CH 28 SMEs Basic Financial Instruments (15 to 20 minutes)

Give at least five examples of basic financial instruments and non-basic financial
instruments.
Basic Financial instruments:
1. Cash
2. Demand and fixed term deposits or bank accounts
3. Trade accounts and notes receivable
4. Loans receivable
5. Commercial papers or commercial bills
6. Investments in nonputtable ordinary shares
7. Investments in nonconvertible and nonputtable preference shares
8. Commitment to receive a loan if the commitment cannot be net settled in cash
9. Accounts payable in local and foreign currency
10. Loans from bank and other third parties
11. Bonds and similar debt instrument
12. Loans to or from subsidiaries or associates that are due on demand
Non-Basic Financial Instruments:
1. Asset-backed securities
2. Derivative contracts
3. Hedging instruments
4. Commitments to make a loan to another entity
5. Commitments to receive a loan if the commitment can be net settled in cash
In simple language, when is a debt instrument considered basic financial
instrument?
A debt instrument shall be considered a basic financial instrument when the creditor
is assured of the payment of the fixed amount of principal and fixed amount of
interest without any conditions. The payment or prepayment of the principal and
interest must be unconditional.
What are the financial instruments that are outside the scope of PFRS for SMEs?
1.
2.
3.
4.

Investments in subsidiaries, associates, and joint ventures

Financial instruments that meet the definition of an entitys own equity
Leases
Employers rights and obligations under employee benefit plans

Explain the initial and subsequent measurement of basic and non-basic financial
instruments of an SME.
PFRS for SMEs provides that basic financial instruments are initially measured at the
transaction price, including transaction costs. However, if the instrument is

measured at fair value through profit or loss, transactions costs are expensed
immediately.
If the arrangement is in effect a financing transaction or if the payment is deferred
beyond normal business terms or is financed at a rate of interest that is not a
market rate, the basic financial instrument is measured at the present value of the
future payments discounted at the market rate of interest.
PFRS for SMEs provides that at initial recognition all financial instruments not
qualifying as basic financial instruments are measured at fair value which is
normally the transaction price.
PFRS for SMEs provides that basic financial instruments are subsequently measured
at fair value through profit or loss, amortized cost or cost less impairment
depending on the instruments.
a. Basic debt instruments measured at amortized cost using the effective interest
method
b. Commitments to receive a loan measured at cost less impairment
c. Investments in nonputtable ordinary shares and investments in nonconvertible
and nonputtable preference shares:
Publicly traded measured at fair value through profit or loss
Not publicly traded measured at cost less impairment
Financial instruments not qualifying as basic financial instruments are subsequently
measured at fair value through profit or loss. However, equity instruments that are
not publicly traded and whose fair value cannot be measured reliably shall be
measured at cost less impairment.
Explain the impairment of asset under PFRS for SMEs.
Impairment of asset measured at amortized cost, impairment loss is the difference
between the carrying amount of the asset and the present value of the estimated
cash flows discounted at the original effective interest rate. This is consistent with
Full PFRS.
Impairment of asset measured at cost less impairment, impairment loss is the
difference between the carrying amount of the asset and the best estimate of the
amount that would be received if the asset were sold. Under full PFRS, the
impairment loss is the difference between the carrying amount and the present
value of estimated future cash flows discounted at market rate of interest of similar
asset.
Impairment losses are recognized immediately in profit or loss. If the impairment
reverses in a subsequent period, the reversal is also recognized in profit or loss.
However, the reversal shall not result in a carrying amount that exceeds what the

carrying amount would have been had the impairment not previously been
recognized.

CH 29 SMEs Associate (10 to 15 Minutes)

What is the measurement of all investments in associates of an SME? Provide a brief
explanation of each.
PFRS for SMEs provide that an investor shall account for all of its investments in
associates using any one of the following:
a. Cost Model
b. Equity Method
c. Fair Value Model
Under the cost model, the investment in associate is initially measured at
transaction price including transaction cost. Subsequently the investor shall
measure its investment in associate at cost less any accumulated impairment
losses. All dividends and other distributions received are recognized as income
without regard whether the dividends are from preacquisition or postacquisition
retained earnings of the associate.
Under the equity method, it is initially recognized at transaction price including
transaction cost. Subsequently, the investment is adjusted to reflect the investors
share in profit or loss and other comprehensive income of the associate. This is the
same equity method under full PFRS.
Under the fair value model, the investment in associate is initially measured at the
transaction price, excluding transaction cost. At each reporting date, the investment
is measured at fair value with changes in fair value recognized in profit or loss.
Is the investment in associate of an SME subject to impairment?
Under the cost model, the subsequent measurement is at cost less any
accumulated impairment losses. However, the cost model is not permitted if the
investment in associate has a published price quotation.
In other words, the investment in associate shall be accounted for using the fair
value model if there is a published price quotation. The investment in associate
carried at fair value is not tested for impairment.

The investment in associate carried at equity is tested for impairment. Note that if
the investor has elected to account for the investment in associate using the equity
method, it makes no difference whether or not there is a published price quotation.
Compare PFRS for SMEs and full PFRS in relation to measurement of investment in
associate.
Under PFRS for SMEs, only one accounting policy or one model shall be applied in
accounting for all investment in associate. Under full PFRS, the investor has no
accounting policy choice. The investment in associates shall be accounted for using
the equity method only.

Moreover, areas covered under full PFRS but not in PFRS for SMEs include the
following:
a) Guidance on significant influence
b) Consequences when an investment ceases to be an associate
c) profit and loss from upstream and downstream transactions
CH 30 SMEs Investment Property (10 to 15 Minutes)
Explain the initial and subsequent measurement of investment property of an SME.
An SME shall measure investment property initially at cost. This comprises the
purchase price and any directly attributable expenditure such as legal and
brokerage fees, property transfer taxes and other transaction cost. However,
borrowing costs directly attributable to the construction of an investment property
shall be recognized as expense when incurred.
PFRS for SMEs provides that investment property whose fair value can be measured
reliably without undue cost or effort shall be measured at fair value at the end of
the reporting period. Any changes in fair value shall be recognized in profit or loss.
If the fair value of the investment property cannot be measured reliably, the entity
must use the cost-depreciation-impairment model. The investment property is
measured at cost less accumulated depreciation and accumulated impairment
losses. Any residual value of such property is deemed to be NIL or zero. The
investment property shall be presented as a separate class of PPE.
Explain the transfer of property to and from investment property under PFRS for
SMEs.
An SME shall transfer property to or from investment property only when the
property meets or ceases to meet the definition of investment property. Thus, if a
reliable measure of fair value is no longer available for investment property using
the fair value model, the entity shall account for that investment property as PPE
using the cost-depreciation-impairment model, until a reliable measure of fair value

becomes available. The carrying amount of the investment property on the date of
transfer becomes the cost as an item of PPE.
Compare PFRS for SMEs and full PFRS in relation to measurement of investment
property.
Under PFRS for SMEs, investment property is measured at fair value if the fair value
can be measured reliably without undue cost or effort on an ongoing base.
Otherwise, the investment property is accounted for as property, plant, and
equipment using the cost-depreciation-impairment model.
Full PFRS allows an accounting policy choice of either fair value model or cost
model. If the entity follows the cost model, the fair value of the property must be
disclosed. However, when an investment property is held by a lessee under an
operating lease, the entity must follow the fair value model for all of the investment
properties.

CH 31 SMEs PPE, Government Grant, Borrowing Costs (5 to 10 minutes)

Full PFRS and PFRS for SMEs have the same definition of property, plant, and
equipment. The latter would require what model in the subsequent measurement of
property, plant, and equipment?
Cost Model
An SME shall select a depreciation method that reflects the pattern in which it
expects to consume the future economic benefits from the asset. Give a possible
depreciation method.
Straight Line Method, Diminishing Balance Method, Production Method
Under full PFRS, a noncurrent asset held for sale is measured at the lower of
carrying amount and fair value less cost of disposal and presented separately as
current asset and no longer depreciated. Under PFRS for SMEs, an item of property,
plant, and equipment held for sale is __________.
Not separately presented
Under full PFRS, a government grant is recognized when there is a reasonable
assurance that the entity will comply with the specified condition. Under PFRS for
SMEs, a government grant is recognized when the conditions are ________________.
Actually satisfied
Under full PFRS, a government grant is recognized as income over the periods.
Under PFRS for SMEs?

Not allowed to recognize as income over the periods

Under full PFRS, a grant related to an asset may be treated either as a deferred
income or a reduction in the carrying amount of the asset. Under PFRS for SMEs?
There is no such option and the grant is a deferred income until the
conditions are actually satisfied.
Under full PFRS, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset shall be capitalized as part of the
cost of the asset. Under PFRS for SMEs, it shall recognize all borrowing costs as
___________.
Expensed when incurred