Accounting Standards for Small and Medium-sized Entities
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.