SME Financial Statements: Core Concepts & Reporting

Concepts and Principles

Primary Objective of SME Financial Statements

What is the primary objective of financial statements of SMEs? To provide information about the financial position, performance, and cash flows of the entity that is useful for economic decision-making by a broad range of users who are not in a position to demand reports tailored to meet their particular information needs.

Qualitative Characteristic: Reliability

What does the qualitative characteristic “reliability” mean? Information presented in financial statements should be free from material error and bias and ensure a faithful representation of the economic phenomenon.

True Statements About Financial Position

Which of the following statements are true?

• The financial position of an entity is the relationship of its assets, liabilities, and equity at a specific date as presented in the statement of financial position.
• The financial position of an entity is a “stock” amount, while the financial performance of an entity is a “flow” amount.

Basic Recognition Criteria

What are the basic recognition criteria for an item to be recognized in the financial statements of an entity? It is certain that any future economic benefit associated with the item will flow to or from the entity, and the item’s cost or value can be measured reliably.

Measurement Bases

What are the two basic measurement bases applied to items recognized in the financial statements of an entity (according to IFRS for SMEs)? Two: historical cost and fair value.

Revenue vs. Gain

In which of the following examples is income recognized as revenue, and in which is it recognized as a gain (according to IFRS for SMEs)?

• a) Revenue
• b) Gain
• c) Revenue, Gain, Revenue
• d) Gain

Expense vs. Loss

In which of the following examples is an expense recognized as an expense, and in which is it recognized as a loss (according to IFRS for SMEs)? Loss, Loss, Loss

Financial Statements Presentation

Principle of Fair Presentation

What does the principle “fair presentation” mean? Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income, and expenses.

Recognition Criteria for Current Assets

What are the recognition criteria for an item to be recognized as a current asset?

• An entity expects to realize an item or intends to sell or consume it in the entity’s normal operating cycle.
• An entity holds such an item primarily for the purpose of trading.
• An entity expects to realize such an item within twelve months after the reporting date.

Cash and Cash Equivalents

Which of the following are cash and cash equivalents?

• Cash receipts from the sale of goods and the rendering of services
• Cash payments to suppliers for goods and services
• Money market instruments, e.g., T-bills and commercial loans
• Cash payments or refunds of income tax
• Demand deposits and demand loans

Primary Objectives of Notes to Financial Statements

What are the primary objectives of notes to financial statements?

• To present information about the basis of preparation of the financial statements and the specific accounting policies used.
• To provide information that is not presented elsewhere in the financial statements but is relevant to an understanding of any of them.