IFRS for SMEs:
Concepts and Pervasive Principles
Classes of accounts
Asset: A resource controlled by an entity as a result of past events from which future economic benefits are expected to flow to the entity.
Liability: A present obligation of the entity arising from past events, the settlement of which is expected to result in outflow of resources containing economic benefits
Equity: The assets remaining after deducting all liabilities from it.
Income: Inflows of economic benefits
Expense: Outflows of economic benefits
Cash and Accrual Basis
Accrual basis is where incomes are recorded when it is earned, and expenses are recorded when it is incurred. You earn an income at the point that it is determined that you deserve to receive consideration. Expenses are recorded at the point that it is determined that you deserve to give consideration. Consideration is either a monetary or non-monetary 'payment'.
Cash basis is where incomes are recorded when cash is received, and expenses are recorded when cash is paid. Cash basis is not allowed in IFRS for SMEs.
Matching concept
Incomes earned and their related expenses should be recorded in the same period.
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Qualitative characteristics
Understandability
- Financial statements should be comprehensible by potential users with reasonable understanding of accounting. This doesn't mean information that is difficult to understand should be omitted.
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Materiality
- The accuracy of the records that you keep depends on materiality. A record is material if keeping the record affects the decision of those who use financial statements to make decisions. You only need to make your records accurate to the extent that it affects the user's decisions.
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Relevance
- Information is relevant when it is capable of influencing the economic decisions of its users.
- Immaterial information is not relevant. Judgement should be used to identify information that is immaterial.
- Materiality depends on the size of a transaction, and the influence of its ommission of misstatement on economic decisions of the users.
Reliability
- Information should be free from material error and bias. It should be represented faithfully.
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Economic substance over legal form
- When recording transactions, you should consider the economic effect of the transaction, regardless of how it would be treated legally. Economic substance and legal form usually overlap. But in cases that it doesn't, focus on the economic effect.
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Balance between benefits and cost
- If the cost of recording something is greater than the benefit that the users of financial statements receive from that record, you don't need to keep that record.
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Comparability
- The financial statements that you make should look similar every year/period. The values and details of different things should be shown in the same structure and order every year. Otherwise, it will get difficult for users to compare financial statements of different years.
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Prudence, Completeness and Timeliness
- Appropriate caution must be used when making judgements.
- Information should be complete within the limits of materiality.
- Information should be provided soon enough for it to be relevant, but not so soon that information becomes unreliable.
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Offsetting
Offsetting is not allowed, unless the standard allows it. Offsetting is when you deduct an amount (a liability or expense) from its related amount (an asset or income), and show the balance (net amount) on the financial statements. For example, deducting sales returns from sales, and showing the net sales figure as total sales.
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Financial Statements
Statement of financial position
This shows the values of assets, liabilities and equity items at a point in time.
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Statement of comprehensive income
This shows the incomes earned and expenses incurred within a period of time.
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Statement of cash flows
This shows how money has moved within a period of time.
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Statement of changes in equity
This shows how equity has changed within a period of time.
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Notes to the financial statements
This shows extra details of the amounts shown on the above financial statements.