• Discussed with SAC: July 2001
• Discussed with SAC: June 2003
• Discussed at July 2003 IASB Meeting
• Discussed at September 2003 IASB Meeting
• Discussed at October 2003 IASB Meeting
• Discussed at December 2003 IASB Meeting
• Discussed at February 2004 IASB Meeting
• Discussed with SAC: February 2004
• Discussed at March 2004 IASB Meeting
• Discussed at April 2004 IASB Meeting
• Discussed at May 2004 IASB Meeting
• Discussed at June 2004 IASB Meeting
• Discussion Paper published for comment 24 June 2004
• Discussed at July 2004 IASB Meeting
• Discussed at September 2004 IASB Meeting
• Discussed at October 2004 IASB Meeting
• Discussed at December 2004 IASB Meeting
• Discussed at January 2005 IASB Meeting
• Discussed with SAC: February 2005
• Discussed at February 2005 IASB Meeting
• Discussed at March 2005 IASB Meeting
• Staff Questionnaire on SME recognition and measurement issues published 11 April 2005
  Comment deadline is 30 June 2005
• Working Group expanded in April 2005
• Discussed at May 2005 IASB Meeting
• Discussed with SAC: June 2005
• Discussed at July 2005 IASB Meeting
• Public round-table meetings on possible recognition and measurement simplifications: 13-14 October 2005
• Discussed at November 2005 IASB Meeting
• Discussed at December 2005 IASB Meeting
• Discussed at January 2006 IASB Meeting
• Discussed at February 2006 IASB Meeting
• Discussed at March 2006 IASB Meeting
• Discussed at May 2006 IASB Meeting
• Discussed at June 2006 IASB Meeting
• Discussed with SAC June 2006
• Discussed at July 2006 IASB Meeting
• 4 August 2006: IASB Makes Draft of ED Publicly Available
• Discussed at September 2006 IASB Meeting
• Discussed at October 2006 IASB Meeting
• Discussed at December 2006 Board Meeting
• Discussed at January 2007 IASB Meeting
• 15 February 2007: IASB publishes Exposure Draft of IFRS for SMEs:
  • Summary of the Exposure Draft
    
  • Press Release (PDF 98k)
  • Deadline for comments on the Exposure Draft: 1 October 2007
    Extended to 30 November 2007
• 5 April 2007: IASB publishes a Staff Overview of the ED
• 27 April 2007: IASB publishes the Spanish translation of the ED
• 11 May 2007: IASB publishes the French translation of the ED
• 5 June 2007: IASB publishes the German translation of the ED
• 20 June 2007 IASB launches programme to field test the ED
• September 2007: IASB publishes the Romanian and Polish translations of the ED
• Discussed at September 2007 IASB Meeting
• Discussed at March 2008 IASB Meeting
• Discussed at April 2008 IASB Meeting
• Discussed at May 2008 IASB Meeting
• Discussed at June 2008 IASB Meeting
• Discussed at July 2008 IASB Meeting
• Discussed at September 2008 IASB Meeting
• Discussed at October 2008 IASB Meeting
• Discussed at November 2008 IASB Meeting
• Discussed at December 2008 IASB Meeting
• Discussed at January 2009 IASB Meeting
• Discussed at February 2009 IASB Meeting
• Discussed at March 2009 IASB Meeting
• Discussed at April 2009 IASB Meeting
• 9 July 2009 – Final IFRS for SMEs issued, effective immediately.
  Click for More Information

Timetable

• Click for IASB Project Timetable

This is an active agenda project that seeks to develop an International Financial Reporting Standard for private entities (entities that do not have public accountability).

From inception of the project until May 2008, the name of the project was IFRS for Small and Medium-sized Entities, or SMEs. The new name, private entities, is intended to encompass the same scope of entities as the former name SMEs. Because this web page is a historical record of the project, we have kept the use of the term SME in the decision summaries prior to May 2008.

Board Discussion July 2003

The Board agreed with the following 4 step approach:

Step 1: Extract from all existing IFRSs and Interpretations the basic principles in those standards. This is likely to include many of the principles in the 'black letter' paragraphs of those standards, plus key elements of the Framework, plus some principles in IASB and IFRIC EDs that have not yet been finalised.

Step 2: Reorganise these topically (perhaps financial statement order) if it is concluded that this makes the presentation of the principles more user friendly.

Step 3: Review these for principles or guidance that had been omitted in the original Step 1 extraction but that, on review, are deemed to be essential to operationalise the standards for SMEs and add these to the principles extracted in Step 1.

Step 4: Review the results of Step 3 with a view to identifying helpful simplifications for SMEs. Present those potential simplifications to the Advisory Group and the Board for deliberation.

The key issues to be addressed by the Board at future meetings:

• Specific definition of entities included in the scope of the project.
• Whether the special guidance for SMEs should be promulgated (i) as separate sections in or blanket exemptions from individual IFRS or (ii) in a separate volume of standards.
• Which specific differences and simplifications.
• How to describe (label) the body of standards in the basis of presentation note and, presumably, in the auditor's report.

The target is to have at least some of the simplifications and/or guidance issued for public comment by June 2004 and approved by the Board by December 2004.

Board Discussion September 2003

The Board continued its discussion of an approach to a project on accounting standards for small and medium-sized entities (SMEs) and reached the following tentative decisions:

• The Board should develop accounting standards appropriate for small and medium-sized entities (IASB SME standards).
• The Board should describe the characteristics of SMEs for which it intends the standards. These characteristics should not prescribe quantitative 'size tests' but rather consider qualitative factors such as public accountability. National jurisdictions should determine which, if any, entities should be permitted or required to follow IASB SME standards.
• Development of IASB SME standards should start by extracting the fundamental concepts from the IASB Framework and the principles and related mandatory guidance from IFRSs and related Interpretations.
• Any modifications to these concepts or principles must be based on the identified needs of users of SME financial statements.
• It is likely that disclosure and presentation modifications will be justified based on user needs. The disclosure modifications could increase or decrease the current level of disclosure.
• There would be a rebuttable presumption that no modifications would be made to the recognition and measurement principles in IFRSs. Such modifications can only be justified based on user needs and cost/benefit analysis.
• If IASB SME standards do not address a particular accounting question, full IFRSs would be a mandatory fallback.
• IASB SME standards should be published in a separate printed volume. In the electronic version of the Standards, IASB SME standards should be integrated with full IFRS.
• The Board will decide in the future how IASB SME standards should be labelled or described in the basis of presentation note.

Board Discussion October 2003

At its September 2003 meeting, the Board decided that it should develop accounting standards appropriate for small and medium-sized entities (SMEs) and that development of IASB SME standards should start by extracting the fundamental concepts from the IASB Framework and the principles and related mandatory guidance from IFRSs and related Interpretations. Any modifications to these concepts or principles must be based on the identified needs of users of SME financial statements. The Board felt that it was likely that disclosure and presentation modifications will be justified based on user needs, but there would be a rebuttable presumption that no modifications would be made to the recognition and measurement principles in IFRSs.

At this meeting, the staff presented, for discussion, a proposed implementation of the foregoing approach with respect to IAS 19, Employee Benefits. The staff extracted all black-letter principles from IAS 19 plus some material from the non-black letter sections that were identified as matters of principle. The extraction reflected the following modifications of the recognition and measurement principles in IAS 19:

• Discounting for all employee benefits payable beyond one year from balance sheet date.
• Measurement of non-monetary benefits (cars, housing, and similar) at cost.
• Allowing an actuarial method that results in measurements that are consistent with the Projected Unit Credit method (IAS 19 requires strict adherence to the Project Unit Credit method).
• Allowing SMEs to choose between two of the methods of recognising actuarial gains and losses that are allowed by IAS 19.
• SMEs would use a single method of recognising actuarial gains and losses for post-employment benefits other than pensions.

• Principles relating to multiemployer plans.
• Principles relating to state plans.
• Principles relating to insured plans.
• The asset ceiling test.
• Regularity of actuarial valuation.
• Detailed guidance on actuarial assumptions.
• Principles relating to reimbursement rights.
• Standards on curtailments and settlements.

Board members commented on the draft extraction, but no Board decisions were made. Among the comments:

• The IAS 19 principles relating to multiemployer plans, state plans, and insured plans should not be omitted because these kinds of plans are commonly used by SMEs.
• Consider whether all or most of the material on defined benefit plans should be removed from the extraction, with reference back to the full IAS 19, because SMEs tend not to have defined benefit plans.
• The SME version of IAS 19 is "far more readable" than the full IAS 19. The document may have an educational use in relation to IAS 19.
• Add a statement of objective and an executive summary at the beginning.
• Explicitly mention the fall-back to the full IFRS in each SME standard.
• Some Board members found the measurement simplifications appropriate, while others favoured reverting to the full text of IAS 19.
• Requiring discounting for all employee benefits payable beyond one year from the balance sheet date complicates, rather than simplifies IAS 19 for SMEs.
• Abolishing the full corridor approach of IAS 19 is not simplification.
• Staff should indicate its proposed justification for each proposed recognition and measurement change or disclosure omission or simplification.
• The Board should agree on the types of entities for which it believes its SME standards appropriate (who is the target company), but should not adopt quantified size criteria.
• Present the proposed SME standards to the Board in a 'marked draft' reflecting all changes to the principles in the related IFRS.

Discussion at December 2003 IASB Meeting

In September 2003, the Board reached the following decision about the approach to defining the small and medium sized entities (SMEs) toward which the Board's SME standards will be aimed:

The Board should describe the characteristics of SMEs for which it intends the standards. These characteristics should not prescribe quantitative "size tests" but rather consider qualitative factors such as public accountability. National jurisdictions should determine which, if any, entities should be permitted or required to follow IASB SME standards.

The purpose of the discussion in December was to seek the Board's view on the appropriate characteristics.

The Board agreed that IFRSs should be regarded as suitable for all business entities.

The Board also agreed that it would develop, as an alternative to IFRSs, a separate body of financial reporting standards suitable for those business entities that do not have a public accountability. A principle of "no public accountability" should be the overriding characteristic to identify those business entities for which IASB SME standards would be intended.

The "public accountability" principle implies that an entity is publicly accountable if:

• there is a high degree of outside interest in the entity, from investors or other stakeholders;
• the entity may have a social responsibility because of the nature of its operations; and
• the substantial majority of stakeholders depend on external financial reporting, as they have no other way of obtaining financial information about the entity.

The Board also agreed to adopt presumptive indicators of public accountability. A business entity would be regarded as having public accountability if it meets any one of the following criteria:

• a. It has filed, or it is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.

• b. It holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities brokerage, pension fund, mutual fund, or investment banking entity.

• c. It is a public utility or similar entity that provides an essential public service.

• d. It is of economic significance in the jurisdiction in which it is domiciled.

• e. One or more of its owners has expressed objection to the entity's decision to use SME standards rather than full IFRSs (all owners, including those not otherwise entitled to vote, having been informed of that decision).

Discussion at February 2004 IASB Meeting

The Board discussed a summary of the tentative decisions made with respect to the approach to the SME project and made certain modifications. The Board decided to clarify that the IASB's SME standards would be suitable only for entities that do not have public accountability. They would not be intended for use by publicly-listed companies, even if national law or regulation were to permit this.

As modified, the Board's tentative decisions are:

Several decisions require an assessment of the needs of users of financial statements of SMEs in deciding on the appropriate accounting standards for such entities. The Board agreed to consult an informal user group to assess users' needs.

The Board agreed to publish a discussion document setting out its tentative decisions on the approach to the project, with comments invited. The document will include the Board's reasons for those decisions. The Board also asked the staff to develop one or two examples of SME Standards for possible inclusion in the document.

Discussed at the March 2004 IASB Meeting

The Board discussed a proposed Discussion Paper based on preliminary and tentative Board views based on discussions to date. The Discussion Paper includes specific questions for respondents with respect to the Board's preliminary views. It also sets out alternatives that were considered and the arguments for and against each.

The Board asked the staff to make a number of clarifications in the draft Discussion Paper. The staff will redraft the Discussion Paper based on the Board members' comments with the objective of seeking the Board's approval to issue at the Board's April 2004 meeting, with a 90 day comment period.

The staff noted that the paper will be sent to the advisory panel after the Board meeting for comment.

Discussed at the April 2004 IASB Meeting

The Board reviewed a revised draft of a Discussion Paper on Accounting Standards for Small and Medium-sized Entities. The draft reflected decisions that had been made by the Board in March 2004 as well changes resulting from a review by members of the IASB's Advisory Panel on SMEs.

The Board asked that further changes to the draft be made, including the following:

• Clarify that the objectives of financial reporting set out in the IASB Framework are appropriate for SMEs as well as for entities following full IFRSs.
• Full IFRSs, rather than IASB standards for SMEs, should be regarded as appropriate for entities that are economically significant in their home country based on criteria such as total assets, total revenue, number of employees, degree of market dominance, and the nature and extent of external borrowings.
• If an SME that otherwise is following IASB standards for SMEs elects to follow a treatment in an IFRS that differs from the treatment in the related IASB standard for SMEs, it must follow the entire IFRS, not just selected parts of it.
• Explain that while initially the Board will issue a single comprehensive exposure draft of 'SME versions' of all existing IFRSs (including IASs) and interpretations, once the initial set of IASB standards for SMEs is in place the Board expects to keep them up to date by including SME-related proposals in each new exposure draft or draft interpretation. Moreover, the effective dates of new or revised IASB standards for SMEs would be the same as the effective dates of new or revised IFRSs.

The Board voted (12 in favour, 1 opposed) to approve the Discussion Paper for publication subject to the opportunity to review and comment on a ballot draft of the document. There will be a 90-day comment period.

Discussion at the May 2004 IASB Meeting

The Board considered a previous tentative decision that where an SME standard provided an exemption or simplification from a related IFRS and the entity chooses not to apply the exemption or simplification but reverted to the related IFRS it should apply the related IFRS in its entirety. The Board confirmed its support for the tentative conclusion and for raising the issue specifically in the discussion paper. The discussion paper is expected to be published in June.

Discussion at the June 2004 IASB Meeting

The staff noted that a discussion paper on this topic would be formally issued on Thursday, 24 June 2004, with comments due by 24 September. The staff has identified 40 organisations of SMEs, primarily in Europe, to which the discussion paper will be sent in an attempt to elicit comments from those directly involved in preparing SME financial statements, in addition to IASB's normal respondent base.

The Board then discussed extractions of SME standards from full IFRSs, considering IAS 1, IAS 8, and the IASB Framework. The Board will continue to consider extractions of standards at its July and September meetings while awaiting responses to the discussion paper. The Board agreed that the process for extractions would be to identify the principles in each existing IFRS, consider the appropriateness of the principles for SMEs, consider what additional requirements are needed to operationalise the standard, and where necessary provide additional guidance.

Accounting policy choices. If there is an accounting policy choice in an IFRS, the Board considered whether all of the policy choices in the IFRS should also be available in the related SME standard. The Board agreed that the SME standard should identify the policy choice that it believes is the simplest and most relevant, and generally include only that policy choice in the SME standard, with a cross-reference to the additional choice(s) in the IFRS, which SMEs may elect to apply.

Optional fallback to IFRS. The Board had already agreed that if an entity chooses to apply a treatment in a full IFRS rather than the SME provisions, it must apply the entire IFRS in which that treatment is addressed. For example, if the SME borrowing costs standard does not provide for capitalising borrowing costs, an SME could elect to capitalise by applying IAS 23. In that case, however, IAS 23 would be applied in its entirety.

Mandatory fallback. The Board then considered the 'mandatory fallback' when an SME standard does not address a particular transaction that is addressed in the full IFRS. For example, if the SME employee benefits standard only discussed how to account for defined contribution plans, which requirements would an SME with defined benefit plans be required to comply with? The Board agreed the mandatory fallback to an IFRS should be on an issue by issue basis, rather than a standard by standard basis. Accordingly, in this example, the entity would be required to comply with the requirements of IAS 19 as they relate to defined benefit plans, but would not be required to comply with all other requirements of IAS 19.

Preface. The Board agreed that there is a need for a preface, or similar document, for the SME series of standards. Such a document would explain which entities are eligible to use the SME standards and the rules relating to voluntary and mandatory fall-backs to full IFRSs. The staff agreed to prepare a proposed preface once comments on the SME discussion paper have been received.

Interpretations. The Board considered the role of SIC Interpretations and IFRIC Interpretations in the SME regime and agreed that if, for any reason, an entity must look to full IFRS in accounting for a transaction, that entity is also required to take account of the related SIC interpretations. The Board agreed that where Interpretations are relevant to SMEs those interpretations should be incorporated into the relevant SME standard.

Justifications for changing an IFRS in the SME version. The Board discussed appropriate reasons for the SME standards departing from full IFRS and agreed that a departure from full IFRS should be considered for the SME standards in the following situations:

• The issues are unlikely to be relevant to SMEs.
• Where the departures will better meet SME user needs.
• On the basis of a cost/benefit analysis.
• Where it is possible to simplify a measurement calculation without detracting from the principle.
• Where it is possible to provide guidance for a type of transaction that may be common for SMEs.

The Board agreed that the basis for conclusions of each SME standard should explain the rationale for changes to the full IFRS.

Going concern. The Board considered the requirement in IAS 1 for an entity to disclose whether or not it is a going concern, and agreed that this requirement should be retained in the SME standard. The Board considered the merits of providing guidance as to how to complete the accounting for an entity that is not considered to be a going concern and decided against it.

Classified balance sheet. The Board considered whether the SME version of IAS 1 should include balance sheet presentation both on the current/non-current basis and also the liquidity basis. The Board agreed that both alternatives should be retained in the SME standard, and further guidance should be provided on identifying which of the two alternatives provides the most relevant and reliable information.

Analysis of expenses. The Board considered whether the SME standard should require expenses to be analysed only by nature (IAS 1 allows a choice of nature or function), and agreed to leave both alternatives in the SME standard.

Illustrative guidance. The Board discussed the status of the illustrative examples to IAS 1 and agreed that those examples should be retained in the SME standard with the same status as they have in IAS 1. That is, those examples that form part of the standard will be considered mandatory, and those that are identified as being an accompaniment to, rather than a part of, the standard will be considered non-mandatory.

Statement of changes in equity. The Board considered the format of the statement of changes in equity, and which of the alternatives in IAS 1 is most relevant to SME users. The Board agreed that the format that includes transactions with owners as owners is most relevant and should be required as part of the SME regime, with the SME standard cross-referring to IAS 1 should entities wish to use an alternative format.

Disclosure of management judgements and assumptions. The Board agreed that the requirement to disclose significant management judgements used in preparing the accounts should not be retained in the SME regime, but the requirement to disclose information about key assumptions concerning the future and other key sources of estimation uncertainty at balance sheet date should be included in the SME standard.

True and fair override. The Board discussed the appropriateness of including the "true and fair override" in the SME standard. The Board agreed that this requirement should be mentioned in the SME standard with a cross-reference to the explanation of the requirement in IAS 1.

Liability classification. One Board member noted that the FASB was unlikely to converge with the IASB on the classification of a liability as current at balance sheet date if a breach of a covenant is cured after balance sheet date but before the financial statements have been authorised for issue, because SMEs, in particular, often may be unlikely to identify a breach before the balance sheet date, and therefore would not have an opportunity to rectify it until after balance sheet date.

24 June 2004: Discussion Paper Issued on Accounting Standards for SMEs

On 24 June 2004, the IASB published a discussion paper on the Board's Preliminary Views on Accounting Standards for Small and Medium-sized Entities (SMEs). The discussion paper focuses on issues relating to the Board's approach to the project. It does not include proposals for specific financial reporting standards for SMEs. That will come later. Printed copies of the discussion paper will be sent to subscribers or may be purchased for £10 from the IASB. An electronic version of the discussion paper may be downloaded from www.iasb.org without charge starting 5 July. Comment deadline is 24 September 2004. Click for IASB Press Release (PDF 26k).

Discussion at the July 2004 IASB Meeting

The Board discussed draft SME versions of the IASB Framework for the Preparation and Presentation of Financial Statements and of three standards:

• IAS 16 Property, Plant and Equipment
• IAS 18 Revenue
• IAS 23 Borrowing Costs

As was the case with the discussion at previous meetings of a number of other draft SME versions of IFRSs, the Board's discussion was preliminary, and no decisions were made. Decisions on the content of IASB Standards for SMEs will be made only after the Board has considered the responses to the Discussion Paper Preliminary Views on Accounting Standards for Small and Medium-sized Entities.

Draft SME version of the Framework. Staff presented to the Board an extraction of the principles from the Framework in the form of an IASB Framework for SMEs. Board Members expressed some concern that the extraction might be regarded as creating a different Framework for SMEs than the one looked to by entities following IFRSs. The Board concluded to wait to review the responses to the Discussion Paper before providing guidance to the staff on whether a special version of the Framework is appropriate for SMEs. Draft SME version of IAS 16. The SME version of IAS 16 includes no discussion of the revaluation model but has a reference back to IAS 16 if an SME wants to adopt the revaluation model rather than the historical cost-depreciation model. The Board did not disagree with this approach.

Board members generally felt that some of the grey-letter guidance in IAS 16 that was omitted in the draft SME version of that standard would be particularly useful to an SME. Examples include the initial costs to be included as part of the cost of an item of property, plant and equipment; accounting for costs subsequent to initial acquisition; inspection and overhaul cost; costs of self-constructed assets; component depreciation; and when depreciation should begin and should cease. Staff agreed to review the deleted guidance and, at a future meeting, present to the Board a revised standard with certain guidance reinstated, perhaps as an appendix of application guidance rather than in the body of the SME standard. The Board also suggested that the staff consider a similar approach (application guidance and examples in an appendix) for other SME standards.

Draft SME version of IAS 18. All of the principles in IAS 18 are included in the draft SME version of that standard except that the detailed guidance on exchanges of goods and services in paragraph 12 of IAS 18 is replaced with a reference back to IAS 18. Also, several disclosures are not included. Board members generally felt that revenue recognition is a pervasive issue for all SMEs, and most of the guidance in IAS 18 should be retained in the SME version of that standard.

Draft SME version of IAS 23. IAS 23 was not revised in the recent Improvements Project. It presents the two accounting policy choices (expensing and capitalisation) as the 'benchmark' and 'allowed alternative' respectively. The SME version of IAS 23 retains the two choices but does not include any discussion of the capitalisation model. Instead, there is a reference back to IAS 23 if an SME wishes to choose capitalisation. However, the SME version of IAS 23 does not describe the choices as 'benchmark' and 'allowed alternative'. Instead, it describes them as the 'expense model' and the 'capitalisation model'. The Board did not disagree with this approach.

Project Plan. The Board also discussed a project plan proposed by the staff and made some modifications to it. Under the plan tentatively agreed to by the Board:

• The Board will have reviewed the SME version of all IASs and IFRSs and the Framework by December 2004, in most cases at more than one Board meeting. However, the views expressed in the letters of comment on the Board's Discussion Paper may result in a change to this timetable.
• An SME version of IAS 26 Accounting and Reporting by Retirement Benefit Plans is not needed because such plans have a fiduciary responsibility to their participants and, therefore, have public accountability. They must use IFRSs, not SME standards.
• The Board will begin its consideration of the comments received on the Discussion Paper at the October 2004 meeting. Consideration would continue in November and December 2004.
• Assuming that the responses to the Discussion Paper do not result in major alterations to the Board's approach to the project, in January 2005 the staff will bring to the Board an initial combined document reflecting a proposed exposure draft of IASB Standards for SMEs. Deliberation of that document would continue during the first half of 2005, with a goal of approval of an exposure draft by 30 June 2005.
• The Board suggested that the staff organise one or more roundtable meetings with preparers, auditors, and users of SME financial statements to discuss their views about the IASB's exposure draft of IASB Standards for SMEs after it is published.

Discussion at the September 2004 IASB Meeting

The Board noted that tomorrow (24 September 2004) is the deadline for comments on the IASB's Discussion Paper Preliminary Views on Accounting Standards for Small and Medium-sized Entities and that no decisions would be taken at this meeting. The staff noted that as a result of this project certain potential improvements to full IFRSs have been identified. The Board decided that such items should be catalogued and dealt with at some time in the near future.

The Board spent much of the time discussing who the target market is for the SME standards – with considerable differences of opinions. Some believe that SME standards should be for companies that have local GAAP reporting requirements but that cannot follow full IFRSs due to the sophistication of the standards. Others believe SME standards should apply to any company that does not have public accountability, which would include large unlisted companies as well as those more traditionally thought of as SMEs. This debate is fundamental to the project and will have to be discussed at a future meeting after reviewing comment letters on the discussion paper.

The Board discussed two broad approaches to the format and content of IASB Standards for SMEs:

• IASB Standards for SMEs should primarily be a reorganisation of all of the principles in the IFRSs to make the standards more useful to SMEs. An SME that wishes to asset that its financial statements conform to IASB Standards for SMEs would be required to follow all, or virtually all, of the recognition and measurement principles in all IFRSs. However, because some of those principles are not likely to be relevant for many SMEs, the IASB Standards for SMEs might put the less relevant material in one or more appendixes or might omit the material entirely, with a requirement to look to the IFRS if an issue confronting an SME is addressed there. The SME standards would contain appropriate references back to the IFRSs.
• IASB Standards for SMEs should be a self-contained and reduced version of IFRSs that includes those recognition and measurement principles of relevance to the majority of SMEs. In some cases, the principles in the IASB Standards for SMEs might differ from those in IFRSs. There would not be references back to full IFRSs, or mandatory or optional 'fallbacks'.

Both approaches would start with extracting the principles from IFRSs. They would differ in the extent to which all of the recognition and measurement requirements of IFRSs would apply to SMEs. They would also differ in degree of detail.

To date the staff has prepared and presented to the Board 13 preliminary SME versions of IFRSs. Development of those standards has followed the first approach above more closely than the second.

At this meeting, the staff presented to the Board an approach by which the IASB Standards for SMEs would include only broad principles (based on black letter principles in IFRSs) plus any critical guidance, with a general reference back to the full IFRSs. The IASC Foundation's Education Department would publish, concurrently with the relatively brief IASB Standards for SMEs, guidance that is expressly tailored for SMEs, including the relevant material from the IFRS that has been omitted in the SME version of the standard. Staff presented two examples of this approach to the Board based on IAS 29 and IAS 41.

The Board concluded that any decision about these approaches in is premature and should await analysis of the comments on the Discussion Paper. Staff agreed to prepare a preliminary analysis for consideration at the Board's October 2004 meeting. The Chairman said he would appoint a subcommittee of the Board to review the comment letters and make a recommendation about the approach.

Discussion at the October 2004 Board Meeting

The IASB has, to date, received over 100 comment letters on the SME discussion paper, all of which are posted on the IASB website. The Board had before them an analysis of 41 of those comment letters. All of the comment letters will be included in an analysis to be presented at a future meeting. As the short time between the closure of the comment period and the meeting had not allowed a complete analysis to be prepared, the Board discussed some of the main concerns raised by constituents but deferred any decisions to a future meeting.

The Board noted that most respondents did not support a 'clean slate' approach to the development of an SME standard, rather advocating the development of an SME standard from the base provided by existing IFRS. However, a majority of respondents supported the Board being open to the possibility of differences in the framework and/or the recognition and measurement principles between SMEs and full IFRS.

The Board discussed what 'user needs' are in the context of SMEs. It was noted that while a majority of respondents supported differences from full IFRS when they can be justified by reference to 'user needs' no respondents had provided helpful comments describing what those 'user needs' are. A number of Board members expressed discomfort with proceeding with the project without doing more comprehensive research into user needs. However, it was suggested that rather than an academic study, the most appropriate way forward would be to create either an exposure draft or an invitation to comment on certain topics which would give constituents a model to comment on.

The Board noted that the intended application of the SME standard had been poorly understood. They clarified that any entities that are publicly listed or otherwise publicly accountable should be required to prepare accounts using full IFRSs. Other entities could use the SME standard. However, a jurisdiction might choose to push full IFRSs down to a wider group of preparers. Accordingly it was noted that there would be two groups of users of the SME standard - those without public accountability that are required to prepare financial reports in accordance with IFRSs by their jurisdiction, and those who voluntarily compile IFRS financial reports.

The Board noted that certain decisions regarding application of the SME standard were jurisdictional, rather than the choice of the IASB, and expressed a need for jurisdictions to be educated as to the decisions they must make in respect of the application of the SME standard, particularly the interpretation of when an entity is considered to be of 'economic significance' to a jurisdiction.

Board member Tom Jones, who has been appointed the chair of the SME sub-committee, noted the importance of the IASB completing this project on a timely basis. He noted that there are a number of jurisdictions out there that would develop their own SME regimes if the IASB did not. He also noted that there is a wide range of users in relation to SMEs, including but not limited to investors, creditors, banks,and governments. The Chairman of the IASB has appointed a sub-committee to assist the Board in completing this project considering both its significance and its urgency. It was noted that the sub-committee would maintain an open mind about recognition and measurement differences and will consider both the simplification approach and the reorganisation approach to completing the SME project.

The SME sub-committee, consisting of Tom Jones (chair), Gilbert Gelard, Jim Leisenring, Tricia O'Malley, Bob Garnett, Geoff Whittington, and Paul Pacter (IASB staff director for SMEs) will meet prior to the November Board meeting to consider the analysis of all comment letters, will present its preliminary thoughts at the November Board meeting, and will bring a proposal for the best way forward with this project to the December IASB meeting.

Discussion at the December 2004 Board Meeting

The Board considered the responses from commentators on the discussion paper on SMEs, and considered recommendations made by the sub-committee on SMEs.

The following responses from the comment letters were noted

• An overwhelming majority of respondents believed that full IFRS was not suitable for all entities (however, the Board clarified that they do not believe this means all entities should be prohibited from applying full IFRS)
• A majority of respondents believed separate standards should be developed for SMEs, with a minority favouring the existing standards simply stating which paragraphs need not be applied by SMEs (an 'IAS minus' approach)
• Many respondents said that the decision as to whether full IFRS should apply to all listed entities should be left in the hands of local regulators. The Board noted that where an entity which did not qualify for SME accounting (as defined by the Board) used SME accounting (even under the direction of a regulator) this could not be claimed to be full IFRS or SME IFRS, and would instead be considered national GAAP
• Nearly one half of respondents agreed with the objectives of the SME accounting as set out by the Board in the discussion paper, with the majority of reservations expressed being in relation to whether SME standards should be built on the same conceptual framework as IFRS (the Board also noted some confusion from respondents as to the use of the word 'enforceable' and noted that the Board had no intention or desire of enforcing standards, simply that their standards must be written in such a way as to be enforceable by the relevant regulatory bodies)
• A majority of respondents agreed that a 'characteristics' approach was a better method of defining SMEs, rather than issuing quantitative guidelines.
• Respondents supported a proposal that where SME standards did not address a particular issue the entity should be required to revert to the requirements of full IFRS in respect of that issue
• A majority of respondents however disagreed with the proposal that where an entity wishes to apply full IFRS rather than the SME standards they should be allowed to (the Board had proposed that entities could adopt entire full IFRS standards in replace of the related SME standard if they so desired)
• A majority of respondents agreed that the IASB should complete the SME project by starting with full IFRS and working back to SME standards, there was very little support for starting from scratch
• Respondents noted that full IFRS should be amended where considered necessary after consideration of user needs and a cost/benefit analysis
• A clear majority of respondents agreed that it was likely that disclosure and presentation modifications to full IFRS would be needed in respect of SMEs having taken into account user needs and cost/benefit analyses
• A majority of respondents disagreed that the Board should approach this project with a presumption that no modification should be made to recognition and measurement requirements, believing instead that the Board should keep an open mind on this issue
• A majority of respondents agreed that IASB Standards for SMEs should be published in a separate printed volume
• Views of respondents as to whether SME standards should be presented in IFRS sequence or topically were divided
• Having heard the views expressed by constituents, the chair of the sub-committee, Tom Jones, put forward the recommendations of the sub-committee.

The Board agreed that they are strongly committed to this project. The Board agreed that the project should focus on companies without public accountability that have external users. It was noted that the definition of SMEs should be framed in such a way as to presume full IFRS is appropriate to all entities, but noting that they are not designed with all entities in mind SME standards are necessary.

The Board agreed to keep an open mind as to the possibility of recognition and measurement differences between full IFRS and SME standards. The Board agreed that there should be two attestations - IFRS and IFRS for SMEs. It was noted that the term 'small and medium-sized entities' is misleading as it does not adequately disguise the entities being targeted by the Board and suggested that alternative names should be considered.

The Board agreed to require that where an issue is not dealt with in SME standards, an entity must apply full IFRS in respect of that issue. It was noted that the hierarchy for SMEs would be to look at the relevant SME standard, look at the remaining SME standards and then default into full IFRS and the hierarchy of IAS 8. The Board agreed by a narrow margin that an entity could not elect to apply full IFRS to particular scenarios - they must either use SME standards or full IFRS rather than cherry-picking between the two. One of the justifications for this was the issue of comparability, although the Board acknowledged the 'comparability' objective may not be as relevant to SMEs as it is to those with full public accountability. The Board agreed to proceed with this as its working assumption (that full IFRS standards could not be defaulted to on a voluntary basis) but noted that this decision may need to be revisited.

The Board agreed that IFRS for SMEs should be organised topically rather than by standard. It was noted that this was consistent with a project being undertaken in the US to re-codify US GAAP by topic. It was greed that the IASB would work on SME standards on a 'full IFRS standard by full IFRS standard' basis, and once those amendments are complete will consider the best way for structuring the SME standards. In presenting SME standards topically a concordance will be required in order to enable entities to identify where the requirements come from.

The Board agreed that standards should be consistent with the conceptual framework and amended to reflect user needs and cost benefit analysis. The Board agreed that there should not be a requirement for entities that feed full IFRS information up to a parent to prepare its own accounts on a full IFRS basis, despite the fact that cost benefit analyses would not be relevant as the information was prepared anyway.

Staff were asked to prepare a paper summarising the conclusions for circulation to the sub committee and agreement at the January Board meeting.

Discussion at the January 2005 IASB Meeting

The Board reviewed and affirmed the summary of tentative decisions that the Board had made in December 2004 on the appropriate way forward for the project. The Board agreed to clarify, in the summary, that the same IASB Framework should apply to all entities. However, the Board should consider recognition and measurement simplifications for SMEs, as well as disclosure and presentation simplifications, based only on user needs and cost-benefit considerations as provided for in the IASB Framework. There should be no preconceived objections to such changes.

The staff has developed a project plan that includes:

• expanding the Advisory Group by adding preparers and users of SME financial statements; organising round-table meetings with preparers and users of SME financial statements;
• soliciting the views of the Standards Advisory Council;
• holding a meeting of the Advisory Group;
• leveraging several upcoming conferences at which SME accounting issues will be addressed.

A meeting of the Board's internal SME subcommittee has been scheduled to discuss the plan and provide guidance to the staff.

Several Board members proposed that another name or title for this project should be considered, as the 'SME' title was causing an expectation gap. Staff will provide recommendations to the Board at a future meeting.

Discussion at the February 2005 IASB Meeting

Board members noted that comments at the Standards Advisory Council meeting held 10 and 11 February demonstrated that many people 'turned on' a filter whenever they discussed this project and seemed to filter out information that the Board was giving. The Board had been consistent throughout this project in its attempts to focus on the needs of users of financial statements. In broadening the membership of the working group, the Board needed to find 'real users' of small company financial statements.

Comments at the SAC had also demonstrated that constituents had a tendency to focus on 'who is going to apply the standards' rather than the Board's approach of assessing costs and benefits to both users and preparers. Board members noted that the Board's target was the information needs of smaller entities with any third party users-as understood by the IASB Framework. One Board member suggested that external users would not include management, tax authorities or other regulators who, by virtue of their position or local law, are able to request any information they require from the entity. External users would include, for example, owners who are not directors or part of management, trade suppliers and credit rating agencies such as Dun & Bradstreet. Board members noted that this limitation was a tool to assist the Board in its analysis of IFRS in the non-public entity environment. It was not related to issues related to which entities would apply the standards.

Broadening the advisory panel/ working group

The Board agreed to broaden the membership of the working group, but stressed that the nominations should be assessed with a degree of rigor.

Round-table discussions

The staff introduced a proposed questionnaire that would be sent to all respondents to the IASB's Preliminary Views document, the SAC and the working group. The questionnaire was intended to focus the discussion at the round-tables likely to be held in September 2005. The questionnaire was intended to probe responses already made and, if properly completed, would require a good deal of effort on behalf of those responding. Board members and senior staff had comments on some aspects of the questionnaire, but the general approach was agreed.

Disclosure and presentation simplification

The staff and some of the Board agreed to review the current disclosure requirements of IFRSs (using a disclosure checklist prepared by one of the major accounting firms) to determine not only what might be unnecessary in a non-publicly accountable entity environment but also what additional disclosure might be necessary (e.g., in those circumstances in which there was a recognition or measurement difference between IFRSs and the policies adopted).

Other matters

The remainder of the project plan was agreed. The Board also decided to use the term 'non-publicly accountable entities' (NPAEs) in place of 'small and medium-sized entities' (SMEs).

Discussion at the March 2005 IASB Meeting

At the February meeting, the Board expressed general agreement with a project plan proposed by the staff. The plan includes organising round-table meetings with preparers and users of NPAE financial statements and others to discuss possible recognition and measurement modifications of IFRSs in standards for NPAEs. To identify the issues for discussion at those round-table meetings, the plan includes sending a questionnaire to those who responded to the Discussion Paper, SAC, and the NPAE working group. The Board agreed to request comments from any other interested parties as well.

The staff intend to have the responses to this questionnaire in time for the SAC meeting in the 3rd week of June and the working group discussions thereafter.

The Board discussed and agreed on changes to be made to the questionnaire as regards its structure and wording. In addition to the content of the questionnaire, the Board decided that respondents should be requested to provide information about their entities that would allow the IASB to gauge the size of the entity (such as number of employees, revenue, etc.) and thereby to assist with the interpretation of the responses.

The staff will finalise the questionnaire with the Board NPAE sub-committee before distributing it for public comment.

April 2005: Questionnaire on SME Recognition and Measurement

On 11 April 2005, the IASB published a staff questionnaire on possible modifications of the recognition and measurement principles in IFRSs for use in IASB standards for small and medium-sized entities (SMEs). The IASB plans to hold public round-table meetings with preparers and users of the financial statements of SMEs, most likely in September 2005, to discuss possible recognition and measurement modifications. The questionnaire has been prepared by the staff of the IASB as a tool to identify issues that should be discussed at those round-table meetings. Response deadline is 30 June 2005. The questionnaire contains two questions:

Click for:

• Questionnaire (Word Doc 103k) and
• Press Release (PDF 69k).

April 2005: IASB Expands its SME Working Group

In April 2005, the IASB expanded its working group on Accounting Standards for Small and Medium-sized Entities (SMEs) to include more preparers and users of SME financial statements as well as others with a particular SME expertise. Click for Press Release (PDF 65k). Here is the list of Working Group members [updated to 15 February 2006]:

Discussion at the May 2005 IASB Meeting

The staff noted that the Working Group would meet next in June 2005 and that the Board intended to hold round-table discussion later in the year, most likely in October 2005.

Definitions

The Board noted that goal of this project was to develop accounting standards suitable for entities that (a) do not have public accountability and (b) publish general purpose financial statements for external users. They discussed both attributes.

The Board agreed that there was a need to clarify what the Board understood 'public accountability' to imply. Filing financial statements with Companies House or with the taxation authorities did not, by itself, create public accountability. The Board could usefully provide a commentary on the Framework on this issue.

In addition, the Board should define what it meant by 'general purpose financial statements' and 'external users'. Most importantly, the Board should define what external users are not: e.g., management and parties permitted by contract or operation of law to demand additional financial information from the entity.

General purpose financial statements are financial statements prepared for investment or credit decisions, etc, to be made by those without any other access to financial information.

After discussion, the Board agreed that their current definitions of public accountability, external users, and general purpose financial statements are appropriate as a 'working principle' for defining the entities included in the scope of the project.

Presentation and disclosure

The Board agreed to direct the staff to prepare a presentation and disclosure questionnaire, similar to that prepared on recognition and measurement.

In doing so, the Board also debated, and decided to stay silent on, the following:

• The need for a cash flow statement
• If a cash flow statement was a necessary component of a set of SME financial statement, whether it should be prepared on the direct method
• Whether a SME should be required to prepare consolidated, consolidating or combined financial statements

Standard formats

There was agreement (but not unanimous) that the presentation and disclosure questionnaire should raise the possibility of standardising the format of the statement of changes in equity for SMEs (a single format for all SMEs). As an alternative, all of the options under IAS 1 should be retained pending completion of the Performance Reporting project.

Consolidated financial statements

The Board discussed whether it should raise the matter of exemption for SMEs from a requirement to prepare consolidated financial statements in that questionnaire, or whether the possibility of an SME exemption should be addressed as a potential recognition and measurement difference. The Board agreed that such a question should be asked. In addition, questions should be asked about:

• Whether the level of disclosure of related party disclosure was adequate or should be increased; and
• Whether disclosure of economic dependence should be required.

Discussion at the July 2005 IASB Meeting [Educational Session]

The Board held an educational session on two issues relevant to the project on financial reporting by small and medium-sized entities (SMEs):

1. Bank lending to SMEs

The SME Research Director and Chief Economist of a major United Kingdom bank explained his bank's approach to initial lending decisions and subsequent loan monitoring for borrowings by various size categories of SMEs. He discussed when and how financial statements are used in lending and loan monitoring, including whether adjustments are made to the data in the financial statements; which information is not found to be useful, and why; and which information is missing that lenders would like to have.

The Board was informed of the general credit sanctioning process, which differs depending on turnover levels as well as other factors. Regarding the general process of credit sanctioning, the following was noted and discussed:

• Pre-scoring / approval is generally used to approve loans to borrowers with a turnover of up to £500,000. This process involves using the account data of the individual borrowing. Borrowing levels tend to be up to about £50,000. For 'start up' entities, behavioural scoring is used.
• Up to two-thirds of lending is unsecured, although any collateral offered is priced into the interest rate.
• For borrowers with turnover approximately in the region of &163;0.5m and &163;1m the approval process for loans tends to become more complicated. Typically, this group borrows between £50,000 and £100,000.

As regards the financial information needs of lenders, the following was noted and discussed:

• Most of the information required for credit sanctioning as well as ongoing monitoring of borrowers is standardised by individual financial institutions to their information needs and systems and will vary across the banking industry. Information required for such standardised systems is generally obtained from management reports. The requirement of most loan agreements is the furnishing of timely management reports to the lender and such reports are generally viewed as the primary source of information. The frequency with which management reports are required by lenders depends on circumstances and will range from periods of less than one month to six-monthly reports.
• Annual financial statements are used as a 'cross check' of the information contained in management accounts. It was pointed out that the income statement is particularly useful in the credit sanctioning process and that on the whole; lenders are satisfied by the structure and content of the income statement and balance sheet as currently presented. The income statement and balance sheet currently provide the minimum information required by lenders and there is no requirement that annual financial statements must comply with the FRSSE (see below) or any particular accounting framework. Any changes proposed by the IASB to other aspects of the financial statements would not impact lenders significantly as access to management accounts is generally unrestricted.
• The point was made that consolidated cash flow statements are generally not used by lenders as these are derived by lenders themselves based on the income statement and balance sheet.

It was noted that the above issues may not necessarily be similar to how lending activities are conducted elsewhere in Europe or other parts of the world. Much of the discussion revolved around credit sanction which is distinct from ongoing control and monitoring of borrowers, which was not discussed.

2. UK's Financial Reporting Standard for Small Entities (FRSSE) issued by the UK Accounting Standards Board (ASB)

The chair of the committee of the ASB responsible for developing and maintaining the FRSSE discussed the features of the FRSSE, implementation of the FRSSE by UK SMEs, and acceptance of the resulting financial statements by users. She explain the criteria the ASB has used to make simplifications in the areas of disclosure, presentation, recognition, and measurement and what is required of an SME when the FRSSE does not address a particular accounting issue.

The following issues were discussed and noted:

• The criteria set for entities to qualify to use the FRSSE is based on EU legislation and is as follows:
  • Turnover £5.6m
  • Balance sheet total £2.8m
  • Average number of employees 50

  An entity broadly has to meet two out of the three criteria.

• Certain companies are excluded from the 'small company' criteria for reasons of public interest. These are any entity that is, or is in a group that includes:
  • a public company;
  • a banking or insurance company;
  • a body corporate that (not being a company) has the power to offer its shares or debentures to the public and may lawfully exercise that power;
  • an authorised institution under the Banking Act 1987;
  • an insurance company to which Part II of the Insurance Companies Act 1982 applies; or
  • an authorised person under Part IV of the Financial Services and Markets Act 2000.

  It was noted that, to date, the above criteria had not been problematic. After discussing the requirements to lodge financial statements in jurisdictions including the UK, Australia and Canada, the Board indicated that the requirement to lodge annual financial statements is one of public policy that is not for the IASB to decide.

• Whilst the FRSSE is now in its fifth edition, it was pointed out that the amendments, which occur on average every two years, are not of a minor nature. The changes have emanated mainly from changes to UK GAAP, and the FRSSE tends to lag behind by between one and two years in this regard. The time lag is intentional as this allows the ASB to gather information about the changed requirements as they affect SMEs and experience, before making amendments to the FRSSE.

  IASB members indicated their intention to have the IFRS standard running parallel to other IFRSs as this would be a standard applicable on a global scale.

• The only area where the FRSSE is more detailed than UK GAAP is in the area of related party disclosures.
• There is no mandatory fall back to UK GAAP where the FRSSE contains no guidance on a particular issue. Instead, the FRSSE guides preparers as follows:
  • first, the financial statements must give a true and fair view;
  • accounting policies and estimation techniques must be consistent with the requirements of the FRSSE and of company's legislation. Where a choice is permitted, "an entity shall select the policies and techniques most appropriate to its particular circumstances for the purpose of giving a true and fair view, taking account of the objectives of relevance, reliability, comparability and understandability;"
  • paragraph 2.5 of the FRSSE then acts as a 'catch all' by requiring "where there is doubt whether applying provisions of the FRSSE would be sufficient to give a true and fair view, adequate explanation shall be given in the notes to the accounts of the transaction or arrangement concerned and the treatment adopted."

• In addition, the introductory remarks on the status of the FRSSE state that "financial statements will generally be prepared using accepted practice and, accordingly, for transactions or events not dealt with in the FRSSE, smaller entities should have regard to other accounting standards and UITF Abstracts, not as mandatory documents, but as a means of establishing current practice."

  There was some discussion about what constitutes 'established practice' when an SME is seeking to establish accounting policies for transactions that are not specifically dealt with by the FRSSE. Some believed this would involve determining the requirements in UK GAAP for such transactions as they apply to other entities (a type of indirect fall back to UK GAAP) as there could be no established practice amongst SME's as the transactions are neither common nor is there any accounting guidance for that section of preparers (not included in the FRSSE). It was pointed out that when looking for established practice, this involved surveying SME's to assess prevalence of the transactions as well as the treatment adopted. Consequently, only when SME's are generally issuing share-based payment transactions will this type of transaction be dealt with by the FRSSE.

  Some IASB members indicated that they had been unaware that the requirements of the FRSSE were not as comprehensive as they had thought, given that the FRSSE did not prescribe the accounting for derivatives and share-based payment transactions, and that there was no fall-back to full UK GAAP should these transactions occur. IASB members stated a concern about issuing a standard that omits guidance on important transactions given the fact that the IASB's standard would be applied globally. It was pointed out that the FRSSE included guidance on transactions that were expected to occur within the target group of entities. Some Board members certain concerned that some small entities enter into derivatives and share-based payment transactions that would not be accounted for if the FRSSE was applied. Instead some disclosures of the transaction would be required together with the accounting treatment adopted, if any.

  In addition, some IASB members expressed concern about the basis for assessing a 'true and fair view' if the standard does not prescribe guidance on the accounting for derivatives and share-based payment transactions. Other Board members drew the Board's attention to the fact that the UK had no standard dealing with financial instruments until very recently, but this did not affect the assessment of 'true and fair view', therefore the Board should not seek to provide guidance in the SME standard for every conceivable transaction.

• The FRSSE is based on objectives for financial statements that primarily focus on stewardship of the entity's management and secondarily for making economic decisions. Some IASB members expressed their concern on this issue as they believe financial statements should be 'forward looking' by providing information with predictive value.

Discussion at the November 2005 IASB Meeting

The staff summarised recent events, including IASB roadshows, the public roundtable on SMEs, and staff presentations in various countries, for the Board. Staff noted:

• Wide support for global SME standards issued by IASB.
• Wide support for simplifications apart from recognition and measurement (things like eliminating difficult options, scope exceptions that require calculations or complex judgements, and eliminating guidance not relevant to SMEs).
• Wide support for Recognition and Measurement simplifications. However:
  • Different constituents support different recognition and measurement simplifications.
  • And for different reasons.

The Board discussed whether it should defer consideration of recognition and measurement simplifications pending completion of a draft exposure draft that reflects simplifications other than recognition and measurement. Some Board members expressed concern that constituents might perceive that the Board is 'going to stop the project' and/or that it is 'not serious' about producing meaningful SME standards. Others objected to that characterisation, saying that they were serious, but they wanted to approach the problems in a disciplined way.

Staff proposed to review all IFRSs with a view toward eliminating the complex options, scope exceptions, and implementation guidance not generally relevant to SMEs. The resulting principles would be reorganised topically. Based on this approach, staff will prepare a rough draft of a major section of an exposure draft, for consideration by the Board in January 2006. Staff also proposed that further exploration of specific recognition and measurement simplifications should continue while the other aspects of the exposure draft are being developed.

The Board agreed with this approach.

The Board moved on to discuss the staff recommendations. These focused on possible recognition and measurement simplifications that were addressed in a large number of Questionnaire responses and included a staff recommendation and request for Board decision.

IAS 2 Inventories

The Board agreed that no simplification of the major principles in IAS 2 was needed for SMEs.

Use of the percentage of completion method for contracts under IAS 11 and for service revenue under IAS 18

The Board agreed, in principle, that no simplification of the major principles relating to construction contracts and service revenue in IAS 11 and IAS 18 was needed for SMEs. However, several Board members were concerned about the tax consequences of such transactions, bearing in mind the staff proposals with regard for IAS 12.

IAS 12 Income Taxes

The Board agreed that the staff should explore further, with preparers and users of SME financial statements, the issue of recognition of deferred income taxes by SMEs and bring a recommendation to the Board at a future meeting. One Board member stated that, given the concerns over front-loading percentage of completion revenue noted above, they would require full tax allocation accounting.

IAS 17 Leases

The Board expressed a preference to allow staff to explore further with both preparers and users of SME financial statements the following possibilities:

• All leases as finance leases with measurement simplifications.
• Retaining the operating and finance lease split but with measurement simplifications.

A Board member cautioned the Board that they needed to be very careful when considering simplifications in IAS 17 that they not trap SMEs into bad decisions because the management of such entities do not understand the economics (that is, accounting for leases should not drive the financing decision).

IAS 19 Employee Benefits

Board members expressed concern that the Board should not be seen to aid any attempt to obfuscate the true cost of obligations created by defined benefit plans established by the entity or imposed by government (such as gratuity or long-service plans). All employee benefit obligations should be accounted for using the IAS 19 principles.

The Board agreed that the staff should explore further an approach that would simplify the defined benefit measurement (for example by allowing triennial actuarial valuations in the absence of any triggers that would call into question the actuarial assumptions used in the last actuarial valuation; requiring all actuarial gains and losses to be recognised immediately in profit or loss, thus removing a significant record-keeping burden).

IAS 27 Consolidated Financial Statements

The Board agreed to require consolidated financial statements when one SME controls another entity.

The equity method of accounting under IAS 28 Investments in Associates and under IAS 31 Interests in Joint Ventures

The Board agreed that SMEs should measure investments in associates using either the equity method or as investments at fair value with gains and losses recognised in profit or loss.

The Board agreed that SMEs should measure interests in joint ventures using either method permitted in IAS 31 (equity method or proportionate consolidation).

IAS 36 impairment of goodwill and intangible assets

The Board agreed with the tenor of the staff recommendation that an indicator approach (but not an amortisation approach) should be explored for recognising impairment of goodwill and other indefinite-lived intangibles.

IAS 36 other impairment issues

The Board agreed that the staff should explore the following approach to impairment for all items other than goodwill and indefinite-life intangible assets:

• Retain the key principle that assets should not be carried at more than recoverable amount.
• Simplify recognition by requiring impairment only when clear under-usage, damage, or intent to sell. However, the impairment indicators should be based on those in IAS 36 paragraph 12.
• Simplify calculations – fair value rather than a value-in-use calculation.

The agenda paper included staff recommendations on other matters for which time did not permit discussion, plus a list of additional simplifications that the staff is studying. Staff plans to bring all of these to the Board in December.

Discussion at the December 2005 IASB Meeting

The Board continued its discussion from the November 2005 meeting of possible modifications for SMEs of recognition and measurement principles in IFRSs. The Board considered the staff recommendations and reached the following decisions:

Recognition and measurement of provisions and contingent liabilities under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. No major simplifications needed for SMEs.

Capitalisation of development costs incurred after commercial viability has been determined under IAS 38 Intangible Assets. No major simplification needed for SMEs. An entity that incurs significant development expenditure is likely to know whether and when that expenditure has proved fruitful. Therefore, the IAS 38 requirement is not particularly burdensome.

Use of the effective interest method under IAS 39 Financial Instruments: Recognition and Measurement. Retain the requirement to use the effective interest method. Include one or more examples in the SME standard.

Fair value measurements under IAS 39. The Board asked the staff to develop an approach that involves classifying financial assets into two categories -:easily disposable and not easily disposable financial assets. Easily disposable financial assets are those (a) for which an observable market price is available and (b) either the asset can be sold on the market at any time without causing any disruption or major change in the entity's operations or the management is committed to a plan to sell the asset and an active programme to locate a buyer and complete the plan have been initiated.

Whether a cost model should be an accounting policy option for SMEs in accounting for biological assets and agricultural produce at point of harvest. The Board concluded that IAS 41 Agriculture already provides that if reliable measure of fair value is not available, use the cost model. Therefore, no major simplification of IAS 41 is needed for SMEs.

Measurement of share-based payments under IFRS 2 Share-based Payment. No major simplification is needed for SMEs because IFRS 2 already provides for use of the intrinsic value method if an entity is unable to estimate reliably the fair value of the equity instruments granted at the measurement date. The Board agreed to remove the references to 'rare cases' in the SME equivalent to paragraph 24 of IFRS 2.

IFRS 3 Business Combinations - Purchase method procedures. No major simplification is needed for SMEs either with respect to measuring acquired assets and liabilities in business combinations or with respect to recognition of intangibles.

IAS 7 Cash Flow Statement. No major simplification is needed for SMEs. That is, a cash flow statement should be a required component of the financial statements of SMEs.

IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets - Revaluation model. The revaluation option for property, plant, and equipment and for intangible assets as set out in IAS 16 and IAS 38 should remain an option for SMEs via cross-reference to those standards in the SME standard.

IAS 16 - Component depreciation. The SME version of IAS 16 should not refer to component depreciation.

IAS 16 Residual values and useful lives of property, plant and equipment. No major simplification is needed for SMEs. A requirement to review annually the estimates of residual value and useful life is not burdensome.

IAS 40 Investment Property - Frequency of remeasurement. Include both the cost-depreciation-impairment model and the fair value model in the SME standard. Require fair value at reporting date; do not specify annual fair valuation.

IAS 40 - Use the IAS 16 revaluation model option? The revaluation model of IAS 16 should not be used by SMEs to account for investment property.

IFRS 1 First-time Adoption of IFRSs - Retrospective application. The Board considered the view that retrospective application of a new IASB Standard for SMEs is too complex for SMEs because of unavailability of data. The Board concluded that a decision on this issue can only be made after the specific SME standards have been decided on, because only then can the issues relating to retrospective application be identified and analysed.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations - Is an SME Version Needed? IFRS 5 is not burdensome for SMEs, and no major simplification of it is needed for SMEs. Regarding the need to measure costs to sell on a present value basis, because most disposals will be completed in one year, the SME version of IFRS 5 should require measurement at fair value less costs to sell without the present value computational guidance from IFRS 5.

Discussion at the January 2006 Board Meeting

The purpose of this session was to give the Board some preliminary information on a nearly complete first draft of an exposure draft presented to the Board. The Board was not expected to discuss the specific content of the draft during this session, as the plan is to discuss this at the February 2006 meeting. Several Board members did note, however, that their overall view is that further simplification of the recognition and measurement principles is needed.

The Board had a lengthy discussion on how the IASB Framework should be incorporated into the SME standards. The draft ED currently includes extracts from the Framework covering objectives, qualitative characteristics, and elements definitions. An alternative would be to include the full framework or to cross-refer back to the Framework but not include it.

The ED also included some pervasive principles to which SMEs could look for guidance in the absence of a specific standard. Some Board members were critical of those principles on grounds that they are inconsistent with specific standards elsewhere in the ED or are inconsistent with provisions in full IFRSs.

The Board did not make any final decisions on this issue. The staff suggested preparing some amendments to this section of the ED and bring those back to the Board for further consideration.

Discussion at the February 2006 IASB Meeting

At its January 2006 meeting, the Board had its initial discussion of a preliminary draft of an Exposure Draft (ED) of an International Financial Reporting Standard for Small and Medium-sized Entities (SMEs). Discussion of that draft continued in February.

On 30-31 January 2006 – subsequent to the Board's January meeting – the IASB's Working Group (WG) on Accounting Standards for SMEs met in London to discuss the draft ED. A preliminary summary of the views and recommendations of Working Group members arising from their January 2006 meeting was provided to the Board in advance of the Board's February meeting. In reviewing the draft ED, Board members considered the WG's recommendations.

The Board made the following decisions on significant issues:

Mandatory Fallback

The Board discussed the WG recommendation of a stand-alone, self-contained IFRS for SMEs - with designated fallbacks to full IFRSs on specific matters, but not a general mandatory fallback. After discussion, by vote of 11/3, the Board reached the following view on this issue:

• Standards in full IFRSs that address transactions, events, or conditions commonly encountered by SMEs should be included in the IFRS for SMEs, either directly or by cross-reference back to the full IFRS. Conversely, standards relating to transactions, events, or conditions not generally encountered by SMEs should not be included in the IFRS for SMEs. The goal would be to minimise the circumstances in which an SME would need to fall back to full IFRSs.

• If the IFRS for SMEs does not specifically address a transaction, event, or condition, an SME should be required to look to the requirements and guidance elsewhere in the IASB Standard for SMEs dealing with similar and related issues (that is, select an appropriate accounting policy by analogy). Failing that, the SME should be required to look to the requirements and guidance in IFRSs and Interpretations of IFRSs dealing with similar and related issues.

Disclosures

Put all disclosures in a separate section.

Glossary

Define all terms in a glossary at the end of the IFRS for SMEs. Highlight defined terms the first time they are used in each section.

Preface

A short preface to the IFRS for SMEs should be included, explaining the nature of IFRSs for SMEs. This material is now in the Introduction section of the draft ED.

Basis for conclusions

The Exposure Draft of the IFRS for SMEs will include a basis for conclusions explaining the basis for any changes from full IFRSs.

Scope

Definition of SMEs should be included in a scope section. This is now included in the Introduction section of the draft ED.

IASB Framework

The draft ED currently includes the objective of financial reporting, qualitative characteristics, definitions of financial statement elements, and recognition concepts from the IASB Framework. This section should be retained.

Pervasive principles

The draft ED currently includes certain pervasive measurement principles intended to be guidance if the IFRS for SMEs does not specifically address a transaction, event, or condition encountered by an SME. Some Board members favoured retaining these pervasive principles, with modifications. Others favoured deleting them. After discussion the Board asked the staff to prepare revised pervasive principles for consideration at a future meeting.

'True and fair override'

The Board decided that a 'true and fair override' similar to that in paragraph 17 of IAS 1 should not be included in the IFRS for SMEs. However, a question about whether to do so should be included in the invitation to comment on the exposure draft.

Use of IFRS for SMEs by small listed entities

The Board believes that full IFRSs are appropriate for an entity whose securities are publicly traded. This should be explained in the basis for conclusions. A jurisdiction that believes that the standards in the IFRS for SMEs are appropriate for small listed entities could adopt those standards, even word for word, as their national standards for small listed entities, in which case the financial statements would be described as conforming to national GAAP.

Combined statement of income and retained earnings

The IFRS for SMEs will provide that if the only changes in an SMEs equity during a period arise from net profit or loss and payment of dividends, the SME may present a combined statement of income and retained earnings in place of separate income and equity statements.

Cash flow statement

The IFRS for SMEs will illustrate only the indirect method. An SME electing the direct method would be cross-referred to IAS 7 for guidance.

Consolidation

An SME group (parent and one or more subsidiaries) will be required to prepare consolidated financial statements. The IFRS for SMEs will include only the basic principles for consolidation, with a cross-reference to IAS 27 for detailed guidance.

Combined financial statements

Guidance should be added regarding preparation of combined financial statements of two SMEs controlled by the same shareholder(s).

Correction of errors

Retrospective treatment should be the principle, as it is in IAS 8. Adjust of retained earnings if retrospective restatement is impractical.

Investments in associates

Allow an SME to elect either (a) the cost method with impairment or (b) fair value through profit and loss in addition to equity method. Cross-reference to IAS 28 would replace the details of the equity method.

Investments in joint ventures

Allow an SME to elect either (a) the cost method with impairment or (b) fair value through profit and loss in addition to (c) equity method and (d) proportionate consolidation. Cross-reference to IAS 31 would replace the details of methods (c) and (d).

Investment property

The section on investment property should be brief. A simple definition of investment property should be included in the glossary. The IAS 40 accounting policy choice of (a) cost-depreciation-impairment model and (b) fair value through profit and loss model should be retained. An SME electing (a) should be referred to the property, plant, and equipment section of the IFRS for SMEs for guidance. An SME electing (b) should be referred to IAS 40.

Business combinations

SMEs need not separate out acquired indefinite-lived intangible assets other than goodwill - may include in goodwill.

Goodwill and indefinite-lived intangible assets that are separated from goodwill

Do an impairment test only if there is an indication of impairment. The Board did not support an amortisation approach.

Leases

Retain the distinction between operating and finance leases.

Assets held for sale

No need for a separate section in the IFRS for SMEs. Include in the section on property, plant, and equipment.

Provisions

Consider whether this section can be simplified. Consider which of the examples in the appendix to IAS 37 should be included in the IFRS for SMEs. Address restructurings and onerous contracts as examples.

Equity - redeemable and puttable capital

The IASB is developing a general exposure draft on this topic. It is a transaction frequently encountered by SMEs. Include the general exposure draft principles in the IFRS for SMEs. Also include the guidance on cooperatives in IFRIC 2.

Next steps

The Board will continue its consideration of the remaining sections of the draft ED at its March 2006 meeting. Staff plans to bring a revised draft to the Board at the May 2006 meeting, including the two sections (financial instruments and income taxes) that are not included in the current draft.

Discussion at the March 2006 IASB Meeting

The Board continued the review it began in January of a preliminary draft of an Exposure Draft (ED) of an IFRS for Small and Medium-sized Entities (SMEs). In reviewing the draft ED, Board members considered the recommendations made by its SME Working Group, which reviewed the draft at its 30-31 January 2006 meeting.

The Board made the following tentative decisions:

Accounting policy options for SMEs

The Board was informed of constituents' wishes for a stand-alone standard without accounting alternatives. The staff informed the Board that to date their recommendations for the SME standard had been based on an assessment of what is viewed as the simpler alternative where such alternatives exist in the main IFRS. The Board reaffirmed its previous decision that all accounting policy options included in IFRSs should also be available to SMEs in the IFRS for SMEs and that a question should be added to the exposure draft to allow constituents to comment on this issue after reviewing the Board's proposals.

Construction contracts

Use the percentage of completion method, provided that the stage of completion, future costs, and collectibility can be estimated reliably. Include the standards on construction contracts in the section on revenue.

Government grants

An SME would use the principle for recognising grants in IAS 41 Agriculture as the basic principle for recognising all grants. However, an SME wishing to use one of the alternatives in IAS 20 Accounting for Government Grants and Disclosure of Government Assistance would be permitted to do so by cross-reference to IAS 20. Under the IAS 41 approach:

• (a) an unconditional grant would be recognised in income when the grant is receivable
• (b) a conditional grant would be recognised in income when the conditions are met;
• (c) grants would be measured at the fair value of the asset received; and
• (d) grants received before the income recognition criteria are satisfied would be recognised as deferred income (a liability).

Borrowing costs

Only the expense model will be included in the IFRS for SMEs. However, an SME could choose to use the capitalisation model by applying IAS 23 Borrowing Costs. The ED will note that the IASB has agreed to issue an exposure draft of an IFRS proposing to prohibit the expense model and invite comments on whether that is appropriate for SMEs as well.

Share-based payment

The IFRS for SMEs will address cash-settled options and will refer back to IFRS 2 Share-based Payment with respect to equity-settled share-based payments. The IFRS for SMEs will note that IFRS 2 permits the use of the intrinsic value method if fair value cannot be reliably measured.

Impairment of non-financial assets

This section will cover all non-financial assets in one place. The principle would be that non-financial assets other than inventories should not be measured at more than fair value less cost to sell. Inventory should not be measured at more than net realisable value.

Employee benefits

This section will include standards for:

• (a) short term benefits;
• (b) the following kinds of retirement plans: multi-employer plans, state plans, insured plans, and defined contribution plans. However, defined benefit retirement plans will be addressed by cross-reference to IAS 19;
• (c) other long term benefits (including deferred compensation and long-service payments) and termination benefits (measurement at discounted present value, actuarial valuation not required, need not use the projected unit credit method).

Income taxes

Deferred tax assets and liabilities will be recognised for all temporary differences between the carrying amounts and the tax bases of assets and liabilities (the various exceptions and special rules in IAS 12 Income Taxes would be eliminated). Staff indicated that it will consider whether to make a special recommendation to the Board regarding deferred tax assets arising from operating loss carryforwards.

Interim financial reporting

Instead of having a separate section on interim reporting, the IFRS for SMEs will cross-refer to IAS 34 Interim Financial Reporting for guidance. However, the IFRS for SMEs will expressly permit an entity that is not subject to a periodic interim reporting requirements to present, as comparative information, a statement of income and retained earnings (or separate income and equity statements) and a cash flow statement of the immediately preceding year when the year-to-date comparative statements otherwise required by IAS 34 have not been prepared previously.

Classification of instruments as debt or equity

The exposure draft will acknowledge that the IASB and FASB are working jointly on standards for classifying puttable shares and similar instruments as debt or equity and will indicate that the final IFRS for SMEs would reflect the decision(s) in that project.

Discussion at the May 2006 IASB Meeting

The Board considered a marked version of the revised draft ED International Financial Reporting Standard for Small and Medium-sized Entities. In addition, the Board began deliberations of some specific issues identified by the staff. The Board started by discussing the notion of 'mandatory fallback' to the full text of IFRSs. The Board agreed that this phrase had raised undue alarm amongst constituents and indicated its intention that the draft ED should clearly state that:

• The SME standard is intended to be a stand-alone document for a typical entity with about 50 employees.
• Where IFRSs provide an accounting policy choice, the Board has concluded that SMEs should have the same options. The simpler option is set out in he IFRS for SMEs, and the other option or options are permitted by cross reference to IFRSs.
• The IFRS for SMEs omits some accounting topics that are addressed in full IFRSs, because the Board believes that the typical SME is not likely to encounter such transactions. However the IFRS for SMEs has an explicit cross-reference telling an SME that happens to encounter such a transaction to look to a particular IFRS.
• The SME standard states that if the IFRS for SMEs does not address a transaction, event, or condition or provide an explicit cross-reference back to an IFRS, an SME should select an accounting policy that results in relevant and reliable information.
  • In making this judgement, an SME should consider, first, whether appropriate accounting can be determined by analogising from the principles in the IFRS for SMEs.
  • Only if no analogies can be derived, the full text of IFRS should be consulted as a 'fallback'. The Board considered whether the second tier of the hierarchy would be operational as auditors are likely to force preparers to apply the full IFRS guidance if no specific guidance exists in the SME Standard.
  • The Board voted and agreed that the approach they were taking could result in different accounting for similar transactions if entered into by entities following the SME Standard and those following the full IFRSs.
• In adopting the IFRS for SMEs, a jurisdiction could elect to add, as an appendix to the IFRS for SMEs, the full text of an IFRS that they deem especially relevant to SMEs in that jurisdiction, even though in the IFRS for SMEs itself that IFRS is cross-referenced rather than included. For example, in hyperinflationary economies, the full text of IAS 29 may be incorporated into the SME Standard for such jurisdictions.
• The Board will seek views from constituents about whether all of the options in full IFRS should be available to SMEs or, if not, which option(s) should be retained.

The Board commenced deliberations of specific sections of the draft ED and will continue tomorrow. During today's discussion, the Board asked the staff to perform an exercise of checking that the simplifications and cross-references made in the draft ED and its accompanying glossary are faithful to the meanings intended in the full text of IFRS so as to avoid unintentional differences in meaning.

Based on progress made to date, it was noted that an exposure draft is likely to be released for public comment in September or October 2006.

The Board continued its discussions of a draft Exposure Draft of an IFRS for Small and Medium-sized Entities (SMEs). The Board had begun its discussion of that topic yesterday. Many of the comments given were drafting comments.

Incorporating changes to IFRSs in the IFRS for SMEs. The Board agreed that generally, the text of the IFRS for SMEs should be based on existing IFRSs and should not reflect changes that have been proposed in Exposure drafts. The Board also agreed that each time an IFRS is exposed, that Exposure Draft should also address how, if at all, the changes would be incorporated into the IFRS for SMEs. This approach would enable SMEs to early adopt standards and would minimise inconsistencies between IFRSs and the IFRS for SMEs.

Definitions. The Board noted that in the Draft ED, some of the definitions in the glossary differ from those in the 2006 Bound Volume of IFRSs. They should be conformed, or the difference should be explained.

Business combinations. Material on business combinations will be removed from the IFRS for SMEs and, instead, will be addressed by cross-reference to IFRS 3 Business Combinations.

Statement of income and retained earnings. Previously, the Board had concluded that if the only changes to an SME's equity during a period arise from profit and loss and payment of dividends, the SME may present a combined statement of income and retained earnings instead of separate income and equity statements. The Board clarified that an SME is eligible to present a combined statement of income and retained earnings if its equity changes due to (a) correction of a prior period error or (b) changes in accounting policy, in addition to changes due to profit and loss and dividends.

Expensing all development cost. The draft ED will include an option for an SME to charge all development cost to expense. An SME that wishes to capitalise development cost would be cross-referred to the requirements of IAS 38 Intangible Assets.

Combined financial statements. A better description of these is needed. Further, clarify that if an entity chooses to present combined financial statements, it must comply in full with the IFRS for SMEs.

Model financial statements. Staff noted that a comprehensive model set of financial statements for SMEs was being developed based on the IFRS for SMEs. Those statements would include actual figures (rather than X's for numbers).

True and fair override. The Board discussed whether a fair presentation override should be permitted for SMEs. The Board concluded that such an override should only be allowed when requirements of the IFRS for SMEs would conflict with local law or regulation.

Financial instruments. Most of the remaining discussion centred around the section dealing with financial assets and financial liabilities. Whilst there was general agreement that the full requirements of IAS 39 should not be included in the SME standard, Board members noted that in simplifying the requirements, there were sometimes unwanted inconsistencies or complications. Areas of particular discussion were:

• which financial assets should be accounted for at fair value, and how to determine fair value; and
• reclassifications of financial assets.

Staff will discuss how this section should be redrafted with particular Board members.

Income taxes. The Board agreed that the exemptions in IAS 12 from recognising the tax effects of certain temporary differences should be included in the IFRS for SMEs. There was also a general discussion about whether to bring in some of the definitions in the proposed amendments to IAS 12, as this might help clarify and simplify certain situations.

Discussion at the June 2006 IASB Meeting

In an all-day session, the Board discussed a revised draft Exposure Draft of an International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). Among the broad range of decisions made by the Board were the following:

• Definition of an SME. In defining SMEs, an entity that is economically significant in its home country would not automatically be regarded as publicly accountable. Each jurisdiction should decide.
• Pervasive measurement principles. The draft ED includes some pervasive principles for recognising assets, liabilities, income, and expenses, based on the IASB Framework, and also some specially developed pervasive measurement principles not in the Framework. The Board asked the staff to redraft the measurement principles in consultation with a small group of Board members.
• Maintaining the IFRS for SMEs. Approximately every two years, the Board will publish an 'omnibus' Exposure Draft of proposed amendments to the IFRS for SMEs based on new and amended IFRSs adopted during those two years.
• Sections of the draft ED that require significant rewriting. The draft has 40 topical sections. Based on Board discussions, only the following are likely to require substantial rewriting:
  • financial instruments
  • provisions
  • employee benefits
  • income taxes
  • business combinations.
• Financial instruments. The Board discussed proposals for simplification of IAS 39 Financial Instruments: Recognition and Measurement for SMEs in three important areas:
  • Classification of financial instruments. The ED would provide for two categories of financial instruments – fair value through profit or loss and cost/amortised cost.
  • Derecognition. The draft Exposure Draft imposes a high hurdle for derecognition - only when substantially all risks and rewards have been transferred. The major benefit of this derecognition requirement is that an SME will not have to refer to the complex derecognition provisions of IAS 39. A drawback would be that the SME standard would not derecognise securitisations whereas IAS 39 would.
  • Limited relief from hedge accounting focussed on the two kinds of hedging that an SME is likely to do.
  The Board expressed general agreement with the proposals and identified several matters for which revision or amplification is needed.
• Cash flow statement. Add guidance on cash and cash equivalents. Add guidance on when cash flows can be reported net. Disclose total taxes paid. Disclose the effect of exchange rate changes on cash and cash equivalents separately from operating, investing, and financing activities. Add guidance on reporting cash flows from acquisitions and disposals of subsidiaries.
• Accounting policies.
  • When an entity has adopted an accounting policy for an event or circumstance for which the IFRS for SMEs allows an accounting policy choice, disclosure of the chosen policy is required.
  • State that inappropriate accounting policies are not rectified by disclosure.
  • Clarify that 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, performance, or cash flows.
  • Explain that a change in measurement basis is a change in accounting policy.
• Model financial statements. Michelle Fisher of Deloitte Hong Kong was credited with preparing the model financial statements included in the draft Exposure Draft. The Board welcomed the model financial statements. The Board decided that the illustrative balance sheet should show assets and liabilities in a 'current followed by non-current' sequence, rather than the other way around.
• Invitation to comment. Ask a question about the adequacy of guidance and which specific areas need additional guidance.
• Consolidation. The Board concluded that the standards for consolidation should be included in the IFRS for SMEs rather than incorporated by cross-reference of IAS 27 Consolidated and Separate Financial Statements. One Board member will work with the staff to develop a shortened version of the consolidation guidance in IAS 27.
• Business combinations. Details of the purchase method should be included in the IFRS for SMEs rather than addressed by cross-reference to IFRS 3 Business Combinations. Add guidance on reverse takeovers and common control transactions. Define minority interest.
• Government grants. The section on government grants should reflect the principles in IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. Grants related to agricultural assets measured at fair value through profit and loss should be addressed in the section on Agriculture.
• Leases. Discussion of lessor accounting for finance leases should be deleted and replaced by a cross-reference to IAS 17 Leases.
• Agriculture. Circumstances in which an SME would fall back to the cost model should be less restrictive than those currently in IAS 41 Agriculture. In general, for an SME, if fair value is not readily determinable, then the cost model should be followed.
• Internally generated intangible assets other than goodwill. The expense model (charge costs to expense when incurred) will be in the IFRS for SMEs. An SME wishing to follow the capitalisation model (to the extent provided under IAS 38 Intangible Assets) would be cross-referred to IAS 38 for guidance.
• Impairment of assets. The section on impairment should be titled Impairment of Non-financial Assets.
• Employee benefits. Because many SMEs provide benefits under voluntary or government-mandated programmes that are similar to defined plans, include guidance on defined benefit plan accounting in the IFRS for SMEs rather than by cross-reference to IAS 19 Employee Benefits.
• Interim financial reporting. If an entity does not routinely prepare interim financial statements, but is required to do so on a one-time basis (perhaps in connection with a business combination), allow its prior annual financial statements to be comparatives, if it is impracticable to prepare financial statements for the comparable prior interim period.
• Inventories. Clarify that borrowing cost can be part of the cost of inventory under certain conditions if the entity chooses the option of capitalising borrowing cost.
• Opening balance sheet. A balance sheet at the beginning of the period will not be required as part of a complete set of financial statements of an SME.
• The Board deleted the following disclosures:
  • Dividends per share
  • Amount of retained earnings legally available for distribution to shareholders.
  • An entity's objectives, policies, and processes for managing capital.
  • Disclosures about amendments to the IFRS for SMEs that have not been early-adopted.
• Receivables from sale of an entity's own equity. Clarify that these should be shown as an offset in the equity section of the balance sheet, not as an asset.

Discussion at the July 2006 IASB Meeting

Project status

The session primarily focussed on section 12 Financial Assets and Financial Liabilities of a draft Exposure Draft of an IFRS for SMEs. However, before that, staff presented a brief summary of the project's progress. Most of the 40 sections of the draft IFRS for SMEs have been tentatively approved. The main outstanding sections to be drafted are those on income taxes and employee benefits. In addition, the basis for conclusions and invitation to comment also need to be drafted.

Income taxes

Before looking at the financial instruments section, the Board briefly considered the approach being taken to accounting for income taxes. Staff proposed using a timing difference approach. There was support for this, although some Board members were concerned that certain assets and liabilities that should be recorded would be missed.

Financial instruments

The remainder of the time was spent considering section 12 of the draft SME IFRS> Section 12 contains substantial re-drafts based on decisions taken at the June Board meeting. However, the full text of section 12 was not made available to observers.

At the June meeting, the Board tentatively agreed that an SME should not have the option to use IAS 39 instead of section 12. However, whilst section 12 adopts a simpler way of accounting for financial instruments than IAS 39, the simplifications mean that many of the options available in IAS 39 would not be available to SMEs (for example, the available-for-sale and held-to-maturity classifications for financial assets). Furthermore, certain assets that could be carried at amortised cost under IAS 39 would have to be carried at fair value through profit and loss under section 12, and the derecognition provisions of section 12 are simpler but stricter than those in IAS 39. As a result, staff asked the Board to reconsider its June decision. The Board agreed that SMEs should have the choice to adopt IAS 39 in full instead of using section 12.

As part of simplifying the requirements on accounting for financial instruments, the reference to categories of financial assets and liabilities has been removed. Instead, staff proposed that the default is for all instruments to be carried at fair value, with changes in fair value recognised in profit or loss. There are three exceptions to this, two of which are optional, and one of which is mandatory:

• 1. 'plain vanilla' receivables, such as trade receivables, payables, and similar instruments (elective);
• 2. commitments to make or receive loans that cannot be net settled and will result in a financial instrument that qualifies for recognition at amortised cost (elective); and
• 3. equity instrument that are not publicly traded and whose fair value cannot be measured reliably, and options on such instruments (mandatory).

Part of the reason for doing this was to eliminate the need to refer to derivatives or embedded derivatives. Some Board members felt it would be better to reverse these paragraphs so that the standard first stated which items could be carried at cost (or amortised cost) and then stated that all other items had to be carried at fair value through profit and loss.

At the June meeting, the Board asked that the guidance in IAS 39 on determining fair values to be included in the draft IFRS for SMEs. The Board also asked that the guidance on impairment be re-written. These changes were processed by the staff and approved by the Board.

The Board was again asked to approve the guidance on derecognition. Broadly, an entity would derecognise an asset when:

• the contractual rights to the cash flows expire; or
• the entity transfers all the significant risks and rewards relating to the asset; or
• the entity transfers physical control of the asset and the transferee can sell the asset to an unrelated third party without restriction.

Whilst the wording had not changed significantly, staff highlighted that the simplified derecognition provisions result in a very high hurdle for derecognition. It is therefore possible that certain securitisations and debt factoring that would qualify for derecognition under IAS 39 would not be derecognised under the IFRS for SMEs. The Board agreed with the derecognition provisions. They pointed out that few SMEs enter into securitisation transactions, and the option to adopt IAS 39 is available to those that do and wish to derecognise.

The proposals for hedge accounting were debated at length. Some members believed that the easiest way of simplifying the hedging rules was to only allow hedge accounting in four identified circumstances and to not account for any ineffectiveness that may arise. The logic is that hedging is limited to circumstances where there is unlikely to be much ineffectiveness. Some call this the 'shortcut method'. Under this proposal, an entity could hedge the following:

• interest rate risk of a debt instrument measured at amortised cost;
• foreign currency exposure in a commitment or highly probably forecast transaction;
• commodity price risk exposure in a commitment or highly probably forecast transaction; and
• foreign exchange risk exposure in a net investment in a foreign operation.

Some Board members proposed an alternative under which effectiveness would have to be measured at each reporting date and any ineffectiveness would be reported immediately in profit or loss – similar to IAS 39 but with simplified calculations.

The Board asked the staff to develop both a shortcut approach and an effectiveness testing approach, and also to consider whether the IFRS for SMEs should permit both of those approaches.

4 August 2006: IASB Makes Draft of ED Publicly Available

The IASB has posted on its website the latest draft of an Exposure Draft (ED) prepared by staff for the IASB's project to develop an International Financial Reporting Standard for Small and Medium-sized Entities (SMEs). That project is ongoing, and the draft posted is a work in progress, not a finished product. Further changes, some of which could be substantial, will be made to this draft before the IASB publishes it for public comment. The IASB has discussed earlier drafts of this ED at public meetings, and this draft reflects the cumulative, tentative decisions made by the conclusion of its meeting in July 2006. Those tentative decisions have been reported in the newsletter IASB Update. The IASB has not approved this draft. The draft is being made publicly available purely for information – to give interested parties an update on the project. The IASB does not request comments on this draft, and the staff will not be in a position to consider or respond to any comments. The IASB expects to publish an ED for public comment later this year. Click here for a Link to Download the Draft SME ED from the IASB website. It is about 3.2mb PDF in size.

Discussion at the September 2006 IASB Meeting

The Board continued its discussions of a draft Exposure Draft (ED) of an International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs).

Financial instruments

The Board considered a revised draft of ED Section 12 Financial Assets and Financial Liabilities. That draft reflects comments of the Board on the version of Section 12 discussed at the July 2006 meeting, as well as suggestions made by two independent expert reviewers.

An SME would have a choice of applying Section 12 or IAS 39 in accounting for financial instruments. Section 12 simplifies the provisions of IAS 39 in a number of respects, including:

• Two categories of financial assets rather than four.
• Three types of financial instruments will be measured at cost or amortised cost when certain conditions are met. These are (a) receivables, payables, and loans, (b) most commitments to make or receive loans, and (c) equity instruments whose fair value cannot be reliably measured and options on such instruments. Categories (a) and (b) may optionally be at fair value through profit or loss. All other types of financial instruments will be measured at fair value through profit or loss.
• Section 12 includes a clear and simple principle for derecognition – if the transferor has any significant continuing involvement, do not derecognise. As a result, derecognition would be allowed in fewer circumstances than under IAS 39. However, staff does not expect this to be a problem for most SMEs. For one thing, banks and other financial institutions will be prohibited from using the IFRS for SMEs, so the fact that many securitisations may not result in derecognition is not likely to affect most SMEs unfavourably. Another simplification is that the complex 'pass-through testing' and 'control retention testing' of IAS 39 are avoided. Further, an SME can always choose to use IAS 39 instead of Section 12.
• For hedge accounting, Section 12 addresses the four kinds of risk hedges that SMEs typically do. Hedge accounting is not allowed for any other kinds. Additionally Section 12 imposes strict conditions on the designation of a hedging relationship. The benefit for the SME is that if the SME meets those conditions, hedge accounting provisions are greatly simplified.

The draft of Section 12 included two alternative approaches to hedge accounting simplification. One would impose strict conditions on the designation of a hedging relationship with subsequent hedge effectiveness assumed without need for measuring ineffectiveness. The other would (a) relax the conditions for designating a hedging relationship somewhat and (b) require periodic measurement and recognition of ineffectiveness for all hedging activities, but would not require as a qualifying condition that the hedging relationship be effective within a range of 80% to 125%. IAS 39 has such an 80%-125% condition, requiring somewhat complex and retrospective calculations.

The Board discussed those two approaches and also a third approach. The third approach would be not to include any hedge accounting provisions in Section 12 but, instead, to refer SMEs to the hedge accounting provisions of IAS 39 if they wish to do hedge accounting.

After discussion, the Board concluded that in the ED Section 12 should reflect the first approach (effectiveness assumed) and that the Invitation to Comment in the ED should describe the second approach (simplified effectiveness measurement) in detail. Respondents should be invited to express their views regarding the two approaches.

The Board also asked the staff to revise Section 12 as follows:

• Clarify that futures contracts can be hedging instruments.
• Clarify that options cannot be hedging instruments.
• Add guidance on whether and how an SME could change from following Section 12 to following IAS 39 and vice versa.

The Board also agreed that Section 12 should include an appendix of fair valuation guidance from IAS 39.

Income taxes

The Board discussed a revised draft of Section 29 Income Taxes of the ED. Under that draft, an SME would be required to recognise deferred income taxes on all items of income or expense that are recognised in profit or loss or in equity in one period but, under tax laws or regulations, are included in taxable income in a different period (sometimes called 'timing differences'). An SME would also recognise deferred taxes arising from tax losses and tax credits that, under the law, are available to offset taxable profit or tax payable in future periods, although technically these are not timing differences.

Staff characterised this approach as a 'timing differences plus' approach.

Board members generally agreed that deferred taxes should be recognised on all or most timing differences and on tax loss/credit carryforwards. However, some Board members felt that deferred taxes should be provided in more circumstances than just timing differences and carryforwards (including differences between the tax basis and carrying amount that arises when an asset or liability is initially acquired). And some Board members felt that – consistent with IAS 12 Income Taxes – Section 29 should take a 'temporary differences' approach, rather than a 'timing differences plus' approach.

The draft of Section 29 proposed that an SME should not recognise deferred taxes on differences between the tax basis and the carrying amount of assets and liabilities that arise at initial recognition of those assets or liabilities – whether acquired in a business combination or in another transaction. After discussion, the Board did not agree with that proposal. The Board acknowledged that these are not timing differences, but they do create benefits or obligations that meet the definitions of assets and liabilities. The Board asked the staff to revise the draft of Section 29 accordingly.

The Board discussed problems that an SME may encounter in adopting Section 29 for the first time when its previous national accounting framework did not recognise deferred income taxes. The Board agreed that the principle in Section 29 should be that deferred taxes are recognised on differences between the tax basis and the carrying amount of all assets and liabilities. However, the Board also agreed that an exception should be included on first-time adoption of Section 29 when measurement of deferred taxes would require undue cost and effort.

The Board discussed whether an entity should recognise deferred taxes on unremitted earnings of foreign subsidiaries, associates, and interests in joint ventures. The Board concluded that such deferred taxes should not be recognised unless it is probable that the timing difference will reverse in the foreseeable future.

Employee Benefits

The draft of Section 28 Employee Benefits that the Board had discussed in June 2006 did not include standards on accounting for defined benefit plans. Instead, SMEs were cross-referred to IAS 19 Employee Benefits. At that meeting, the Board concluded that because many SMEs provide benefits under deferred benefit plans or government-mandated programmes that are similar to defined benefit plans, Section 28 should include guidance on defined benefit plan accounting directly, rather than by cross-reference to IAS 19.

The revised draft of Section 28 discussed at the September 2006 meeting included new paragraphs addressing defined benefit plans. Those paragraphs were based on the relevant paragraphs in IAS 19.

The Board agreed that an SME should be required to use the projected unit credit method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost. That actuarial method is generally consistent with the asset and liability definitions and recognition provisions of the IASB Framework.

The draft of Section 28 proposed that an SME should recognise actuarial gains and losses in their entirety either in profit or loss or directly in retained earnings, and that the non-recognition and partial recognition (spreading) options of IAS 19 should not be included in the IFRS for SMEs. The Board agreed that the non-recognition and partial recognition options of IAS 19 should not be included in Section 28. However, the Board did not agree with allowing an option to recognise actual gains and losses directly in retained earnings. The Board asked the staff to revise Section 28 to recognise actuarial gains and losses in their entirety in profit or loss. Similar treatment will apply to actuarial gains and losses arising in connection with other long-term benefits. Also, an SME should recognise increases or decreases in past service in their entirety in profit or loss when they arise.

Inventories

The Board decided to add an exclusion, in Section 13 Inventories, that Section 13 does not apply to the measurement of inventories held by:

• producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value (above or below cost) through profit or loss; or
• commodity brokers and dealers who measure their inventories at fair value less costs to sell through profit or loss.

Provisions

In the criteria for recognising a provision in Section 21, clarify that probability must be assessed only with respect to transfer of economic benefits. Also, add guidance from paragraph 15 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets on what to do in the rare cases when it is not clear whether there is a present obligation.

Revenue

Include in Section 23 Revenue guidance on accounting for construction contracts, rather than requiring SMEs always to look to IAS 11 Construction Contracts.

Impairment

• Section 27 Impairment of Non-financial Assets should address how to allocate an impairment loss to individual assets when a group of assets is tested for impairment.
• Include in Section 27 the guidance on how to measure goodwill impairment, rather than cross-referring to paragraphs 80-99 of IAS 36 Impairment of Assets.

Discussion at the October 2006 IASB Meeting

Staff presented four documents for Board review:

• a marked draft of an exposure draft of an IFRS for SMEs, reflecting changes to the draft discussed in September 2006,
• an exposure draft of implementation guidance comprising illustrative financial statements and disclosure checklist [these are similar to the Draft ED available on the IASB Website],
• a draft basis for conclusions [not available to Observers], and
• a draft invitation to comment [not available to Observers].

The Board discussed those documents and made the following decisions.

Exposure Draft

• Permit SMEs to use a liquidity presentation on their balance sheet.
• Do not require an SME to make special disclosures relating to amendments to the IFRS for SMEs that have been adopted but are not yet effective.
• Replace the term 'net realisable value' with 'selling price less costs to complete and sell'.
• Clarify in the financial instruments section that ancillary costs incurred in connection with the arrangement of borrowings should be reflected in calculating the effective interest rate (that is, they should not be charged to expense in their entirety at the time of the borrowing).
• Add guidance on the appropriate accounting when an entity moves from full IFRSs to the IFRS for SMEs.
• With regard to hedge accounting, require simplified effectiveness testing rather than the 'shortcut method' under which ineffectiveness is not measured or recognised.
• In the section on first-time adoption of the IFRS for SMEs, include all of the exemptions in IFRS 1 from retrospective restatement. Also add guidance on designation of financial instruments to be measured at amortised cost or at fair value through profit or loss, where the IFRS for SMEs allows such designation.

• Staff should consider whether any of the disclosures currently presented in the illustrative notes might be more clearly presented on the face of the financial statements.
• Identify one or more persons to do a final 'cold review' of the illustrative financial statements.

• Explain the Board's approach to deciding which disclosures in full IFRSs could be eliminated for SMEs
• Acknowledge the encouragement of the Standards Advisory Council to undertake the project
• Explain that addressing the needs of SMEs is part of the IASB's mission as set out in the IASC Foundation Constitution
• Explain the hierarchy for choosing an accounting policy when the IFRS for SMEs does not specifically address a transaction, other event or condition.

• Add a general question on the volume of proposed disclosures
• Where full IFRSs allow accounting policy options, the IFRS for SMEs include only the simpler option, and the other option(s) are available to SMEs by cross-reference to the full IFRS. Add a question about whether the Board has chosen the appropriate options to include in the IFRS for SMEs.
• Add a general question on whether the transition guidance is adequate both for an entity that is moving from national GAAP to the IFRS for SMEs and for an entity that is moving from full IFRSs to the IFRS for SMEs.
• Add a general question on cross-references to full IFRSs that are in the IFRS for SMEs.
• Clarify that in making recognition and measurement simplifications, the Board's criteria were user needs and cost-benefit considerations.
• Add a question about whether the few remaining circumstances in which items of income and expense are recognised directly in equity should (with the exception of hedges of future cash flows) be eliminated, requiring instead that they be recognised in profit or loss.

Indicative Board vote

After discussion of the four documents, Board members indicated their support for issuing the Exposure Draft by a vote of 11 in favour, 1 against, and 1 preferring to review the pre-Ballot draft before deciding. Comment deadline is expected to be 30 June 2007.

December 2006: Update on IASB's SME project

The Association of Chartered Certified Accountants (ACCA) published a special edition of its magazine Accounting & Business for the World Congress of Accountants, November 2006. That issue included an article titled Standards and SMEs: Who, What, When and Why? (PDF 70k) written by Paul Pacter, the IASB's director of standards for SMEs, who is also webmaster of www.iasplus.com. We have posted the article, which is copyright ACCA 2006, with their kind permission.

Discussion at the December 2006 IASB Meeting

In response to an issue that had arisen as a result of the Board's consideration of a pre-ballot draft of the Exposure Draft of an IFRS for SMEs, the Board agreed that the GAAP hierarchy for an SME (in paragraph 10.3 of the draft ED) should not include a 'mandatory fallback' to full IFRSs. The hierarchy should be:

• (a) the requirements and guidance in this IFRS dealing with similar and related issues; and
• (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2 Concepts and Pervasive Principles; and

The Board's reasons included the following:

• SMEs are likely, in most cases, to conclude that they can find answers using (a) and (b), so a 'mandatory fallback' will not normally be invoked;
• requiring SMEs to look to full IFRSs imposes two sets of standards with some recognition and measurement differences on a single entity; and
• leaving the mandatory fallback in 10.3 creates a potential conflict between auditors – who are likely to be aware of the provisions of full IFRSs – and SME managers – who are responsible for preparing the financial statements and may have done so based solely on the IFRS for SMEs.

Accordingly, paragraph 10.4 of the draft ED would be revised as follows:

In making the judgement described in paragraph 10.2, management may also consider the requirements and guidance in full IFRSs and Interpretations of full IFRSs dealing with similar and related issues. If additional guidance is needed to make the judgment described in paragraph 10.2, management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 10.3. The Board concurred that paragraph 10.4 as revised reflects the decision reached in October 2006.

Discussion at the January 2007 IASB Meeting

Deferred taxes on initial recognition of goodwill

Paragraph 15 of IAS 12 Income Taxes establishes a general principle that a deferred tax liability should be recognised for all taxable temporary differences. However, subparagraph (a) of that paragraph provides a special exception from that general principle for the initial recognition of goodwill. As a result of that exception, a deferred tax liability is not recognised.

Based on a tentative Board decision in September 2006, the pre-ballot draft of an Exposure Draft of an IFRS for SMEs that was sent to the Board in December 2006 proposed the same general principle as in paragraph 15 of IAS 12 but without the subparagraph (a) special exception.

In their comments on that pre-ballot draft, a number of Board members noted that the issue of whether, and in what amount, deferred tax should be recognised on initial recognition of goodwill is under study in the IASB's current convergence project on accounting for income taxes and also in the current business combinations phase two project. They suggested that it is premature to reach a decision on the issue for SMEs alone.

Consequently, in early January, when staff sent a Ballot Draft of the Exposure Draft to the Board, staff asked Board Members whether they wished to reconsider the matter. A majority of the Board asked that the issue be discussed at the January 2007 Board meeting.

On the basis of that discussion, the Board decided to propose in the SME Exposure Draft the same special exception as is in IAS 12.15(a). That is, an entity shall not recognise a deferred tax liability for taxable temporary differences associated with the initial recognition of goodwill.

The Board also decided to require disclosure of the aggregate amount of temporary differences associated with the initial recognition of goodwill for which deferred tax liabilities have not been recognised.

February 2007: IASB Publishes Exposure Draft of an IFRS for SMEs

On 15 February 2007, the IASB published an Exposure Draft of an International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). The ED is a simplified, self-contained set of accounting principles for SMEs. Compared to full IFRSs, the volume has been reduced by 85%. The IFRS for SMEs is based on full IFRSs, which are developed for public capital markets. Modifications are based on user needs and cost-benefit considerations.

The IFRS for SMEs would enable investors, lenders, and others to compare SMEs' financial performance, financial condition, and cash flows while, at the same time, reducing the burden of preparing SME financial statements. The ED was approved by a vote of 13 Board members in favour and 1 opposed. An overview is presented below. Comment deadline is 1 October 2007 extended to 30 November 2007. Click for Press Release (PDF 98k). The ED is available on the IASB's website (subscribers only until 26 February 2007).

April 2007: IASB publishes an Overview of the SME exposure draft

On 5 April 2007, the IASB published a Staff Overview of the exposure draft of the proposed IFRS for SMEs. The Overview is written in question-and-answer format and is intended as a high level introduction to the proposals. However, it has not been approved by the IASB, and it is not intended to serve as the basis for commenting on the exposure draft. You can Download the SME ED Overview from the IASB's website (PDF 277k). Comment deadline on the ED is 1 October 2007.

Here is a list of the questions in the Staff Overview:

April 2007: Spanish translation of SME Exposure Draft

The IASB has published the Spanish translation of the Exposure Draft of a Proposed International Financial Reporting Standard for Small and Medium-sized Entities – Propuesta para un Proyecto de NIIF para Pequeñas y Medianas Entidades. Electronic copies of the Exposure Draft may be downloaded from The 'Open to Comment' Pages of the IASB's Website (until the comment period closes). The ED, Implementation Guidance, and Basis for Conclusions have all been translated. Hard copies are available soon to purchase from the IASCF for £23 each. Comments are due by 1 October 2007. French and German translations are forthcoming.

May 2007: Exposé-sondage – NIIF pour les PMEs (SME ED in French)

The IASB has published the French translation of the Exposure Draft of a Proposed International Financial Reporting Standard for Small and Medium-sized Entities – Exposé-sondage – Norme internationale d'information financière pour les petites et moyennes entités. The French translation is now freely available to all from the 'Open to Comment' Pages of the IASB's Website (until the comment period closes on 1 October 2007). The ED, Implementation Guidance, and Basis for Conclusions have all been translated. Hard copies are available soon to purchase from the IASCF for £23 each. A Spanish translation was published two weeks ago (download from the 'Open to Comment' link), and a German translation is forthcoming.

June 2007: Entwurf eines vorgeschlagenen IFRS für KMU (SME ED in German)

The IASB has published the German translation of the Exposure Draft of a Proposed International Financial Reporting Standard for Small and Medium-sized Entities – Entwurf eines vorgeschlagenen IFRS für kleine und mittelgrosse Unternehmen (KMU). The German translation is now freely available to all from the 'Open to Comment' Pages of the IASB's Website. The comment period closes on 1 October 2007. Currently only the ED itself is available in German. Translations of the Implementation Guidance and Basis for Conclusions will be posted before the end of June. Spanish and French translations were previously published and can be downloaded from the 'Open to Comment' link.

June 2007: Field tests of the proposed IFRS for SMEs

On 20 June 2007, the IASB launched a comprehensive programme for field testing the proposals in the Exposure Draft of an IFRS for Small and Medium-sized Entities (IFRS for SMEs) during the comment period. The testing will help to identify aspects of the exposure draft that may need reconsideration. Companies taking part in the field test are asked to provide background information about the company, submit their most recent annual financial statements under their existing accounting framework, prepare financial statements in accordance with the proposed IFRS for SMEs for the same financial year, and respond to a series of questions designed to identify any specific problems the company encountered in applying the exposure draft.

The IASB published a Field Test Questionnaire and related Compliance Checklist for the proposed IFRS for SMEs. This checklist identifies all of the accounting recognition and measurement requirements in the Exposure Draft. It is intended to allow users of the draft IFRS for SMEs to pinpoint quickly those sections and paragraphs that are directly relevant to them. The IASB has established a separate email address for the SME field test correspondence: smefieldtests@iasb.org.

The IASB, in co-operation with national and international organisations around the globe, is identifying field test companies and will assist them in applying the requirements proposed in the exposure draft and in responding to the field test questionnaire. Field testers are asked to provide their information by 31 October 2007. Click for:

• Press Release (PDF 46k).
• English Field Test Questionnaire and Compliance Checklist (ZIP of Word DOCs 200k)
• French Field Test Questionnaire (ZIP of Word DOC 37k)
• Spanish Field Test Questionnaire (ZIP of Word DOC 46k)
• More Information about the SME Field Tests on IASB's website.

Discussion at the September 2007 IASB Meeting

The Board agreed that the deadline for comment letters should be deferred until 30 November 2007 to allow organisations participating in field tests to factor the results into their comment letters.

Discussion at the March 2008 IASB Meeting

The Board held an initial discussion on the responses to the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED) based on a high-level comment letter analysis prepared by the staff. No decisions were made. The staff noted that 162 comment letters have been received and that 116 companies from 20 jurisdictions participated in the field tests. In addition, the staff pointed out that approximately 50 roundtable discussions were held around the world.

The Board was particularly interested in the outcome of the field tests, that is, the problems encountered in implementing the ED. The staff responded that the quality of implementation varied, but that the problems encountered by the field test companies were relatively minor; in particular, no company was unable to implement the ED.

One Board member asked whether there is a correlation between the quality of implementation and the proximity of the respective national GAAP to IFRSs. The staff said they would try to include this information in the detailed field test analysis.

General issues raised in the comment letters

The staff highlighted the following key issues raised by constituents.

Need for an IFRS for SMEs

Some comment letters still questioned the need for an IFRS for SME even though this issue was not addressed in the invitation to comment. These respondents suggested that SMEs should follow tax accounting requirements and should not keep two sets of books.

The staff pointed out that it is not the IASB's decision which entities have to apply an IFRS for SME but that this decision has to be made in each jurisdiction. The staff expressed the view that the IFRS for SME is intended for those entities that are required to prepare general purpose financial statements that are used by lenders, vendors, credit rating agencies, outside shareholders, and other capital providers.

The Board agreed.

One Board member requested that the final standard should clarify what general purpose financial statements means to avoid any confusion.

Cross references to full IFRSs / Accounting policy options

A vast majority of respondents recommended that the IFRS for SME should be a (fully) stand-alone standard and therefore suggested to remove all cross references to full IFRSs or to keep the number of cross-references to an absolute minimum. Further, a majority of constituents expressed the view that all or most options in full IFRSs should also be available to SMEs. Some of these respondents noted that this would be particularly important for subsidiaries of entities reporting under full IFRSs.

The staff raised the concern that having a stand-alone standard including all or most options available under full IFRSs could significantly increase the size of the IFRS for SMEs. This would contradict the goal of keeping the standard simple which was also required by these constituents.

It seemed that a majority of Board members was in favour of keeping the options and cross references, though no formal decision was made.

One Board member suggested to keep the printed version of the Standard as simple as possible but to include links to full IFRSs relating to the options in an electronic version. The Board agreed to take this proposal into consideration.

Anticipating changes to full IFRSs

Some respondents pointed out that anticipating decisions made in current Board projects would not be an appropriate policy because such potential changes have not yet been through a complete public due process.

The staff noted that in the ED the elimination of the corridor approach and the elimination of certain exceptions to recognition of deferred taxes could be seen as anticipated changes.

No strong views were expressed.

Disclosure requirements

Many constituents suggested making further simplifications to the disclosure requirements.

The staff pointed out that the respondents often did not specify which disclosures they consider as being not helpful or too complex.

One Board member expressed the view that there are areas where even more disclosures should be required for SMEs, for example, significant customers and other economic dependencies. The staff responded that it will consider this issue in the recommendations that it will bring to the Board in May.

The Board encouraged the staff to address the disclosure issue with the working group, in particular, to seek input from the representatives of users on this topic.

Title of the standard

Many constituents noted that the term 'small and medium-sized entities' implies a size test because it is defined by using quantitative thresholds in some jurisdictions. Therefore, these respondents suggested alternative terms such as 'non-publicly accountable entity' or 'non-public-interest entity'.

The Board acknowledged these concerns and asked the staff to find a more appropriate title for the standard.

Scope

Some constituents recommended reconsidering whether the IFRS for SMEs is suitable for micro-entities, small listed entities, and other entities that have public accountability because they act in a fiduciary capacity such as travel agencies and unit trusts managed for a small number of investors.

With regard to the micros, Board members noted that jurisdictions will decide which entities should use the IFRS for SMEs and that, in turn, will depend on whether the micro-sized entity is required to produce general purpose financial statements. With regard to the small listed entities and others that act in a fiduciary capacity, there seemed to be no willingness among Board members to widen the scope of the IFRS for SMEs for any of these entities.

Use of fair value in general

Many respondents suggested restricting the use of fair values to situations where a market price is quoted or readily determinable, plus all derivatives.

The staff noted that in the ED the mandatory use of fair values as the basis for measuring non-financial assets is already restricted to agricultural assets. However use of a current valuation cannot be avoided for impairment testing and valuation allowances for many both financial and non-financial assets.

No strong views were expressed and the staff will prepare a detailed analysis on this topic for discussion at a future meeting.

Post-issuance review / Interpretations of the IFRS for SMEs

Some constituents recommended that the Board commit to conduct comprehensive post-implementation reviews on a regular basis (approximately every two years). In addition, a formal process should be implemented for amending the Standard and developing Interpretations.

Regarding the first issue there seemed to be consensus to conduct such a review after two full years of implementation. The staff noted that the second issue is also a 'version control issue' when an IFRS is amended – do cross references continue to refer to the old version or automatically refer to the revised IFRS.

Regarding the second issue the Board did not support developing a formal process for publishing interpretations of the IFRS for SMEs. The Board noted that substantial guidance for implementing the IFRS for SMEs will be provided by the IASC Foundation Education Team's planned IFRS for SMEs training materials, which are expected to be released in mid- to late-2009. Further, the implementation guidance in full IFRSs can be used by SMEs under the hierarchy in paragraph 4 of section 10 of the ED. It was decided to clarify this in the standard.

Key issues related to specific sections in the ED

The staff highlighted the following key issues arising from the comment letters:

• Format of financial statements
• Requirements for statements of cash flows
• Requirements for consolidated financial statements
• Amortisation of goodwill and other indefinite life intangibles
• Default measurement basis for financial instruments
• Measuring stock options if equity instruments are not traded (intrinsic value)
• Proposed simplified value in use calculation for impairment test
• Accounting for employee benefits
• Accounting for deferred taxes

The topics were discussed in detail, but will be part of the detailed comment letter analysis to be presented at the April 2008 Board meeting.

Work plan

The Board agreed to proceed with the project as follows:

• April 2008: Second education session including a detailed comment letter analysis and report on field tests
• May to July 2008: Decisions on technical issues
• September or October 2008: Deliberation of revised draft of the ED
• December 2008: Vote on final standard

Discussion at the April 2008 IASB Meeting

The Board held a second discussion on the responses to the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED). At this meeting the staff presented the main issues identified in the field tests, that is, the problems encountered in implementing the ED. The staff's summary of issues raised in the field test is presented in Agenda Paper 6 available on the IASB's website. No decisions were made.

The staff noted that 116 entities from 20 countries participated in the field tests. The staff pointed out that they did not work with the individual field test entities but that professional accounting bodies and accounting standard-setters took the lead in identifying field test entities and in helping those entities preparing their reports.

The entities were asked to:

• provide background information about their business and reporting requirements,
• submit their most recent annual financial statements under their existing accounting framework,
• prepare financial statements in accordance with the ED for the same financial year (without presenting comparative prior year information)
• respond to a series of questions designed by IASB staff to identify specific problems the field test entity encountered in applying the ED.

Demographics of the field test entities

The staff provided an overview and, among other things, highlighted the following:

• Of the 116 entities 12 entities were full IFRS reporters because national law permits or requires unlisted entities to use IFRSs, whereas all other participants currently report under their national GAAP.
• Approximately 70% of the field test entities have 50 or fewer employees, including 35% with less than 10 employees.
• Approximately 60% of the field test entities have an annual turnover of less than US$ 5 million including 35% with annual turnover of less than US$ 1 million.

The Board was particularly interested in whether there was a correlation between the problems encountered and the demographics and asked the staff whether it would be possible to analyse the field test results using criteria such as size and proximity of the respective national GAAP to IFRSs (including a separate analysis for the 12 full IFRS reporters). One Board member pointed out that the responses of entities with less than 10 employees (so called 'micros') should be considered separately.

The staff responded that such an analysis would be possible and indicated that the quality of implementation was mainly influenced by the proximity of the respective national GAAP to IFRSs rather than the size of the entities. In particular, the staff explained that the 12 entities already applying full IFRSs in general reported fewer problems than the other entities. Limitations encountered during the field testing

The staff noted that overall the feedback received from the field test entities was very helpful and that only minor limitations were encountered.

Among other things the staff highlighted the following:

• Some field test entities provided financial statements without responding to the IASB's field test questionnaire and vice versa. The staff noted that the reasons for not providing financial statements often were concerns regarding confidentiality of the data rather than the inability of the entity to apply the ED, that is, the financial statements were prepared in accordance with the ED but not sent to the IASB.
• Some field test entities did not prepare a full set of financial statements. The parts omitted by these entities were mainly the statement of cash flows, the statement of changes in equity and certain note disclosures. The staff was of the view that in many cases the omitted parts were considered to be too onerous to prepare for a voluntary field test but that the entities would be able to prepare them if required for financial statements.

General issues raised in the field test comments

The staff highlighted a number of key issues that are not related to a specific section of the ED. The Board discussion focussed on the following topics:

Overall impression

The staff noted that overall the responses received from field test entities were positive. In particular, about half of the field test entities listed no, or only one or two, issues or problems.

Use of fair value

Many field test entities noted that the requirement to perform annual fair value measurements for common financial instruments and residual values of non-financial assets is complex, costly, and often not possible due to lack of reliable values and inability to bear necessary specialists' fees.

The Board asked whether these concerns relate to complex financial instruments only. The staff assumed that this issue would be more a classification issue since many field test entities were not certain which financial instruments qualify for measurement at cost or amortised cost less impairment.

Disclosures are too burdensome

Another significant area of concern was the nature, volume and complexity of disclosures.

• A significant number of the field test entities commented that the required disclosures are too onerous to prepare, in terms of time and costs.
• A few field test entities noted that, in some cases, they were required to publicly disclose sensitive information. The staff explained that disclosures on remuneration of key management personnel (for instance, some SMEs have only one key manager) and related parties are the main areas of concern in this context.

Further simplifications are required

In addition to disclosure requirements being identified as too complex, many field test entities stated the ED itself should be simplified because it currently provides little relief from full IFRSs.

Field test issues related to specific sections in the ED

Only a few topics were mentioned and no strong views were expressed.

Discussion at the May 2008 IASB Meeting

At this meeting the Board started its redeliberations of the proposals in the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED).

The staff presented the key issues that were raised in comment letters on the ED, the reports prepared by field test entities and the IASB SME Working Group meeting in April 2008.

At this meeting the Board was asked to make decisions on general issues and issues relating to some specific sections of the ED. The staff noted that all disclosure issues and specific requests for additional implementation guidance will be combined and addressed separately at a future meeting.

General issues

Stand-alone IFRS for SMEs, Accounting policy options, and Omitted topics

The three issues were discussed together since they are related.

The Board decided that the IFRS for SMEs should be a fully stand-alone standard.

This decision implied all cross-references to full IFRSs being removed. Currently the ED contains two types of cross references:

• Accounting policy options: The ED generally includes the simpler option and allows application of the more complex option by cross-reference to full IFRSs
• Omitted topics: The ED does not address certain topics that are presumed not to be encountered by typical SMEs but allows application by cross-reference to the respective full IFRS

The Board then discussed to what extent the cross-referenced topics should be included in the standard.

By majority vote the Board affirmed its decision that all accounting policy options should be available to SMEs. The Board also decided that the options that the ED had proposed to allow by cross-reference to full IFRSs should be included in an appendix to the standard, that is, not in the main text of the respective section. No decision was made regarding the question whether and to what extent the (more complex) options should be simplified for use by SMEs.

Regarding the nine omitted topics identified in the staff analysis the Board decided by majority vote to include five of them and to be silent on the remaining four:

The topics to be addressed (simplified as appropriate) in the standard are:

• Lessor accounting for finance leases
• Equity-settled share-based payment
• Share-based payment transactions with cash alternative
• Financial reporting in a hyperinflationary environment
• Determining the fair value of agricultural assets

• Segment reporting
• Earnings per share
• Interim reporting
• Insurance contracts (insurers would not be eligible to use the proposed IFRS for SMEs)

No decision was made in relation to the information an SME needs to provide if it presents information on the deleted topics in its financial statements. However, there seemed to be a consensus that this issue should not be addressed in a pervasive disclosure requirement. The staff was asked to bring back a proposal for discussion at a future meeting.

Anticipating changes to full IFRSs

The Board discussed whether the standard should include a principle that the IFRS for SMEs should not try to anticipate evolving changes to full IFRSs but that if a genuine simplification of full IFRSs that is appropriate for SMEs happens to coincide with the direction that the IASB appears to be following in one of its projects, this should not prevent inclusion of this simplification in the IFRS for SMEs.

By majority vote the Board decided not to address this issue since such a principle would not be operational and could put constraints on the development of a separate, fully stand-alone IFRS for SMEs.

Entities that receive funds in a fiduciary capacity

The Board principally agreed to a staff analysis that an entity whose primary business is holding funds in a fiduciary capacity is publicly accountable and hence should be out of the scope of the IFRS for SMEs. This decision implies that an entity that holds funds in a fiduciary capacity as a sideline to its principal business should be permitted to use the IFRS for SMEs if it otherwise qualifies.

However, the Board asked the staff to further elaborate the meaning of 'primary' and to consider consequential adjustment to the definition of scope in section 1 of the ED.

Replace the term fair value

Some constituents noted that the term 'fair value' belongs to the language of valuation experts and is not easily understandable. These constituents suggested replacing the term fair value by a description of what the basis for measurement is in each specific case.

At first a majority of Board members disagreed with this proposal. One Board member noted that the term fair value is currently deliberated as part of the fair value measurement project on full IFRSs and that any decisions in the SME project could be precedential. Other Board members raised the concern that such descriptions could have unintended consequences since they may result in diverging definitions in IFRS for SMEs and full IFRSs.

Finally, the Board agreed to a staff proposal to bring back a draft wording of such descriptions for discussion at a future meeting.

Post-issuance assessment and ongoing review of the IFRS for SMEs

The Board was reluctant being specific regarding the timing of such reviews.

The Board agreed to undertake a post-issuance assessment of implementation problems after two years of financial statements using the IFRS for SMEs are available. Thereafter reviews should be performed when deemed necessary which would be expected to be on a three-year cycle.

Other general issues

In addition, the Board made/confirmed the following decisions without discussing the issues in detail:

• Change the title of the standard to 'International Financial Reporting Standard for Private Entities' with private entities defined similarly to the ED's definition of small and medium-sized entities.
• The standard should not explicitly exclude micro entities (such as fewer than 10 employees). Consequently, no very simple set of standards for micros (a third tier of standards) should be developed.
• The standard should not include special exemptions for entities at the small end of the SME spectrum
• Small listed entities should not be included in the intended scope of the standard.
• No 'undue cost or effort principle' should be included in the impracticability exemption when the standard requires restatement.
• Regarding fair value measurement:
  • An overall 'undue cost or effort' principle should not be added for fair value measurement,
  • The condition 'intent to dispose' should not be added whenever a fair value measurement is required and
  • A condition such as 'is readily realisable' or 'has an observable market price' should not be added whenever a fair value measurement is required.
• Not to change the overall structure of the standard.
• No formal process for developing official interpretations of the IFRS for SMEs should be established.

Issues relating to specific sections of the ED

At this meeting the Board discussed issues relating to sections 1 to 3.

Use by a subsidiary of a full IFRS company (section 1)

The Board agreed that a subsidiary of an IFRS entity should not be allowed use the recognition and measurement principles in full IFRSs but make only the disclosures required by the IFRS for SMEs in its published general purpose financial statements.

Objective of financial reporting and qualitative characteristics (section 2)

The Board deferred most of the decisions in light of the forthcoming exposure draft on Phase A of the conceptual framework project. In particular, the Board deferred the decision whether the final IFRS for SMEs should reflect the changes expected to be proposed to the IASB framework on objectives and qualitative characteristics.

The Board agreed with the staff recommendation that determination of taxable income and distributable income should not be added as objectives of the financial statements of an SME.

Financial statement presentation (section 3)

The Board decided that the IFRS for SMEs should:

• not prescribe financial statement formats, subtotals, minimum line items, sequencing, and note disclosures with more specificity than currently in the ED,
• incorporate the new requirements in IAS 1 (revised 2007) Presentation of Financial Statements, and
• not require two prior years of comparative data.

The incorporation of the requirements in IAS 1 (revised 2007) implies, among other things, that an SME would be required to present a statement of comprehensive income. Additionally, the new titles of financial statements would be used in the final standard but would, similarly to full IFRSs, not be mandatory.

Discussion at the June 2008 IASB Meeting

IFRS for Private Entities (formerly Small and Medium-sized Entities, or SMEs)

The Board continued its redeliberations of the proposals in the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED). At this meeting the Board discussed the key issues relating to section 4 to 12 excluding any disclosure issues and requests for additional implementation guidance. The main decisions are outlined below.

Balance sheet (section 4)

With regard to the presentation of the statement of financial position (balance sheet) the Board decided to:

• Retain the requirement that a private entity should present the statement of financial position based on liquidity if this presentation provides information that is reliable and more relevant than a current/non-current presentation. The Board was nearly equally split on this issue but finally a majority of Board members was of the view that private entities should not be precluded from presentation based on liquidity.
• Not simplify the criteria for current/non-current classification of assets and liabilities, that is, not to exclusively base this classification on the 12 months criterion.
• Retain the requirement that the current portion of a non-current liability should be presented separately as part of current liabilities

Income statement (section 5)

The Board decided to delete the requirements in paragraph 5.10 for additional disclosures if an analysis of expenses by function is chosen since these disclosures are already required by other sections.

No decision was made on whether changes in fair values should be presented separately on the face of the statement of comprehensive income (income statement). The staff was asked to further elaborate the implications of such a presentation requirement.

Statement of changes in equity and statement of income and retained earnings (section 6)

The Board agreed that a combined statement of comprehensive income and retained earnings should only be permitted if the changes to equity during the period arise from profit and loss, payment of dividends, corrections of prior period errors and changes in accounting policies. In case other equity transactions with owners occur, a separate statement of changes in equity would be required.

Statement of cash flows (section 7)

The Board reaffirmed its decisions that all private entities should be required to present a statement of cash flows and that operating cash flows should be presented using either the direct or indirect method.

Consolidated and separate financial statements (section 9)

The Board agreed the following:

• Not to provide exemption from the requirement to present consolidated financial statements, i.e. the Board reaffirmed its decision that all private entities that are parent entities should prepare consolidated financial statements.
• Not to provide a temporary control exemption.
• To retain and probably enhance the guidance on combined financial statements. A majority of Board members was of the view that quite often two or more private entities are controlled by a single investor and, therefore, private entities should be encouraged (but not required) to prepare combined financial statements.
• To allow in the separate financial statements different accounting policies for categories of investments, for example, to measure associates at fair value through profit and subsidiaries at cost. This decision is a consequence of the general decision made at the May 2008 meeting that all accounting policy options in full IFRSs should also be available for private entities.

Accounting policies, estimates and errors (section 10)

The Board in principle confirmed the accounting policy hierarchy in paragraphs 10.2 to 10.4. However, the Board decided to amend paragraph 10.4 to clarify that an entity may, but is not required to look at full IFRSs and to exclude pronouncements of other standard setting bodies from the hierarchy.

Financial assets and financial liabilities (section 11)

The Board had a thorough debate on the guidance regarding financial instruments. The Board decided to reorganise the section to make application easier. In particular it should be clarified by use of examples that the cost model will be appropriate for most of the financial instruments usually held by private entities. In this context the Board decided not to define cost/amortised cost as the default measurement basis since this would require explicit guidance for financial instruments that are to be measured at fair value such as derivatives and embedded derivatives.

Among other things the Board also decided to:

• Remove the option in paragraph 11.1 to apply IAS 39 and IFRS 7 in full instead of section 11. However, the Board acknowledged that this is a tentative decision and decided to redeliberate this decision after Section 11 has been reorganised as outlined above.
• Not add an 'available for sale' category for financial assets to section 11.
• Not permit straight-line amortisation of discounts and premiums as an alternative to the effective interest rate method.
• Not permit a 'shortcut method' for hedge accounting.
• Not include additional guidance on measuring hedge effectiveness. Instead, such guidance should be included in the training materials developed by the IASC Foundation.
• Add additional guidance to clarify which types of risks can be hedged in accordance with paragraph 11.31.
• Add guidance on accounting for factoring and similar transactions.
• Clarify that interest rate swaps must be measured at fair value through profit or loss.
• Clarify that an impairment loss for an equity instrument carried at cost because it is not publicly traded and its fair value cannot otherwise be measured reliably should be the difference between the asset's carrying amount and the best estimate (which will necessarily be an approximation) of the amount (which might be zero) that the entity would receive for the asset if it were to be sold.

The staff was asked to redraft section 11 accordingly for discussion at a future meeting.

Inventories (section 12)

The Board decided to:

• Not permit using IAS 2 in full instead of section 12.
• Allow measuring inventory at the most recent prices if the results approximate costs.
• Not allow LIFO as an inventory cost method.

Discussion at the July 2008 IASB Meeting - Recognition, Measurement, and Presentation

The Board continued its redeliberations of the proposals in the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED). In this session the Board discussed the key issues relating to sections 13 to 19 excluding any disclosure issues and requests for additional implementation guidance. The main decisions are outlined below.

Investments in associates and joint ventures (sections 13 and 14)

The Board had a thorough debate regarding the options permitted in accounting for associates and joint ventures. Currently, the ED permits using the cost model, the equity method, proportionate consolidation (joint ventures only) or fair value through profit or loss.

The Board decided to add an exception to the use of the cost model. The cost model would not be permitted when the shares of the associate or joint venture have public price quotations.

The Board deferred its decision on elimination of proportionate consolidation for joint ventures but indicated that the requirements in ED 9 Joint Arrangements will be considered if the ongoing project on joint ventures results in elimination of proportionate consolidation and if the final standard of that project is issued before publication of the IFRS for Private Entities.

In addition, the Board decided to replace the requirement that the difference between the reporting date of the financial statements of the associate/joint venture and those of the investor must not be greater than three months by a general statement that the most current information should be used.

Investment property (section 15)

The Board decided to not to make any changes to the guidance in this section.

Property, plant and equipment (section 16)

The Board agreed the following:

• To retain the requirement for component depreciation in paragraph 16.14 but to rewrite the paragraph by addressing the normal case (being no component depreciation) first.
• To clarify in paragraph 16.17 that reassessing residual value, useful life and depreciation method should be performed only if there is a clear indication of change since the last reporting date. The additional guidance should also clarify that such an assessment does not require a full impairment test.
• To retain the option to use the revaluation model
• Not to add an undue cost or effort exemption to for the requirement to separate the land and building components when land and building are acquired in a single purchase transaction. This decision also applies to similar requirements in sections 15 Investment Property and section 19 Leases.

Intangible assets other than goodwill (section 17)

The Board agreed the following:

• Not to add a presumption that all intangible assets other than goodwill have a finite life, which would allow amortisation of indefinite-lived intangibles. Instead, as proposed in the ED, private entities will be required to distinguish between intangible assets with finite and indefinite useful lives. The Board noted that such a simplification would not be appropriate since private entities can have material intangible assets with indefinite useful lives (franchises, licenses, etc.).
• To include a clarification regarding reassessment residual value, useful life and depreciation method (same as for property, plant and equipment).
• To retain the accounting policy choice either to expense all development costs or capitalise that portion of development costs that is incurred after commercial viability has been assessed.
• To retain the option to use the revaluation model

Business combinations and goodwill (section 18)

The Board agreed the following:

• Not to amortise goodwill over its estimated useful life
• Not to add an undue cost or effort exemption regarding separation of intangible assets acquired and contingent liabilities assumed in a business combination
• To add the requirements in IFRS 3(2008) regarding the 'measurement period' to account for adjustments to the fair values of identifiable assets and liabilities after acquisition
• Not to permit the pooling of interests method

Leases (section 19)

The staff proposed to add an exemption to the application of the straight-line method for operating leases if payments to the lessor are structured to compensate for the lessor's expected cost increases. Some Board members raised the concern that such an exemption could open the door for earnings management by structuring lease arrangements. The Board deferred its decision and asked the staff to prepare a more detailed analysis focussing on inflation clauses.

In addition the Board decided to retain the guidance in the ED relating to classification of leases as either operating or financing but to include additional guidance regarding the application of the criterion 'major part of the economic life of the asset'.

Provisions and contingencies (section 20)

The Board decided not to simplify the measurement requirements for provisions. However, the Board agreed to a staff proposal that most issues raised by respondents could be mitigated by adding examples to the implementation guidance.

Equity (section 21)

The Board decided to retain the requirement of split accounting for compound instruments, i.e. that equity and debt components of compound instruments need to be separated. However, the Board agreed to add examples as implementation guidance to assist entities in accounting for compound instruments.

The Board deferred its decision on debt-equity classification for certain types of entities, such as cooperatives and partnerships. The staff noted that comment letters and reports of the field tests were prepared before the changes made to IAS 32 Financial Instruments: Presentation regarding classification of puttable instruments and obligations arising on liquidation were finalised. The staff intends to present their recommendations in this regard at a future Board meeting.

Revenue (section 22)

The Board decided to retain the percentage of completion method and to add examples as implementation guidance.

Government grants (section 23)

The Board agreed to remove the option in paragraph 23.3(b) of the ED to apply IAS 20 Accounting for Government Grants and Disclosure of Government Assistance for those government grants not related to assets measured at fair value through profit or loss. Consequently, only the 'IFRS for SME model' will be allowed for these assets. Some Board members noted that IAS 20 is a standard that 'needs fixing' and that removing the option to follow IAS 20 would therefore be appropriate.

Borrowing costs (section 24)

The Board decided to retain both the expense model and the capitalisation model as accounting policy options. The Board noted that as a consequence of retaining the options there is no need for simplifying the capitalisation model, for example, by allowing the application of an average borrowing rate.

Share-based payment (section 25)

No decisions were made at this meeting because the staff is currently researching measurement of equity-settled share-based payments by private entities. The staff will present their recommendations at a future Board meeting.

Impairment of non-financial assets (section 26)

Several respondents and field test entities disagreed with the proposal in the ED requiring impairment to be measured by comparing the carrying amount to fair value less cost to sell and suggested reinstating the notion of 'value in use'. The Board decided that the approach for determining an impairment loss should be similar to IAS 36 Impairment of Assets and, consequently, Section 26 should include the concepts of 'recoverable amount' and 'value in use'. In addition, the Board decided to include the concept of 'cash generating units'.

The Board deferred its decision regarding the requirements for allocating goodwill to components of an entity. The staff was asked to further elaborate this issue by focussing on entities that do not manage their business based on cash-generating units.

Employee benefits (section 27)

The Board decided to retain the requirement in the ED that all actuarial gains and losses and past service costs should be recognised immediately in profit or loss.

Several constituents noted that in some cases information to apply the projected unit credit method (such as data about demographic and financial variables) would not be available. No decision was made whether private entities might be allowed to measure defined benefit obligation at a current liquidation amount rather than using the projected unit credit method in such situations. The staff was asked to prepare for discussion at a future meeting an analysis under which circumstances the use of a current liquidation amount would be appropriate.

Discussion at the September 2008 IASB Meeting

The Board resumed its redeliberation of the proposals in the exposure draft (ED) of a proposed IFRS for SMEs. At this meeting th Board discussed issues relating to Sections 28 - 38 of the ED. The staff presented the Board with the following issues and its recommendations:

Income taxes

The Board considered but rejected a taxes payable with disclosure approach for deferred tax. The Board had a considerable and, in part, emotional debate on how users of IFRS for private entities financial statements are served best. Some Board members had very strong views on this topic and highlighted that deferred tax liabilities and assets would provide useful information. Many other Board members had sympathy with the many respondents that said the temporary difference approach prescribed by IAS 12 Income Taxes (and essentially as proposed in the ED) is too difficult for many private entities. It was highlighted by some that requiring the conceptually right approach will not be accepted by many jurisdictions and hence, if the Board could not agree on a consensus position taking into accounts concerns raised that could potentially put at stake the success of the project. The Board discussed possible ways to simplify deferred tax recognition and measurement that take into account the needs of users of private entity financial statements and cost-benefit considerations. The Board asked the staff to develop the following two approaches and present their recommendation at a future meeting:

• A new approach that would aim to approximate the amounts recognised under IAS 12 but remove many of its complexities by recognising only those deferred taxes relating to book-tax differences in items of income or expense that are expected to reverse (and therefore affect an entity's cash flows) in a relatively short term.
• Starting from the temporary difference approach in IAS 12, but making simplifications in areas considered particularly complex.

The Board expects to issue an ED on income taxes later in 2008 One of the aims of that ED is to enhance understandability by substantially rewriting IAS 12. The staff will take this redrafting into account when rewriting Section 28.

Hyperinflationary economies

The staff asked the Board whether to change the ED to include all of the characteristics that indicate hyperinflation as listed in paragraph 3 of IAS 29 Financial Reporting in Hyperinflationary Economies in the final IFRS for Private Entities.

The Board agreed.

Foreign currency translation

The staff proposed to the Board that the final version of the IFRS for Private Entities should prohibit entities from recycling through profit or loss any cumulative exchange differences that were previously recognised in equity on disposal of a foreign operation to reduce the administrative burden of detailed tracking.

The Board agreed.

However, on the second issue that private entities should be allowed simply to elect to deem their local currency as their functional currency if the law requires that financial statements be presented in the local currency, the Board disagreed with the staff recommendation that this 'deemed' functional currency approach should be allowed.

Related parties

The staff proposed that the final amendments to IAS 24 Related Party Disclosures, currently in exposure draft phase, should be reflected in the final standard.

The Board agreed.

Agriculture

The Board was presented with an proposal that the cost model should not be added as an accounting policy choice for private entities since the addition of an 'undue cost or effort' exception to the requirement to apply fair value measurement, as proposed in the ED, is considered a sufficient simplification.

The Board agreed.

Assets held for sale

The staff proposed that there should be no 'held for sale' classification for non-financial assets, or groups of assets, and the requirements for assets held for sale should be dropped from the final standard. Instead the decision to sell an asset should be added as an impairment indicator.

The Board agreed

Discontinued operations

It was proposed that private entities should be required to identify and segregate amounts for discontinued operations in the statement of comprehensive income for the current and all prior periods presented in the financial statements, unless impracticable.

The Board agreed.

The staff informed that Board that the definition of a discontinued operation currently refers to components of an entity that are classified as held for sale and, hence, will need to be amended due to the Board's decision directly above.

First-time adoption

The staff presented a proposal that all of the IFRS 1 optional exemptions for first time adopters (for example, parent and subsidiary adopt at different times, and deemed cost for investment property and intangibles) should be added to Section 38 so they are available to private entities adopting the IFRS for Private Entities for the first time.

The Board agreed

In addition, the staff proposed that an entity should not be allowed to benefit from the special measurement and restatement exemptions available under Section 38 more than once.

The Board agreed.

Outstanding issues

The staff noted that there are still a few outstanding issues that have been deferred at previous meetings, and staff recommendations on these will be brought to the Board at the October and November Board meetings. Some of the main outstanding issues relate to restructuring the financial instruments section, concepts and pervasive principles, classification of equity and debt, measurement of equity-settled share-based payments, accounting for defined benefit plans, impairment of goodwill, and lessee recognition of rent expense under an operating lease.

Discussion at the September 2008 IASB Meeting - Disclosure

The Board continued its redeliberations of an IFRS for Private Entities. At this session the staff sought Board confirmation on disclosures. Nearly all of those recommendations were for further disclosure simplifications, though in a few cases the staff recommended additional disclosures. The staff's recommendations (69 proposals), which were generally consistent with the recommendations of the Working Group, are set out in the attachment to Agenda Paper 6B for the meeting available on the IASB's Website. The Board agreed with the great majority, but not all, of the staff recommendations.

Below are only those proposals (reference to paragraphs in the exposure draft of IFRS for SMEs in brackets) with which the Board disagreed or agreed to with substantive changes.

Financial effect of departure from the IFRS for Private Entities (3.4)

The Board disagreed with the proposal to delete the requirement to disclose for each period presented the financial effect of that departure. This only applied if the entity invoked a true and fair override.

Information about judgements (8.6)

The Board disagreed with the staff proposal to delete the paragraph. However, to avoid boilerplate disclosure, it was agreed to include guidance on how such disclosures could look in the educational materials.

Disclosure of fair values of investment property under the cost model (15.6)

The Board disagreed with the staff proposal to encourage, but not require disclosure of fair value of investment property. It was noted that the staff proposal contained an undue cost or effort exemption. Instead, it was agreed to require disclosure, but to keep the undue cost or effort exemption.

Reconciliation of property, plant and equipment (16.29)

The staff proposed simplifications in the reconciliation per class of property, plant and equipment, especially not requiring separate disclosure of exchange differences and additions due to business combinations. The Board agreed with the exception of additions due to business combinations. It was agreed to disclose these additions separately.

Disclosures on provisions (20.14)

The staff proposed to delete subparagraphs (e), (f), (g) and (h). The Board agreed to delete (e) and (f), but to keep:

• (g) indication of the uncertainties about the timing of outflow; and
• (h) amounts of possible reimbursements (including recognised assets).

Disclosures about contingent liabilities (20.15)

The staff proposed to add and undue cost or effort exemption for disclosing contingent liabilities. The Board disagreed with that proposal.

Disclosures about defined contribution plans (27.37)

The staff proposed to keep the disclosures in 27.37 on the period expense for defined contribution plans. The Board agreed but decided to delete the requirement to disclose the amount of defined contribution expense that had been included in the cost of an asset.

Income tax disclosures (questions 57 and 58)

These questions were skipped as the Board has not yet decided on the recognition and measurement principles for income taxes in the IFRS for Private Entities.

Non-adjusting events after the end of the reporting period (32.9/10)

The Board disagreed with the staff proposals to insert the word 'material' in the paragraph on disclosures about each category of non-adjusting events. The staff informed the Board that IAS 10 Events After the Reporting Period included the word 'material'. The Board then proposed that this should possibly be deleted in full IFRS, too, and asked the staff to liaise with the Annual Improvements project team on this issue.

Non-current assets held for sale (36.8)

While the Board agreed with the addition of a disclosure requirement for major asset (group of assets and liabilities) disposals, it also agreed to require this disclosure only for binding sale agreements and not also for future disposals where a formal plan exists.

Discussion at the October 2008 IASB Meeting

The Board continued its redeliberations on the exposure draft of an IFRS for Private Entities. Staff informed the Board that they did not want to discuss major issues today. Those would be brought back at the November meeting.

Temporary control exemption from consolidation

Due to the Board's decision at the September 2008 meeting to eliminate the 'held for sale' classification, the Board considered whether there should be an exemption from consolidation for a subsidiary that was acquired with an intent to dispose in the near future. Effectively, such an exemption currently exists under full IFRSs. The Board decided that a similar exemption from consolidation should be added for subsidiaries where on acquisition there is evidence that control is intended to be temporary (that is, there is an intention to dispose of the subsidiary within twelve months and management is actively seeking a buyer). The use of such this exemption would trigger additional disclosures by the investing entity.

Purchaed options as hedging instruments

The Board discussed whether purchased options should be permitted as hedging instruments for hedge accounting purposes. The staff explained that these instruments are rarely used by private entities and recommended not allowing them to reduce complexity. The staff also noted that an entity would not be prohibited to provide additional disclosures about this fact.

One Board member objected to this observation stating that from own experience he believed these are frequently used by private entities. Others believed except for some measurement challenges options would, from an accounting perspective, not be different than forwards or swaps. It was noted that this could impair neutrality of accounting as entity might refrain from using option because of the accounting consequences. One Board member responded that an entity is free to apply full IFRS and apply the guidance in IAS 39.

The Board decided not to permit purchased options in the IFRS for Private Entities.

Operating leases

Staff presented a revised proposal to modify the application of the straight-line method by lessees for operating leases if minimum lease payments are structured to increase to compensate the lessor for expected inflation. The Board supported the staff proposal but noted that it must be clarified that 'expected inflation' means changes in general purchasing power based on published statistics, rather than a general estimate of the lessor's future cost increases. The staff also informed the Board that it would bring back a proposal to add guidance on contingent rentals for operating leases.

Classification of equity/liability

The Board considered whether the February 2008 amendment to IAS 32 on puttable instruments and obligations arising on liquidation should be incorporated in the IFRS for Private Entities. The staff proposed to simplify the wording used in the original pronouncement. The Board agreed that the amendment should be incorporated but rejected the wording simplifications, noting that the words were carefully drafted to meet the objective and that any changes could potentially alter the content. Instead the Board decided that the amendment will be incorporated without revision in the IFRS for Private Entities.

Definition of government grant

The staff withdrew their recommendation to remove the phrase 'in return for past or future compliance with certain conditions relating to the operating activities of the entity' from the definition of a government grant.

Way forward

The Board will discuss outstanding issues in November and December. Some of the main outstanding issues relate to restructuring the financial instruments section, possible replacement of the term 'fair value', concepts and pervasive principles, measurement of equity-settled share-based payments, accounting for defined benefit plans, income taxes, and impairment of goodwill. The staff also indicated that it will propose that the Board revisit several of the tentative decisions made during redeliberations, including the name of the standard, consolidation, amortisation of indefinite-life intangibles, and recognition of actuarial gains and losses.

Discussion at the November 2008 IASB Meeting

IFRS for Private Entities (formerly IFRS for SMEs) – Recognition, Measurement, and Presentation

At this meeting the Board discussed some of the issues that had been deferred at previous meetings and also some new issues relating to areas where respondents requested further guidance, in particular in areas addressed by certain IFRIC interpretations. The Board made the following tentative decisions:

Income taxes

Staff presented two possible approaches for accounting for deferred taxes by private entities to the Board for their consideration:

• Temporary difference approach with simplifications – Starts from the temporary difference approach as set out in the latest version of a forthcoming exposure draft of revisions to IAS 12 Income Taxes, but makes simplifications in areas considered particularly complex.
• Taxes-payable-plus approach – Recognising deferred taxes only for those differences between accounting and tax treatment of items of income or expense that are expected to reverse (and therefore affect an entity's cash flows) in a relatively short term.

The Board decided to pursue the temporary difference approach with simplifications in the final IFRS for Private Entities. However the Board disagreed with the staff recommendatiaon that deferred tax assets should not be recognised for unused tax loss and tax credit carryforwards. The Board decided that such deferred tax assets should be recognised, and that the circumstances under which they should be recognised should be restricted in the same way as in IAS 12.

The Board made the following decisions related to accounting for income taxes by private entities:

• to retain the requirements proposed in the Exposure Draft of an IFRS for SMEs (ED) and existing IAS 12 regarding the measurement of deferred tax when a jurisdiction imposes different tax rates on distributed and undistributed income, rather than follow the forthcoming exposure draft of revisions to IAS 12.
• to require all deferred tax assets and liabilities to be classified as non-current.
• to require that current tax assets and liabilities are not discounted.
• not to require that the initial measurement of assets and liabilities that have a tax basis different from their initial carrying amount should be disaggregated into (i) an asset or liability excluding entity-specific tax effects and (ii) any entity-specific tax advantage or disadvantage.

Share-based Payment (SBP)

The Board decided that private entities should always recognise an expense for equity-settled SBPs issued by private entities and that expense should be measured based on observable market prices, if available, or if not using the directors' best estimate of the fair value of the equity-settled SBPs. Disclosure only, without expense recognition, would not be permitted.

For SBP transactions that give either the entity or the counterparty a choice of settlement in cash or equity instruments, the Board decided that the entity shall account for the transaction as a cash-settled SBP transaction unless either

• (a) the entity has a past practice of issuing equity instruments or
• (b) the option to settle in cash has no commercial substance.

In circumstances (a) and (b), the transaction shall be accounted for as equity-settled.

The Board agreed with a number of simplifications to the disclosure requirements for SBPs that were proposed by the staff. However, the Board asked staff to ensure that the disclosure requirements for private entities are sufficient to ensure an understanding of how the amount recognised in profit or loss has been determined, including information on the key assumptions used in measuring SBPs.

Post-employment benefit plans

The Board decided not to adopt the staff proposal to require an entity to measure the defined benefit obligation of a defined benefit plan at the current termination amount (vested benefit obligation) under certain circumstances. However the Board felt that the defined benefit accounting under IAS 19 Employee Benefits should be simplified for private entities. The Board asked the staff to bring back an approach at a future meeting that is more in line with the current IAS 19 approach (for example, it includes consideration of unvested benefits), but would be something that the entities could generally be able to apply themselves without needing to use external specialists. The Board suggested that the staff also consider whether the concept of accumulated benefit obligation in FASB Statement 87 may be suitable.

The Board also made the following decisions related to accounting for post-employment benefit plans by private entities:

• to retain the requirements for multi-employer plans as proposed in the ED (and IAS 19), ie when sufficient information is not available to use defined benefit accounting for a multi-employer plan that is a defined benefit plan, an entity shall treat the plan as defined contribution plans with appropriate disclosure.
• to permit subsidiaries to recognise a charge based on a reasonable allocation of the group charge if the parent presents consolidated financial statements under IFRS for Private Entities or full IFRSs.
• not to require entities to divide the return on assets into an expected return and an actuarial gain or loss.

IFRIC Interpretations

The Board decided guidance from the following IFRIC interpretations should be covered in the IFRS for Private Entities, suitably adapted for private entities.

• IFRIC 4 Determining Whether an Arrangement Contains a Lease
• IFRIC 8 Scope of IFRS 2
• IFRIC 12 Service Concession Arrangements
• IFRIC 15 Agreements for the Construction of Real Estate

Name of Standard

The Board discussed the issue of the title of the Standard due to some negative reactions received from the change from SME to private entities. The Board decided that the title should describe the types of entities to which the standard would be applicable. As Board members' views were divided on a specific title, the Board decided to invite public comment via the IASB's website or a webcast.

Outstanding issues

The staff noted that there are still a few outstanding issues that have been deferred at previous meetings, and staff recommendations on these will be brought to the Board at one or more future Board meetings. Some of the main outstanding issues relate to restructuring the financial instruments section, concepts and pervasive principle and impairment of goodwill.

Discussion at the December 2008 IASB Meeting

The Board continued its redeliberations of an IFRS for Private Entities. The objective of this session was to address certain issues previously deferred. The staff introduced this session by highlighting the major topics to be discussed:

• Outstanding issues on financial statement presentation;
• Redeliberation of an approach for impairment of non-financial assets; and
• Redeliberation of an approach for financial instruments.

Outstanding issues on financial statement presentation

The staff presented a proposal that private entities should be required to present a single statement of comprehensive income and not have an option to present, instead, two statements – an income statement and a statement of comprehensive income as currently allowed under IAS 1.

Staff noted that this would be more in line with the underlying concepts, would eliminate an accounting policy choice, and simplify accounting for preparers. It was also noted that private entities generally had few or no items of other comprehensive income. One Board member disagreed with this observation. Another Board member questioned why private entities should be required to present one statement while public entities have an accounting policy choice. After a short debate the Board decided to allow entities a choice of using a single or two statement approach.

A second related issue were the permissible formats of a single statement of comprehensive income. The staff presented four formats. Initially, the staff identified one of the formats as being inconsistent with the proposed requirements, but the previous discussion showed that this format seemed to be also in line with the requirements.

Finally, the staff asked the Board whether the requirement to present a third statement of financial position at the beginning of the earliest comparative period if an entity applied an accounting policy retrospectively, made a retrospective restatement of items or reclassified items should not be applicable to private entities. The Board briefly discussed the issue and, while not agreeing with the rationale presented, agreed not to require this third statement of financial position.

Redeliberation of an approach for impairment of non-financial assets

The staff reminded the Board of the background to this topic. In July 2008, the Board agreed to:

• Modify the general approach for the impairment of non-financial assets to include the 'recoverable amount' and 'value in use' concepts;
• Simplify the requirements for assessing goodwill impairment; and
• Introduce the concept of a cash-generating unit.

The Board agreed with the redraft of the section. However, staff was asked to make sure that fair value was not interpreted as being determined for a distressed situation. Further it was observed that the inability to determine fair value and apply value in use instead seemed contradictory. Some Board members also had further editorial comments to be resolved offline.

Redeliberation of an approach for financial instruments

The staff's final topic for this session was the redraft of the section on financial instruments. The redraft splits the section into (a) Part A on basic financial instruments and (b) Part B on other issues in accounting for financial instruments, reflecting a previous Board decision. At this meeting, only Part A was discussed. The Board had also previously agreed that it should be clarified by way of examples that for many instruments that private entities hold a cost model would be appropriate.

Some Board members were concerned over the use of undefined terms like 'market value' and 'present value' where IAS 39 uses the term 'fair value'. Others had difficulties discussing Part A without Part B. There was general consensus that the final document should clearly identify financial instruments that cannot be carried at (amortised) cost.

Board members questioned the reason why initial measurement of a basic financial asset (liability) was to be made with reference to the fair value of the consideration given rather than the fair value of the financial asset received (given). It was agreed that this paragraphs will be redrafted to make clear that cost will be the fair value of whatever is receivable (for an asset) or payable (for a liability).

Another Board member expressed his concerns over the example on factoring in relation to derecognition. Others were concerned about trying to base derecognition on the notion of transferring 'significant risk and rewards'. It was agreed to revert to the original proposal and allow derecognition only if the entity had no significant continuing involvement with the transferred asset. Some Board members asked why the draft contained a concept of 'linked presentation' (that is, presenting the asset not derecognised linked with the associated liability), something which the Board had not agreed on yet under full IFRS. The staff responded that the proposal is to permit the linked presentation only in limited circumstances as set out in the agenda paper and is based on the requirements for factoring in the current FRSSE standard in the United Kingdom. After discussion, they would reconsider and bring back this issue.

Discussion at the January 2009 IASB Meeting

Title of the Standard

The Board agreed that the title should be 'International Financial Reporting Standard for Non-publicly Accountable Entities' (IFRS for NPAEs).

Rewrite of Section 11A Basic Financial Instruments

Initial Measurement

The Board agreed with the restatement of the initial measurement principle for basic financial instruments as follows:

When a financial asset or financial liability is recognised initially, an entity shall measure it at the transaction price. If payment for the asset is deferred or is financed at a rate of interest that is not a market rate, the entity shall measure the asset or liability at the present value of future payments discounted at a market rate of interest.

However it was agreed that some of statements about discounting were problematic and a review by the staff was required in order to ensure that the wording throughout was consistent with that in Example 3 of 11A.11 of the draft Standard.

Derecognition and Factoring

The Board agreed that the guidance on factoring should be consistent with the general principles on derecognition. It was therefore agreed that the proposed paragraphs of special guidance on factoring should be deleted and replaced with two examples of factoring – one that resulted in derecognition and one that did not – based on general derecognition principles.

The Board also decided that the guidance on loan commitments, as outlined in 11A.12(b) should be moved to Section 11B Additional Financial Instruments Issues.

First Draft of Section 11B Additional Financial Instruments Issues

The Board requested that the wording of 11B.4 be clarified. No other issues raised.

Redeliberation of Issues Relating to Other Sections

The Board redeliberated six issues as follows:

Accounting policy options

The staff had recommended that a number of complex options should not be available to private entities. The Board decided that each option needed to be considered on its own merits rather than an 'all or nothing' approach to allowing options within the IFRS for NPAEs. While no final decisions were reached at the meeting, the board tentatively held the following views in respect of each option:

• Investment property. Measurement should be circumstance-driven rather than allowing NPAEs an accounting policy choice between the cost and fair value methods. The Board decided if the fair value of an item of investment property can be measured reliably without undue cost or effort, the fair value through profit or loss method must be used. Otherwise, the cost-depreciation-impairment method must be used.
• Property, plant and equipment. The revaluation model should not be an option.
• Intangible assets. The revaluation model should not be an option.
• Borrowing costs. All borrowing costs should be charged to expense. The capitalisation model should not be an option.
• Presenting operating cash flows. NPAEs should be permitted to use either the indirect method or the direct method to present operating cash flows in the cash flow statement.
• Development costs. All research and development costs should be charged to expense Capitalisation of development costs should not be an option.
• Financial instruments. An NPAE will have a choice of applying Section 11 of the IFRS for NPAEs or all of the provisions of full IFRSs - the three financial instrument standards (IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures), and related interpretations. Due to the size of the additional material that would need to be incorporated into the IFRS for NPAEs, the option to use full IFRSs will be available by cross-reference. This would be the only cross-reference to full IFRSs.
• Associates. The options proposed in the ED (cost method, equity method, and fair value through profit or loss) should all be allowed.
• Jointly controlled entities. The options in the ED should all be allowed with the exception of proportionate consolidation. Therefore NPAEs could choose the cost method, equity method, or fair value through profit or loss.

Consolidated and Separate Financial Statements

The staff recommended that consolidated financial statements be required only when certain conditions are met. The Board disagreed and concluded that consolidated financial statements should be required for all private entities that are parent entities.

Special Purpose Entities (SIC 12)

The Board agreed with the staff recommendation that the guidance in SIC 12 Special Purpose Entities is appropriate for private entities and agreed with the addition of 3 paragraphs to Section 9 of the draft Standard.

Remove distinction between distributions from pre-acquisition and post-acquisition profits under the cost method in the sections on consolidation, associates, and joint ventures

The Board agreed with the staff recommendation to update the relevant sections of the draft Standard to reflect the May 2008 amendments to IFRS 1 and IAS 27 in respect of cost of an investment in a subsidiary, jointly-controlled entity, and associate. This removes the requirement to separate the retained earnings of the investee into pre-acquisition and post-acquisition components as a method for assessing whether a dividend is a recovery of its associated investment.

Amortisation of goodwill and intangibles

The Board agreed with the staff recommendation that indefinite life intangibles including goodwill should be amortised over their useful life subject to a maximum period of 10 years. As proposed in the ED, there would be a requirement to assess at each reporting date whether there are indicators of impairment. The Board agreed that the Basis of Conclusions should explain that this treatment had been allowed on the basis of a cost-benefit analysis rather than being justified on a conceptual basis.

Discussion at the February 2009 IASB Meeting

The Board discussed the simplification of defined benefit pension accounting. In the Exposure Draft (ED) of a Proposed IFRS for SMEs, the requirements proposed for defined benefit plans were similar to, but condensed from, those in IAS 19 Employee Benefits.

At the July and November 2008 meetings the Board considered, but did not support, staff proposals to measure the pension obligation at a current termination amount. The Board asked the staff to return with an approach that was more in line with the IAS 19 approach, but with simplified calculations that would reduce the need for non-publicly accountable entities to engage external specialists (such as actuaries). At this meeting the staff presented a revised approach, based on input from the IASB's Employee Benefits Working Group.

The Board made the following tentative decisions:

• If information based on IAS 19 (using the projected unit credit method, etc.) is already available or can be obtained without undue cost or effort, a NPAE should use that method.
• If information based on IAS 19 is not available and cannot be obtained without undue cost or effort, a NPAE would apply an approach based on IAS 19 but that does not consider future salary progression, future service, or possible mortality during an employee's period of service. This approach would still take into account life expectancy of employees after retirement age. The resulting defined benefit pension obligation would reflect both vested and unvested benefits. This would result in recognising something similar to the accumulated benefit obligation.
• Clarify that comprehensive valuations would not normally be necessary more frequently than once every three years. In the interim periods, the valuations would be rolled forward for aggregate adjustments for employee composition and salaries, but without changing the turnover or mortality assumptions.
• Add further guidance for entities that pay insurance premiums to fund a post-employment benefit plan (insured benefits).

The staff noted that tentative decisions had been reached on all substantive issues to be included in the IFRS. In March 2009, the Board will consider whether or not there is a need for re-exposure before a final Standard is issued.

Discussion at the March 2009 IASB Meeting

The staff opened the discussion by informing the Board that this was the 42nd board meeting at which this was discussed. The objective of this discussion was to decide whether there is a need to re-expose the revised proposals for an IFRS for Non-publicly Accountable Entities (NPAEs) as a result of the changes made during the Board's redeliberations of the February 2007 exposure draft (ED).

The staff recommendation was that re-exposure was not required.

The Board discussed whether there is a need to re-expose the revised draft as a result of the changes made during the Board's redeliberations of the February 2007 exposure draft (ED). The Board considered the nature of the changes made in relation to the guidelines for re-exposure in the Due Process Handbook for the IASB as approved by the Trustees of the IASC Foundation.

The Board decided unanimously that re-exposure is not required.

The Board asked the staff to develop a plan for post-issuance implementation and review of the standard. The plan should address (a) how to deal with issues that inevitably will arise as entities around the world adopt the new standard for the first time and (b) how to maintain the standard particularly in light of the changes to full IFRSs that are expected based on the IASB's current work plan.

One board member asked whether constituents were prohibited from sending issues relating to the NPAE to the IFRIC. The Chairman noted that issue will be addressed at an administrative session later. Another board member note that whatever is decided it will need to be brought back to the board to formalise the process.

The Board then discussed the reaction to its tentative decision in January 2009 that the name of the final standard should be International Financial Reporting Standard for Non-publicly Accountable Entities, or IFRS for NPAEs. Some Board members observed that reaction to IFRS for NPAEs has been somewhat unfavourable because (a) it sounds negative, (b) all entities have some types of accountability to the public for their actions, and (c) 'non-publicly accountable entity' is a complicated phrase to say and to translate. The Board discussed alternative names proposed including (1) Simplified IFRSs, (2) IFRS for SME, (3) IFRS for Smaller Entities, and (4) IFRS for Private Entities. The board expressed a preference to revert to IFRS for Private Entities, with Simplified IFRSs as a second preference. The Chairman will discuss the name with representatives of the National Standard Setters at their meeting in April 2009.

The Chairman asked the Board members to indicate how they currently intend to vote on the final standard based on the changes made during the Board's redeliberations of the February 2007 exposure draft (ED). Thirteen Board members indicated an intent to vote in favour, and one intends to dissent.

The Board noted their appreciation for the efforts of the staff in finalising the IFRS.

Discussion at the April 2009 IASB Meeting

Issues arising in drafting the pre-ballot draft

The staff had identified three issues on which the Board's view was requested:

• Consolidation disclosures. The Board decided to add disclosures comparable to those in paragraph 41 of IAS 27(2008) Consolidated and Separate Financial Statements.
• Option to use IAS 39. The Board tentatively decided that an entity that elects to use IAS 39 Financial Instruments: Recognition and Measurement instead of the two financial instruments sections in the IFRS for SMEs should make the disclosures required by the IFRS for SMEs rather than those required by IFRS 7 Financial Instruments: Disclosures. Board members were concerned that the disclosures in IFRS 7 were onerous for publicly-accountable entities that are financial institutions, and that to require them for entities without public accountability was likely to be burdensome. The Board preferred that, if an entity using this Standard chose to apply IAS 39, it should assess whether the disclosure required by that standard provided sufficient information to the users of the financial statements. Only then would a further fall-back to IFRS 7 be required.

  The Board asked the staff to prepare a comparison of the two sets of disclosures and circulate the comparison to Board members after the meeting. If Board members feel there is a significant omission in the disclosures in the pre-ballot draft, that issue will be raised at the May 2009 Board meeting.

• Example of measurement of a one-off provision. The Board decided not to add an example to the appendix to the section of the Standard on provisions that would illustrate a calculation of a provision for settlement of a lawsuit.

Name of the Standard

The Board has discussed the name on several occasions during its redeliberations. In March 2009, the Board agreed to raise the issue with the National Standard Setters (NSS) at their April 2009 meeting. After considering the various views it has received, the Board has decided that the name of the final standard will be International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), as proposed in the exposure draft.

9 July 2009: IASB issues IFRS for SMEs

On 9 July 2009, the IASB issued the IFRS for SMEs. This is the first set of international accounting requirements developed specifically for small and medium-sized entities (SMEs). It has been prepared on IFRS foundations but is a stand-alone product that is separate from the full set of International Financial Reporting Standards (IFRSs). The IFRS for SMEs has simplifications that reflect the needs of users of SMEs' financial statements and cost-benefit considerations. Compared with full IFRSs, it is less complex in a number of ways: Topics not relevant to SMEs are omitted. Where full IFRSs allow accounting policy choices, the IFRS for SMEs allows only the easier option. Many of the principles for recognising and measuring assets, liabilities, income and expenses in full IFRSs are simplified. Significantly fewer disclosures are required. And the standard has been written in clear, easily translatable language. To further reduce the reporting burden for SMEs, revisions to the IFRS will be limited to once every three years. It is suitable for all entities except those whose securities are publicly traded and financial institutions such as banks and insurance companies. The 230-page standard is a result of a five-year development process with extensive consultation of SMEs worldwide. Accompanying the standard is implementation guidance consisting of illustrative financial statements and a presentation and disclosure checklist. The IFRS for SMEs is available for any jurisdiction to adopt whether or not it has adopted the full IFRSs. It is up to each jurisdiction to determine which entities should use the standard. It is effective immediately on issue. The standard and accompanying guidance and basis for conclusions may be downloaded immediately without charge from the IASB's website. To support the implementation of the IFRS for SMEs the IASC Foundation is developing comprehensive training material. The Foundation is also working with international development agencies to provide instructors for regional workshops to 'train the trainers' in the use of the training material, particularly within developing and emerging economies. The training material will be published in a number of languages. The English language material will be downloadable free of charge from the IASB's website in late 2009. Click for: IASB Press Release (PDF 39k) IFRS for SMEs Fact Sheet (PDF 182k) The Fact Sheet includes details of: Project history Outreach and consultation Five types of simplifications Omitted topics Examples of options in full IFRSs not included in the IFRS for SMEs Recognition and measurement simplifications Main changes from the exposure draft The IASB also announced that Paul Pacter, Director of Standards for SMEs for the IASB, has agreed to lead a group to support international adoption of the standard. Details of this group will be announced shortly.