ity. 5ach )enturer is entitled to a share of the income of the
?ointly%controlled entity, although some ?ointly%controlled entities also in)ol)e a
sharing of the output of the ?oint )enture. An e>ample of a ?ointly%controlled entity
is !hen t!o or more entities combine their acti)ities in a particular line of
business by trans%
ferring the rele)ant assets and liabilities into a ?ointly%controlled entity.
Reco&n"t"on
24.14 A )enturer should ma#e an accounting policy choice to account
for its interests in ?oint )entures using
a' the e+uity method 7see chapter 118F or
$' the proportionate consolidation method, only applicable to unin%
corporated entities !hen it is an established industry practice.
All interests in ?oint )entures should be accounted for using the same
method. 5+uity method in)estees normally should follo! the same basis of
accounting 7that is, the *0* for 235s accounting frame!or#8 as the in)es% tor.
Accordingly, financial statements of e+uity method in)estees should be ad?usted,
if necessary, to conform !ith principles in the *0* for 235s accounting
frame!or#, unless it is impracticable to do so.
FRF-SME 24.11
Interests in Joint Ventures 131
Proport"onate Conso$"at"on
24.15 Accounting for an interest in ?ointly%controlled unincorporated
operations, assets, or an interest in a ?ointly%controlled unincorporated en% tity
using the proportionate consolidation method results in the )enturer
recogni4ing
a' in its statement of financial position, the assets that it controls
and the liabilities that it incursF its share of the ?ointly%controlled assets
and liabilities incurred ?ointly !ith the other )enturers in relation to the
?oint )entureF or its share of the assets and liabili%
ties of the ?ointly%controlled ?oint )entureF and
$' in its statement of operations, its share of the re)enue of the
?oint )enture and its share of the e>penses incurred by the ?oint
)enture, or any re)enue from the sale or use of its share of the output
of, and any e>penses incurred by, the ?oint )enture, or its share of the
re)enue and e>penses of the ?oint )enture.
24.16 1o the e>tent that assets are transferred bet!een a )enturer
and a ?oint )enture, or ser)ices are performed by a )enturer for the ?oint )enture,
the application of proportionate consolidation re+uires that the )enturerBs share of
interentity transactions and interentity gains and losses be eliminated. 1he
treatment of the portion of gains or losses on the contribution of assets to a ?oint
)enture or transactions bet!een a )en% turer and a ?oint )enture that relates to the
interest of the other )enturers is dealt !ith subse+uently.
24.17 ;hen an in)estor ceases to ha)e ?oint control o)er a ?ointly%
controlled entity, the in)estor ceases to proportionately consolidate its in% terest.
2uch interests are accounted for as in)estments 7see chapter 118. Amounts
reported on a proportionate consolidation basis for periods prior to the cessation
of proportionate consolidation are not retroacti)ely re% stated on a
nonconsolidated basis.
24.18 An interest in a ?ointly%controlled entity that is intended for
disposal should continue to be proportionately consolidated in the finan% cial
statements of the )enturer until such time as the )enturer ceases to ha)e ?oint
control o)er the ?ointly%controlled entity.
Presentat"on
24.19 1he follo!ing should be presented separately in the statement
of financial position@
a' Interests in ?oint )entures accounted for using the e+uity
method
$' Assets and liabilities in ?oint )entures accounted for using the
proportionate consolidation method as its share of each asset or
liability, such as share of accounts recei)able from ?oint )enture
acti)ities
24.20 Income from participation in a ?oint )enture in the follo!ing
should be presented separately in the statement of operations@
a' Interests in ?oint )entures accounted for using the e+uity
method
FRF-SME 24.20
1
32
Financial Reporting Framework for Small- and Medium-Sized
Entities
$
'
Inter
ests in ?oint )entures accounted for using the proportionate
consolidation method as a total of its share of the ?oint )entureBs
re)enue, gross profit, and other e>penses categories
24.21 A significant factor !hen e)aluating the in)estment income is
the relationship of the income reported to the in)estments from !hich such
income is deri)ed. *or this reason, in)estments reported in the state% ment of
financial position and in)estment income reported in the state% ment of
operations are grouped in the same !ay.
,"sc$osure
24.22 1he basis used to account for an entityBs interests in ?oint )en%
tures should be disclosed.
24.23 A )enturer should pro)ide a listing and description of interests
in significant ?oint )entures, including the names, business purposes, car% rying
amounts, and proportion of o!nership interests held in each ?oint )enture.
24.24 A )enturer should disclose its share of any contingencies and
commitments of ?oint )entures and those contingencies that e>ist !hen the
)enturer is contingently liable for the liabilities of the other )enturers of the
?oint )entures.
24.25 If in)estments in common stoc# of corporate &oint ventures are,
in the aggregate, material in relation to the statement of financial position or
statement of operations of an in)estor, it may be necessary for summa% ri4ed
information about assets, liabilities, and results of operations of the in)estees
to be presented in the notes or in separate statements, either indi)idually or in
groups, as appropriate.
24.26 2eparate disclosure of the )enturerBs share of any contingen%
cies and commitments of ?oint )entures should include, as appropriate, the
)enturerBs share of any contingencies and commitments of ?oint )en% tures and
the )enturerBs responsibility for the other )enturersB share of the contingencies
of ?oint )entures. If a )enturer guarantees more than its proportionate share of a
?oint )entureBs liabilities, such a guarantee should be disclosed.
24.27 ;hen the fiscal periods of a )enturer and a ?oint )enture are
not the same, e)ents relating to, or transactions of, the ?oint )enture that ha)e
occurred during the inter)ening period and significantly affect the financial
position or results of operations of the entity should be disclosed. 1his
disclosure is not necessary if these e)ents or transactions are record% ed in the
financial statements.
FRF-SME 24.21
Leases 133
Chapter 2
$eases
Purpose an Scope
25.01 1his chapter establishes principles for methods of accounting
for lease transactions and circumstances in !hich these methods are appropriate.
25.02 1his chapter does not apply to licensing agreements for items
such as motion pictures, )ideotapes, plays, manuscripts, patents, and copy% rights
7see chapter 13, CIntangible AssetsC8.
C$ass"f"cat"on
25.03 1his chapter classifies leases
1
as follo!s@
a' *rom the point of )ie! of the lesseeEcapital and operating
leases
$' *rom the point of )ie! of the lessorEsales%type, direct financ%
ing, and operating leases
25.04 1his chapter adopts the )ie! that property has benefits and
ris#s associated !ith its o!nership. 9enefits may be represented by the
e>pectation of profitable operation o)er the propertyBs economic life and gain
from appreciation in )alue or reali4ation of a residual )alue. 0is#s include
possibilities of losses from idle capacity or technological obsoles% cence and
)ariations in return due to changing economic conditions. 1his chapter adopts the
)ie! that a lease that transfers substantially all the benefits and ris#s of
o!nership to the lessee is, in substance, an ac+uisi% tion of an asset and an
incurrence of an obligation by the lessee and a sale or financing by the lessor.
25.05 *rom the point of )ie! of a lessee, a lease normally transfers
substantially all the benefits and ris#s of o!nership to the lessee !hen, at the
inception of t#e lease, one or more of the follo!ing conditions are
present@
a' 1he terms of the lease result in o!nership being transferred to
the lessee by the end of the lease term, or the lease pro)ides for a
$argain purc#ase option.
$' 1he lease term is of such a duration that the lessee !ill recei)e
substantially all the economic benefits e>pected to be deri)ed from the
use of the leased property o)er its remaining life span. Although the
lease term may not be e+ual to the economic life of t#e leased propert!
in terms of years, the lessee is normally e>pected to recei)e
substantially all the economic benefits to be deri)ed from the leased
property !hen the lease term is e+ual to a substantial portion 7usually
'( percent or more8 of the remain% ing economic life of the leased
property. 1his is due to the fact that ne! e+uipment, reflecting later
technology and in prime
1 Italici4ed terms are defined in the glossary.
FRF-SME 2.0
1
34
Financial Reporting Framework for Small- and Medium-Sized Entities
condition, may be assumed to be more efficient than old e+uip%
ment that has been sub?ect to obsolescence and !ear.
c'
1he
lesso
r is
assur
ed of
reco
)ering the in)estment in the leased
property and earning a return on the in)estment as a result of the lease
agreement. 1his condition e>ists if the present )alue at the beginning
of the lease term of the minimum lease pa!ments, e>cluding any
portion thereof relating to e-ecutor! costs, is e+ual to substantially all
7usually H0 percent or more8 of the mar#et )alue of the leased property
at the inception of the lease. ;hen determining the present )alue, the
discount rate used by the les% see is the lo!er of the lessee5s rate for
incremental $orrowing and the interest rate implicit in t#e lease, if
#no!n.
In )ie! of the fact that land normally has an indefinite useful life, it is not
possible for the lessee to recei)e substantially all the benefits and ris#s associated
!ith its o!nership, unless there is reasonable assurance that o!nership !ill pass
to the lessee by the end of the lease term.
25.06 *rom the point of )ie! of a lessor, a lease normally transfers
substantially all the benefits and ris#s of o!nership to the lessee !hen, at
the inception of the lease, all the follo!ing conditions are present@
a' Any one of the conditions in paragraph 2(.0(.
$' 1he credit ris# associated !ith the lease is normal !hen com%
pared to the ris# of collection of similar recei)ables.
c' 1he amounts of any nonreimbursable costs that are probable
to be incurred by the lessor under the lease can be reasonably
estimated. If such costs are not reasonably estimable, the lessor may
retain substantial ris#s in connection !ith the leased prop% erty. *or
e>ample, this may occur !hen the lessor has a commit% ment to
guarantee the performance of, or to effecti)ely protect the lessee from
obsolescence of, the leased property.
;hen assessing !hether the condition set out in paragraph 2(.0(7c8 e>%
ists, the discount rate used by the lessor is the interest rate implicit in the lease.
25.07 1he e>istence of any of the follo!ing conditions, by themsel)es,
is not sufficient e)idence that substantially all the benefits and ris#s of
o!nership ha)e been transferred to the lessee@
a' /essee pays cost incident to o!nership. 1his condition is consid%
ered inappropriate because in )irtually all leasing agreements, the
lessee !ill either directly or indirectly pay such costs.
$' /essee has the option to purchase the asset for the lessorBs unre%
co)ered in)estment. 1his condition is considered inappropriate because
there is no assurance that the lessee !ill e>ercise the option.
c' /eased property is special purpose to the lessee. 1his condition
is considered insufficient because the concept of special purpose is
relati)e and difficult to define. In addition, the fact that the leased
property is special purpose does not, in itself, e)idence a transfer of
substantially all the benefits and ris#s of asset o!n% ership. Although it
is e>pected that most lessors lease special purpose property only under
terms that transfer substantially
FRF-SME 2.0!
Leases 13
all of those benefits and ris#s to the lessee, nothing in the nature
of special purpose property necessarily entails such terms.
d' /essee records the lease as a capital lease for federal income ta>
purposes.
25.08 A lease that transfers substantially all the benefits and ris#s
of o!nership related to the leased property from the lessor to the lessee should be
accounted for as a capital lease by the lessee and as a sales%type or direct
financing lease by the lessor.
25.09 A lease in !hich the benefits and ris#s of o!nership related to
the leased property are substantially retained by the lessor should be ac% counted
for as an operating lease by the lessee and lessor.
25.10 A rene!al, an e>tension, or a change in the pro)isions of an
e>isting lease that !as not contemplated in the original lease agreement should be
treated as a ne! lease and classified in accordance !ith para% graphs 2(.0&%.0H
7for a rene!al or e>tension of an e>isting sales-t!pe lease, see paragraph 2(.K28.
25.11 ;hen the classification of a lease arising from a rene!al, an
e>tension, or a change in the pro)isions of an e>isting lease results in a capital
lease being replaced by an operating lease, the asset and related obligation are
remo)ed from the accounts of the lessee. 1he net ad?ustment is included in income
of the period. ;hen the classification of the ne! lease is the same as the original
lease, the asset and obligation related to the original lease are ad?usted to conform
to the recalculated balances.
25.12 ;hen the classification of a lease arising from a rene!al, an
e>tension, or change in the pro)isions of an e>isting lease results in a sales%type
or direct financing lease being replaced by an operating lease, the remaining net
in)estment is remo)ed from the accounts of the lessor and the leased asset
recorded as an asset at the lo!er of its original cost, present mar#et )alue, or
present carrying amount. 1he net ad?ustment is included in income of the period.
Account"n& Treat'ent b* a .essee
Met!o of Account"n& for a Cap"ta$ .ease
25.13 1o report the total resources at the lesseeBs disposal and all
aspects of the lesseeBs long%term obligations, a capital lease should be ac% counted
for by the lessee as an ac+uisition of an asset and an assumption of an obligation.
25.14 1he asset )alue and the amount of the obligation recorded at
the beginning of the lease term are the present )alue of the minimum lease
payments, e>cluding the portion thereof relating to e>ecutory costs. 1he amount
relating to e>ecutory costs included in the minimum lease payments are estimated
if not #no!n to the lessee. 1he interest rate im% plicit in the lease is affected by the
residual value of t#e leased propert! in !hich the lessee usually has no interest.
As a result, to use the interest rate implicit in the lease as the discount rate !hen
it is higher than the lesseeBs rate for incremental borro!ing !ould produce an
amount that is less representati)e of the )alue of the asset to the lessee than !ould
be ob% tained by using the lesseeBs rate for incremental borro!ing as the discount
rate. 1herefore, the discount rate used by the lessee !hen determining
FRF-SME 2.14
13! Financial
Reporting Framework for Small- and Medium-Sized Entities
the present )alue of minimum lease payments should be the lo!er of the
lesseeBs rate for incremental borro!ing and the interest rate implicit in the lease, if
practicable to determine. ot!ithstanding the foregoing, the ma>imum )alue
recorded for the asset and obligation may not e>ceed the leased assetBs mar#et
)alue.
25.15 1he capitali4ed )alue of a depreciable asset under a capital
lease should be amorti4ed o)er the period of e>pected use on a basis that is
consistent !ith the lesseeBs depreciation policy for other similar fi>ed assets 7see
chapter 1K, CProperty, Plant, and 5+uipmentC8. If the lease con% tains terms that
allo! o!nership to pass to the lessee or a bargain pur% chase option, the period of
amorti4ation should be the economic life of the asset. -ther!ise, the property
should be amorti4ed o)er the lease term.
25.16 An obligation under a capital lease is similar to a loan. /ease
payments should be allocated to a reduction of the obligation, interest e>pense,
and any related e>ecutory costs. 1he interest e>pense is calculated using the
discount rate used !hen computing the present )alue of the minimum lease
payments applied to the remaining balance of the obligation.
25.17 A lessee that has a liability to a lessor under a capital lease
should remo)e the liability from its statement of financial position !hen, and only
!hen, it is e>tinguished 7that is, !hen the obligation specified in the lease is
discharged or cancelled8.
25.18 ontingent rentals should be charged to e>pense as incurred.
Presentat"on of a Cap"ta$ .ease
25.19 In order to distinguish bet!een assets that the entity o!ns and
those that it only has the right to use, assets leased under capital leases should be
presented separately on the statement of financial position or in the notes to the
financial statements.
25.20 -bligations related to leased assets should be presented sepa%
rately from other long%term obligations on the statement of financial posi% tion or
in the notes to the financial statements.
25.21 Any portion of lease obligations payable !ithin a year out of
current funds should be included in current liabilities.
Met!o of Account"n& for an /perat"n& .ease
25.22 9ecause of the nature of operating leases, charging lease rent%
als to e>pense on a straight%line basis o)er the lease term, e)en if not pay% able in
such a manner, !ould normally result in recognition of the e>pense in a manner
that is representati)e of the time pattern in !hich the user deri)es benefit from
the leased property. 6o!e)er, circumstances may in% dicate that another basis is
re+uired to achie)e this result.
25.23 1he terms of a renegotiated lease are interdependent !ith
those of the original lease. -n renegotiation, a lessee should continue to account
for the lease in accordance !ith the terms of the original lease con% tract until the
original lease term e>pires. 1o the e>tent that the payments re+uired under the
renegotiated lease arrangement differ from those oth% er!ise due under the
original lease, the differences are considered to re% late to the term of the lease
e>tension.
FRF-SME 2.1
Leases 137
25.24 Payments under a residual )alue guarantee are included in
lease rentals !hen it becomes probable that the lessee !ill be re+uired to honor
the guarantee because the estimated )alue of the property at the end of the lease
term is less than the residual )alue guaranteed by the lessee.
25.25 ,ease inducements are an inseparable part of the lease agree%
ment and, accordingly, are accounted for as reductions of the lease e>pense o)er the
term of the lease.
25.26 /ease rentals under an operating lease should be included in
the determination of net income o)er the lease term on a straight%line basis,
unless another systematic and rational basis is more representati)e of the time
pattern of the userBs benefit. Increases in rentals under lease arrangements that
include inflationary%type escalation clauses may be ac% counted for on an as%
incurred basis, rather than a straight%line basis.
Account"n& Treat'ent b* a .essor
Met!o of Account"n& for a ,"rect F"nanc"n& .ease
25.27 .irect financing leases normally arise !hen a lessor acts as a
financing intermediary bet!een a manufacturer or dealer and a lessee. 2uch
leases gi)e rise to income in the form of finance income.
25.28 *inance income arising on a direct financing lease is composed
of the difference bet!een
a' the total minimum lease payments, net of any e>ecutory costs
and related profit included therein, plus any unguaranteed re-
sidual value of the leased property accruing to the lessor and
$' the carrying amount of the leased property.
25.29 A lessor enters into a direct financing lease !ith the intention
of earning a return on funds in)ested in the lease transaction. ;hen as% sessing
!hether proposed terms of a lease !ill produce an acceptable re% turn on the
re+uired in)estment, a lessor considers the pattern of cash flo!s associated !ith
the lease transaction. In some instances, the pattern of cash flo!s !ill be
significantly affected by the fact that income ta>es !ill be reduced as a result of
an in)estment ta> credit. ;hen income ta> elements that affect the cash flo! are
predictable !ith reasonable assur% ance, it may be appropriate to ta#e these
elements into consideration in accounting for income from the lease.
25.30 ;hen income ta> factors are ta#en into consideration in ac%
counting for a direct financing lease, the lessorBs initial and continuing in)estment
in the lease, for purposes of income recognition, is the net of
the balances of the follo!ing accounts@
a' 3inimum lease payments recei)able, less any e>ecutory costs
and related profit included therein
$' 1he unguaranteed residual )alue of the lease property accruing
to the lessor
c' ecutory costs and
related profit included therein, plus any unguaranteed residual
)alue of the leased property accruing to the lessor and
$' the aggregate of the present )alue of the minimum lease
payments.
1he discount rate for determining the present )alues is the interest rate
implicit in the lease.
25.37 ;hen it is appropriate to ta#e income ta> factors into consider%
ation in accounting for a sales%type lease, the lessorBs initial and continu% ing
in)estment in a sales%type lease, for purposes of income recognition, is the net of
the balances of the accounts set out in paragraph 2(.307a8%7d8.
25.38 ;hen income ta> factors are not ta#en into consideration in
accounting for a sales%type lease, the lessorBs initial and continuing in)est% ment for
purposes of recogni4ing unearned finance income in the lease is the net balances
of the accounts set out in paragraph 2(.307a8%7c8.
FRF-SME 2.31
Leases 13"
25.39 Initial direct costs are considered to be incurred in order to pro%
duce the saleF therefore, they are recogni4ed as an e>pense at the inception of the
lease.
25.40 ;hen a lease is a sales%type lease, a sale should be recorded
!ith the manufacturerBs or dealerBs profit or loss being recogni4ed at the time of the
transaction. tension of an e>isting sales%type lease should be classified as a direct
financing lease because the manufacturerBs or dealerBs profit !ill ha)e been
recogni4ed at the inception of the original lease.
Co$$ectab"$"t* an Reco+erab"$"t* Issues
25.43 At the end of each reporting period, management should assess
!hether there are any indications that each direct financing lease, sales% type
lease, operating lease recei)ables 7the lease asset8, or group of similar lease assets
are not collectible or reco)erable. ;hen there is an indication of collectability or
reco)erability issues, management should determine !hether a significant ad)erse
change has occurred during the period in the e>pected timing or amount of future
cash flo!s from the lease asset or group of lease assets.
25.44 Indicators of collectability or reco)erability issues include
a' significant financial difficulty of the lesseeF
$' a breach of contract, such as a default or delin+uency in paymentF
c' the entity granting a concession to the lesseeF
d' the probability that the lessee !ill enter ban#ruptcy or other
financial reorgani4ationF and
e' a significant ad)erse change in the technological, mar#et, eco%
nomic, or legal en)ironment in !hich the lessee operates. 7*or
e>ample, a sharp decline in the price of a commodity may cause
economic instability in the lesseeBs industry or ha)e an ad)erse effect
on other entities in a region that is dependent on the les%
seeBs industry.8
25.45 ;hen management identifies a significant ad)erse change in
the e>pected timing or amount of future cash flo!s from a lease asset, or group of
similar lease assets, it should reduce the carrying amount of the
asset, or group of assets, to the highest of the follo!ing@
a' 1he present )alue of the cash flo!s e>pected to be generated by
holding the lease asset, discounted using a current mar#et rate
of interest appropriate to the asset
FRF-SME 2.4
140 Financial
Reporting Framework for Small- and Medium-Sized Entities
$' 1he amount that could be reali4ed by selling the lease at the
statement of financial position date net of disposal costs
1he carrying amount of the lease asset, or group of assets, should be re%
duced directly or through the use of an allo!ance account.
Presentat"on of a ,"rect F"nanc"n& or Sa$es-T*pe .ease
25.46 1he result of these types of lease transactions is to create a
long%term recei)able, although the lessor may also hold an interest in the residual
)alue of an asset under lease. As a conse+uence, the net in)est% ment in the lease
is considered to be distinct from other assets and pre% sented separately.
25.47 *or purposes of statement presentation, the lessorBs net in)est%
ment in the lease includes
a' the minimum lease payments recei)able, less any e>ecutory
costs and related profit included thereinF plus
$' any unguaranteed residual )alue of the leased property accru%
ing to the lessorF less
c' unearned finance income remaining to be allocated to income
o)er the lease term.
25.48 ;hen income ta> factors ha)e been considered in accounting
for a direct financing or sales%type lease, any unamorti4ed in)estment ta> credit
should either be deducted in computing the net in)estment in the lease or sho!n
as a deferred credit. .eferred income ta>es, if any, relating to the net in)estment
in the lease are presented separately from the net in)estment in accordance !ith
paragraph 21.((.
25.49 1he lessorBs net in)estment in direct financing and sales%type
leases should be segregated bet!een current and long%term portions in a classified
statement of financial position.
Met!o of Account"n& for an /perat"n& .ease
25.50 0ental re)enue from an operating lease should be recogni4ed
as income o)er the term of the lease as it becomes due. 6o!e)er, if rent% als )ary
from a straight%line basis, the income should be recogni4ed on a straight%line basis
unless another systematic and rational basis is more representati)e of the time
pattern in !hich the benefit from the leased property is utili4ed.
25.51 ;hen initial direct costs are associated !ith a specific lease
agreement, the costs are applicable to all re)enue earned during the lease term and
should be deferred and amorti4ed o)er the lease term in propor% tion to the
recognition of rental income.
Part"c"pat"on b* a T!"r Part*
25.52 1he terms of either an assignment of lease payments due under
an operating lease or a sale of property that is already, or that is intended to be,
sub?ect to an operating lease may result in the assignee or purchaser being gi)en
an effecti)e guarantee that the in)estment !ill be reco)ered. *or e>ample, the
terms of the transaction pro)ide that in the case of
FRF-SME 2.4!
Leases 141
default by the lessee or termination of the lease, the seller must reac+uire
the property, substitute an e>isting lease, or gi)e priority to securing a
replacement lessee or buyer under a remar#eting agreement. ;hen the substance
of a transaction is such that the purchaser loo#s to the seller, rather than to the
property or lease in order to reco)er his in)estment, the transaction is regarded as
a secured loan by both parties because the seller or assignor has retained
substantial ris#s of o!nership.
25.53 An assignment of lease payments due under an operating lease
or a sale of property that is already, or that is intended to be, sub?ect to an
operating lease should be accounted for as a loan !hene)er the assignor or seller
retains substantial ris#s of o!nership in connection !ith the leased property.
25.54 ;hen a sale of property that is already, or that is intended to
be, sub?ect to an operating lease is classified as a secured loan, the seller should
record the proceeds of sale as a loan. 1he interest rate applicable to the loan is that
!hich an unrelated lender !ould negotiate !ith the les% sor for a loan under
similar terms and conditions. pense an appropriate portion of
each rental payment !ith the remainder reducing the amount of the loan. 1he asset
is depreciated o)er the amorti4ation period of the loan. 1he assignment by the
lessor of lease payments due under an operating lease should be accounted for as a
loan.
25.55 A sale of property already sub?ect to a sales%type or direct fi%
nancing lease, or an assignment of lease payments due under a sales%type or direct
financing lease, does not negate the original accounting treat% ment of the lease.
Sub$eases
25.56 ;hen leased property is subleased by the original lessee to a
third party, the sublease is e)aluated by both parties in accordance !ith
paragraphs 2(.0&%.0H. 1here is no effect on the accounting treatment of the
obligation under the original lease.
Sa$e-.easeback Transact"on
25.57 A sale-lease$ack transaction in)ol)es the sale of property !ith
the purchaser concurrently leasing the same property bac# to the seller.
25.58 In a sale%leasebac# transaction, the lease should be accounted
for as a capital, direct financing, or operating lease, as appropriate, by the seller%
lessee and the purchaser%lessor.
25.59 In )ie! of the interdependence of the terms and the inability
to ob?ecti)ely and practically separate the sale and lease, any profit or loss arising
on the sale is generally deferred and ta#en to income o)er the lease term. 6o!e)er,
!hen the leasebac# is of a portion of the remaining use of the property sold, it
may be possible to separate the accounting aspects of the terms of the sale and the
lease. 1he BportionB may be a part of the prop% erty, such as one floor of an office
to!er, or may consist of a portion of the propertyBs remaining economic life, such
as 3 years of an estimated life of 10 years. In substance, such a leasebac# is not a
lease of the same property as that sold to the purchaser%lessor.
FRF-SME 2."
142 Financial
Reporting Framework for Small- and Medium-Sized Entities
25.60 5>cept as noted in paragraph 2(.$K, !hen the leasebac# is clas%
sified as a capital lease, any profit or loss arising on the sale should be de% ferred
and amorti4ed in proportion to the amorti4ation of the leased asset, e>cept for
leases in)ol)ing land only, in !hich case, it should be amorti4ed o)er the lease
term on a straight%line basis.
25.61 5>cept as noted in paragraph 2(.$K, !hen the leasebac# is clas%
sified as an operating lease, any profit or loss arising on the sale should be
deferred and amorti4ed in proportion to rental payments o)er the lease term.
25.62 ;hen the seller%lessee retains the right to only a minor portion
of the property sold, the sale and leasebac# is accounted for as separate
transactions based on their respecti)e terms. 1he entire gain or loss is included in
the determination of net income at the date of the sale un% less the amount of
rentals called for by the lease is unreasonable under mar#et conditions at the
inception of the lease. In these circumstances, an appropriate amount is deferred
or accrued by ad?usting the profit or loss on the sale and amorti4ed to ad?ust those
rentals to a reasonable amount. If the present )alue of the minimum lease
payments represents 10 percent or less of the mar#et )alue of the asset sold, the
seller%lessee could be presumed to ha)e transferred to the purchaser%lessor the
right to substan% tially all the remaining use of the property sold, and the seller%
lessee could be presumed to ha)e retained only a minor portion of such use.
25.63 ;hen the seller%lessee retains the right to more than a minor
portion of the property but less than substantially all the property, the amount of
the gain or loss included in the determination of net income im%
mediately is e+ual to the e>cess, if any, of the gain on sale o)er
a' the present )alue of the minimum lease payments o)er the lease
term, if the leasebac# is classified as an operating lease or
$' the recorded amount of the leased asset, if the leasebac# is clas%
sified as a capital lease.
25.64 ;hen, at the time of the sale%leasebac# transaction, the mar%
#et )alue of the property is less than its carrying amount, the difference should be
recogni4ed as a loss immediately.
.eases In+o$+"n& .an an -u"$"n&s
25.65 ists, and the reporting entity is either the
managing or managed party.
1 Italici4ed terms are defined in the glossary.
FRF-SME 2!.03
1
4!
Financial Reporting Framework for Small- and Medium-Sized Entities
#' Any party that is sub?ect to significant influence, !hether by
r
e
a
s
o
n
o
f
a
n
o!nership interest, management contract, or other management
authority, by another party that also has signifi% cant influence o)er
the reporting entity.
i' Any party that is sub?ect to &oint control by the reporting entity.
7In this instance, a party sub?ect to ?oint control is related to each of
the )enturers that share that ?oint control. 6o!e)er, the )enturers
themsel)es are not related to one another solely by
)irtue of sharing of ?oint control.8
26.04 A transaction bet!een a )enturer and a ?oint )enture in)ol)ing
the e>change of an asset for an interest in the ?oint )enture is considered to be a
transaction bet!een the )enturers. ;hen the )enturers are unre% lated, such a
transaction is not a related part! transaction.
26.05 1he degree of influence that one party may e>ert on another
is a ma?or factor in determining !hether they are related. In some cases, the
degree of influence may be so remote that they need not be considered related. *or
e>ample, t!o companies may be unrelated, e)en though one director ser)es on the
board of each companyF in such a case, the degree of influence e>ercised by the
director o)er the strategic policies of each com% pany determines !hether the
companies are related.
26.06 3anagement should ma#e reasonable efforts to identify all re%
lated parties. Circumstances that might indicate the e>istence of related parties
include abnormal terms of trade or transactions not normally en% tered into by the
reporting entity. ;hen identifying related parties, man% agement ta#es into
account any beneficial o!nership of an entity that it #no!s is held through
nominees. ;hen management has identified cir% cumstances indicating that the
other party to a transaction may be re% lated, management has a responsibility to
ascertain !hether that party is, indeed, related.
Measure'ent
26.07 A related party transaction that occurs in the ordinary course
of business should be measured in the same manner as the transaction !ould ha)e
been measured if it too# place bet!een unrelated parties. A re% lated party
transaction that does not occur in the ordinary course of busi% ness should be
measured at the carrying amount, unless there is ob?ecti)e third%party e)idence
supporting the mar#et )alue of !hat !as e>changed in the transaction 7for
e>ample, mar#et )alue of the asset recei)ed or transferred8.
,"sc$osure
26.08 An entity should disclose the follo!ing information about its
transactions !ith related parties@
a' A description of the relationship bet!een the transacting parties $' A
description of the transaction7s8, including those for !hich no
amount has been recogni4ed
c' 1he recogni4ed amount of the transactions classified by finan%
cial statement category
d' 1he measurement basis used
FRF-SME 2!.04
Related Party Transactions 147
e' Amounts due to, or from, related parties and the terms and con%
ditions relating thereto
f' Commitments !ith related parties, separate from other
commitments
g' Contingencies in)ol)ing related parties, separate from other
contingencies
26.09 Information about related party transactions is often of more
significance to a financial statement user than information about unre% lated party
transactions, regardless of the si4e of such transactions.
,escr"pt"on of Re$at"ons!"p
26.10 1erms such as affiliate, associate, and related compan! are in%
sufficiently precise to describe relationships. ;ith additional e>planation, the
effect of the related party relationship on the entity is more under% standable.
1erms such as controlled investee, significantl! influenced in- vestee, &ointl!-
controlled entit!, common control entit!, management, s#are- #older, mem$er of
t#e immediate famil! of t#e s#are#older or management, and director describe the
relationships better.
,escr"pt"on of Transact"on
26.11 A clear description of a related party transaction that sets out
the significance of the transaction to the operations of the entity clarifies the
effects of the transaction on the entity. 2uch a description includes information
about the nature of the items e>changed and !hether the e>% change is in the
normal course of operations.
26.12 An e>change of goods or ser)ices bet!een related parties that
has not been gi)en accounting recognition is also a related party transac% tion. *or
e>ample, an entity may pro)ide a related party !ith management ser)ices or use
of a patent or license in the normal course of operations !ithout recei)ing
consideration in e>change. An e>planation of the nature of such a transaction and
the fact that no consideration has been recei)ed or paid is useful to e>plain the
effect of the transaction on the entity.
A'ount of Transact"ons
26.13 1o con)ey the e>tent of related party transactions, the recog%
ni4ed amounts of such transactions are disclosed. .isclosure of informa% tion
aggregated by financial statement category 7for e>ample, re)enue, purchases,
ma?or operating costs, interest e>pense or income, and man% agement fee income
or e>pense8 and nature of relationship is more useful than disclosure of indi)idual
transactions !ith related parties, e>cept for indi)idually significant transactions.
Representat"ons About Market >a$ue
26.14 0epresentations that the e>change amount is e+ui)alent to
mar#et )alue 7or an armBs length e+ui)alent )alue8 should not be made un% less they
can be substantiated. ;hen an entity has underta#en a related party transaction
on the same terms as current transactions !ith unre% lated parties !ith similar
)olumes, terms, and conditions, that fact should be disclosed. In many cases, a
mar#et )alue cannot be determined unless
FRF-SME 2!.14
148 Financial
Reporting Framework for Small- and Medium-Sized Entities
there are identical transactions, and the )alues of the items e>changed are
determined by the mar#et.
A"t"ona$ ,"sc$osures
26.15 5ntities should comply !ith disclosure re+uirements in the fol%
lo!ing chapters@
a' Chapter 11, C5+uity, .ebt, and -ther In)estments.C 2ee
disclosures applicable to the e+uity method of accounting for
in)estments.
$' Chapter 1', CContingencies.C 2ome guarantees are issued to
benefit entities that meet the definition of a related party, such as ?oint
)entures and e+uity method in)estees. In those cases, the disclosures
re+uired in the C=uaranteesC section of chapter 1' may be in addition
to the disclosures re+uired by this chapter.
c' Chapter 2&, C9usiness Combinations.C 2ee the re+uirements in
the CCombinations of 5ntities isted at
the financial statement date
$' 1hose that are indicati)e of conditions that arose subse+uent to
the financial statement date
1he e>tent to !hich, and the manner in !hich, the effect of a subse+uent
e)ent is reflected in the financial statements !ill depend on its type.
27.04 1he effect of subse+uent e)ents may be so per)asi)e, ho!e)er,
that the )iability of the !hole, or a part, of the business of the entity is brought
into +uestion. A rapid deterioration in operating results or finan% cial position after
the date of the financial statements may indicate a need to consider !hether it is
proper to use the going concern assumption.
Account"n& Treat'ent
27.05 *inancial statements should be ad?usted !hen e)ents occur%
ring bet!een the date of the financial statements and the date the finan% cial
statements are a)ailable to be issued pro)ide additional e)idence re%
lating to conditions that e>isted at the date of the financial statements.
27.06 2ubse+uent e)ents may pro)ide additional information relat%
ing to items included in the financial statements and may re)eal condi% tions
e>isting at the financial statement date that affect the estimates in)ol)ed in the
preparation of financial statements. All such information that becomes a)ailable
prior to the date the financial statements are a)ail% able to be issued should be
used !hen e)aluating the estimates made, and the financial statements should be
ad?usted !here necessary. *or e>ample, the institution of ban#ruptcy proceedings
against a debtor subse+uent to the date of the financial statements may be
indicati)e of the underlying financial situation of the debtor at the date of the
financial statements. If the pro)ision for that debt !as inade+uate, ad?ustment of
the financial statements is re+uired.
27.07 *inancial statements are a)ailable to be issued !hen
a' a complete set of financial statements, including all re+uired
note disclosures, has been prepared 7see paragraphs 2.10%.128F
FRF-SME 27.07
1
0
Financial Reporting Framework for Small- and Medium-Sized Entities
$' all final ad?usting ?ournal entries ha)e been reflected in the fi%
nancial statements 7for e>ample, ad?ustments for income ta>es
a
n
d
b
o
n
u
s
es8F
c' no changes to the financial statements are planned or e>pectedF
and
d' the financial statements meeting the preceding re+uirements
ha)e been appro)ed in accordance !ith the entityBs process to finali4e
its financial statements.
27.08 *inancial statements should not be ad?usted for those e)ents
occurring bet!een the date of the financial statements and the date the financial
statements are a)ailable to be issued that do not relate to condi% tions that e>isted
at the date of the financial statements.
27.09 Ad?ustment of the financial statements for subse+uent e)ents
is not appropriate if such e)ents do not relate to conditions e>isting at the financial
statement date. 1o reflect the effect of such e)ents !ould not be consistent !ith
the concept that a statement of financial position repre%
sents the financial position of an entity at the financial statement date.
,"sc$osure
27.10 .isclosure should be made of the date through !hich subse%
+uent e)ents ha)e been e)aluated and the fact that this is the date that the
financial statements !ere a)ailable to be issued.
27.11 .isclosure should be made of those e)ents occurring bet!een
the date of the financial statements and the date the financial statements are
a)ailable to be issued that do not relate to conditions that e>isted at the date of the
financial statements but are of such a nature that they should be disclosed to #eep
the financial statements from being misleading.
27.12 At a minimum, the disclosure re+uired by paragraph 2'.11
should include
a' a description of the nature of the e)ent and
$' an estimate of the financial effect, !hen practicable, or a state%
ment that such an estimate cannot be made.
27.13 5>amples of e)ents described in paragraph 2'.11 include
a' an e)ent, such as a fire or flood, that results in a lossF
$' a decline in the mar#et )alue of in)estmentsF
c' purchase of a businessF
d' commencement of litigation !hen the cause of action arose sub%
se+uent to the date of the financial statementsF
e' changes in foreign currency e>change ratesF and f' the
issue of capital stoc# or long%term debt.
FRF-SME 27.08
Business Combinations 11
Chapter 28
"usiness Com#inations
Purpose an Scope
28.01 1his chapter establishes principles and re+uirements for ho!
the ac(uirer1
a' recogni4es and measures in its financial statements the identifi-
a$le assets ac+uired, the liabilities assumed, and any noncon-
trolling interest in the ac(uireeF
$' recogni4es and measures the good!ill ac+uired in the $usiness
com$ination or a gain from a bargain purchaseF and
c' determines !hat information to disclose to enable users of the
financial statements to e)aluate the nature and financial effects of the
business combination.
28.02 1his chapter applies to a transaction or other e)ent that meets
the definition of a business combination and to combinations of entities
under common control. 1his chapter does not apply to
a' the formation of a ?oint )enture.
$' the ac+uisition of an asset, or a group of assets, that does not
constitute a $usiness.
Ient"f*"n& a -us"ness Co'b"nat"on
28.03 3anagement should determine !hether a transaction or other
e)ent is a business combination by applying the definition in this chapter, !hich
re+uires that the assets ac+uired and liabilities assumed constitute a business. If
the assets ac+uired are not a business, the reporting entity should account for the
transaction or other e)ent as an asset ac+uisition. In such cases, the ac+uirer
should identify and recogni4e the indi)idual identifiable assets ac+uired 7including
those assets that meet the defini% tion of, and recognition criteria for, intangible
assets in chapter 13, CIn% tangible AssetsC8 and liabilities assumed. 1he transaction
cost should be allocated to the indi)idual identifiable assets and liabilities on the
basis of their relati)e mar#et )alues at the date of purchase. 2uch a transaction or
e)ent does not gi)e rise to good!ill.
T!e Ac:u"s"t"on Met!o
28.04 3anagement should account for each business combination by
applying the ac+uisition method.
28.05 Applying the ac+uisition method re+uires
a' identifying the ac+uirerF
$' determining the ac(uisition dateF
1 Italici4ed terms are defined in the glossary.
FRF-SME 28.0
1
2
Financial Reporting Framework for Small- and Medium-Sized Entities
c' recogni4ing and measuring the identifiable assets ac+uired, the
l
i
a
b
ilities assumed, and any noncontrolling interest in the ac%
+uireeF and
d' recogni4ing and measuring good!ill or a gain from a bargain
purchase.
Ient"f*"n& t!e Ac:u"rer
28.06 *or each business combination, one of the combining entities
should be identified as the ac+uirer.
,eter'"n"n& t!e Ac:u"s"t"on ,ate
28.07 1he ac+uirer should identify the ac+uisition date, !hich is the
date it obtains control of the ac+uiree.
28.08 1he date the ac+uirer obtains control of the ac+uiree is gener%
ally the date the ac+uirer legally transfers the consideration, ac+uires the assets,
and assumes the liabilities of the ac+uireeEthe closing date. 6o!% e)er, the
ac+uirer might obtain control on a date that is either earlier or later than the
closing date. *or e>ample, the ac+uisition date precedes the closing date if a
!ritten agreement pro)ides that the ac+uirer obtains con% trol of the ac+uiree on a
date before the closing date. An ac+uirer should consider all pertinent facts and
circumstances !hen identifying the ac+ui% sition date.
Reco&n"%"n& an Measur"n& t!e Ient"f"ab$e Assets
Ac:u"re) ."ab"$"t"es Assu'e) an An* 0oncontro$$"n&
Interest "n t!e Ac:u"ree
Recognition rinciple
28.09 As of the ac+uisition date, the ac+uirer should recogni4e, sepa%
rately from good!ill, the identifiable assets ac+uired, the liabilities as% sumed, and
any noncontrolling interest in the ac+uiree. 0ecognition of identifiable assets
ac+uired and liabilities assumed is sub?ect to the condi% tions specified in
paragraphs 2&.10%.11.
Reco&n"t"on Con"t"ons
28.10 1o +ualify for recognition, the identifiable assets ac+uired and
liabilities assumed must meet the definitions of assets and liabilities in chapter 1,
C*inancial 2tatement Concepts,C at the ac+uisition date. *or e>% ample, costs the
ac+uirer e>pects, but is not obliged to incur in the future, to effect its plan to e>it
an acti)ity of an ac+uiree or terminate the em% ployment of or relocate an
ac+uireeBs employees are not liabilities at the ac+uisition date. 1herefore, the
ac+uirer does not recogni4e those costs as part of applying the ac+uisition method.
Instead, the ac+uirer recogni4es those costs in its postcombination financial
statements in accordance !ith other chapters.
FRF-SME 28.0!
Business Combinations 13
28.11 In addition, to +ualify for recognition, the identifiable assets
ac+uired and liabilities assumed must be part of !hat the ac+uirer and the
ac+uiree 7or its former o!ners8 e>changed in the business combination
transaction, rather than the result of separate transactions. 1he ac+uirer should
apply the guidance in paragraphs 2&.K'%.K& to determine !hich assets ac+uired or
liabilities assumed are part of the e>change for the ac% +uiree and !hich, if any,
are the result of separate transactions to be ac% counted for in accordance !ith
their nature and the applicable chapters.
28.12 1he ac+uirerBs application of the recognition principle and
conditions may result in recogni4ing some assets and liabilities that the ac+uiree
had not pre)iously recogni4ed as assets and liabilities in its fi% nancial statements.
*or e>ample, the ac+uirer may recogni4e the ac+uired identifiable intangible
assets, such as a brand name, a patent, or a cus% tomer relationship, that the
ac+uiree did not recogni4e as assets in its financial statements because it
de)eloped them internally and charged the related costs to e>pense.
C$ass"f*"n& or ,es"&nat"n& Ient"f"ab$e Assets Ac:u"re an
."ab"$"t"es Assu'e "n a -us"ness Co'b"nat"on
28.13 At the ac+uisition date, the ac+uirer should classify or desig%
nate the identifiable assets ac+uired and liabilities assumed as necessary to apply
other chapters subse+uently. 1he ac+uirer should ma#e those classifications or
designations on the basis of the contractual terms, eco% nomic conditions, its
operating or accounting policies, and other pertinent conditions as they e>ist at the
ac+uisition date.
28.14 In some situations, other chapters pro)ide for different ac%
counting, depending on ho! an entity classifies or designates a particular asset or
liability.
Measurement rinciple
28.15 1he ac+uirer should measure the identifiable assets ac+uired
and the liabilities assumed at their ac+uisition%date mar#et )alues.
28.16 *or each business combination, the ac+uirer should measure
any noncontrolling interest in the ac+uiree at the noncontrolling interestBs
proportionate share of the ac+uireeBs identifiable net assets.
E/ceptions to the Recognition and Measurement rinciples
28.17 1his chapter pro)ides limited e>ceptions to its recognition and
measurement principles. Paragraphs 2&.1&%.2' specify both the particular items
for !hich e>ceptions are pro)ided and the nature of those e>cep% tions. 1he
ac+uirer should account for those items by applying the re+uire%
ments in paragraphs 2&.1&%.2', !hich !ill result in some items being
a' recogni4ed either by applying recognition conditions in addition
to those in paragraphs 2&.0H%.10 or by applying the re+uire% ments of
other chapters, !ith results that differ from applying
the recognition principle and conditions and
$' measured at an amount other than their ac+uisition%date
mar#et )alues.
FRF-SME 28.17
14 Financial
Reporting Framework for Small- and Medium-Sized Entities
E/ceptions to "oth the Recognition and Measurement rinciples
Intan&"b$e Assets
28.18 An entity should ma#e an accounting policy choice to account
for intangible assets ac+uired in a business combination either by
a' separately recogni4ing the intangible asset as an identifiable as%
set or
$' not separately recogni4ing the intangible asset as an identifi%
able asset and subsuming into good!ill the )alue of the intan% gible
asset.
28.19 *or an intangible asset to be separately recogni4ed as an iden%
tifiable asset, its ac+uisition%date mar#et )alue should be measured reli% ably. 1he
ac+uirer should assign a useful life to the recogni4ed identifiable intangible asset.
;hen the precise length of an intangible assetBs useful life is not #no!n, the
ac+uirer should estimate its useful life. =uidance for determining the useful life of
an intangible asset is pro)ided in para% graph 13.(&. If the ac+uirer cannot reliably
measure the ac+uisition%date mar#et )alue of the intangible asset or cannot
estimate its useful life, then separate recognition of the intangible asset as an
identifiable asset is not permitted and the )alue of the intangible asset should be
subsumed into good!ill.
28.20 1he accounting policy option in paragraph 2&.1& may be made
on an indi)idual intangible asset basis. -nce made, the accounting policy chosen
for a specific intangible asset cannot be subse+uently re)ersed.
Asset Ret"re'ent /b$"&at"ons
28.21 1he ac+uirer should recogni4e and measure an asset retire%
ment obligation associated !ith the assets ac+uired in a business combi% nation in
accordance !ith the section, CAsset 0etirement -bligations,C in
chapter 1', CContingencies.C
Inco'e Ta;es
28.22 If the ac+uirer uses the deferred income ta>es method of ac%
counting for income ta>es, then it should recogni4e and measure a de% ferred
income ta> asset or liability arising from the assets ac+uired and liabilities
assumed in a business combination in accordance !ith chapter
21, CIncome 1a>es.C
28.23 If the ac+uirer uses the deferred income ta>es method of ac%
counting for income ta>es, then it should account for the potential ta> ef% fects of
temporary differences and carryfor!ards of an ac+uiree that e>ist at the
ac+uisition date or arise as a result of the ac+uisition in accordance !ith chapter
21.
E'p$o*ee -enef"ts
28.24 1he accrued benefit obligation is calculated using best
estimate assumptions consistent !ith those that !ill be used on a going% for!ard
basis in accordance !ith chapter 20, C0etirement and -ther Postemployment
9enefits.C 2imilarly, plan assets are )alued at mar#et )alue in accordance !ith
chapter 20. Any pre)iously e>isting, unamorti4ed
FRF-SME 28.18
Business Combinations 1
net actuarial gain 7loss8, unamorti4ed prior ser)ice cost, unamorti4ed
transitional obligation, or unamorti4ed transitional asset is eliminated !ith the
result that the accrued benefit asset or accrued benefit liability is the difference
bet!een the accrued benefit obligation and the mar#et )alue of plan assets. 1he
carrying amount of an accrued benefit asset in the ac+uired entityBs financial
statements may need to be reduced !hen the ac+uirer e>pects limitations on its
ability to access a plan e>cess as
a result of e>isting regulations of the rele)ant ?urisdiction and the plan.
Ine'n"f"cat"on Assets
28.25 1he seller in a business combination may contractually indem%
nify the ac+uirer for the outcome of a contingency or uncertainty related to all or
part of a specific asset or liability. *or e>ample, the seller may indemnify the
ac+uirer against losses abo)e a specified amount on a li% ability arising from a
particular contingencyF in other !ords, the seller !ill guarantee that the ac+uirerBs
liability !ill not e>ceed a specified amount. As a result, the ac+uirer obtains an
indemnification asset. 1he ac+uirer should recogni4e an indemnification asset at
the same time it recogni4es the indemnified item measured on the same basis as
the indemnified item. 1herefore, if the indemnification relates to an asset or
liability that is rec% ogni4ed at the ac+uisition date and measured at its ac+uisition%
date mar% #et )alue, the ac+uirer should recogni4e the indemnification asset at the
ac+uisition date measured at its ac+uisition%date mar#et )alue.
28.26 In some circumstances, the indemnification may relate to an
asset or a liability that is an e>ception to the recognition or measurement
principles. In those circumstances, the indemnification asset should be
recogni4ed and measured using assumptions consistent !ith those used to
measure the indemnified item, sub?ect to managementBs assessment of the
collectability of the indemnification asset and any contractual limita% tions on the
indemnified amount. Paragraph 2&.(1 pro)ides guidance on the subse+uent
accounting for an indemnification asset.
E/ceptions to the Measurement rinciple
Assets Be$ for Sa$e
28.27 1he ac+uirer should measure an ac+uired noncurrent asset 7or
disposal group8 that is classified as held for sale at the ac+uisition date in
accordance !ith chapter 1(, C.isposal of /ong%/i)ed Assets and .iscon%
tinued -perations.C
Reco&n"%"n& an Measur"n& change only e+uity interests, the ac+uisi% tion%
date mar#et )alue of the ac+uireeBs e(uit! interests may be more reli% ably
measurable than the ac+uisition%date mar#et )alue of the ac+uirerBs e+uity
interests. If so, the ac+uirer should determine the amount of good% !ill by
using the ac+uisition%date mar#et )alue of the ac+uireeBs e+uity in% terests
instead of the ac+uisition%date mar#et )alue of the e+uity interests transferred.
1o determine the amount of good!ill in a business combina% tion in !hich no
consideration is transferred, the ac+uirer should use the ac+uisition%date mar#et
)alue of the ac+uirerBs interest in the ac+uiree, determined using a )aluation
techni+ue in place of the ac+uisition%date mar#et )alue of the consideration
transferred.
-ar&a"n Purc!ases
28.30 -ccasionally, an ac+uirer !ill ma#e a bargain purchase, !hich
is a business combination in !hich the amount in paragraph 2&.2&7b8 e>% ceeds
the aggregate of the amounts specified in paragraph 2&.2&7a8. If that e>cess
remains after applying the re+uirements in paragraph 2&.32, the ac+uirer
should recogni4e the resulting gain in net income on the ac+uisi% tion date. 1he
gain should be attributed to the ac+uirer.
28.31 A bargain purchase might happen, for e>ample, in a business
combination that is a forced sale in !hich the seller is acting under com%
pulsion. 6o!e)er, the recognition or measurement e>ceptions for particu% lar
items discussed in paragraphs 2&.1&%.2' may also result in recogni4ing a gain
7or change the amount of a recogni4ed gain8 on a bargain purchase.
28.32 9efore recogni4ing a gain on a bargain purchase, the ac+uirer
should reassess !hether it has correctly identified all the assets ac+uired and
all the liabilities assumed and should recogni4e any additional assets or
liabilities that are identified in that re)ie!. 1he ac+uirer should then re)ie! the
procedures used to measure the amounts this chapter re+uires
to be recogni4ed at the ac+uisition date for all of the follo!ing@
a' 1he identifiable assets ac+uired and liabilities assumed
$' 1he noncontrolling interest in the ac+uiree, if any
c' *or a business combination achie)ed in stages, the ac+uirerBs
pre)iously held e+uity interest in the ac+uiree
d' 1he consideration transferred
1he ob?ecti)e of the re)ie! is to ensure that the measurements appropri%
ately reflect consideration of all a)ailable information as of the ac+uisition date.
FRF-SME 28.2"
Business Combinations 17
Cons"erat"on Transferre
28.33 1he consideration transferred in a business combination should
be measured at mar#et )alue, !hich should be calculated as the sum of the
ac+uisition%date mar#et )alues of the assets transferred by the ac+uirer, the
liabilities incurred by the ac+uirer to former o!ners of the ac+uiree, and the e+uity
interests issued by the ac+uirer.
28.34 1he consideration transferred may include assets or liabilities
of the ac+uirer that ha)e carrying amounts that differ from their mar% #et )alues
at the ac+uisition date 7for e>ample, nonmonetary assets or a business of the
ac+uirer8. If so, the ac+uirer should remeasure the trans% ferred assets or liabilities
to their mar#et )alues as of the ac+uisition date and recogni4e the resulting gains
or losses, if any, in net income. 6o!e)er, sometimes the transferred assets or
liabilities remain !ithin the combined entity after the business combination 7for
e>ample, because the assets or liabilities !ere transferred to the ac+uiree rather
than to its former o!n% ers8 and, therefore, the ac+uirer retains control of them. In
that situation, the ac+uirer should measure those assets and liabilities at their
carrying amounts immediately before the ac+uisition date and should not
recogni4e a gain or loss in net income on assets or liabilities it controls both
before and after the business combination.
Contingent Consideration
28.35 1he consideration the ac+uirer transfers in e>change for the
ac+uiree includes any asset or liability resulting from a contingent consid% eration
arrangement. 1he ac+uirer should recogni4e contingent consider-
ation !hen its payment or receipt is probable and reasonably estimable.
28.36 1he ac+uirer should classify an obligation to pay contingent
consideration as a liability or as e+uity on the basis of the definitions of an e+uity
instrument and a financial liability. 1he ac+uirer should classify as an asset a right
to the return of pre)iously transferred consideration.
A"t"ona$ isting relationships be%
t!een the ac+uirer and ac+uiree
$' A transaction that remunerates employees or former o!ners of
the ac+uiree for future ser)ices
c' A transaction that reimburses the ac+uiree or its former o!ners
for paying the ac+uirerBs ac+uisition%related costs
Ac:u"s"t"on-Re$ate Costs
28.49 "c(uisition-related costs are costs the ac+uirer incurs to effect
a business combination. 1hose costs include finderBs feesF ad)isory, legal,
accounting, )aluation, and other professional or consulting feesF general
administrati)e costs, including the costs of maintaining an internal ac+ui% sitions
departmentF and costs of registering and issuing debt and e+uity securities. 1he
ac+uirer should account for ac+uisition%related costs as e>% penses in the periods
in !hich the costs are incurred and the ser)ices are recei)ed, !ith one e>ception@
1he costs to issue e+uity securities should be
recogni4ed in accordance !ith chapter 1&,C5+uity.C
Subse:uent Measure'ent an Account"n&
28.50 In general, an ac+uirer should subse+uently measure and ac%
count for assets ac+uired, liabilities assumed or incurred, and e+uity in% struments
issued in a business combination in accordance !ith other ap% plicable chapters
for those items, depending on their nature. 6o!e)er, this chapter pro)ides
guidance on subse+uently measuring and accounting for indemnification assets.
Ine'n"f"cat"on Assets
28.51 At the end of each subse+uent reporting period, the ac+uirer
should measure an indemnification asset that !as recogni4ed at the ac+ui% sition
date on the same basis as the indemnified liability or asset, sub?ect to any
contractual limitations on its amount and, for an indemnification asset that is not
subse+uently measured at its mar#et )alue, manage% mentBs assessment of the
collectability of the indemnification asset. 1he ac+uirer should derecogni4e the
indemnification asset only !hen it col% lects the asset, sells it, or other!ise loses
the right to it.
FRF-SME 28.48
Business Combinations 1!1
Co'b"nat"ons of Ent"t"es #ner Co''on Contro$
28.52 1his section applies to combinations bet!een entities under
common control. 1he follo!ing are e>amples of those types of transactions@
a' An entity charters a ne!ly formed entity and then transfers
some or all of its net assets to that ne!ly chartered entity.
$' A parent transfers the net assets of a !holly%o!ned subsidiary
into the parent and li+uidates the subsidiary. 1hat transaction is a
change in legal organi4ation but not a change in the report% ing entity.
c' A parent transfers its controlling interest in se)eral partially
o!ned subsidiaries to a ne!, !holly%o!ned subsidiary. 1hat also is a
change in legal organi4ation but not in the reporting entity.
d' A parent e>changes its o!nership interests or the net assets of
a !holly%o!ned subsidiary for additional shares issued by the parentBs
less%than%!holly%o!ned subsidiary, thereby increasing the parentBs
percentage of o!nership in the less%than%!holly% o!ned subsidiary but
lea)ing all the e>isting, noncontrolling interest outstanding.
e' A parentBs less%than%!holly%o!ned subsidiary issues its shares
in e>change for shares of another subsidiary pre)iously o!ned by the
same parent, and the noncontrolling shareholders are not party to the
e>change. 1hat is not a business combination from the perspecti)e of
the parent.
f' A limited liability company is formed by combining entities un%
der common control.
Reco&n"t"on
28.53 ;hen accounting for a transfer of assets or e>change of shares
bet!een entities under common control, the entity that recei)es the net assets or
the e+uity interests should initially recogni4e the assets and li% abilities transferred
at the date of transfer.
Measure'ent
28.54 ;hen accounting for a transfer of assets or e>change of shares
bet!een entities under common control, the entity that recei)es the net assets or
e+uity interests should initially measure the recogni4ed assets and liabilities
transferred at their carrying amounts in the accounts of the transferring entity at
the date of transfer.
28.55 In some instances, the entity that recei)es the net assets or
e+uity interests 7the recei)ing entity8 and the entity that transferred the net assets
or e+uity interests 7the transferring entity8 may account for similar assets and
liabilities using different accounting methods. In such circumstances, the carrying
amounts of the assets and liabilities trans% ferred may be ad?usted to the basis of
accounting used by the recei)ing entity if the change !ould pro)ide reliable and
more rele)ant information about the effects of transactions, other e)ents, or
conditions on the entityBs financial position, financial performance, or cash flo!s.
Any such change in
FRF-SME 28.
1!2 Financial
Reporting Framework for Small- and Medium-Sized Entities
accounting method should be applied retrospecti)ely, and financial state%
ments presented for prior periods should be ad?usted unless it is imprac% ticable to
do so.
F"nanc"a$ State'ent Presentat"on "n Per"o of Transfer
28.56 1he recei)ing entityBs financial statements should report re%
sults of operations for the period in !hich the transfer occurs as though the
transfer of net assets or e>change of e+uity interests had occurred at the
beginning of the period. 1hus, results of operations for that period !ill comprise
those of the pre)iously separate entities combined from the beginning of the
period to the date the transfer is completed and those of the combined operations
from that date to the end of the period. 9y eliminating the effects of intraentity
transactions !hen determining the results of operations for the period before the
combination, those results !ill be on substantially the same basis as the results of
operations for the period after the date of combination. 1he effects of intraentity
transactions on current assets, current liabilities, re)enue, and cost of sales for
periods presented and on retained earnings at the beginning of the periods pre%
sented should be eliminated to the e>tent possible.
28.57 2imilarly, the recei)ing entity should present the statement of
financial position and other financial information as of the beginning of the period
as though the assets and liabilities had been transferred at that date.
Co'parat"+e F"nanc"a$ State'ent Presentat"on for Pr"or Aears
28.58 *inancial statements and financial information presented for
prior years also should be retrospecti)ely ad?usted to furnish comparati)e
information. All ad?usted financial statements and financial summaries should
indicate clearly that financial data of pre)iously separate entities are combined.
6o!e)er, the comparati)e information in prior years should only be ad?usted for
periods during !hich the entities !ere under common control.
,"sc$osure
28.59 1he ac+uirer should disclose information that enables users of
its financial statements to e)aluate the nature and financial effect of a
business combination that occurs either
a' during the current reporting period or
$' after the end of the reporting period but before the financial
statements are a)ailable to be issued.
28.60 1o meet the ob?ecti)e in paragraph 2&.(H, the ac+uirer should
disclose the follo!ing information for each material business combination@
a' 1he name and a description of the ac+uiree
$' 1he ac+uisition date
c' 1he percentage of )oting e+uity interests ac+uired
d' 1he ac+uisition%date mar#et )alue of the total consideration
transferred and the ac+uisition%date mar#et )alue of each ma?or
class of consideration, such as
FRF-SME 28.!
Business Combinations 1!3
i. cashF
ii. liabilities incurred 7for e>ample, a liability for contingent
consideration8F and
iii. e+uity interests of the ac+uirer, including the number of in%
struments or interests issued or issuable
e' A description of the arrangement and the basis for determin%
ing the amount of the payment for contingent consideration ar%
rangements and indemnification assets
f' A condensed statement of financial position sho!ing the
amounts recogni4ed as of the ac+uisition date for each ma?or
class of assets ac+uired and liabilities assumed
g' 1he amount of any gain recogni4ed in a bargain purchase in
accordance !ith paragraph 2&.2& and the line item in the state%
ment of operations in !hich the gain is recogni4ed
#' 1he amount of the noncontrolling interest in the ac+uiree rec%
ogni4ed at the ac+uisition date and the measurement basis for
that amount
i' 1he accounting policy related to intangible assets ac+uired and
those intangible assets recogni4ed separately, including their
amounts and useful li)es
&' In a business combination achie)ed in stages
i. the ac+uisition%date mar#et )alue of the e+uity interest in
the ac+uiree held by the ac+uirer immediately before the
ac+uisition date and
ii. the amount of any gain or loss recogni4ed as a result of re%
measuring to mar#et )alue the e+uity interest in the ac% +uiree
held by the ac+uirer before the business combination 7see
paragraph 2&.3&8 and the line item in the statement of
operations in !hich that gain or loss is recogni4ed
28.61 *or indi)idually immaterial business combinations occurring
during the reporting period that are material collecti)ely, the ac+uirer
should disclose the follo!ing information@
a' 1he number of entities ac+uired and a brief description of those
entities
$' 1he ac+uisition%date mar#et )alue of the total consideration
transferred
c' 1he number of e+uity instruments or interests of the ac+uirer
issued or issuable
d' A description of the arrangement and the basis for determin%
ing the amount of the payment for contingent consideration ar%
rangements and indemnification assets
28.62 If the ac+uisition date of a business combination is after the
end of the reporting period but before the financial statements are a)ail% able to be
issued, the ac+uirer should disclose the information re+uired by paragraphs
2&.$0%.$1, unless the initial accounting for the business com% bination is
incomplete at the time the financial statements are a)ailable to be issued. In that
situation, the ac+uirer should describe !hich disclosures could not be made and
the reasons !hy they cannot be made.
FRF-SME 28.!2
1!4 Financial
Reporting Framework for Small- and Medium-Sized Entities
Co'b"nat"ons of Ent"t"es #ner Co''on Contro$
28.63 1he notes to financial statements of the recei)ing entity should
disclose the follo!ing for the period in !hich the transfer of assets and li%
abilities or e>change of e+uity interests occurred@
a' 1he name and brief description of the entity included in the re%
porting entity as a result of the net asset transfer or e>change
of e+uity interests
$' 1he method of accounting for the transfer of net assets or
e>change of e+uity interests
FRF-SME 28.!3
New Basis (Push-Down) Accounting 1!
Chapter 2"
'ew "asis 2ush-&own3 Accounting
Purpose an Scope
29.01 1his chapter establishes recognition, measurement, and disclo%
sure principles dealing !ith the comprehensi)e re)aluation of assets and liabilities
by entities in order to establish a ne! cost basis.
Reco&n"t"on
29.02 Assets and liabilities may be comprehensi)ely re)alued by
means of push%do!n accounting !hen an ac+uirer gains control of an entity.
ontrol
1
of an entity is gained !hen more than (0 percent of the outstanding
residual e+uity interests in the entity ha)e been ac+uired, in one or more
transactions bet!een nonrelated parties, by an ac+uirer. 1he ac+uirer may be a
corporation, an indi)idual, or other type of entity permitted by la! or a group of
indi)iduals or entities that act together to ac+uire control of an entity. ;hen an
ac+uirer gains control of an entity 7ac+uisition of an entity8, a ne! cost basis for a
continuing entity may be established.
29.03 In the case of an ac+uisition of an entity, the application of
pus#-down accounting results in comparable accounting to !hat !ould ha)e
resulted had the ac+uirer either purchased the assets and assumed the liabilities of
the entity directly or established a ne! legal entity to hold the assets and assume
the liabilities of the ac+uired entity and continue its operations.
29.04 A comprehensi)e re)aluation is only appropriate !hen the ac%
+uirer, representing an indi)idual or groupBs collecti)e interest, controls the entity.
29.05 ;hen one or more transactions ta#e place bet!een nonrelated
parties, it is presumed that the transaction or transactions ha)e been bar% gained in
an armBs length manner bet!een #no!ledgeable, !illing parties !ho are under no
compulsion to act and, therefore, that )alues determined in that process represent
mar#et )alue. 6o!e)er, transactions bet!een re% lated parties are not an
appropriate basis for a comprehensi)e re)aluation. 7*or purposes of this chapter,
related parties are as defined in chapter 2$, C0elated Party 1ransactions.C8 ;hen
an indi)idual or entity already o!ns an e+uity interest in an entity, the re)aluation
or mar#et )alue is propor% tionate to that o!nerBs increase in o!nership. *or
e>ample, if a 10%percent o!ner ac+uires the e+uity interest of a H0%percent o!ner,
the re)aluation is stepped up for the H0 percent that represents the ne! o!nership.
29.06 ;hen ne! costs are not reasonably determinable for indi)idual
assets and liabilities, comprehensi)e re)aluation is not appropriate. An e>ample
of !hen ne! costs are not reasonably determinable is in an ac+ui% sition !hen an
entity is ac+uired as part of a group purchase 7that is, !hen a group of assets and
liabilities is ac+uired for a single amount8, and the entity does not ha)e, and
cannot obtain, from the ac+uirer details of the purchase price and its allocation
among assets and liabilities.
1 Italici4ed terms are defined in the glossary.
FRF-SME 2".0!
1!! Financial
Reporting Framework for Small- and Medium-Sized Entities
29.07 Comprehensi)e re)aluation of assets and liabilities through
the application of push%do!n accounting is not re+uired !hen the condi% tion in
paragraph 2H.02 is met as a result of the ac+uisition of an entity. Application of
push%do!n accounting is based on the presumption that the ac+uirer !ould find
the ne! costs more useful !hen e)aluating in)est% ment returns and entity
performance. In situations in !hich the ac+uirer prefers to retain old cost basis
financial statements 7either for its o!n pur% poses or the purposes of other financial
statement users, such as holders of outstanding public debt8, push%do!n
accounting is not re+uired.
Ac:u"s"t"on of an Ent"t*EPus!-,o(n Account"n&
Measure'ent
29.08 ;hen a comprehensi)e re)aluation of an entityBs assets and
liabilities is underta#en as a result of a transaction or transactions as de% scribed in
paragraph 2H.02, push%do!n accounting may be applied.
29.09 1he application of push%do!n accounting pro)ides symmetry
bet!een the carrying amounts of assets and liabilities reported in the ac+uired
entityBs financial statements and the carrying amounts of assets and liabilities
reported in the consolidated financial statements of the parent.
29.10 ;hen applying push%do!n accounting, the )alues used are
those resulting from accounting for the ac+uisition7s8 in accordance !ith
chapter 2&, C9usiness Combinations.C
29.11 ;hen an ac+uisition is financed by debt, in !hole or in part,
it is not considered appropriate for the ac+uired entity to record the debt, unless it
is a liability of the ac+uired entity.
Reta"ne Earn"n&s an t!e Re+a$uat"on A5ust'ent
29.12 ;hen a comprehensi)e re)aluation of an entityBs assets and
liabilities is underta#en as a result of a transaction or transactions as described in
paragraph 2H.02, the transaction should be accounted for as a capital transaction,
and the portion of retained earnings that has not been included in the consolidated
retained earnings of the ac+uirer or is not related to any continuing, noncontrolling
interests in the entity should be reclassified to either capital stoc#, additional paid%
in capital, or a sepa% rately identified account !ithin shareholdersB e+uity.
29.13 2hareholdersB e+uity is also restated to reflect the purchase
transaction or transactions.
29.14 1he treatment accorded to retained earnings is also applied
to other shareholdersB e+uity accounts that arose prior to the purchase transaction
or transactions and that are not specifically related to capital in)ested.
29.15 1he purpose of the re)aluation of assets and liabilities is to pro%
)ide information for assessing returns that reflect the in)estment of the controlling
shareholder in the entity. It is consistent !ith this purpose that the re)aluation
ad?ustment 7the net effect of the re)aluation of the entityBs assets and liabilities8 is
accounted for as capital of the ac+uired entity. 1he re)aluation ad?ustment is
included in either capital stoc#, additional paid% in capital, or a separately
identified account !ithin shareholdersB e+uity.
FRF-SME 2".07
New Basis (Push-Down) Accounting 1!7
Inco'e Ta; -enef"ts
29.16 es method, deferred income ta>
assets are appropriately recogni4ed as part of a comprehensi)e re)alua% tion to the
e>tent that they are more li#ely than not to be reali4ed 7see chapter 21, CIncome
1a>esC8. .eferred income ta> assets that are not con% sidered to be more li#ely than
not to be reali4ed at the time of the compre% hensi)e re)aluation should be
e>cluded from the re)aluation. If such an unrecogni4ed deferred income ta> asset
!ere recogni4ed subse+uent to the application of push%do!n accounting, the
benefit should be recogni4ed in net income 7or, if chapter 21 so re+uires, outside
net income8.
,"sc$osure
29.17 In the period that push%do!n accounting has been first applied,
the financial statements should disclose the follo!ing@
a' 1he date push%do!n accounting !as applied and the date or
dates of the purchase transaction or transactions that led to the
application of push%do!n accounting
$' A description of the situation resulting in the application of
push%do!n accounting
c' 1he amount of the change in each ma?or class of assets, liabili%
ties, and shareholdersB e+uity arising from the application of
push%do!n accounting
29.18 In the fiscal period that push%do!n accounting has been applied
and the follo!ing fiscal period, the financial statements should disclose
a' the date push%do!n accounting !as appliedF
$' the amount of the re)aluation ad?ustment and the sharehold%
ersB e+uity account in !hich the re)aluation ad?ustment !as
recordedF and
c' the amount of retained earnings reclassified and the sharehold%
ersB e+uity account to !hich it !as reclassified.
FRF-SME 2".18
1!8 Financial Reporting Framework for Small- and Medium-Sized Entities
Chapter 30
'onmonetar+ !ransactions
Purpose an Scope
30.01 1his chapter establishes principles for the recognition, mea%
surement, and disclosure of nonmonetary transactions. It defines !hen an
e>change of assets is measured at mar#et )alue and !hen an e>change of
assets is measured at the carr!ing amount.1
30.02 1his chapter applies to nonmonetary transactions e>cept
a' business combinations that are accounted for in accordance
!ith chapter 2&, C9usiness CombinationsFC
$' transactions in)ol)ing retirement and other postemployment
benefits that are accounted for in accordance !ith chapter 20,
C0etirement and -ther Postemployment 9enefitsFC and
c' the replacement, through insurance or e>propriation proceeds,
of nonmonetary assets that are lost, destroyed, or e>propriated. 1hese
items are monetary transactions.
Measure'ent
30.03 An entity should measure an asset e>changed or transferred in
a nonmonetary transaction at the more reliably measurable of the mar#et )alue of
the asset gi)en up and the mar#et )alue of the asset recei)ed,
unless
a' the transaction lac#s commercial su$stanceF
$' the transaction is an e>change of a product or property held for
sale in the ordinary course of business for a product or property to be
sold in the same line of business to facilitate sales to cus%
tomers other than the parties to the e>changeF
c' neither the mar#et )alue of the asset recei)ed nor the mar#et
)alue of the asset gi)en up is reliably measurableF
d' the transaction is a nonmonetary nonreciprocal transfer to o!n%
ers to !hich paragraph 30.10 appliesF or
e' the transaction is bet!een related parties and is not in the nor%
mal course of operations. changed or transferred
in a nonmonetary transaction that is not measured at mar#et )alue in ac% cordance
!ith paragraph 30.03 at the carrying amount of the asset gi)en up, ad?usted by the
mar#et )alue of any monetary consideration recei)ed or gi)en.
1 Italici4ed terms are defined in the glossary.
FRF-SME 30.01
Nonmonetary Transactions 1!"
30.05 ;hen an e>change described in paragraph 30.0K in)ol)es par%
tial monetary consideration, the carrying amount of the asset gi)en up is ad?usted
by the mar#et )alue of the monetary consideration. 1he en% tity paying the
monetary consideration measures the nonmonetary asset recei)ed at the carrying
amount of the asset gi)en up, plus the mar#et )alue of the monetary consideration
paid. 1he entity recei)ing the mon% etary consideration measures the nonmonetary
asset recei)ed at the car% rying amount of the nonmonetary asset gi)en up less the
mar#et )alue of the monetary consideration recei)ed, unless the monetary
consideration e>ceeds the carrying amount, in !hich case, a gain is recogni4ed for
the amount of such e>cess.
Measure'ent Cr"ter"a
30.06 ;hen an entity is able to reliably determine the mar#et )alue
of both the asset recei)ed and the asset gi)en up, the mar#et )alue of the asset
gi)en up is used to measure the asset recei)ed unless the mar#et )alue of the
asset recei)ed is more reliably measurable. If mar#et )alue is not reliably
measureable, then the transaction is based on the carrying amounts.
Co''erc"a$ Substance
30.07 A nonmonetary transaction has commercial substance !hen
the entityBs future cash flo!s are e>pected to change significantly as a result of the
transaction. 1he entityBs future cash flo!s are e>pected to
change significantly !hen
a' the configuration of the future cash flo!s of the asset recei)ed
differs significantly from the configuration of the cash flo!s of
the asset gi)en up 7see paragraph 30.0&8 or
$' the entit!-specific value of the asset recei)ed differs from the
entity%specific )alue of the asset gi)en up, and the difference is
significant relati)e to the mar#et )alue of the assets e>changed.
In some cases, a +ualitati)e assessment !ill be conclusi)e !hen deter%
mining that the estimated cash flo!s of the entity are e>pected to change
significantly as a result of the transaction.
30.08 1he configuration of future cash flo!s is composed of the ris#,
timing, and amount of the cash flo!s. A change in any one of these consid% erations
is a change in the configuration.
30.09 5ntity%specific )alue, resulting from entity%specific measure%
ment, differs from mar#et )alue. It attempts to capture the )alue of an item in the
conte>t of the reporting entity. 1he entity uses its e>pectations about its use of the
asset rather than the use assumed by mar#etplace participants.
Restructur"n& or .":u"at"on
30.10 An entity should measure a nonmonetary nonreciprocal trans%
fer to o!ners that represents a spin%off or other form of restructuring or
li+uidation at the carrying amount of the nonmonetary assets or liabilities
transferred.
FRF-SME 30.10
170 Financial
Reporting Framework for Small- and Medium-Sized Entities
Reco&n"t"on of t of accounting for intangible assets, cost is defined as the
amount of cash or cash e+ui)alents paid or the mar#et )alue of other
consideration gi)en to ac+uire an asset at the time of its ac+uisition or
construction, or, !hen appropriate, the amount attributed to that asset
!hen initially recogni4ed in accordance !ith the re+uirements of other
chapters.
cost 'benefit( of current incoe taxes. 1he amount of income ta>es
payable 7refundable8 in respect of the period.
cost 'benefit( of deferred incoe taxes. 1he change during the period
in deferred income ta> liabilities and deferred income ta> assets.
cost et$od. A basis of accounting for in)estments !hereby the in)est%
ment is initially recorded at costF earnings from such in)estments are
recogni4ed only to the e>tent recei)ed or recei)able.
date of transition to t$e )*) for +,-s accounting frae%or.. 1he
beginning of the earliest period for !hich an entity presents financial
statements under the *0* for 235s accounting frame!or#.
deferred incoe tax assets. 1he amounts of income ta> benefits aris%
ing in respect of
A deductible temporary differencesF
A the carryfor!ard of unused ta> lossesF and
A the carryfor!ard of unused income ta> reductions, e>cept for in%
)estment ta> credits.
deferred incoe tax liabilities. 1he amounts of income ta>es arising
from ta>able temporary differences.
deferred incoe taxes et$od. A method of accounting under !hich
an entity reports as an e>pense 7income8 of the period the cost 7ben% efit8
of current income ta>es and the cost 7benefit8 of deferred income ta>es,
determined in accordance !ith the rules established by ta>a% tion
authorities.
defined benefit plan. A pension plan that defines the amount of pension
benefit to be pro)ided. 1he amount of the benefit is usually a function of
one or more factors such as age, years of ser)ice, or compensation. Any
pension plan that does not meet the definition of a defined contri% bution
plan should be considered a defined benefit plan.
defined contribution plan. A plan that pro)ides benefits for ser)ices
rendered based solely on the amount contributed to each plan partici%
pantBs account and the returns on the in)estment of those contribu% tions.
5ach participant has his or her o!n account and, in many cases, directs
the in)estment of the contribution. 1he plan specifies ho! the
contribution amounts are to be determined.
depreciation. A method of allocating the cost of a tangible asset o)er its
useful life and begins !hen the asset is placed in ser)ice.
derecognition. 1he remo)al of a pre)iously recogni4ed financial asset
or financial liability from an entityBs statement of financial position.
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Glossary 177
derivative. A contract !ith all three of the follo!ing characteristics@
A Its )alue changes in response to the change in a specified interest
rate, financial instrument price, commodity price, foreign e>change rate,
inde> of prices or rates, a credit rating or credit inde>, or other )ariable
7sometimes called the CunderlyingC8 pro)ided in the case of a nonfinancial
)ariable that the )ariable is not specific to a party to the contract.
A It re+uires no initial net in)estment or an initial net in)estment
that is smaller than !ould be re+uired for other types of contracts that
!ould be e>pected to ha)e a similar response to changes in mar#et
factors.
A It is settled at a future date.
developent. 1he application of research findings or other #no!ledge to
a plan or design for the production of ne! or substantially impro)ed
materials, de)ices, products, processes, systems, or ser)ices before the start of
commercial production or use.
direct financing lease. A lease that, from the point of )ie! of the lessor,
transfers substantially all the benefits and ris#s incident to o!ner% ship of
property to the lessee and, at the inception of the lease, the mar#et )alue of
leased property is the same as its carrying amount to the lessor 7usually not a
manufacturer or dealer8. A lease is not precluded from being classified as a
direct financing lease after it is rene!ed or e>tended, e)en though the
carrying amount of the prop% erty at the end of the original lease term is
different from its mar#et )alue at that date.
disposal group. A group of assets to be disposed of, by sale or other!ise,
together as a group in a single transaction, and liabilities directly associated
!ith those assets that !ill be transferred in the transac% tion. 75>amples of
such liabilities include, but are not limited to, legal obligations that transfer
!ith a long%li)ed asset, such as certain en% )ironmental obligations, and
obligations that, for business reasons, a potential buyer !ould prefer to settle
!hen assumed as part of a group, such as !arranty obligations that relate to
an ac+uired cus%
tomer base.8
dividends. .istributions paid or payable in cash or other assets and do
not include distributions of shares unless the effect is to change the e+uity
interests of t!o or more classes of shares.
econoic life of t$e leased propert!. 1he estimated remaining period
during !hich the property is e>pected to be economically usable by one or
more users, !ith normal repairs and maintenance, for the pur% pose for !hich
it !as intended at the inception of the lease and !ith% out limitation by the
lease term.
entit!"specific value. 1he present )alue of the cash flo!s an entity e>%
pects to arise from the continuing use of an asset and its disposal at the end of
its useful life or e>pects to incur !hen settling a liability. 5ntity%specific
)alue resulting from entity%specific measurement dif% fers from mar#et )alue.
It attempts to capture the )alue of an item in the conte>t of the reporting
entity. 1he entity uses its e>pectations about its use of the asset, rather than
the use assumed by mar#et% place participants.
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equit!. 1he residual interest in the assets of the entity after deducting
all of its liabilities.
equit! instruent. Any contract that e)idences a residual interest in
the assets of an entity after deducting all of its liabilities.
equit! interests. ample, insurance, maintenance cost, and property ta>es8.
financial asset. Any asset that is
A cashF
A a contractual right to recei)e cash or another financial asset from
another partyF
A a contractual right to e>change financial instruments !ith another
party under conditions that are potentially fa)orableF or
A an e+uity instrument of another entity.
1he cost incurred by an entity to purchase a right to reac+uire its o!n
e+uity instruments from another party is a deduction from its e+uity, not a
financial asset.
financial instruent. A contract that creates a financial asset for one
entity and a financial liability or e+uity instrument of another entity.
financial liabilit!. Any liability that is a contractual obligation to
A deli)er cash or another financial asset to another party or
A e>change financial instruments !ith another party under condi%
tions that are potentially unfa)orable to the entity.
financing activities. Acti)ities that result in changes in the si4e and
composition of the e+uity capital and borro!ings of the entity.
financing fees and transaction costs. *inancing fees are amounts that
compensate the lender for the ris# of pro)iding funds to the borro!er.
*inancing fees, sometimes referred to as fees in lieu of interest, loan
fees, or financing costs, include
A fees charged to originate, arrange, or syndicate a loan or debt
financingF
A commitment, standby, and guarantee feesF and
A refinancing, restructuring, and renegotiation fees.
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Glossary 17"
*inancing fees may be refundable or nonrefundable.
*ransaction costs are incremental costs that are directly attributable
to the ac+uisition, issue, or disposal of a financial asset or financial liability.
1ransaction costs include e>penditures such as legal fees, re% imbursement of
the lenderBs administrati)e costs, and appraisal costs associated !ith a loan.
fir purc$ase coitent. An agreement !ith an unrelated party,
binding on both parties and usually legally enforceable, that
A specifies all the significant terms, including the price and timing of
the transaction and
A includes a disincenti)e for nonperformance that is sufficiently
large to ma#e performance probable.
foreign currenc! transactions. 1ransactions of the reporting entity
!hose terms are denominated in a currency other than its reporting currency.
forer eplo!ees. *ormer employees are those !ho are retired, !hose
employment has been terminated, or !ho ha)e left the entity. *or chapter 20,
acti)e, former, and inacti)e employees are referred to col% lecti)ely as
emplo!ees.
good%ill. An asset representing the future economic benefits arising
from other assets ac+uired in a business combination that are not in%
di)idually identified and separately recogni4ed.
identifiable. An asset is identifiable if it either
A is separable 7that is, capable of being separated or di)ided from the
entity and sold, transferred, licensed, rented, or e>changed, either
indi)idually or together !ith a related contract, identifiable asset,
or liability, regardless of !hether the entity intends to do so8 or
A arises from contractual or other legal rights, regardless of !hether
those rights are transferable or separable from the entity or from other
rights and obligations.
ipracticable. A re+uirement is considered impracticable !hen the en%
tity cannot apply it after ma#ing e)ery reasonable effort to do so.
In the conte>t of applying a change in an accounting policy, for a par%
ticular prior period, it is impracticable to apply a change in an ac%
counting policy retrospecti)ely if
A the effects of the retrospecti)e application are not determinableF
A the retrospecti)e application re+uires assumptions about !hat
managementBs intent !ould ha)e been in that periodF or
A the retrospecti)e application re+uires significant estimates of
amounts, and it is impossible to distinguish ob?ecti)ely informa%
tion about those estimates that
E pro)ides e)idence of circumstances that e>isted on the date7s8
at !hich those amounts are to be recogni4ed, measured, or dis%
closed and
E !ould ha)e been a)ailable !hen the financial statements for
that prior period !ere a)ailable to be issued.
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Financial Reporting Framework for Small- and Medium-Sized Entities
inception of t$e lease. 1he earlier of the date of the lease agreement
and the date of a commitment that is signed by the parties to the lease
transaction and includes the principal terms of the lease 7this is the effecti)e
date used for classification of the lease8.
incoe taxes. Income ta>es include
A all domestic and foreign ta>es that are based on ta>able incomeF
A ta>es that are based on a measure of re)enue less certain specified
e>pensesF
A alternati)e minimum income ta>es, including ta>es based on mea%
sures other than income and that may be used to reduce income
ta>es of another periodF and
A fees assessed on re)enues if the entity does not pay ta>es on profits.
initial direct costs. 1hose costs incurred by the lessor that are directly
associated !ith negotiating and e>ecuting a specific leasing transac% tion.
2uch costs include commissions, legal fees, and costs of preparing and
processing documents for ne! leases. 2uch costs do not include super)isory
and administrati)e costs, promotion and lease design costs intended for
recurring use, costs incurred in collection acti)ities, and pro)isions for
uncollectable rentals.
insurance contract. A contract under !hich one party 7the insurer8 ac%
cepts significant insurance ris# from another party 7the policyholder8 by
agreeing to compensate the policyholder if a specified uncertain future e)ent
7the insured e)ent8 ad)ersely affects the policyholder. In% surance contracts
include any contract based on climatic, geological, or other physical
)ariables.
intangible asset. An identifiable, nonmonetary asset !ithout physical
substance that the entity controls and !hich embodies future eco% nomic
benefits.
interest rate iplicit in t$e lease. 1he discount rate that, at the incep%
tion of the lease, causes the aggregate present )alue of
A the minimum lease payments, from the standpoint of the lessor, e>%
cluding that portion of the payments representing e>ecutory costs
to be paid by the lessor and any profit on such costs and
A the unguaranteed residual )alue accruing to the benefit of the
lessor
to be e+ual to the mar#et )alue of the leased property to the lessor at
the inception of the lease.
inventories. Assets that are
A held for sale in the ordinary course of businessF
A in the process of production for such saleF or
A in the form of materials or supplies to be consumed in the produc%
tion process or in the rendering of ser)ices, or pac#aging supplies.
investing activities. 1he ac+uisition and disposal of long%term assets
and other in)estments not included in cash e+ui)alents.
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Glossary 181
&oint control. Loint control of an economic acti)ity is the contractually
agreed sharing of the continuing po!er to determine its strategic op% erating,
in)esting, and financing policies.
&oint venture. An economic acti)ity resulting from a contractual ar%
rangement !hereby t!o or more )enturers participate, directly or in% directly,
in the ?ointly%controlled economic acti)ity.
lease. 1he con)eyance, by a lessor to a lessee, of the right to use a tangible
asset, usually for a specified period of time in return for rent.
lease induceents. Incenti)es for a lessee to sign a lease 7for e>ample,
an upfront cash payment to the lessee, an initial rent%free period or reduced
rent payments in early periods, the reimbursement of costs of the lessee such
as mo)ing costs or leasehold impro)ements, or the assumption by the lessor
of the lesseeBs pree>isting lease8.
lease ter. 1he fi>ed, noncancellable period of the lease plus
A all periods co)ered by $argain renewal optionsF
A all periods for !hich failure to rene! !ould impose on the lessee a
penalty sufficiently large that rene!al appears, at the inception of
the lease, reasonably assuredF
A all periods co)ered by ordinary rene!al options during !hich the
lessee has underta#en to guarantee the lessorBs debt related to the
leased propertyF
A all periods co)ered by ordinary rene!al options preceding the date
on !hich a bargain purchase option is e>ercisableF and
A all periods representing rene!als or e>tensions of the lease at the
lessorBs option
pro)ided that the lease term does not e>tend beyond the date a bar%
gain purchase option becomes e>ercisable.
1he lease term is considered to be noncancellable if cancellation is
possible only
A upon the occurrence of some remote contingencyF
A !ith permission of the lessorF
A upon the lessee entering into a ne! lease for the same or e+ui)a%
lent property !ith the same lessorF or
A upon payment by the lessee of a penalty sufficiently large that con%
tinuation of the lease appears, at the inception of the lease, reason% ably
assured.
lessee/s rate for increental borro%ing. 1he interest rate that, at the
inception of the lease, the lessee !ould ha)e incurred to borro!, o)er a
similar term and !ith similar security for the borro!ing, the funds necessary
to purchase the leased asset.
long"lived asset. An asset that does not meet the definition of a current
asset 7see chapter (, CCurrent Assets and Current /iabilitiesC8. 1he
term long-lived asset could include an asset group or disposal group.
ar.et value. 1he amount of the consideration that !ould be agreed
upon in an armBs length transaction bet!een #no!ledgeable, !illing parties
!ho are under no compulsion to act.
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0elated to lease accounting@
A ;hen the lessor is a manufacturer or dealer, the mar#et )alue of
the property at the inception of the lease !ill usually be its normal
selling price, reflecting any )olume or trade discounts that may be
applicable. 6o!e)er, the determination of mar#et )alue !ould be made
in light of mar#et conditions pre)ailing at the time, !hich may
indicate that the mar#et )alue of the property is less than the normal
selling price.
A ;hen the lessor is not a manufacturer or dealer, the mar#et )alue
of the property at the inception of the lease !ill usually be its cost to
the lessor, reflecting any )olume or trade discounts that may be
applicable. 6o!e)er, !hen there has been a lapse of time bet!een the
date of ac+uisition of the property by the lessor and the in% ception of
the lease, the determination of mar#et )alue !ould be made in light of
mar#et conditions pre)ailing at the inception of the lease, !hich may
indicate that the mar#et )alue of the property is greater or less than its
cost or carrying amount.
aterialit!. 3ateriality is the term used to describe the significance of
financial statement information to users. An item of information, or an
aggregate of items, is material if it is probable that its omission or
misstatement !ould influence or change a decision. 3ateriality is a matter
of professional ?udgment in the particular circumstances.
iniu lease pa!ents.
A *rom the point of )ie! of the lessee, minimum lease payments
comprise
E the minimum rental payments called for by the lease o)er the
lease termF
E any partial or full guarantee, by the lessee or a third party re%
lated to the lessee, of the residual )alue of the leased property at
the end of the lease term 7!hen the lessee agrees to ma#e up a
deficiency in the lessorBs reali4ation of the residual )alue belo! a
stated amount, the guarantee to be included in the minimum lease
payments is the stated amount rather than an
estimate of the deficiency to be made up8F and
E any penalty re+uired to be paid by the lessee for failure to re%
ne! or e>tend the lease at the end of the lease term
pro)ided that if the lease contains a bargain purchase option, only the
total of the minimum rental payments o)er the lease term and the
payment called for by the bargain purchase option is included in mini%
mum lease payments. /ease payments that depend on factors measur% able
at the inception of the lease, such as the consumer price inde> or the
prime interest rate, are not, in substance, contingent rentals in their
entirety, and are included in the minimum lease payments based on the
inde> or rate e>isting at the inception of the lease.
A *rom the point of )ie! of the lessor, minimum lease payments
comprise
E minimum lease payments for the lessee as described pre)i%
ously and
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Glossary 183
E any residual )alue or rental payments beyond the lease term
guaranteed by a third party unrelated to either the lessee or lessor,
pro)ided that the guarantor is financially capable of dis% charging the
obligations under the guarantee.
onetar! ites. 3oney, and claims to money, the )alue of !hich 7in
terms of the monetary unit, !hether foreign or domestic8 is fi>ed by contract
or other!ise.
onetar! assets and liabilities. 3oney, monetary assets to be re%
cei)ed, or claims to future cash flo!s that are fi>ed or determinable in
amounts and timing by contract or other arrangement. 5>amples are cash and
accounts and notes recei)able and payable in cash.
ore li.el! t$an not. An e)ent is more li#ely than not !hen the prob%
ability that it !ill occur is greater than (0 percent.
ultieplo!er plan. A defined benefit plan under !hich a single plan
funds the benefits for employees of different unrelated companies. 1hese
types of plans are often set up as a result of union contracts. 1he plan
assumes the liability for benefits to all participants !ithout regard to the
company. Although contributions are determined on an annual basis by a
formula specified in the plan, if a company termi% nates its participation in
the plan, it may be sub?ect to a termination liability.
near ter. A period of time not to e>ceed one year from the date of the
financial statements.
net reali#able value. 1he estimated selling price in the ordinary course
of business less the estimated costs of completion and the estimated costs
necessary to ma#e the sale.
noncontrolling interest. 1he e+uity in a subsidiary not attributable,
directly or indirectly, to a parent.
nononetar! assets and liabilities. Assets and liabilities that are not
monetary. 5>amples are in)entoriesF in)estments in common stoc#F property,
plant, and e+uipmentF and liabilities for rent collected in ad% )ance. A
contractual right to recei)e ser)ices in the future is a non% monetary asset,
and a contractual obligation to perform ser)ices in the future is a
nonmonetary liability.
nononetar! transactions. onmonetary transactions are either
A nononetar! exc$anges, !hich are e>changes of nonmonetary
assets, liabilities, or ser)ices for other nonmonetary assets, liabili% ties, or
ser)ices !ith little or no monetary consideration in)ol)ed or
A nononetar! nonreciprocal transfers, !hich are transfers of
nonmonetary assets, liabilities, or ser)ices !ithout consideration.
onreciprocal transfers include, but are not limited to
E donations of nonmonetary assets or ser)icesF
E payments of di)idends%in%#indF
E stoc# di)idends, !hen the shareholder has the option of recei)%
ing cash or sharesF and
E the distribution of assets to o!ners in the li+uidation of all, or
part, of an entity.
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Financial Reporting Framework for Small- and Medium-Sized Entities
1he issue of shares in a stoc# split and the payment of nonoptional
stoc# di)idends are not nonreciprocal transfers.
obligation for retireent and ot$er posteplo!ent benefits. 1he
actuarial present )alue as of a particular date of benefits e>pected to be paid
under a defined benefit plan. 1he obligation is measured on the basis of the
e>pected amount and timing of future benefits, ta#ing into consideration the
e>pected future cost of pro)iding the benefits and the e>tent to !hich the
costs are shared by employees or others.
operating activities. 1he principal re)enue%producing acti)ities of
the entity and all other acti)ities that are not in)esting or financing acti)ities.
operating lease. A lease in !hich the lessor does not transfer substan%
tially all the benefits and ris#s incident to o!nership of property.
o%ners. tent that sufficient assets are in the separate entity, the
reporting entity !ill ha)e no obligation to pay the related retire% ment and
other postemployment benefits directly.
Plan assets include any financial instruments issued by the reporting
entity and held by the trust or other legal entity. *or the purposes of the *0*
for 235s accounting frame!or#, plan assets do not include amounts held by
the reporting entity and not yet paid into the trust or other legal entity. Plan
assets may include certain arrangements !ith insurance entities.
percentage of copletion et$od. A method of accounting that rec%
ogni4es re)enue proportionately !ith the degree of completion of the
rendering of goods or ser)ices under a contract.
prior period errors. -missions from, and misstatements in, the entityBs
financial statements for one or more prior periods arising from a fail%
ure to use, or the misuse of, reliable information that
A !as a)ailable !hen financial statements for those periods !ere
a)ailable to be issued and
A could reasonably be e>pected to ha)e been obtained and ta#en
into account in the preparation and presentation of those financial
statements.
2uch errors include the effects of mathematical mista#es, mista#es in
applying accounting policies, o)ersights or misinterpretations of facts, and
fraud.
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Glossary 18
probable. 1he future e)ent or e)ents are li#ely to occur. Probable is a
higher le)el of li#elihood than Cmore li#ely than not.C Probable does not mean
)irtually certain.
proissor! estoppel. 1he legal principle that a promise or assurance
made !ithout consideration may, nonetheless, be enforced to pre)ent
in?ustice, !hen the promise or assurance !as intended to affect a con% tract or
other legal relationship bet!een the promisor and the prom% isee and be acted
on, and the promisee acted on the promise or assur% ance or, in some !ay,
changed its position.
propert!0 plant0 and equipent. Identifiable tangible assets that meet
all the follo!ing criteria@
A Are held for use in the production or supply of goods and ser)ices,
for administrati)e purposes, or for the de)elopment, construction,
maintenance, or repair of other property, plant, and e+uipment
A 6a)e been ac+uired, constructed, or de)eloped !ith the intention of
being used on a continuing basis
A Are not intended for sale in the ordinary course of business
proportionate consolidation. A method of accounting and reporting
only applicable to unincorporated entities in !hich it is an established
industry practice, !hereby a )enturer may account in its financial statements
for its pro rata share of the assets, liabilities, re)enues, and e>penses that are
sub?ect to ?oint control. 1he )enturerBs pro rata share of the assets, liabilities,
re)enues, and e>penses that are sub?ect to ?oint control is combined on a line%
by%line basis !ith similar items in the )enturerBs financial statements. 1his
method of accounting dif% fers from full consolidation in that only the
)enturerBs portion of all assets, liabilities, re)enues, and e>penses is
recogni4ed rather than the full amount, offset by noncontrolling interests.
prospective application. A change in an accounting policy, and of recog%
ni4ing the effect of a change in an accounting estimate, that consists of
A applying the ne! accounting policy to transactions, other e)ents,
and conditions occurring after the date the policy is changed and
A recogni4ing the effect of the change in the accounting estimate in
the current and future periods affected by the change.
pus$"do%n accounting. A techni+ue that attributes re)ised )alues to
the assets and liabilities reported in the entityBs financial statements based on
a purchase transaction or transactions of its e+uity interests. Application of
the techni+ue results in the ac+uirerBs cost being as% signed to the assets and
liabilities of the ac+uired entity.
reasonabl! possible. 1he chance of the occurrence 7or nonoccurrence8 of
the future e)ent7s8 is more than remote but less than li#ely.
related parties. 0elated parties e>ist !hen one party has the ability to
e>ercise, directly or indirectly, control, ?oint control, or significant in% fluence
o)er the other. 1!o or more parties are related !hen they are sub?ect to
common control, ?oint control, or common significant influ% ence. 0elated
parties also include management and immediate family members.
related part! transaction. A transfer of economic resources or obli%
gations bet!een related parties, or the pro)ision of ser)ices by one
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Financial Reporting Framework for Small- and Medium-Sized
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part
y to
a related party, regardless of !hether any consideration is e>%
changed. 1he parties to the transaction are related prior to the trans%
action. ;hen the relationship arises as a result of the transaction, the
transaction is not one bet!een related parties.
reote. 1he chance of the occurrence 7or nonoccurrence8 of the future
e)ent7s8 is slight.
reporting entit!. In the conte>t of chapter 31, C*oreign Currency 1rans%
lation,C an entity !hose financial statements include transactions en% tered
into by the entity in a foreign currency.
researc$. -riginal and planned in)estigation underta#en !ith the
prospect of gaining ne! scientific or technical #no!ledge and
understanding.
residual value. 1he estimated net reali4able )alue of an item of property,
plant, and e+uipment at the end of its useful life to an entity. 0esidual
)alue is entity%specific compared to sal)age )alue.
In the conte>t of intangible assets, residual )alue is defined as the
estimated amount that an entity !ould currently obtain from disposal of
the asset after deducting the estimated costs of disposal, if the asset !ere
already of the age and in the condition e>pected at the end of its useful
life.
residual value of t$e leased propert!. 1he estimated mar#et )alue of
the leased property at the end of the lease term.
retained earnings. Comprises the accumulated balance of income less
losses arising from the operation of the business after ta#ing into account
di)idends and other amounts that may properly be charged or credited
thereto. ;hen the accumulation is a negati)e figure, Cac% cumulated
deficitC is a suitable designation. As used in the *0* for 235s accounting
frame!or#, the term retained earnings also refers
to o!nersB capital accounts, depending upon the nature of the entity.
retireent. 0etirement of a long%li)ed asset is its other%than%temporary
remo)al from ser)ice, including its sale, abandonment, recycling, or
disposal in some other manner, but not its temporary idling.
retrospective application. A type of application that applies a ne! ac%
counting policy to transactions, other e)ents, and conditions as if that
policy had al!ays been applied.
retrospective restateent. Correcting the recognition, measurement,
and disclosure of amounts of elements of financial statements as if a prior
period error had ne)er occurred.
revenue. 1he inflo! of cash, recei)ables, or other consideration arising
in the course of the ordinary acti)ities of an entity, normally from the sale
of goods, the rendering of ser)ices, and the use by others of entity
resources yielding interest, royalties, and di)idends. 0e)enue is net of
items such as trade or )olume discounts, returns and allo!ances, claims
for damaged goods, and certain e>cise and sales ta>es. 5>cise and sales
ta>es to be netted against re)enue !ould normally include those imposed
at the time of sale and !ould normally e>clude those imposed prior to
the time of sale on either the goods or their constituents.
sale"leasebac. transaction. 1he sale of property !ith the purchaser
leasing the property bac# to the seller.
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Glossary 187
sales"t!pe lease. A lease that, from the point of )ie! of the lessor, trans%
fers substantially all the benefits and ris#s incident to o!nership of property
to the lessee and, at the inception of the lease, the mar% #et )alue of the
leased property is greater or less than its carrying amount, thus, gi)ing rise
to a profit or loss to the lessor 7usually a manufacturer or dealer8.
salvage value. 1he estimated net reali4able )alue of an item of property,
plant, and e+uipment at the end of its useful life. 2al)age )alue is normally
negligible.
service potential. 1he output or ser)ice capacity of an item of property,
plant, and e+uipment, normally determined by reference to attributes such as
physical output capacity, associated operating costs, useful life, and +uality of
output.
severe ipact. A significant financially disrupti)e effect on the normal
functioning of the entity. 2e)ere impact is a higher threshold than ma% terial.
3atters that are important enough to influence a userBs deci% sions are deemed
to be material, yet they may not be so significant as to disrupt the normal
functioning of the entity. 1he concept of se)ere impact, ho!e)er, includes
matters that are less than catastrophic.
significant influence. 2ignificant influence o)er an entity is the ability
to affect the strategic operating, in)esting, and financing policies of the
entity.
subsidiar!. An entity that another entity 7parent8 controls.
taxable incoe 'tax loss(. 1he amount for a period, determined in ac%
cordance !ith the rules established by ta>ation authorities, upon !hich
income ta>es are payable 7refundable8.
taxes pa!able et$od. A method of accounting under !hich an entity
reports as an e>pense 7income8 of the period only the cost 7benefit8 of current
income ta>es for that period, determined in accordance !ith the rules
established by ta>ation authorities.
teporal et$od. A method of translation that translates assets, liabil%
ities, re)enues, and e>penses in a manner that retains their bases of
measurement in terms of the change rates, un%
less such items are carried at net reali4able )alue or mar#et )alue, in
!hich case, they are translated at the e>change rate in effect at
the statement of financial position dateF
A re)enue and e>pense items are translated at the e>change rate in
effect on the dates they occurF and
A depreciation or amorti4ation of assets translated at historical e>%
change rates is translated at the same e>change rates as the assets to !hich
it relates.
teporar! differences. .ifferences bet!een the ta> basis of an asset
or liability and its carrying amount in the statement of financial posi%
tion. 1emporary differences may be either
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1
88
Financial Reporting Framework for Small- and Medium-Sized
Entities
A
ded
ucti
ble
te
porar! differences, !hich are temporary dif%
ferences that !ill result in deductible amounts !hen determining
ta>able income of future periods !hen the carrying amount of the
asset or liability is reco)ered or settled, or
A taxable teporar! differences, !hich are temporary differenc%
es that !ill result in ta>able amounts !hen determining ta>able
income of future periods !hen the carrying amount of the asset or
liability is reco)ered or settled.
unguaranteed residual value. 1hat portion of the residual )alue of
leased property that is not guaranteed or is guaranteed solely by a party
related to the lessor.
useful life. 1he period o)er !hich an asset, singly or in combination !ith
other assets, is e>pected to contribute directly or indirectly to the fu% ture
cash flo!s of an entity.
venturer. A party to a ?oint )enture, !ho has ?oint control o)er that ?oint
)enture, has the right and ability to obtain future economic benefits from
the resources of the ?oint )enture, and is e>posed to the related ris#s.
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