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Comprehensive review of IFRS for SMEs (education session)

Date recorded:

At the March 2013 IASB meeting a few IASB members noted that before deciding whether national authorities/standard-setters should be able to permit wider use of the IFRS for SMEs they would like to be provided with an analysis of the simplifications made from full IFRSs at the time the IFRS for SMEs was developed. It was noted that a similar analysis would also be useful to national authorities/standard-setters because it would describe the main changes to an entity’s financial statements if it moved from full IFRSs to the IFRS for SMEs. This would enable national authorities/standard-setters to better understand the consequences of widening the scope.

The IASB held an education session to discuss IFRS for SMEs. The IFRS for SMEs has been developed for general purpose financial statements for external users but do not have public accountability. The primary driver was to make changes to full IFRS to take into account the differences in information needs to the users of publicly accountable entities and to users of non-publicly accountable entities and also a cost benefit analysis in relation to those needs. However the IFRS for SMEs was also developed with the mind-set that there would be an alternative option for non-publicly accountable entities for those entities to still choose to use full IFRS so for example non-publicly accountable entities that want comparability with publicly accountable entities and want to make use of complex options and enter into complex transactions may find that full IFRS suits their needs better than the IFRS for SMEs. So whilst the user needs of the non-publicly accountable entities were the primary driver and the Staff understanding is that the IASB Board members that the IFRS for SMEs was more intended for those entities with perhaps limited resources to adopt full IFRS with less complex transactions and also were comparability to listed entities is less of a consideration. So for this reason some of the complex options and also the guidance from full IFRS addressing complex transactions have been omitted from the IFRS for SMEs. In actual fact when this project was first started by the IASB it was primarily intended to address the needs of smaller entities and also for emerging economies.

IFRS for SMEs does not address the following topics as they are not considered to be relevant for SMEs:

  1. Earnings per share (“EPS”);
  2. Interim financial reporting; and
  3. Segmental reporting

One Board member asked to the extent that an SME would like to prepare segmental reporting which is not required under IFRS for SMEs and not compliant with IFRS 8, given that entities may refer to guidance under full IFRS but they don’t have to follow it and also in relation to EPS and Interim financial reporting. If an entity decides to go beyond the requirements of IFRS for SMEs an entity should be transparent and, as a minimum, disclose why an alternative option to the full IFRS guidance has been selected.

The Staff noted that essentially they can use any basis but there is an accounting policy hierarchy in section 10 so when using any guidance from anywhere else entities need to ensure it is in accordance with the accounting policy hierarchy and the guidance there.

Another board member noted that many entities have converted to IFRS for SMEs not from IFRS but from local GAAP and to the extent they have choose to make disclosures over and above the IFRS for SMEs they would probably have used the local GAAP equivalent of for example Segmental Reporting. A lot of pressure would be added to entities if they have to refer to the big book every time they want to make any additional disclosures and would cause entities to be discouraged from making any additional disclosures.

The Staff noted that if the IFRS for SMEs does not specifically address a transaction, other events or conditions, there is no requirement to look to full IFRS.  Instead management is required to use judgement in developing and applying an accounting policy that is reliable and results in information that is relevant to the economic decision making needs of users.  The IFRS for SMEs establishes the following hierarchy for an entity to follow in deciding on an appropriate accounting policy:

  1. Requirements and guidance in the IFRS for SMEs dealing with similar and related issues; and
  2. The definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2 Concepts and Pervasive Principles.

One member asked about the treatment of cumulative exchange differences that relate to a foreign operation under Section 30 of the IFRS for SMEs where there is no recycling of the cumulative OCI and still remains in equity without any segregation on disposal of the foreign operation.

Staff noted that the treatment depends on what the local legal requirements are. The purpose was having this cumulative OCI remaining in equity is to avoid having the company track those exchange differences.

This point will be looked into again in the context of the conceptual framework.

No decisions were made by the Board.

Another member commented that given there is nothing on Earnings per Share and if somebody wanted to calculate its EPS or diluted EPS they ought to calculate this in accordance with IAS 33 by listed or non-listed entities if this is required by such entities in the future.

No decisions were made by the Board.

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