Enquiry:
Your kind attention is drawn towards provisions of SRO 929 (I)/ 2015 dated 10 September 2015. At serial No. 3 the IFRS for SMEs were made applicable for medium sized companies. In column No. 4 of the above SRO the following is mentioned:
“A Medium-Sized Company with appropriate disclosure in its financial statements may have option to adopt the following:
(i) The revaluation model included in the IAS – 16, ‘Property, Plant and Equipment’; and
(ii) The capitalizing of borrowing costs as permitted by IAS – 23, ‘Borrowing Costs’”.
The third schedule of the Companies Act, 2017 as amended up to date vide SRO 1169(I)/2017 dated 7 November, 2017 does not include the above mentioned clarification as included in SRO 929(I)/2015 allowing the medium-sized companies to adopt revaluation model and to capitalize the borrowing costs as mentioned in (i) and (ii) above respectively.
You are requested to please clarify the applicability or otherwise of the above two options for the medium-sized companies under the third schedule of the Companies Act, 2017.
Opinion:
The International Accounting Standards Board (IASB) issued the IFRS for SMEs in July 2009. In Pakistan, the Securities and Exchange Commission of Pakistan (SECP) through S.R.O 929(I)/2015 (dated September 10, 2015) prescribed the IFRS for SMEs as the financial reporting framework for medium-sized companies. However, under S.R.O 929(I)/2015 two modifications were made in the IFRS for SMEs. These modifications are reproduced as under:
“A medium sized company with appropriate disclosure in its financial statements may have the option to adopt the following:
- The revaluation model included in the International Accounting Standard (IAS) 16 ‘Property, Plant and Equipment’.
- The capitalizing of borrowing cost as permitted by International Accounting Standard (IAS) 23 ‘Borrowing Cost’.”
It is to be noted that in 2015 IFRS for SMEs were amended by IASB. Amongst the incorporated amendments was addition of revaluation model in relation to the property, plant and equipment. Relevant paragraph 17.15 of section 17 (Property, plant and equipment) of IFRS for SMEs (2015 version) is reproduced hereunder:
“An entity shall choose either the cost model in paragraph 17.15A or the revaluation model in paragraph 17.15B as its accounting policy and shall apply that policy to an entire class of property, plant and equipment. ……………..” (Underline is ours)
Pursuant to the above amendment in the IFRS for SMEs the only modification/ difference between the IFRS for SMEs issued by IASB and financial reporting framework prescribed by SECP through S.R.O 929 (I)/ 2015 related to the borrowing costs.
IFRS for SMEs require that all borrowing costs are charged to profit or loss, and the relevant paragraph 25.2 of section 25 (Borrowing Costs) of IFRS for SMEs is reproduced hereunder:
“An entity shall recognise all borrowing costs as an expense in profit or loss in the period in which they are incurred.”
The Board understands that SRO 929 (I)/ 2015 was issued under the repealed Companies Ordinance, 1984. The Companies Act, 2017 has been enacted on May 30, 2017 and the Board would like to draw your attention to the third schedule of the Companies Act 2017. The Third Schedule of the Companies Act, 2017 specifies that a medium-sized company is required to prepare statutory financial statements in accordance with IFRS for SMEs. However, in the Third Schedule of the Companies Act, 2017 no modification has been prescribed in the IFRS for SMEs.
Based on the above discussion the Board concludes that a medium-sized company in accordance with IFRS for SMEs:
- Can choose either cost model or revaluation model for measurement after initial recognition of property, plant and equipment.
- Shall recognise all borrowing costs as an expense in the statement of profit or loss in the period in which they are incurred.
(January 12, 2018)