Accounting For SMEs

3rd Year
2023
 Accounting For SMEs

Part One
Section I:(B)
Financial Reporting for SMEs
Learning objectives:
1- Introduction to IFRS.
2- Discuss the biggest Financial Reporting
differences between IFRS and GAAP
Objective 1: Introduction to IFRS:
- IFRS is an abbreviation of International Financial
Reporting Standards.
- International Financial Reporting Standards
(IFRS) issued by the International Accounting
Standards Board (IASB) to set common rules
(common accounting language) that specify how:
** companies must maintain and report their
accounts so that financial statements can be
consistent, transparent, reliable and comparable
from company to company and country to country.
- IFRS are sometimes confused with International
Accounting Standards (IAS), which are the older
standards that IFRS replaced.
- IAS were issued from 1973 to 2000, and the
International Accounting Standards Board (IASB)
replaced the International Accounting Standards
Committee (IASC) in 2001.
- Moreover, IFRS are sometimes confused
with Generally Accepted Accounting
Principles (GAAP).
- GAAP were issued by Financial Accounting
Standards Board (FASB).
 • Committee on • International Financial
CAP Accounting Procedures reporting Foundation
1973
1939

• Accounting Principle • International Accounting

APB Board Standard (41 Standards)
IASC
1959

• Financial Accounting • International Financial

FASB Standard Board IASB reporting Standards.
1973 2001

Jointly Issued
Accounting Standard Codification
ASC 606
 Objective 2: Discuss the biggest Financial Reporting
differences between IFRS and GAAP:

Point of GAAP / FASB IFRS / IASB

Comparison

1- Scope of Local (in U.S.) - Global (in EU, Middle East,

Application Asia and South America).
- IFRS are used in more than
11o countries (at least 150
countries).
2- Rules V. Principles More Rules -based More Principles-based
- Entities have industry- - Require judgment and
specific rules and interpretation to
guidelines to follow. determine how they are to
be applied.
 GAAP/FASB IFRS/IASB

3- Fair Value - Revaluation to fair - PPE, intangible assets,

value is not allowed and securities can
Revaluations
except for marketable be revaluated to fair
value if fair value can be
securities.
measured reliably.
4- Accounting for - All inventory methods - (LIFO) method is not
are accepted. allowed.
Inventory
- Inventories are - Inventories are required
required to be stated at to be stated at the lower
the lower of cost and of cost and net
current replacement realizable value (NRV)
cost. ([LCM)]. (LCM)].
5- Inventory-Write - Reversal of earlier - Reversal of earlier
down & Reversal. Write-Downs is not Write-Downs is allowed.
allowed (prohibited).
 GAAP/FASB IFRS/IASB
6- Intangible - Development costs - Internal costs to
Assets (R&D) are expensed as create intangible
incurred, with the assets, such as
development costs, are
exception of internally
capitalized when
developed software certain criteria are met
that will be used such as future
externally. economic benefits.
7- Fixed Assets - long-term assets, - long-term assets are
such as buildings, initially valued
furniture and (recorded) at cost, but
equipment, are valued can later be revalued
(recorded) and up or down to market
remained at historic value.
cost and depreciated
appropriately.
 GAAP/FASB IFRS/IASB

8- Investment - has no such separate - Has a separate

Property category. (distinct) category of
investment property in
PPE ,which is defined
as property held for
rental income or
capital (gain)
appreciation.
- Investment property is
initially measured at
cost, and can be
subsequently revalued
to market value.
The biggest differences between IFRS and
GAP:
1- Scope of Application:
- IFRS is used in more than 110 countries (at least 150 countries)
around the world, including the EU and many Asian, African and
South American countries.
- GAP, on the other hand, is only used in the United States.
Companies that operate in the U.S. and overseas may have more
complexities in their accounting.
2- Rules vs. Principles:
- Rules-based accounting is basically a list of detailed rules
that must be followed when preparing financial statements.
- While principles-based accounting is often better to adjust
accounting principles to a company’s transactions rather
than adjusting a company’s operations to accounting rules.
Notice that:
** GAAP tends to be more rules-based, while IFRS
tends to be more principles-based.
** Under GAAP, companies may have industry-specific
rules and guidelines to follow, while under IFRS,
companies have principles that require judgment and
interpretation to determine how they are to be applied
in a given situation.
Exercise 1: ABC Company represents SMEs, at the end of
2022 the records show the following information:

Equipm Accounts
Measurement Principle Land Building Inventory Cash Goodwill
ent receivable

Historical Cost on Dec. 31,

2022 10,000 20,000 12,000 10,000 10,000 15,000 30,000

Fair Value on Dec. 31, 2022

11,000 25,000 10,000 8,000 10,000 15,000 30,000

According to GAAP, ABC should report total assets at Dec.31, 2022 in its
balance sheet as:
A 105,000 B 115,000 C 90,000 D 107,000 E None of these
According to IFRS, ABC should report total assets at Dec.31, 2022 in its balance sheet as:

A 105,000 B 115,000 C 90,000 D 109,000 E None of these

3- Fair Value Revaluations:
- IFRS allows revaluation of the following assets
to fair value if fair value can be measured reliably:
** inventories, property, plant & equipment,
intangible assets, and investments in marketable
securities.
- This revaluation may be either an increase or a
decrease to the asset’s value.
- Under GAAP, revaluation is prohibited except for
marketable securities.
4- Accounting for Inventory:
- Both GAAP and IFRS allow First In, First Out (FIFO), weighted-average
cost, and specific identification methods for valuing inventories.
- However, GAAP also allows the Last In, First Out (LIFO) method, which
is not allowed under IFRS.
- Using the LIFO method may result in artificially low net income and may
not reflect the actual flow of inventory items through a company.

Exercise 2: ABC Company represents SMEs, at the end of 2019 the

records show the following information:
FIFO LIFO AVERAGE
12,000 11,000 10,000
- According to GAAP, ABC should report ending inventory in its balance sheet as

A 12,000 B 11,000 C 10,000 D Can be any E None of these

- According to IFRS, ABC should report ending inventory in its balance sheet
as
A 12,000 or B 12,000 or C 11,000 or D Can be any E None of these
11,000 10,000 10,000
5- Inventory Write-Down Reversals:
- Both methods allow inventories to be written down to market value. However, if
the market value later increases, only IFRS allows the earlier write-down to be
reversed. Under GAAP , reversal of earlier write-downs is prohibited. Inventory
valuation may be more volatile under IFRS.
Exercise 3: ABC Ltd. is a small-sized business firm established mid
December, 2019, and engage in Photo Frames trading activity. During the
following dates, a number of frames had been purchased in a ready-to-sell
condition. During the last third of Jan 31st, 2020 150 frames were sold to a
credit customer.
Date No. of frames Cost per unit (LE)
Dec. 31st, 2019 200 25
Jan 16th, 2020 150 30
Total 350
- The following information has been available on Feb. 29, 2020:
I. Market cost ( replacement cost): LE 20 / unit
II. Selling price: LE 25/unit
III. Costs to complete sale: LE 4/unit
 Required: (All the following is required under both GAAP and IFRS) :
1- Calculate the value of inventory to be reported in the Balance sheet
dated Jan 31st, 2020, assuming that ABC management refuses to
apply both weighted-average and Specific Identification methods.

GAAP: All Inventory methods are allowed (LIFO/FIFO/Weighted-

Average/ Specific Identification).
FRS: All Inventory methods are allowed Except LIFO
Inventory initial recognition according to GAAP and IFRS is as follows:
Sold Balance Sold Balance
: Q UC TC Q UC TC Q UC TC Q UC TC
200 25 5000 200 25 5000
150 30 4500 150 30 4500
FIFO LIFO
150 25 3750 50 25 1250
150 30 4500 200 25 5000
150 30 4500
5000
5750
Notes:
1- According to GAAP Ending Inventory is
recorded at either $ 5,000 (LIFO) method or $5750
(FIFO) method.
2- According to IFRS Ending Inventory is recorded
at $5750 (FIFO) method.
2- Determine subsequent measurement of inventory to be
reported in the Balance sheet dated Feb 29, 2020.
GAAP IFRS
LCM rule and write -down: LCM rule and write -down:
Historical Cost 5000 Historical Cost 5750
Write-
down Market value (200 x 20) 4000 Net Realizable Value {( 25 - 4) 4200
Feb. 29, x 200) }
2020
Write-down 1000 Write-down 1550
Inventory Write-down 1000 Inventory Write-down 1550

Inventory 1000 Inventory 1550

Inventory Feb. 29,
4000 4200
2020 is

Note: Inventory Write-down is recorded as an expense in

operating expenses section in the income statement.
3- If by end of March, 2020, market value increased from LE
20/unit to LE 30/unit, and Net Realizable Value increased from
LE 4200 to LE 5000, determine the implication on inventory
valuation in the Balance sheet dated March 31st, 2020..
GAAP IFRS
If market value ( replaceable cost) If Net Realizable Value ( NRV )
increases increases LE 4200 to LE 5000
Write- From ( 200 units x $20 per unit) 4000 From 4200
down
To ( 200 units x $30 per unit) 6000 To 5000
Feb.
29,2020 Reversal of write down is equal 2000 Reversal of write down is equal 800

GAAP IFRS
No reversal adjustment is allowed. Inventory is adjusted to be LE 5000
Inventory is reported at L.E. 4000 since reversal is allowed

Inventory 800
No Journal Entry Inventory Write- 800
down

Inventory at
LE 4000 LE 5000
March 31, 2020
True or False Questions
1- Under IFRS revaluation to fair value is not allowed except for marketable
securities.
2 - Under GAAP PPE, intangible assets, and securities can be re-
evaluated to fair value if fair value can be measured reliably.
3 - Under GAAP all inventory methods are accepted.
4 - Under IFRS Inventories are required to be stated at the lower of
cost and current replacement cost (LCM).
5 - Under IFRS (LIFO) method is not allowed.
6 - Under GAAP inventories are required to be stated at the lower of
cost and net realizable value (NRV).
7 - With respect to the application of accounting principles GAAP
provides entities with industry-specific rules and guidelines to follow.
8- With respect the application of accounting principles IFRS require
judgment and interpretation to determine how they are to be applied
9 - Under IFRS reversal of earlier write-down is not allowed.
10 - Under GAAP reversal of earlier write-down is allowed.
11 - Under GAAP, revaluation is prohibited except for
marketable securities.
12 - Both GAAP and IFRS allow Last In, First Out (LIFO),
weighted-average cost, and specific identification methods
for valuing inventories.
13 - Using the LIFO method may result in artificially low
net income and may not reflect the actual flow of inventory
items through a company.
14 - Inventory valuation may be more volatile under
GAAP.