Standards Transition Steps from IFRS for SMEs to Full IFRS

The transition from the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) to full International Financial Reporting Standards (IFRS) represents a significant step in a company’s journey, especially when it decides to go public or when it exceeds a certain size of operations.

This transition requires careful planning and precise execution to ensure a smooth transition and compliance with all International Financial Reporting Standards requirements. In this article, we will define the Standards Transition Steps from IFRS for SMEs to full IFRS, and discuss the key aspects that companies should consider during the Standards Transition Steps, focusing on the importance of early assessment, identifying key differences, and developing a transition plan, as well as highlighting the role of technology and the importance of training in making this journey a success.

When Must an Entity Transition from IFRS for SMEs to Full IFRS?

An entity must transition from applying IFRS for SMEs to full IFRS in the following cases:

• If the entity becomes publicly accountable: That is, if its debt or equity instruments become traded in a public market (a domestic or foreign stock exchange or an over-the-counter market) or it is in the process of issuing such instruments for trading in a public market.
• If the entity voluntarily chooses to apply full IFRS: Even if the entity does not become publicly accountable, it may choose to transition to full IFRS if it believes that doing so is in its best interests, such as to improve the quality of its Financial Reporting or to attract investors.

Standards Transition Steps from IFRS for SMEs to Full IFRS:

Transitioning from IFRS for SMEs to full IFRS requires following organized Standards Transition Steps, including:

1. Step One of Standards Transition Steps: Preliminary Assessment:
   • Determine the Transition Date: The entity must determine the date on which it will apply full IFRS for the first time. This date is known as the “date of transition.”
   • Gap Analysis: Conduct a comprehensive analysis to identify the key differences between the entity’s current Accounting Policies (applied according to IFRS for SMEs) and the requirements of full IFRS. This assessment should cover all areas of Financial Accounting, such as recognition, measurement, presentation, and disclosure. External experts can be consulted to conduct this assessment.
   • Identify Necessary Resources: Estimate the resources needed for the transition process, including human, financial, and technological resources. The entity may need to hire accountants with expertise in full IFRS, or engage external consultants.
   • Assess the Impact of the Transition on Systems and Processes: The impact of the transition on IT systems, Accounting processes, internal controls, and Financial Reporting procedures must be assessed.
   • Identify Key Stakeholders: Key stakeholders who will be affected by the transition process should be identified, such as investors, creditors, management, and employees.
2. Step Two of Standards Transition Steps: Develop a Transition Plan:
   • Develop a Detailed Plan: A detailed plan should be prepared that includes all the activities necessary to transition to full IFRS, specifying responsibilities and timelines. The plan should cover all aspects affected by the transition, including Accounting Policies, systems, processes, training, and disclosure.
   • Determine New Accounting Policies: The new Accounting Policies that will be applied according to full IFRS must be formulated. These policies must be consistent with the latest versions of the International Financial Reporting Standards.
   • Identify Adjustments to Systems and Processes: The necessary adjustments to IT systems, Accounting processes, and internal controls must be identified to ensure their compatibility with full IFRS.
   • Develop a Training Program: A comprehensive training program should be prepared for employees to familiarize them with the requirements of full IFRS and how to apply them. The training should cover all aspects affected by the transition, including new Accounting Policies and modified systems and processes.
   • Communicate with Stakeholders: Key stakeholders should be informed of the transition plan and its impact on the entity.
3. Step Three of Standards Transition Steps: Implementation:
   • Update Accounting Systems: IT systems and Accounting Software must be updated to reflect the requirements of full IFRS. The new systems must be thoroughly tested to ensure they are working correctly.
   • Apply New Accounting Policies: The new Accounting Policies must be applied to all transactions and events that fall within the scope of full IFRS.
   • Remeasure Assets and Liabilities: The transition to full IFRS may require remeasurement of certain assets and liabilities, such as fixed assets, inventory, and Financial instruments. Remeasurement must be carried out in accordance with the requirements of the relevant standards.
   • Prepare Opening Financial Statements: An opening Statement of Financial Position (Balance Sheet) must be prepared in accordance with full IFRS at the date of transition. This statement represents the starting point for applying full IFRS.
   • Restate Comparative Financial Statements: Comparative Financial Statements for the prior period must be restated in accordance with full IFRS, as if these standards had always been applied. This aims to enhance the comparability of Financial Statements over time.
4. Step Four of Standards Transition Steps: Review and Approval:
   • Review Adjusted Financial Statements: The Financial Statements, adjusted in accordance with full IFRS, must be reviewed by management and internal auditors. The review aims to ensure the accuracy and completeness of the Financial Statements and their compliance with IFRS.
   • Approve Financial Statements: The adjusted Financial Statements must be approved by the board of directors and the audit committee.
   • Financial Statement Audit: The adjusted Financial Statements, prepared in accordance with full IFRS, must be audited by an independent external auditor. The external auditor issues a report expressing an opinion on the fair presentation of the Financial Statements in accordance with IFRS.

Dealing with Differences Between IFRS for SMEs and Full IFRS:

IFRS 1 Standard “First-time Adoption of International Financial Reporting Standards” is the primary reference for companies transitioning from IFRS for SMEs to full IFRS. IFRS 1 Standard provides guidance on how to prepare the opening IFRS Financial Statements and how to deal with differences between previous Accounting Policies and the Accounting Policies required by IFRS.

Examples of Key Differences:

• Inventory Valuation Methods: IFRS for SMEs may allow the use of the Last-In, First-Out (LIFO) method, while full IFRS does not.
• Accounting for Financial Instruments: Full IFRS requires the classification and measurement of Financial instruments according to IFRS 9 Standard, while IFRS for SMEs provides a simplified treatment.
• Revaluation of Fixed Assets: IFRS for SMEs does not permit the revaluation of fixed assets, while full IFRS allows it under certain conditions (IAS 16 Standard).
• Goodwill: IFRS for SMEs provides a simplified treatment for goodwill, while IFRS 3 Standard requires an annual impairment test for goodwill.
• Disclosures: Full IFRS requires more comprehensive and detailed disclosures than IFRS for SMEs.

Impact of the Transition on Stakeholders:

The transition to full IFRS affects various stakeholders, such as:

• Investors: Investors can benefit from more comprehensive, transparent, and reliable Financial information, which helps them make better investment decisions.
• Creditors: Creditors can better assess credit risk by obtaining more accurate information about the entity’s Financial position.
• Management: Management benefits from high-quality Financial information to make more effective operational and strategic decisions.
• Employees: Employees may benefit from increased transparency in Financial Reporting, which enhances their confidence in the entity’s stability and future prospects.

Role of the Board of Directors and Audit Committee:

The board of directors and the audit committee play an important role in overseeing the transition to full IFRS. They must:

• Approve the transition plan.
• Monitor the implementation of the transition plan.
• Ensure that sufficient resources are allocated to the transition process.
• Review and approve the adjusted Financial Statements.
• Communicate with stakeholders about the transition process.

Importance of Training and Awareness:

The entity must invest in training and educating accountants and relevant employees on the requirements of full IFRS to ensure their correct understanding of the new standards and how to apply them. Specialized training courses, seminars, and workshops can be used to enhance employees’ knowledge of IFRS.

Consulting with Experts:

It is advisable to consult with Accounting experts specializing in IFRS to provide support and guidance during the transition process. Experts can provide assistance in the following areas:

• Assessing the gap between IFRS for SMEs and full IFRS.
• Developing new Accounting Policies.
• Remeasuring assets and liabilities.
• Preparing the opening Financial Statements.
• Training employees.
• Reviewing the adjusted Financial Statements.

Future of Accounting Standards for SMEs:

The International Accounting Standards Board (IASB) continues to review and update IFRS for SMEs to ensure it remains suitable for the needs of these entities. Further amendments to IFRS for SMEs are expected in the future to enhance its usability and effectiveness.

Conclusion:

Transitioning from IFRS for SMEs to full IFRS is a significant strategic decision that requires careful planning and precise execution. By following the appropriate Standards Transition Steps, an entity can ensure a smooth transition to full IFRS and achieve compliance with all its requirements. Transitioning to full IFRS enhances the quality, reliability, and transparency of Financial Reporting and makes it easier for investors and other stakeholders to understand the entity’s performance and Financial position. It also opens doors for companies to integrate into global markets and attract foreign investment. Finally, good planning, consulting with experts, and using technology effectively contribute significantly to the success of the transition process and the achievement of the desired objectives.