• 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

Background

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

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