ESFA: disclosure of errors, adjustments and changes in accounting policies.

The process of preparing the ESFA should have been carried out at the end of December 31, 2015, in the case of SMEs. In this editorial we mention some consequences of the convergence to International Standards, and what information an entity must disclose about the adjustments in the ESFA.

Based on CTCP Concept 145 of 2018, different concerns and answers are exposed on how the disclosures of errors in the financial information of an SME should be carried out and how the opening statement of financial position -ESFA- should be prepared. The following are some of the aspects to be addressed.

Compliance with the standard

“the preparation of the ESFA should have been carried out as of the closing date of the transition period, that is, between January 1, 2015 and December 31, 2015.”

According to article 1.1.2.2.2. of DUR 2420 of 2015, the date of preparation for the application of International Standards in an SME took place between January 1, 2014 and December 31, 2014. On the other hand, the preparation of the ESFA should have been carried out at the end of the transition period, i.e. between January 1, 2015 and December 31, 2015.

The entity should have presented then, at the end of December 31, 2015, both the ESFA and its last financial statements, in accordance with the previous regulations (Decree 2649 of 1993). Subsequently, as of January 1, 2016, the full application of the Standard for SMEs began, so that, at the close of December 31, 2016, its first financial statements were officially issued under International Standards.

However, there are companies that are catching up with these requirements and, for this, they cannot avoid the mentioned processes, among these, the preparation of the ESFA according to the corresponding period, that is, with the financial information as of December 31, 2015, and present the financial information under the Standard for SMEs since the closing of December 31, 2016, despite the fact that we are already in 2018. This is understood as a retroactive application of the standard, affecting the periods prior to 2018 and presenting the information, complying with the requirements, as the deadlines were defined in DUR 2420 of 2015.

Preparation of the ESFA

One of the situations that generally arise in companies is that they prepare the ESFA only taking into account the balance sheet information, i.e., they think that the balance sheet is the only input to prepare their information under International Standards, so they are dedicated to evaluate the items of the financial statements and transfer the information.

In reality, the transition process goes beyond the simple transfer of accounts: in the preparation of the ESFA, in addition to the 2014 balance sheet information issued under Decree 2649 of 1993, all the financial information of the entity must be considered; an analysis of its operations, the nature of its transactions and pending matters such as litigation, policies, indemnities and others must be performed. All this, in order to identify if there are transactions that should be recognized and that have not been evaluated in the preparation of the financial statements under the previous standard.

Errors from previous periods in the preparation of the ESFA

Taking into account the exceptions in paragraphs 35.9 and 35.11 of the SME Standard, in the preparation of the ESFA an SME should recognize its assets and liabilities in accordance with the guidelines of the SME Standard, and should not recognize items that the standard does not authorize. Likewise, it is necessary to reclassify the items recognized under Decree 2649 of 1993, which, for the purposes of the SME Standard, must be integrated in a different manner.

Regarding the accounting policies used under the guidelines of Decree 2649 of 1993, if an entity identifies that the new accounting policies differ from the previous ones, it must describe each change in the accounting policy, in addition to reporting on the effect that the transition to these new technical frameworks has had in terms of financial performance, cash flows and presentation of the entity’s situation.

Adjustments to the ESFA

If the adjustments that the entity wishes to make arise from the recognition of items obviated from the previous accounting, which was the basis for the preparation of tax returns, the tax authorities will not take such adjustments into account. The entity must then incorporate this type of adjustments in the financial statements prepared under the previous standard, so that omitted assets or liabilities are evidenced and it may be liable for the corresponding penalties, as well as the accountant and statutory auditor who were in charge of the information for such periods. This means that if the entity is making adjustments to the ESFA and identifies inaccuracies or errors in the application of the previous framework, when making the respective corrections retroactively, such errors should not be reflected in the ESFA.

“adjustments resulting from the application of the new accounting policies based on the SME Standard should be recognized in the ESFA, directly in retained earnings.”

On the other hand, adjustments resulting from the application of the new accounting policies based on the SME Standard should be recognized in the ESFA, directly in retained earnings, or in another equity item. Also, the entity must disclose information separately, both for the adjustments of the errors identified from previous periods, as well as the adjustments for the adoption of the new accounting policies; all this, in accordance with paragraph 35.8 and 35.14 of the SME Standard. The presentation suggested by the CTCP, in its Concept 145 of 2018 for each element of the financial statements, is as follows:

– Balance under Decree 2649 of 1993 as of January 1, 2015.

– Correction of prior period errors.

– Balance under Decree 2649 of 1993.

– Effect of the transition to the Standard for SMEs.

– Balance under the Standard for SMEs as of January 1, 2015.

Source: Actualize