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The present value of the fine will be $50,000 discounted at 5% for 5 years, which is $39,177. Therefore in the current year this amount is recorded as an
expense and provision. In subsequent years, the discount will unwind, thus increasing the provision and resulting in a charge to profit or loss. In the first
year, the interest which will unwind will be $39,177 × 5%, that is, $1,959.
Facts
CASE STUDY 3
Angel is a small company whose only asset is a loan received from the sole shareholder. According to IAS 24 it appears that the shareholder is a related
party and on that basis the loan is material to the accounts; this loan is therefore required to be disclosed as a related-party transaction.
Required
Should the related-party note appear in the accounts of Angel under IFRS for SMEs?
Solution
Section 33 on related parties follows the principles of full IFRS, and therefore the loan should be disclosed as a related-party transaction.
Facts
CASE STUDY 4
Some small companies may choose not to apply the IFRS for SMEs on the basis that its provisions would not have made a significant difference to the
costs they incur in producing financial statements. The IFRS provides significant disclosure exemptions, but exemptions from actual accounting entries are
limited. For those preparers who are entitled to use the IFRS, this is no longer the case.
Required
Discuss how significant costs can be saved in adopting the IFRS for SMEs.
Solution
Cost savings will be made in three areas:
1. Not having to value PPE with the cost savings related to a professional valuer.
2. Not having to apply certain complicated accounting rules.
3. Potentially saving further costs in having these items audited.
Facts
CASE STUDY 5
Handy is adopting IFRS for SMEs in its financial statements for the year ended December 31, 20X9. The directors of the company are worried about the
effect of the move to IFRS on their financial performance. The directors have highlighted some differences between IFRS for SMEs and their current local
equivalent standards.
Plant and equipment
Local GAAP does not require the residual value of a noncurrent asset to be determined at the date of acquisition or latest valuation. The residual value of
much of the plant and equipment is deemed to be negligible. However, a certain plant has a high residual value. Handy wishes to use the revaluation model
for PPE.