Accounting (Basics) - Lecture 1
IFRS for SMEs


About the course
nLiterature:
qInternational financial reporting standard for small and medium-sized entities (IFRS for SMEs).
London: International Accounting Standards Board, 2009. 230 s. ISBN 9781907026171. Available at:
http://eifrs.iasb.org/eifrs/sme/en/IFRSforSMEs2009.pdf
q IFRS Foundation: Training Material for the IFRS for SMEs. London: International Accounting
Standards Board. Available at: http://www.ifrs.org/IFRS-for-SMEs/Pages/Training-Modules.aspx
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About the course
nRequirements for successful accomplishment of the course:
q85% participation of seminars is required (i.e. absence at max 2 seminars is allowed)
q60% of final grade can be received during final exam and 40% of final grade can be received during
seminars. 40% is splitted into 2 midterm tests (10% each) and 1 presentation (20%) or activity at
the seminars (20%).
qIn case of practical presentation (i.e. exercise), the exercise is chosen by a student or by a
lecturer always minimally one week in advance. Unless the student is excused (he/she is ill), the
student has to present the exercise at specified date. Topics for theoretical presentations should
be agreed with a lecturer at the beginning of the semester.
qTwo midterm tests, minimum required amount is 60% of correct answers. Tests contain theoretical
(questions) and practical part (exercises).
qFinal test is a written exam.
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Content
nAccounting phenomena
nRegulation – organizations and pronouncements
nInternational Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs)
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Accounting phenomena – history (emergence of acc-g)
nScribes of ancient times - Accountants existed in ancient China and Egypt. They were supervisors
of the accounts of the Chinese Emperor and the Egyptian Pharaoh.
nProfit maximization and double entry - The attitude of profit maximization emerged at the end of
the Middle Ages, with the emergence of large merchant houses in Italy. Trading was no longer the
domain of the individual commercial traveler; it was now coordinated centrally at the luxurious
desks of the large merchant houses in Venice, Florence or Pisa. Double-entry was introduced.
nEconomic conditions for financial reporting - The practice of modern financial reporting dates
back to the beginning of the modern corporation at the dawn of the Industrial Revolution. In 1853,
the Society of Accountants was founded in Edinburgh. Further developments of the separation between
provision of capital and management led to a steady growth of the accounting profession and
regulation.
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Accounting phenomena – history (emergence of acc-g)
nCompanies across the world experienced growth in technology, improvement in communications and
transportation, and the exploitation of expanding worldwide markets. As a result, the demands of
owner-managed enterprises for capital rapidly exceeded the combined resources of the owners’
savings and the wealth-creating potential of the enterprises themselves. Capital markets were
introduced.
nInvestors and creditors may have different objectives than management. Investors and creditors
decisions about financing of certain business depend on true and fair view of business provided by
its financial statements. To give such a view of a business in its financial statements, the best
accounting and financial reporting practices were codified in a form of a set of accounting and
financial reporting standards, first at national and latter at international level.
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Accounting phenomena – role of int. fin. reporting standards
nInformation risk theory - to illustrate the need for international financial reporting standards,
consider the decision of a bank officer in making a loan to a business. If the bank makes the loan,
it will charge a rate of interest determined primarily by three factors: (1) Risk-free interest
rate; (2) Business risk for the customer; (3) Information risk. The latter – information risk -
reflects the possibility that the information upon which the business risk decision was made was
inaccurate. A likely cause of the information risk is the possibility of inaccurate financial
statements. International financial reporting standards have no effect on either the risk-free
interest rate or business risk, but they can have a significant effect on information risk. If the
bank officer is satisfied that there is minimal information risk because a borrower’s financial
statements are prepared in accordance with best world financial reporting practices, the bank’s
risk is substantially reduced and the overall interest rate to the borrower can be reduced. The
reduction of information risk can have a significant effect on the borrower’s ability to obtain
capital at a reasonable cost.
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Accounting phenomena – role of int. fin. reporting standards
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n“Transparency is not just a buzz word or a cliché. It is a fundamental and absolutely essential
attribute of sound financial markets. Relevant, trustworthy, and timely information is the oxygen
of financial markets”,
n- Robert H. Herz, Chairman of FASB, June 2009
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Regulation – IASB (nature, objectives)
nThe International Accounting Standards Board (IASB) was established in 2001 as part of the
International Accounting Standards Committee (IASC) Foundation.
nThe objectives of the IASC Foundation and of the IASB are:
a)to develop  a single set of high quality, understandable and enforceable global accounting
standards that require high quality, transparent and comparable information in financial statements
and other financial reporting to help participants in the world’s capital markets and other users
make economic decisions;
b)to promote the use and rigorous application of those standards;
c)to take account of the special needs of SM entities and emerging economies; and
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Regulation – IASB (functions)
d)to bring about convergence of national accounting standards and IAS and IFRS to high quality
solutions.
nIASB is the standard-setting body of the IASC Foundation - it is responsible for approving IFRS
(including Interpretations) and related documents, such as the Framework for the Preparation and
Presentation of Financial Statements, exposure drafts and discussion documents.
nThe IASB achieves its objectives primarily by developing and publishing IFRS and promoting the use
of those standards in general purpose financial statements and other financial reporting.
nIAS and related Interpretations, which were adopted before IFRS were developed, remain applicable
with the same authority as IFRS, unless and until they are amended or withdrawn by the IASB.
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Regulation - IFRS
nIFRS set out recognition, measurement, presentation and disclosure requirements dealing with
transactions and other events and conditions that are important in general purpose financial
statements.
nIFRS are based on the Framework. The objective of the Framework is to facilitate the consistent
and logical formulation of IFRS. It also provides a basis for the use of judgment in resolving
accounting issues.
nIFRS are designed to apply to the general purpose financial statements and other financial
reporting of all profit-oriented entities. The objective of financial statements is to provide
information about the financial position, performance and cash flows of an entity that is useful to
those users in making economic decisions.
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Regulation - IFRS vs. GAAP
US GAAP
IFRS
•rules-based
•procedure-oriented
•principles-based
•objective-oriented

nInternational Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs) are
designed for small and medium-sized entities (SMEs), private entities, and non-publicly accountable
entities.
nThe term small and medium-sized entities as used by the IASB is defined as entities that:
a)do not have public accountability, and
b)publish general purpose financial statements for external users.
nAn entity has public accountability if:
a)its debt or equity instruments are traded in a public market or it is in the process of issuing
such instruments for trading in a public market, or
b)it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary
businesses.
c)
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IFRS for SMEs – def. and public accountability

nThe Fourth Accounting Directive of EC allows Member States to prescribe lighter reporting regimes
for SMEs, which are defined as following:
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IFRS for SMEs – SMEs
Micro
Small
Medium-sized
Balance sheet total
≤ € 500 000
≤ € 4 400 000
≤ € 17 500 000
Net turnover
≤ € 1 000 000
≤ € 8 800 000
≤ € 35 000 000
Average number of employees during the financial year
≤ 10
≤ 50
≤ 250

nSome entities may hold assets in a fiduciary capacity for a broad group of outsiders (e.g. AUM).
If they do so for reasons incidental to a primary business, that does not make them publicly
accountable.
nA subsidiary whose parent uses full IFRSs, or that is part of a consolidated group that uses full
IFRSs, is not prohibited from using IFRS for SMEs in its own financial statements if that
subsidiary by itself does not have public accountability.
nFinancial statements prepared in conformity with the IFRS for SMEs are unlikely to comply fully
with all of the measurements required by a jurisdiction’s tax laws and regulations.
nDecisions on which entities are required or permitted to use full IFRS or IFRS for SMEs rest with
legislative and regulatory authorities and standard-setters in individual jurisdictions.
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IFRS for SMEs - notes to individual cases