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IFRS for SMEs

Date recorded:

The Project manager introduced the session by explaining that the main issues raised by respondents to the exposure draft had been discussed last month and in the present session the Board would be presented with the remaining issues for SMEs. She further clarified that the concerns to be discussed were raised by few respondents. Agenda paper 5A would present changes proposed by the staff to the current ED, then she would briefly ask the Board for comments on agenda paper 5B which presented issues for which the staff was not proposing amendments to the ED.

Agenda Paper 5A Comprehensive review of the IFRS for SMEs - Additional issues raised by respondents.

The Project manager introduced Issue 1 – Accounting for income tax. She indicated that the ED proposed to align the main recognition and measurement principles of Section 29 of IFRS for SMEs with IAS 12 for deferred tax. She said that the staff recommendations were presented in paragraphs 22-24 of the agenda paper and they recommended not adding an undue cost or effort exception for some or all the requirements in Section 29. She also said that the staff recommended moving the definition of ‘substantively enacted’ from the Glossary into the body of Section 29 to avoid defining a term in full IFRSs.

The Board members expressed agreement with the staff recommendation. However, some members expressed concern about some issues.

One Board member asked in relation to one comment included in the agenda paper that suggested adding the disclosure requirements in IAS 12.82 of the amount of a deferred tax asset and the nature of the evidence supporting its recognition under certain circumstances. He said that he believed that it would be odd if deferred tax assets that were material did not have disclosures. The Project manager responded that IAS 12 required disclosures for deferred tax assets only in specific circumstances. She also said that the main objective was to focus on the main disclosures for SMEs. Another Board member said that there was a general disclosure requirement in IFRS for SMEs but not specific for deferred tax assets which said that an entity should disclose information that would enable users to understand its financial statements. The Board member who raised the issue agreed that it was properly covered. 

One Board member expressed concern for not proposing the undue cost exception. He said that there were small companies that had stable revenue; he said that using deferred tax assets was not being beneficial; he would prefer the tax payable approach. The Project manager responded that the staff had considered that approach; however, they noted that since SMEs had similar transactions year after year, once they were able to understand the mechanics of deferred tax assets, there would be no further issues. The Board member further said that on issue 9 the staff was proposing not to apply retrospective implementation for undue cost or effort, and he found it inconsistent. The Project manager responded that issue 9 was only related to transition.

Another Board member added that it would be difficult to draw the line for undue cost or effort because they had not defined it.

The Chairman called to vote and all members agreed with the staff recommendation.

The Project manager presented issue 2 – Application of “undue cost or effort” exception. She explained that the ED proposed adding additional guidance. The staff recommendations were presented in paragraphs 33 and 34 of the agenda paper. She said that the staff recommended that each exception used based on undue cost or effort should be disclosed and explained.

One Board member agreed with the staff recommendation but she would prefer the sentence to be clear regarding that it should only be used in the context of SMEs. She was concerned that for example in the context of IFRS9 it would have a different meaning.  Another Board member found it very odd to add in a particular standard that a sentence would only be applicable for SMEs. He suggested that it could be added in the beginning of the IFRS for SMEs that the definitions were only applicable for SMEs.

Another Board member agreed with the staff recommendation and indicated that it was not clear but she would assume that whenever the undue cost or effort exception was used, it should be entity specific and also that the assessment should be done at each reporting date because it was not an accounting policy choice that an entity made once.  The Project manager responded that this was the approach of the ED, she explained that it was captured in paragraph 2.14C of the ED.  

Another Board member said that he agreed with the staff recommendation. He was concerned about one of the comments made by the implementation group related to the fact that the difference between impracticable vs undue cost was not clear. The Project manager responded that they decided not to provide further guidance because both terms were used in full IFRSs. 

The Chairman called to vote and all members agreed with the staff recommendation

The Project manager introduced issue 3 – Definition of basic financial instruments. The ED clarified that foreign currency loans and loans with standard loan covenants would usually be basic financial instruments. She said that respondents mainly from the UK raised concerns, even given the proposed changes to paragraph 11.9 in the ED, that the IFRS for SMEs was more onerous than full IFRSs for the measurement of certain ‘basic’ debt instruments. They raised concerns that certain financial instruments that would be measured at fair value through profit or loss in accordance with Section 12 Other Financial Instrument Issues (because they did not meet the criteria under paragraph 11.9) would be measured at amortised cost under IFRS 9 Financial Instruments.  She said that the staff recommendation was presented in paragraph 43 of the agenda paper with drafting changes to paragraph 11.9. She said that the staff would not expect debt instruments held by typical SMEs to fail the criteria in paragraph 11.9 of the ED.  She said that further changes would be considered when they would analyse IFRS 9 at a future review. 

One Board member expressed disagreement with the staff recommendation. She would prefer to add an example to illustrate the application of the paragraph which would be aligned to what the FRC did in the UK. The Project manager agreed with her proposal.

Another Board member asked about paragraph 43, she found there was lack of clarity and asked whether the combination of the fixed and variable rates had to be positive or whether there was any negative element. The Project manager clarified that it referred to changes of the positive and negative, she said that they could consider using the wording of FRC.

There were further concerns expressed about the wording to which one Board member suggested discussing it further offline.

The Chairman concluded that the wording would be clarified. He called to vote and all members agreed with the staff recommendation.

The Project manager presented issue 4 – Offsetting income tax assets and liabilities. She said that the staff recommended an amendment to clarify when the offsetting would be applicable; the proposal was detailed in paragraph 51.  

No significant comments were made.

The Chairman called to vote and all members agreed with the staff recommendation

The Project manager introduced issue 5 – Accounting for extractive activities. She said that the staff recommended amendments to align the requirements with IFRS 6 for the recognition and measurement requirements. She also said that they would also need to consider adding guidance about subsequent measurement.

No significant comments were made.

The Chairman called to vote and all members agreed with the staff recommendation.

The Project manager introduced issue 6 – Requirement for subsidiaries acquired and held for sale. She said that the amendments would clarify that all subsidiaries acquired with the intention of sale or disposal within one year would be excluded from consolidation. She said that concept was already in the standard but in response to concerns raised, the staff proposed adding this clarification shown in paragraph 68 of the agenda paper.  

One Board member asked about paragraph 9.3A (proposed by the staff to be added) that said that a subsidiary “shall be excluded from consolidation” he said that this wording was assuming that the subsidiary was consolidated before, he said that it should say that it should not be consolidated, he also said that the wording “if it was acquired with the intention to sell” it was not clear whether it could have been ten years back, he understood that it was not the real intention. He said that the intention was about a subsidiary acquired with the intention to sell within one year. He also said that paragraph 9.3B proposed by the staff to be added did not appear to be necessary. He said that if a parent had no subsidiary, other than a subsidiary acquired with the intention to sell within one year, then it would not present consolidated financial statements. Other members agreed with his comments.

Another Board member commented about paragraph 9.3.C (proposed by the staff to be added), she said that it should be clarified that the twelve month period was from the acquisition date. 

Another Board member said that if an entity had a subsidiary then it would be required to present consolidated financial statements, he said that this section was not saying that an entity did not have a subsidiary, it was simply adding an exception from consolidation, he said that in the absence of paragraph 9.3.B the requirement for consolidation would be triggered; he said that the wording should be considered. The Project manager responded that she needed to go back to analyse why those paragraphs were added.

The Chairman called to vote and all members agreed with the staff recommendation with further consideration of wording improvements.

The Project manager introduced issue 7 – Distribution of non-cash assets. She said that the amendments would propose adding guidance on accounting for the settlement of a distribution of non-cash assets. She indicated that the staff did not expect that the amendments would change current practice. The staff also proposed adding an additional exception for undue cost or effort which was explained in paragraph 75 of the agenda paper.  

One Board member expressed concern as to why the staff considered that there was undue cost or effort. He believed that if an entity would distribute a dividend, it would be expected that the entity would know the value of what was being distributed. The Project manager explained that they discussed that issue and one possible solution would be to allow the exception during the period, but to require the fair value information at settlement. Another Board member added that it could be understood that during the period there could be a lot of cost but at final distribution an entity should know the fair value. Another member said that the undue cost or effort was not an exception, he also said that for example if an entity was owned only by one shareholder and only had one piece of land, then the fair value information would not provide any value. Another member said that the value of the information would depend on the users of the information, she also said that taking out an asset at its historical cost, which could be out of date, would not be useful and then the exception did not seem valid.

Another member said that he did not see any benefits of requiring disclosure. Other member expressed concern as to why the gain (at settlement) should be recognised in P&L instead of equity because it was a transaction with owners.  The Vice-Chairman said that they were actually two transactions and that they should not debate on that.

The Chairman called to vote and twelve members agreed with the staff recommendation.

The Project manager presented issue 8 – Best evidence of fair value. She said that the staff was proposing adding additional guidance that the best evidence of fair value would be a price in a binding sale agreement. The changes would be added in paragraph 11.27 of the IFRS for SMEs.

No comments were made.

The Chairman called to vote and all members agreed with the staff recommendation.

The Project manager presented issue 9 – Transition provision. She said that the amendments should be applied retrospectively. The staff was also proposing to add an exception for undue cost or effort for all the amendments and to allow the application of the amendments for income taxes prospectively.  

One Board member requested that it would be important to clarify what was meant by prospective application. The Project manager agreed.

The Chairman called to vote and all members agreed with the staff recommendation.

The Project manager presented issue 10 – Other specific issues in the IFRS for SMEs. She said that the issues related to (i) the presentation of investment property carried at fair value and at cost separately on the face of the balance sheet; (ii) SMEs would be able to use replacement costs for derecognition of components parts of property, plant and equipment when it was not practicable to determine their carrying amount to align it with IAS 16; and (iii) the latest version of IAS 39 unamended by IFRS9 to be posted on the IASB website in case any SMEs would continue to use IAS 39.

One Board member said that she agreed and it would also be important to clarify which version of IAS 39 was meant.

Another Board member asked why the staff was not suggesting changing to IFRS 9 or at least allowing IAS 39 or IFRS 9 until IAS 39 would completely disappear. The Project manager responded that the reason they had the fallback to IAS39 was because that IFRS for SMEs were restricted for financial instruments.

Another member said that the fallback was used by very few companies; he also said that they would need to see this as a temporary solution.  He would expect that IFRS 9 would be reviewed (for SMEs) in the next review process.

One member requested that there should be clarification to the meaning of transaction price; some SMEs have off-market interest. She did not agree with the staff analysis that paragraph 11.13 was already clear. The project manager agreed to add clarifications.

The Chairman called to vote and all members agreed with the staff recommendation.

The Project manager introduced the last issue of the paper, issue 11 – IAS 32 amendment. She said that it related to the consideration of the 2009 amendments to IAS 32. In the ED the IASB proposed that the main change in IAS 32 Classification of Rights Issues should be incorporated in the IFRS for SMEs. However, the staff did not recommend adding the IAS 32 amendments into the IFRS for SMEs  because it would add unnecessary complexity.

One Board member said that she agreed because the IAS 32 amendment was designed for entities operating in multiple jurisdictions which would not be relevant for SMEs. No other comments were made.

The Chairman called to vote and all members agreed with the staff recommendation.

The project manager introduced agenda paper 5B. There were no further changes recommended by the staff for the issues discussed in this paper.  She said that they would only discuss concerns that the Board had.  

The Vice-Chairman asked about the concept of fiduciary capacity, he was also concerned that the term was not clear but he would not know what changes to suggest.

One Board member asked about issue 13 (useful life of goodwill/other intangible assets) which would require a maximum life of ten years. He said that he could not understand the reason why it was ten years. The Project manager responded that ten years was in the original standard but she did not recall any particular rationale for using ten years.

Another Board member asked about recycling, because the agenda paper stated that the staff was not recommending changes to the current requirement in the IFRS for SMEs that cumulative exchange differences from the translation of a foreign subsidiary were not recognised in profit or loss on disposal of the subsidiary.

Another member asked about grouping items in OCI in paragraph 36 (the ED proposed incorporating the main change under IAS 1, which required entities to group items presented in other comprehensive income on the basis of whether they were potentially reclassifiable to profit or loss). She said that it would not be necessary to add this requirement; SMEs had only one item that was reclassifiable. She said that full IFRSs entities had more items in OCI and for that reason the requirement was more relevant for full IFRS entities. On the other hand, one member said that since SMEs had few items, the amendment in OCI would be easier to apply with very little effort.

No further comments were made.

The Chairman concluded the session and indicated that since the staff was not proposing any amendment, voting would not be necessary.

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