Concepts and Pervasive Principles

Although many of the concepts and pervasive principles described in IFRS SMEs are similar to those described in the FASB’s Conceptual Framework, their practical role is different.  If IFRS SMEs does not specifically address a transaction, other event, or condition, management must look next to the requirements and guidance in IFRS SMEs dealing with similar and related issues, and then to the definitions, recognition criteria, measurement concepts, and pervasive principles in IFRS SMEs.  The FASB Conceptual Framework, in contrast, is considered nonauthoritative "other accounting literature."

In developing accounting policies, management may also consider the requirements and guidance in the full IFRS dealing with similar and related issues.  Unlike the full IFRS, however, IFRS SMEs makes no mention of other national GAAPs, such as U.S. GAAP, that are based on a framework similar to the full IFRS.  This can be interpreted to mean that the full IFRS are the exclusive approved alternative source of accounting guidance.

SME Par.	IFRS SME	U.S. GAAP
Scope of this section
2.1	This section describes the objective of financial statements of small and medium-sized entities (SMEs) and the qualities that make the information in the financial statements of SMEs useful. It also sets out the concepts and basic principles underlying the financial statements of SMEs.
Objective of financial statements of small and medium sized entities
2.2	The objective of financial statements of a small or medium-sized entity is to provide information about the financial position , performance and cash flows of the entity that is useful for economic decision-making by a broad range of users who are not in a position to demand reports tailored to meet their particular information needs.	Same.
2.3	Financial statements also show the results of the stewardship of management—the accountability of management for the resources entrusted to it.	Same.
Qualitative characteristics of information in financial statements
	Understandability
2.4	The information provided in financial statements should be presented in a way that makes it comprehensible by users who have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. However, the need for understandability does not allow relevant information to be omitted on the grounds that it may be too difficult for some users to understand.	Same.
	Relevance
2.5	The information provided in financial statements must be relevant to the decision-making needs of users. Information has the quality of relevance when it is capable of influencing the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations.	Same.
	Materiality
2.6	Information is material—and therefore has relevance—if its omission or misstatement could influence the economic decisions of users made on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. However, it is inappropriate to make, or leave uncorrected, immaterial departures from the IFRS for SMEs to achieve a particular presentation of an entity’s financial position, financial performance or cash flows.	Same.
	Reliability
2.7	The information provided in financial statements must be reliable. Information is reliable when it is free from material error and bias and represents faithfully that which it either purports to represent or could reasonably be expected to represent. Financial statements are not free from bias (ie not neutral) if, by the selection or presentation of information, they are intended to influence the making of a decision or judgement in order to achieve a predetermined result or outcome.	Unlike IFRS SMEs, the GAAP characteristic of reliability includes verifiability.
	Substance over form
2.8	Transactions and other events and conditions should be accounted for and presented in accordance with their substance and not merely their legal form. This enhances the reliability of financial statements.	Substance over form is not a qualitative characteristic. The idea, however, is covered by reliability and, in particular, in representational faithfulness.
	Prudence
2.9	The uncertainties that inevitably surround many events and circumstances are acknowledged by the disclosure of their nature and extent and by the exercise of prudence in the preparation of the financial statements. Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow the deliberate understatement of assets or income, or the deliberate overstatement of liabilities or expenses. In short, prudence does not permit bias.	Same.
	Completeness
2.10	To be reliable, the information in financial statements must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading and thus unreliable and deficient in terms of its relevance.	Same.
	Comparability
2.11	Users must be able to compare the financial statements of an entity through time to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different entities to evaluate their relative financial position, performance and cash flows. Hence, the measurement and display of the financial effects of like transactions and other events and conditions must be carried out in a consistent way throughout an entity and over time for that entity, and in a consistent way across entities. In addition, users must be informed of the accounting policies employed in the preparation of the financial statements, and of any changes in those policies and the effects of such changes.	Same.
	Timeliness
2.12	To be relevant, financial information must be able to influence the economic decisions of users. Timeliness involves providing the information within the decision time frame. If there is undue delay in the reporting of information it may lose its relevance. Management may need to balance the relative merits of timely reporting and the provision of reliable information. In achieving a balance between relevance and reliability, the overriding consideration is how best to satisfy the needs of users in making economic decisions.	Same.
	Balance between benefit and cost
2.13	The benefits derived from information should exceed the cost of providing it. The evaluation of benefits and costs is substantially a judgemental process. Furthermore, the costs are not necessarily borne by those users who enjoy the benefits, and often the benefits of the information are enjoyed by a broad range of external users.	Same.
2.14	Financial reporting information helps capital providers make better decisions, which results in more efficient functioning of capital markets and a lower cost of capital for the economy as a whole. Individual entities also enjoy benefits, including improved access to capital markets, favourable effect on public relations, and perhaps lower costs of capital. The benefits may also include better management decisions because financial information used internally is often based at least partly on information prepared for general purpose financial reporting purposes.	Same.
Financial position
2.15	The financial position of an entity is the relationship of its assets, liabilities and equity as of a specific date as presented in the statement of financial position. These are defined as follows:	Same.
2.15(a)	An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.	Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Probable in this context is used with its general meaning rather than the SFAS 5 meaning.
2.15(b)	A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.	Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. The word assets in the definition, as opposed to IFRS SMEs’ “resources embodying economic benefits,” makes the GAAP definition more restrictive.
2.15(c)	Equity is the residual interest in the assets of the entity after deducting all its liabilities.	Same.
2.16	Some items that meet the definition of an asset or a liability may not be recognised as assets or liabilities in the statement of financial position because they do not satisfy the criteria for recognition in paragraphs 2.27–2.32. In particular, the expectation that future economic benefits will flow to or from an entity must be sufficiently certain to meet the probability criterion before an asset or liability is recognised.	Same.
	Assets
2.17	The future economic benefit of an asset is its potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity. Those cash flows may come from using the asset or from disposing of it.	Same.
2.18	Many assets, for example property, plant and equipment, have a physical form. However, physical form is not essential to the existence of an asset. Some assets are intangible.	Same.
2.19	In determining the existence of an asset, the right of ownership is not essential. Thus, for example, property held on a lease is an asset if the entity controls the benefits that are expected to flow from the property.	Same.
	Liabilities
2.20	An essential characteristic of a liability is that the entity has a present obligation to act or perform in a particular way. The obligation may be either a legal obligation or a constructive obligation. A legal obligation is legally enforceable as a consequence of a binding contract or statutory requirement. A constructive obligation is an obligation that derives from an entity’s actions when: by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept particular responsibilities, and as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.	Same. However, recognition of constructive obligations is quite limited (mainly pension obligations).
2.21	The settlement of a present obligation usually involves the payment of cash, transfer of other assets, provision of services, the replacement of that obligation with another obligation, or conversion of the obligation to equity. An obligation may also be extinguished by other means, such as a creditor waiving or forfeiting its rights.	Same.
	Equity
2.22	Equity is the residual of recognised assets minus recognised liabilities. It may be subclassified in the statement of financial position. For example, in a corporate entity, subclassifications may include funds contributed by shareholders, retained earnings and gains or losses recognised directly in equity.	Same.
Performance
2.23	Performance is the relationship of the income and expenses of an entity during a reporting period. This IFRS permits entities to present performance in a single financial statement (a statement of comprehensive income) or in two financial statements (an income statement and a statement of comprehensive income). Total comprehensive income and profit or loss are frequently used as measures of performance or as the basis for other measures, such as return on investment or earnings per share. Income and expenses are defined as follows: Income is increases in economic benefits during the reporting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity investors. Expenses are decreases in economic benefits during the reporting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity investors.	Unlike IFRS SMEs, comprehensive income may be presented within the statement of changes in shareholders’ equity.
2.24	The recognition of income and expenses results directly from the recognition and measurement of assets and liabilities. Criteria for the recognition of income and expenses are discussed in paragraphs 2.27–2.32.	Generally the same. However, unlike IFRS SMEs, U.S. GAAP also includes the concept of matching costs and revenues.
	Income
2.25	The definition of income encompasses both revenue and gains. Revenue is income that arises in the course of the ordinary activities of an entity and is referred to by a variety of names including sales, fees, interest, dividends, royalties and rent. Gains are other items that meet the definition of income but are not revenue. When gains are recognised in the statement of comprehensive income, they are usually displayed separately because knowledge of them is useful for making economic decisions.	The distinction between revenue and gains focuses on “the entity’s ongoing or central operations” rather than the course of ordinary activities of the entity.
	Expenses
2.26	The definition of expenses encompasses losses as well as those expenses that arise in the course of the ordinary activities of the entity. Expenses that arise in the course of the ordinary activities of the entity include, for example, cost of sales, wages and depreciation. They usually take the form of an outflow or depletion of assets such as cash and cash equivalents, inventory, or property, plant and equipment. Losses are other items that meet the definition of expenses and may arise in the course of the ordinary activities of the entity. When losses are recognised in the statement of comprehensive income, they are usually presented separately because knowledge of them is useful for making economic decisions.	The distinction between expenses and losses focuses on “the entity’s ongoing or central operations” rather than the course of ordinary activities of the entity.
Recognition of assets liabilities income and expenses
2.27	Recognition is the process of incorporating in the financial statements an item that meets the definition of an asset, liability, income or expense and satisfies the following criteria: it is probable that any future economic benefit associated with the item will flow to or from the entity, and the item has a cost or value that can be measured reliably. [Probable is defined as more likely than not.]	There are probability threshold differences for the recognition of some items. For example, for contingent losses and liabilities, the probability threshold is higher than “more-likely-than-not,” and is typically interpreted to mean about 80%; for revenue recognition, the threshold for some items is that collection is “reasonably assured.”
2.28	The failure to recognise an item that satisfies those criteria is not rectified by disclosure of the accounting policies used or by notes or explanatory material.	Same.
	The probability of future economic benefit
2.29	The concept of probability is used in the first recognition criterion to refer to the degree of uncertainty that the future economic benefits associated with the item will flow to or from the entity. Assessments of the degree of uncertainty attaching to the flow of future economic benefits are made on the basis of the evidence relating to conditions at the end of the reporting period available when the financial statements are prepared. Those assessments are made individually for individually significant items, and for a group for a large population of individually insignificant items.	Same. However, for some items, e.g., advertising costs, a high degree of reliability of the determination of probable economic benefits is required to meet this criterion.
	Reliability of measurement
2.30	The second criterion for the recognition of an item is that it possesses a cost or value that can be measured with reliability. In many cases, the cost or value of an item is known. In other cases it must be estimated. The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. When a reasonable estimate cannot be made, the item is not recognised in the financial statements.	Stricter measurement reliability criteria exist for some items, e.g., software and other multiple-element arrangements.
2.31	An item that fails to meet the recognition criteria may qualify for recognition at a later date as a result of subsequent circumstances or events.	Same.
2.32	An item that fails to meet the criteria for recognition may nonetheless warrant disclosure in the notes or explanatory material or in supplementary schedules. This is appropriate when knowledge of the item is relevant to the evaluation of the financial position, performance and changes in financial position of an entity by the users of financial statements.	Same.
Measurement of assets liabilities income and expenses
2.33	Measurement is the process of determining the monetary amounts at which an entity measures assets, liabilities, income and expenses in its financial statements. Measurement involves the selection of a basis of measurement. This IFRS specifies which measurement basis an entity shall use for many types of assets, liabilities, income and expenses.	Same.
2.34	Two common measurement bases are historical cost and fair value: For assets, historical cost is the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire the asset at the time of its acquisition. For liabilities, historical cost is the amount of proceeds of cash or cash equivalents received or the fair value of non-cash assets received in exchange for the obligation at the time the obligation is incurred, or in some circumstances (for example, income tax) the amounts of cash or cash equivalents expected to be paid to settle the liability in the normal course of business. Amortised historical cost is the historical cost of an asset or liability plus or minus that portion of its historical cost previously recognised as expense or income. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.	Same.
Pervasive recognition and measurement principles
2.35	The requirements for recognising and measuring assets, liabilities, income and expenses in this IFRS are based on pervasive principles that are derived from the IASB Framework for the Preparation and Presentation of Financial Statements and from full IFRSs. In the absence of a requirement in this IFRS that applies specifically to a transaction or other event or condition, paragraph 10.4 provides guidance for making a judgement and paragraph 10.5 establishes a hierarchy for an entity to follow in deciding on the appropriate accounting policy in the circumstances. The second level of that hierarchy requires an entity to look to the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles set out in this section.	The U.S. GAAP hierarchy of sources of generraly accepted accounting principles is different. See Section 10.4-10.5.
Accrual basis
2.36	An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting. On the accrual basis, items are recognised as assets, liabilities, equity, income or expenses when they satisfy the definitions and recognition criteria for those items.
Recognition in financial statements
	Assets
2.37	An entity shall recognise an asset in the statement of financial position when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. An asset is not recognised in the statement of financial position when expenditure has been incurred for which it is considered not probable that economic benefits will flow to the entity beyond the current reporting period. Instead such a transaction results in the recognition of an expense in the statement of comprehensive income (or in the income statement, if presented).	Same.
2.38	An entity shall not recognise a contingent asset as an asset. However, when the flow of future economic benefits to the entity is virtually certain, then the related asset is not a contingent asset, and its recognition is appropriate.	Gain contingencies are usually not recognized since to do so might be to recognize revenue prior to its realization.
	Liabilities
2.39	An entity shall recognise a liability in the statement of financial position when the entity has an obligation at the end of the reporting period as a result of a past event, it is probable that the entity will be required to transfer resources embodying economic benefits in settlement, and the settlement amount can be measured reliably.	For contingent liabilities, the probability threshold is higher than “more-likely-than-not,” and is typically interpreted to mean about 80%.
2.40	A contingent liability is either a possible but uncertain obligation or a present obligation that is not recognised because it fails to meet one or both of the conditions (b) and (c) in paragraph 2.39. An entity shall not recognise a contingent liability as a liability, except for contingent liabilities of an acquiree in a business combination (see Section 19 Business Combinations and Goodwill).	There is a terminology difference between IFRS and U.S. GAAP regarding what is meant by a contingent liability. (Contingent liabilities that meet the SFAS 5 criteria for accrual are referred to as “provisions” under IFRS.) The substance of the guidance is the same, however. See Section 21, Provisions and Contingencies.
	Income
2.41	The recognition of income results directly from the recognition and measurement of assets and liabilities. An entity shall recognise income in the statement of comprehensive income (or in the income statement, if presented) when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably.	Income is recognized when it is (a) realized or realizable and (b) earned. The “earned” criterion does not apply to gains.
	Expenses
2.42	The recognition of expenses results directly from the recognition and measurement of assets and liabilities. An entity shall recognise expenses in the statement of comprehensive income (or in the income statement, if presented) when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably.	Same.
	Total comprehensive income and profit or loss
2.43	Total comprehensive income is the arithmetical difference between income and expenses. It is not a separate element of financial statements, and a separate recognition principle is not needed for it.	Same, given the definitions of income and expenses in IFRS SMEs.
2.44	Profit or loss is the arithmetical difference between income and expenses other than those items of income and expense that this IFRS classifies as items of other comprehensive income. It is not a separate element of financial statements, and a separate recognition principle is not needed for it.	Same.
2.45	This IFRS does not allow the recognition of items in the statement of financial position that do not meet the definition of assets or of liabilities regardless of whether they result from applying the notion commonly referred to as the ‘matching concept’ for measuring profit or loss.	Concepts are the same. But the current authoritative literature permits recognition as assets of some items that do not meet the definition of an asset, such as debt issue costs.
Measurement at initial recognition
2.46	At initial recognition, an entity shall measure assets and liabilities at historical cost unless this IFRS requires initial measurement on another basis such as fair value. [See also Section 21, Provisions and Contingencies.]	Generally same. However, see section 21 regarding liabilities of uncertain timing or amount.
Subsequent measurement
	Financial assets and financial liabilities
2.47	An entity measures basic financial assets and basic financial liabilities, as defined in Section 11 Basic Financial Instruments, at amortised cost less impairment except for investments in non-convertible and non-puttable preference shares and non-puttable ordinary shares that are publicly traded or whose fair value can otherwise be measured reliably, which are measured at fair value with changes in fair value recognised in profit or loss.	See Section 11, Basic Financial Instruments.
2.48	An entity generally measures all other financial assets and financial liabilities at fair value, with changes in fair value recognised in profit or loss, unless this IFRS requires or permits measurement on another basis such as cost or amortised cost.	See Section 12, Other Financial Instruments Issues.
	Non-financial assets
2.49	Most non-financial assets that an entity initially recognised at historical cost are subsequently measured on other measurement bases. For example: An entity measures property, plant and equipment at the lower of depreciated cost and recoverable amount. An entity measures inventories at the lower of cost and selling price less costs to complete and sell. An entity recognises an impairment loss relating to non-financial assets that are in use or held for sale. Measurement of assets at those lower amounts is intended to ensure that an asset is not measured at an amount greater than the entity expects to recover from the sale or use of that asset.	See the following sections: 17 – Property, plant, and equipment 13 – Inventories 27 – Impairment of assets
2.50	For the following types of non-financial assets, this IFRS permits or requires measurement at fair value: investments in associates and joint ventures that an entity measures at fair value (see paragraphs 14.10 and 15.15 respectively). investment property that an entity measures at fair value (see paragraph 16.7). agricultural assets (biological assets and agricultural produce at the point of harvest) that an entity measures at fair value less estimated costs to sell (see paragraph 34.2).	See separate sections on investments in associates, investments in joint ventures, investment property, and specialized activities. Unlike IFRS SMEs, U.S. GAAP does not use the term “biological assets.” Instead, U.S. GAAP has specialized accounting applicable only to agricultural producers and cooperatives. Under IFRS SMEs, certain assets of pharmaceutical and biotech companies, for example, may be considered biological assets. Unlike IFRS SMEs, biological assets are reported at LOCOM or depreciated cost, depending on the type of asset and its use (e.g., row crop, vineyard, breeding animal). Agricultural produce (harvested crops and animals held for sale) are reported at LOCOM, or at sales price less costs of disposal if certain conditions are met.
	Liabilities other than financial liabilities
2.51	Most liabilities other than financial liabilities are measured at the best estimate of the amount that would be required to settle the obligation at the reporting date. [See also section 21, Provisions and Contingencies.]	Liabilities that involve known or estimated amounts of money payable at unknown future dates, for example trade payables or warranty obligations, generally are reported at their net settlement value, which is the nondiscounted amounts of cash, or its equivalent, expected to be paid to liquidate an obligation in the due course of business, including direct costs, if any, necessary to make that payment. Liabilities other than financial liabilities generally are discounted only if the amount and timing of payments is fixed or reliably determinable.
Offsetting
2.52	An entity shall not offset assets and liabilities, or income and expenses, unless required or permitted by this IFRS. Measuring assets net of valuation allowances—for example, allowances for inventory obsolescence and allowances for uncollectible receivables—is not offsetting. If an entity’s normal operating activities do not include buying and selling non-current assets, including investments and operating assets, then the entity reports gains and losses on disposal of such assets by deducting from the proceeds on disposal the carrying amount of the asset and related selling expenses.	Like IFRS SMEs, specific offsetting requirements exist for deferred tax assets (see Section 29.29), and plan assets and obligations in a defined benefit plan (see Section 28.14). Unlike IFRS SMEs, U.S. GAAP also includes a general principle that a right of setoff exists if: Each of two parties owes the other determinable amounts. The reporting party has the right to set off the amount owed with the amount owed by the other party. The reporting party intends to set off. The right of setoff is enforceable at law. Furthermore, U.S. GAAP specifically requires offseting for other specific arrangements, including leveraged leases.