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IFRS for SMEs (IASB only)

Date recorded:

Agenda Paper 6A saw the staff seeking the Board to consider the responses received to the questions in the IASB’s 2012 Request for Information (RFI) on the scope of the IFRS for Small and Medium-Sized Entities (IFRS for SMEs) and to consider whether any amendments should be made to the IFRS for SMEs in relation to the use of the IFRS for SMEs by publicly traded entities.

The IFRS for SMEs currently prohibits an entity whose debt or equity instruments are traded in a public market from using the IFRS for SMEs. Some respondents to the staff consultation believe that governments and market regulatory authorities in the respective jurisdiction should decide whether some publicly traded entities should be able to use the IFRS for SMEs on the basis of their assessment of the public interest and the needs of investors in their jurisdiction; thereby leading to questions about whether the current scope requirements of the IFRS for SMEs is too restrictive for publicly traded entities. The staff presented two alternatives:

View 1: No, do not change the current requirements. Continue to prohibit an entity whose debt or equity instruments trade in a public market from using the IFRS for SMEs.

View 2: Yes, revise the scope of the IFRS for SMEs to permit each jurisdiction to decide whether entities whose debt or equity instruments are traded in a public market should be permitted or required to use the IFRS for SMEs.

The staff noted the majority of the Small and Medium-Sized Entities Implementation Group (SMEIG) members recommended deleting paragraph 1.5 of the IFRS for SMEs which prohibits an entity whose debt or equity instruments trade in a public market from using the IFRS for SMEs. They felt that that local authorities are best placed to decide whether the IFRS for SMEs should be permitted or required for any entities in their jurisdiction.

The staff believe in some cases it may be beneficial for those authorities to permit entities with public accountability and the first question posed by staff related to paragraph 1.5 of the IFRS for SMEs and whether or not this should be deleted since staff consider the implications of paragraph 1.5 may be unduly restrictive.

The Board proceeded to discuss the nature of the IFRS for SMEs, who it was for and how it was designed for a set user and preparer group in mind. Some Board members discussed the need to protect the brand and, how globally, there were disparities with regard to application of full IFRS and hence they were not surprised to be facing a similar issue with regard to the IFRS for SMEs.

Several members of the Board noted several instances of emerging markets, how the Board should be promoting the growth of capital markets and how it was a high hurdle to ask emerging markets to use full IFRS when they did not have the systems and capital in place to do so.

The Board centred on their agreed belief that the aim when developing the IFRS for SMEs was to provide preparers and users a standalone, simplified set of accounting principles that are appropriate for entities that do not have public accountability, in particular those that have less complex transactions, do not have the resources to apply full IFRSs and where comparability with their listed peers is not so important. Such entities do not require complex accounting policy options or the detailed guidance in full IFRSs dealing with complex transactions. The staff think that all entities that have complex transactions, favour comparability with publicly accountable entities and have sufficient expertise should really be applying full IFRSs.

Other members of the Board focused on the staff analysis that 70 per cent of respondents favoured prohibiting an entity whose debt or equity instruments trade in a public market from using IFRS for SMEs on the grounds that entities that choose to enter a public market are publicly accountable and should apply full IFRSs.

Some members of the Board discussed the need for transparency, noting that if an entity chooses to apply the IFRS for SMEs, it should disclose the fact it has done this by virtue of their market regulator allowing it opposed to their eligibility under paragraph 1.5. There was further discussion as to the merits of this and how such a disclosure would potentially promote a lack of confidence. The Chair then requested a vote, to which the deletion of paragraph 1.5 passed by a slim majority. It was therefore felt that there needed to be further discussion and hence the staff were requested to take into account the Board’s discussion, considering options such as the use of the IFRS for SMEs with some form of disclosure. This will be presented at a future meeting.

The Board then briefly discussed not for profit (“NFP”) organisations. The staff questioned whether any changes were required to the definition of NFP entities in the IFRS for SMEs – particularly with respect to the fact some of the NFP entities solicit and request contributions from the public. The Board noted that they were satisfied with the definition and no further changes need be made.

In their Agenda Paper 6B, the staff requested the Board to consider the responses received to the questions in the IASB’s 2012 RFI with respect to new and revised IFRSs issued since the IFRS for SMEs was published in 2009. The staff summarised the main comments received from respondents and provided staff and SMEIG recommendations. The staff noted that this was an opportunity for the Board to discuss the framework as to how the IFRS for SMEs would be updated following the issuance of new or amended (full) IFRSs.

The staff paper suggested the main driver for changes to the IFRS for SMEs should be the implementation experience of SMEs, including that of users of their financial statements, with changes to full IFRSs being a secondary driver. Furthermore, the staff recommended changes to full IFRSs should be considered for incorporation in the IFRS for SMEs only after they have become established under full IFRSs and implementation experience has been assessed.

The Board acknowledged that the post-implementation review process for full IFRSs occurs many years after the issuance of a standard. With this in mind, the Board discussed the importance of keeping the IFRS for SMEs alive and relevant in order for it to remain a stable platform. Some members of the Board noted that whilst consistency is an important objective, the IFRS for SMEs is a different set. However, most Board members believed there ought to be consistency between full IFRSs and the IFRS for SMEs.

The Board agreed that assessing on a standard-by-standard basis would be the most meaningful way to consider the impact of full IFRS on the IFRS for SMEs.

The Board were in agreement with the staff recommendations and suggested slight tweaks to the staff proposals before bringing back to the Board at the next meeting in order to proceed more formally.

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