IFRS for SMEs: Accounting Policies, Estimates, and PPE Principles

IFRS for SMEs: Accounting Policies, Estimates, and Errors

Understanding Accounting Policies, Estimates, and Prior Period Errors

Statement Evaluation:

• Statement: "While accounting for particular transactions, events, or conditions, entities are allowed to deviate from basic requirements imposed by IFRS for SMEs, but only if the effect of following the existing IFRS for SMEs guidance will not be material."
• Truthfulness: This statement is False. IFRS for SMEs generally requires adherence to its principles. Deviation is not permitted simply based on materiality; materiality primarily affects disclosure, not the application of recognition or measurement principles.

What Changes are Treated as Changes in Accounting Policy?

A change is treated as a change in accounting policy when it involves the application of a new accounting policy that is aimed at improving the quality of accounting for particular transactions, events, or conditions. This often occurs when a new IFRS for SMEs standard is adopted or when an entity chooses an alternative accounting policy permitted by the standard.

What Changes are Treated as Changes in Accounting Estimates?

Changes in accounting estimates involve the adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, based on new information or new developments. These changes are inherently forward-looking and are not corrections of errors.

Prior Period Errors: Causes and Recognition

Prior period errors are the result of a failure to use, or misuse of, reliable accounting information that was available and could reasonably have been expected to be used in preparing the financial statements for those periods. Common causes include:

• Failure to use or misuse of reliable accounting information
• Mathematical mistakes
• Wrongly paired accounts
• Oversights or misinterpretations of facts
• Fraud

All the above factors can lead to prior period errors.

Property, Plant and Equipment (PPE) under IFRS for SMEs

Recognizing and Measuring Property, Plant and Equipment

Which Categories of Assets Can Be Recognized as PPE?

Under IFRS for SMEs, Property, Plant and Equipment (PPE) includes tangible assets held for:

• Use in the production or supply of goods or services
• Rental to others
• Administrative purposes

These assets are expected to be used for more than one period.

Component Depreciation: A Key Principle for PPE

Statement Evaluation:

• Statement: "If the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life."
• Truthfulness: This statement is True. This practice is known as component depreciation and is required under IFRS for SMEs when components have significantly different useful lives.

What Comprises the Initial Measurement Cost of PPE?

At initial measurement, the cost of an item of Property, Plant and Equipment comprises:

• The purchase price, including non-refundable import duties and purchase taxes, after deducting trade discounts and rebates.
• Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. This includes:
  • Costs of site preparation
  • Initial delivery and handling costs
  • Installation and assembly costs
  • Costs of testing whether the asset is functioning properly (net of the net proceeds from selling any items produced while bringing the asset to that location and condition)
  • Professional fees
• The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, for which an entity incurs an obligation either when the item is acquired or as a consequence of using the item during a particular period for purposes other than to produce inventories during that period.

Note: Costs of advertising and promotional activities, and generally borrowing costs (unless capitalized for qualifying assets as per Section 25 of IFRS for SMEs), are not included in the initial cost of PPE.

Subsequent Measurement of Property, Plant and Equipment

At subsequent measurement, the cost of an item of Property, Plant and Equipment is typically estimated using the cost model. This involves:

• The initially recognized cost
• Minus accumulated depreciation
• Minus accumulated impairment losses
• Plus impairment loss reversals (up to the original carrying amount, adjusted for depreciation)

Recognition of Depreciation Charge

The depreciation charge for each period shall be recognized in the statement of comprehensive income (or profit or loss, as part of comprehensive income).

Accounting for Changes in Depreciation Charge

A change in the annual depreciation charge, based on new information (e.g., revised useful life or residual value), is accounted for as a change in accounting estimate. This change is applied prospectively from the date of the change.