ACCOUNTING AND FINANCIAL REPORTING STANDARDS FOR

SMALL-SIZED ENTITIES

Table of Contents
Introduction and Background

03

Brief on Standard Development Process

06

Framework

07

Sections

Financial Statements Presentation

09

Assets, Liabilities and Provisions

11

Financing

28

Remuneration

34

Reporting Overseas Activities

35

Taxation

37

Reporting Performance

38

Introduction and Background

Need for revision of existing AFRS for SSEs (2006 version)

Applicability of IFRS for SMEs for both MSEs and SSEs

Adoption of IFRS for SMEs was withheld, which now stands
approved by the Council for adoption
Accordingly, SECP has defined three tier arrangement for non
listed companies along with applicable financial reporting
standards

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Introduction and Background

Alternatives

Response (%)

A Small-Sized Company is a non-listed company

having paid-up capital not exceeding
Rs.25 million.

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A Small-Sized Company is a non-listed company

having paid-up capital not exceeding
Rs.25 million, and turnover not exceeding Rs.100
million.

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Introduction and Background

The objective for issuing a standard for SSEs is to outline the

bare minimum provisions to report financial information by
an SSE.

AFRS for SSEs will be applicable from July 01, 2014.

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Standard Development Process

Members of Committee have representation of all stakeholders
Formation of sub committee to review 2006 version and global
standards particularly FRSSE
Finalization of draft for review of ASC-Committee

Draft approved was exposed to solicit comments from members

This session is for education and awareness of members at large
Submission of draft to SECP for notification in fifth schedule for
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compliance by a SSC.
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Framework
Objective
Information about financial performance & financial position.

Applicability
AFRS for SSEs applies to all SSEs registered under different statutes
wef July 01, 2014
An SSE desirous of adopting a superior set of standards is not
restrained from doing so.
Disqualified SSE shall continue to use for two consecutive years 7
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Framework
Elements of Financial Statements
Asset

Liability

Income

Expenses

Equity

Expenses include losses and expenses in ordinary course interalia decrease in economic benefits in the form of outflows or
curtailment of assets/increase in liabilities decreasing equity,
except those withdrawals made by equity participants.

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Section 1: Presentation of Financial Statements

Components of Financial Statements at minimum to include:
a. Statement of Financial Position (Balance Sheet);
b. Income Statement
c. Accounting policies and explanatory notes.

Financial Statement Presentation

Explicit & unreserved statement of compliance with this Standard
Disclosure of each material class of similar items
Accrual basis of Accounting & Going Concern

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Section 1: Presentation of Financial Statements

Statement of Financial Position (Balance Sheet)
Property, plant and equipment;
Intangible assets;
Investments;
Inventories;
Trade and other receivables;
Cash and cash equivalents;
Short term borrowing;
Trade, accrued and other payables;
Tax liabilities and assets;
Provisions;

Income Statement
Turnover
Cost of sales
Gross profit or loss
Distribution costs
Administrative expenses
Other income
Finance costs
Profit or loss before taxation
Tax
Profit or loss after taxation

Non-current interest-bearing liabilities;

Profit or loss for the financial year

Capital and reserves.

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Assets, Liabilities and Provisions

Property, Plant and Equipment

Intangible Assets
Investment Property
Impairment of Assets

Non-current Assets Held for Sale

Inventories
Construction/Long-term Contracts
Events after the Balance Sheet Date

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Provisions and Contingencies

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Section 2: Property, Plant and Equipment

Recognition: depends on probability of economic benefits flowing in and
reliable measurement of cost, which is a criteria for initial recognition.
Measurement: Subsequent measurement may be made on revalued
amount; eliminate accumulated depreciation against gross carrying
amount.
Depreciation to be charged using a suitable method, straight line basis is
the simplest method.
Transfer of incremental depreciation to accumulated P/L for realization.
Gain/loss from de-recognition to be included in P/L.
Impairment has been covered in Section 5 titled: Impairment of Assets.
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Section 2: Property, Plant and Equipment

Disclosure
Disclose for each class of PPE, useful life or rate of depreciation and a
reconciliation opening and closing carrying amount showing:
Particulars
Additions

Effect of revaluation, if any

Disposals

Transfer from / to lease assets, if any

Amounts written-off / adjustments, if any

Depreciation for the year

If an item of PPE is stated at revalued amount, disclose the following:

a.

the effective date of the revaluation; and

b.

whether an independent valuer was involved.

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Section 3: Intangible Assets

Recognition: depends on probability of economic benefits flowing in and
reliable measurement of cost, which is a criteria for initial recognition.
Initial & Subsequent Measurement: To be done at cost less accumulated
amortization and accumulated impairment losses.
Internally generated research costs/goodwill/brands are expensed.
Development costs are capitalized, in the light of six stage criteria covering:
a.

Technical feasibility and intention to complete the asset;

b.

Ability to use or sell the asset provided a market exists; and

c.

Availability of adequate resources and ability to measure the cost.

Derecognize on either disposal or lack of future economic benefits.

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Section 3: Intangible Assets

Disclosure
Disclose the following:
Particulars
Useful lives or amortization rates
Gross carrying amount and accumulated amortization and impairment
Line items in which amortization is clubbed in the Income Statement
A reconciliation of carrying amount at opening and closing showing separately:
a.
b.
c.
d.

e.

Additions;
Disposals;
Amortization;
Impairment losses; and
Other changes.

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Section 4: Investment Property

Definition: Land or building held by the owner or lessee under finance lease to
earn rentals or for capital appreciation or both, generating cash flows largely
independent of the other assets.
Recognition: depends on probability of economic benefits flowing in and
reliable measurement of cost, which is a criteria for initial recognition.
Measurement: Initial at cost and subsequent at cost less accumulated
depreciation less accumulated impairment or fair value model.
Re-measurement at each reporting period and report changes in fair value in
profit or loss.
If the fair value model had previously been used to measure investment
properties a change from the fair value model to the cost model would not be
allowed.
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Section 4: Investment Property

Disclosure
The following will be disclosed:
An accounting policy note for investment properties should state which
model (cost or fair value) is used.
In case of fair value model: reconciliation between opening balance
and closing balance of property must show; additions, subsequent
expenditure that was capitalized, transfer to and from Investment
property and fair value adjustments.

In case of cost model: same disclosure as for PPE.

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Section 5: Impairment of Assets

At each reporting date, assess whether there is any indication that an
asset may be impaired.
Determine the recoverable amount of the asset, or group of assets
forming a cash generating unit.

If recoverable amount of an asset (other than inventory) is less than its

carrying amount, recognize impairment loss in P/L unless it is to be
charged against revalued amount.
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Section 5: Impairment of Assets

Impairment loss of a cash generating unit should first be
allocated to goodwill of that unit and the remaining loss be
allocated to other assets of cash generating unit on prorate
basis.
Make a new assessment, if circumstances no longer exist or
when there is clear evidence of an increase in recoverable
amount because of changing economic circumstances, reverse
it (other than goodwill) and must be re-measured at lower of :

a. Its carrying amount had there been no impairment loss; and

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b. Its recoverable amount.

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Section 6: Non Current Assets held for Sale

Recognition & disclosure of noncurrent assets and disposal group held for
sale.
Recognition: classified as held for sale only when they are available for sale
immediately at normal terms, the sale of the asset is highly probable and
significant changes to the disposal plan are not foreseeable.
Measurement: lower of carrying amount and fair value less costs to sell.

Once classified as held for sale, no further depreciation to be charged.

no longer meets the criteria, re-measure at lower of:

a. Its carrying amount had the non current asset never been classified as
held for sale; and
b. Its recoverable amount.

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Section 6: Non Current Assets held for Sale

Disclosure:
a. Non-current assets that are held for sale must be shown separately in
balance sheet.
b. If a disposal group includes liabilities, these liabilities must be shown
separately from other liabilities in the balance sheet and may not be
set off against the assets in the disposal group.

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Section 7: Inventories
Measurement: lower of cost and net realizable value.

Cost to be assigned by using specific identification of the individual costs

of items whenever possible.
The cost of other inventories shall be assigned using the first-in, first-out
(FIFO) or weighted average cost formulas.
When inventories are sold the entity shall recognize the carrying amount
as an expense in the period in which the related revenue is recognized.
Disclosure:
the accounting policies adopted in measuring inventories, including the
cost formula used; and
the carrying amount of inventories pledged as security for liabilities.
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Section 8: Construction/Long-term Contracts

Only for contractors/service providers; covering contracts for rendering
services and for destruction or restoration of assets.
Contract revenues: initial amount agreed plus variations, claims and
incentive payments
Contract costs: direct costs, attributable costs and other costs specifically
chargeable under terms
Recognize contract revenue and cost by reference to stage of completion
(costs to date/total expected costs), when outcome can be estimated
reliably.
Fixed price: revenue and cost can be reliably measured including SOC.
Cost plus: cost can be measured reliably.

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Section 8: Construction/Long-term Contracts

Outcome not reliably estimated: revenue to be recognized to the extent
of costs incurred.
Recognize gross amount due from customers as costs incurred +
recognized profits - sum of losses and progress billings;
Recognize gross amount due to customers as costs incurred + recognized
profits - sum of losses progress billings where the later exceed the
former.
Disclose
a. Revenue recognized and methods used to determine revenue;
b. Advances received; and
c. Retention amount.

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Section 9: Events After the Balance Sheet Date

Recognition:
Adjust, amounts recognized in its financial statements, including related
disclosures, to reflect adjusting events after the reporting period date.
DO NOT adjust the financial statements for non-adjusting events, only
disclose if material, nature of event and financial impact.
Disclosure:
Disclose the date financial statements were authorized for issue and the
authority who gave such authorization.

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Section 10: Provisions and Contingencies

Recognize only when: a. Present obligation as a result of a past event;
b. Transfer of economic benefits is probable; and
c. The amount of the obligation can be estimated reliably.
Measurement: at the best estimate quantum of obligation and apply
discounting if time value of money is material, unwinding of discount shall
be shown as part of finance costs.
In case of reimbursement, recognize asset when virtually certain.
Do not recognize contingent liability, disclose only unless is remote.
Do not recognize contingent asset, disclose only when inflow is probable.
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Section 10: Provisions and Contingencies

Disclosure:
For each class of provision, an entity shall disclose all of the following:
The amount of the provision at the beginning and end of financial
year;
Any amounts transferred to or from the provision during the year;
The source and application of the amounts transferred; and
Particulars of each material provision included under other
provisions.

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Financing
Leases
Government Grants
Borrowing Costs
Basic Financial Instruments

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Section 11: Leases

Transfer of risks and rewards is the key factor for determining the type.
Recognition

Finance lease is recorded as an asset and as an obligation to pay future

rentals, usually at FV or if lower, at PV MLPs using interest rate implicit in
the lease.

Finance charge is allocated during lease term so as to produce a constant

periodic rate of charge on the remaining balance of obligation or a
reasonable approximation thereto.

Any rental under an operating lease shall be recognized as an expense on a

straight-line basis over the lease term.

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Section 11: Leases

Sale and leaseback

In finance lease, any excess of sales over the carrying amount to deferred and
amortised over the lease term.

In operating lease if FV=/<sales price, P/L to be recognized immediately.

If sale price>fair value, excess to be deferred and amortised over expected

period of usage.

Disclose: for each class of asset, the net carrying amount at the reporting date
a.

reconciliation between total MLPs at the reporting date, and their present
value. In addition, disclose these for each of the following periods:
i.
ii.

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not later than one year;

later than one year .

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Section 12: Government Grants

Grants related to assets to be reported grossly or by netting off against the
purchase price of assets. Should reflect FV of asset received or receivable.
Grants related to income: recognize in income when the grant proceeds are
receivable in case no specific performance conditions are imposed where
imposed, upon fulfillment of conditions.
Grants received before the revenue recognition criteria are satisfied are
recognized as a liability.

Disclosure
a. The nature and amounts of government grants; unfulfilled conditions and
other contingencies attaching to government grants that have not been
recognized in income.
b. Other forms of government assistance; the entity has directly benefited.

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Section 13: Borrowing Costs

Recognition: report in P/L except to the extent that these are capitalized
by virtue of being directly attributable to the acquisition, construction
or production of a qualifying asset.
Suspension of capitalization during periods of interruptions in
development activity.
Cessation of capitalization when activities that are necessary to get the
qualifying assets ready for use are complete, even if they have not yet
been brought into use.
Disclosure

Amount of finance costs including those capitalized as part of cost of an

asset.

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Section 14: Basic Financial Instruments

A financial instrument is a contract that gives rise to financial asset of one entity
and financial liability or equity instrument of another entity.
Recognition: fair value

Measurement: amortized cost except for investment in equity.

Investments in quoted equity instruments are measured at FV whereas those
having no active market are carried at cost less impairment.
Dividend arising on financial liability are recognized as expense and those
relating to equity component of financial instrument are debited to equity.

Financial assets are tested for impairment.

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Disclose redemption date and terms to identify liability.

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Section 15: Employee Benefits

Recognition: Cost of all employee benefits shall be recorded as a liability
and as an expense. Termination benefits shall be recognized as an
expense in profit or loss immediately.
Measurement: best estimate of expenditure required to settle the
obligation.
Defined contribution plans: contribution is charged to P/L

Defined benefit plans: provide for accruing liability through any method.
Disclose: accounting policy for recognizing actuarial gains and losses, if any;

general description of the type of plan;

PV of DBO, fair value of the plan asset and the surplus or deficit in the
plan
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Section 16: Foreign Currency Translation

Recognition: each asset, liability, revenue or cost denominated in a
foreign currency to be translated at the exchange rate on the date on
which the transaction occurred; if the rates do not fluctuate significantly,
an average rate for a period to be used.

Where a trading transaction is covered by a related or matching forward

contract, the rate of exchange specified in that contract may be used.
Monetary assets and liabilities to be translated using the closing rate or,
where appropriate, the rates of exchange fixed under the defined terms.
All exchange gains/losses on settled transactions and unsettled monetary
items shall be reported as part of the profit or loss for the period.
No subsequent translations for non-monetary assets once recorded.
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Section 16: Foreign Currency Translation

In case of matching foreign currency borrowings to finance or hedge against,
its foreign equity investments, translate at closing rates, park exchange
differences in reserves and offset exchange gains or losses on foreign
currency borrowings, as a reserve movement, against these exchange
differences.
Following conditions that must apply are as follows:
a. exchange gains or losses arising on the borrowings may be offset only to
the extent of exchange differences arising on the equity investments;
b. the foreign currency borrowings, whose exchange gains or losses are
used in the offset process, shall not exceed, in the aggregate, the total
amount of cash that the investments are expected to be able to
generate, whether from profits or otherwise; and
c. the accounting treatment adopted shall be applied consistently from
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period to period.
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Section 17: Taxation

Recognition: apply taxes payable method to account for income taxes to
report as an expense only the current income taxes for that period,
determined in accordance with the Tax Law.
Current income taxes, to the extent unpaid or recoverable, shall be
recognized as a liability or asset as the case may be.
Measurement: Income tax liabilities and assets to be measured using the
income tax rates prescribed by the Tax Law, at the reporting date.
Disclosure:
a. amount of unused income tax losses c/f and unused income tax credits
b. portion of income tax expense related to transactions charged (or
credited) directly to equity.
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Section 18: Revenue

Recognition: Sale of goods:
a. significant risks and rewards of ownership are transferred to buyer.
b. Consideration to be derived can be reasonably measured.
Revenue from services and long term contracts to be recognized using SOC
method unless there is high certainty for which completed contract is
used.
Performance to be regarded as achieved under both of the above:
a. persuasive evidence of an arrangement exists;
b. delivery has occurred or services have been rendered; and

c. the sellers' price to the buyer is fixed or determinable.

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Section 18: Revenue

Revenue from other sources to be recognized when reasonable assurance exists
as to measurement and collectability.
Revenues to be recognized on following basis:
Interest on time proportion basis

Royalty as they accrue under terms

Dividend: right to receive is established

Rental income: on accrual basis

If sales have multiple elements, such as a product and service, clearly state
accounting policy for each element as well as how multiple elements are
determined and valued.
If an entity has different policies for different types of revenue transactions,
including non-monetary (barter) sales, the policy for each material type of
revenue transaction shall be disclosed.

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Disclosure: major categories of revenue recognized during the period.

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Section 19: Accounting Policies, Changes in Accounting

Estimates and Errors
Accounting policies and estimates to be consistent with this Standard for
SSEs and with Companies Ordinance, 1984.
Change in accounting policy and correction of material prior period error to
be applied retrospectively, where impracticable, adjust the comparatives
from the earliest date practicable.
Change in an accounting estimate to be recognized prospectively.
Disclosure:
Reason for change in policy, impact in current and prior periods.
Nature and amount of estimates in current and prior periods and amounts.

Nature and amount of estimates in current and prior periods and amounts.

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Section 20: Related Party Disclosures

When an entity:
purchases, sells or transfers goods and other assets or liabilities; renders
or receives services; or
provides or receives finance or financial support; (irrespective of
whether a price is charged) to, from or on behalf of a related party,
material transactions shall be disclosed, including:
a. a description of the relationship between parties;
b. description of the transactions and amounts involved;
c. other elements necessary for an understanding financial statements;
d. the amounts due to or from related parties and provisions for
amounts due and amounts written off
Disclosure: Personal guarantees given by directors for borrowings and vice
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versa.
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Section 21: Fair Value

Definition
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.
Measurement
Fair value of a particular asset and liability is the exit price determined by
taking into account the transactions in active market of identical assets
and liabilities and if that are not available, take into account transactions
of similar assets and liabilities.

If the transactions regarding the active identical assets and liabilities and
similar assets and liabilities are not available, then valuation techniques
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may be used by market participants that they deem reasonable.
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Section 22: Transition to the Accounting Standards for SSEs

A statement of compliance with the AFRS for SSEs for the first time when:
a. It did not present financial statements for previous periods, or
b. Presented inconsistently with AFRS for SSEs, or
c. Presented its previous financial statements under IFRS for SMEs, or full
IFRS.
In its opening balance sheet as of the date of transition, (beginning of the
earliest period presented in financial statements) to the AFRS for SSEs, shall:
a. Recognize all assets and liabilities whose recognition is required.
b. Not recognize if there is no permission.
c. Reclassify items that it recognized under its previous financial reporting
framework; and
d. Apply the Accounting standards for SSEs in measurement.

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Section 22: Transition to the Accounting Standards for SSEs

An entitys first time financial statements shall include reconciliations of its
equity reported under previous framework to its equity in accordance
with Accounting standards for SSEs for both of the following dates:
a. The date of transition to Accounting standards for SSEs; and
b. The end of the latest period presented in the entitys most recent
annual financial statements in accordance with previous framework.
A reconciliation to its profit or loss in accordance with Accounting
standards for SSEs for the latest period in the entitys most recent annual
financial statements to the profit and loss that would have been in
accordance with previous framework. The starting point for that
reconciliation shall be profit or loss in accordance with previous
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framework for the same period.
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End of Presentation

Thank you
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