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Second Comprehensive Review of the IFRS for SMEs Standard

Date recorded:

Cover paper (Agenda Paper 30)

In March 2021, the Board tentatively decided to develop an Exposure Draft (ED) for amendments to the IFRS for SMEs Standard using the alignment approach.

At its May 2021 meeting, the Board started deliberating specific sections of the IFRS for SMEs Standard that could be aligned with new requirements in IFRS Standards in the scope of the review.

At this meeting the Board continued to deliberate specific sections of the IFRS for SMEs Standard that could be aligned with IFRS Standards, amendments to IFRS Standards and IFRIC Interpretations in the scope of the second comprehensive review of the IFRS for SMEs Standard.

Towards an Exposure Draft—IFRS 3 Business Combinations (Agenda Paper 30A)

This paper discussed whether and how to propose amending Section 19 Business Combinations and Goodwill of the IFRS for SMEs Standard to align with IFRS 3.

Staff recommendations

The staff recommended that the Board:

  • Align the definition of a business in the IFRS for SMEs Standard with the 2018 definition of a business and include, in a new appendix to Section 19 for application guidance
  • Align with the requirements for acquisition-related costs and contingent consideration as set out in IFRS Standards:
  • Recognise acquisition-related costs as an expense at the time of the acquisition
  • Recognise contingent considerion at fair value and subsequently measure it at fair value at each reporting date with changes in fair value recognised in profit or loss (except for any contingent consideration that meets the definition of equity instrument). But give SMEs an option to measure the contingent consideration using a ‘best estimate’ approach if measuring contingent consideration at fair value would involve undue cost or effort
  • Introduce requirements for the accounting for step acquisitions as set out in IFRS 3. The staff also recommend the Board ask for further views on these requirements in the Invitation to Comment
  • Introduce guidance (in the new appendix to Section 19) for a new entity formed in a business combination as set out in paragraph B18 of IFRS 3 and, consequently, introduce the application guidance relevant to SMEs as set out in paragraphs B13-B17 of IFRS 3

The staff also asked the Board, for the purpose of measuring the non-controlling interests whether to retain the current requirements under Section 19 or to propose amendments to Section 19 (to align with IFRS 3).

Board discussion

Align the definition of a business

Most Board members supported aligning the definition of a business. Most Board members also supported bringing some of the IFRS 3 guidance into the IFRS for SMEs. However, three Board members raised concerns about whether any further simplification can be provided to SMEs when applying the definition of a business other than those proposed in the agenda paper.

11 Board members agreed with the staff recommendation and the Board requested the staff to revisit this point to see any further simplications.

Align with the requirements for acquisition-related costs and contingent consideration

Most Board members agreed to align the requirements for acquisition-related costs. One Board member raised the concern that the IFRS for SMEs requirements for business combinations are still to apply the old cost allocation model and not the IFRS 3 fair value model. The Board member asked whether it is appropriate to align some IFRS 3 fair value requirements but leave the IFRS for SMEs business combinations requirements characterised as a cost allocation model. Alternatively, the Board could change the objective of the IFRS for SMEs business combinations requirements as a first step before making the alignment.  

For the alignment of the contingent consideration requirements, most Board members agreed to fair value the contingent consideration and provide a simplication on measurement. One Board member questioned whether the subsequent changes should go to profit or loss. The Board member would feel more comfortable if the subsequent change goes to OCI. Another Board member noted that SMEs have less capacity and are less able to make a subsequent adjustment on contingent consideration thus not supporting the alignment. Two Board members raised concerns on the best estimate simplifications proposed by the staff. Best estimate could mean either most likely or weighted average. If the staff means most likely outcome it should be clearer and the IFRS for SMEs should refer to this. Most Board members did not agree with the subsequent changes going to OCI as this would create complexity for SMEs. 

10 Board members agreed to align the IFRS for SMEs with the requirements for acquisition-related costs.

8 Board members agreed with the staff’s recommendation to align the IFRS for SMEs with the requirements for contingent consideration in IFRS 3.

Introduce requirements for the accounting for step acquisitions as set out in IFRS 3

12 Board members agreed with the staff’s recommendation.

Introduce guidance (in the new appendix to Section 19) for a new entity formed in a business combination as set out in paragraph B18 of IFRS 3 and, consequently, introduce the application guidance relevant to SMEs as set out in paragraphs B13-B17 of IFRS 3

12 Board members agreed with the staff’s recommendation.

The staff also asked the Board, for the purpose of measuring the non-controlling interests whether to retain the current requirements under Section 19 or to propose amendments to Section 19 (to align with IFRS 3).

Some Board members perferred to retain the current requirements and noted that allowing an accounting policy choice per transaction level will add complexity and go against the simplicity principle. They also noted that the option to measure NCI at fair value does not provide any meaningful additional information for the users.

One Board member noted that under IFRS 3, the business combinations requirements are a 100% model so applying fair value to NCI is consistent with the 100% model and the fair value model which should bring simplification instead of complexity.

7 Board members agreed to retain the requirement under section 19 of the IFRS for SMEs.

Towards an Exposure Draft— IFRS 10 Consolidated Financial Statements (Agenda Paper 30B)

This paper discussed whether and how to propose amending Section 9 Consolidated and Separate Financial Statements of the IFRS for SMEs Standard to align with IFRS 10.

Staff recommendations

The staff recommended that the Board:

  • Align the definition of control in Section 9 with IFRS 10
  • Retain and update paragraph 9.5 of the IFRS for SMEs Standard
  • Not introduce the requirement that an investment entity measures its investments in subsidiaries at fair value through profit or loss

Board discussion

Board members agreed with the staff recommendation to align the control definition and acknowledged the benefits for this as it provides better information for users. Board members agreed to bring application guidance and illustrative examples from full IFRS standards but warned against overloading the material for IFRS for SMEs. Board members agreed that the rebuttable presumption would ease the application of the new control definition for many SMEs but noted that when bringing illustrative examples to the IFRS for SMEs it would be better to bring the same example.

For investment entities, Board members did not think that it was an inappropriate time to bring those in when there is an open PIR for the standard. Investment entities are also less common in SMEs. Therefore, Board members supported not to introduce the requirement to measure an investment entity’s investments in subsidiaries at fair value through profit or loss.

Board decision

12 Board members agreed with all staff recommendations in this paper.

Towards an Exposure Draft—IFRS 11 Joint Arrangements (Agenda Paper 30C)

This paper discussed whether and how to propose amending Section 15 Investments in Joint Ventures of the IFRS for SMEs Standard to align with IFRS 11.

Staff recommendations

The staff recommended that the Board:

  • Align the definition of joint control with IFRS 11
  • Retain the classifications of joint arrangements
  • Retain the accounting requirements of Section 15, including the accounting policy election for jointly controlled entities in Section 15

Board discussion

Most Board members agreed to align the joint control definition. One Board member asked why the staff recommended to align the joint control definition while retaining the classification and accounting requirements. This seems inconsistent. The staff explained that in previous Board discussions it was suggested that when the Board aligns the control definition, it should also align the joint control definition to ensure it is consistent within the IFRS for SMEs. However, given the cost and complexity involved, Board members supported not aligning the classification and measurement requirements.

Board decision

12 Board members agreed to align the definition of joint control with IFRS 11.

11 Board members agreed to retain the classifications of joint arrangements.

12 Board members agreed to retain the accounting requirements of Section 15, including the accounting policy election for jointly controlled entities in Section 15.

The Board asked the staff to add an explanation in the ED as to why the Board decided to align the definition of joint control but not the accounting model.

Towards an Exposure Draft—IFRS 9 Financial Instruments (Impairment of Financial Assets) (Agenda Paper 30D)

This paper discussed whether and how to align Section 11 Basic Financial Instruments of the IFRS for SMEs Standard with the impairment requirements in IFRS 9.

Staff questions

The staff asked the Board whether to propose amendments to the IFRS for SMEs Standard replacing the incurred loss model in Section 11 with either Alternative 1 or Alternative 2: 

  • Alternative 1: Measure ECL at each reporting date as contractual cash flows less expected cash flows using the SME’s best estimate of the expected cash flows instead of evaluating a range of possible outcomes and allow the use of a provision matrix as a practical expedient
  • Alternative 2:
    • For trade receivables and contract assets arising from transactions within the scope of Section 23 Revenue of the IFRS for SMEs Standard, measure impairment loss at each reporting date as described in Alternative 1
    • For other debt instruments, measure impairment loss at each reporting date applying the simplified approach in IFRS 9
    • Allow the use of a provision matrix as a practical expedient for all debt instruments

For equity instruments, leave unchanged the requirements (including the requirements on measuring impairment) in the IFRS for SMEs Standard under both alternatives.

Board discussion

Board members agreed not to change the requirements for equity instruments as IFRS 9 does not have a model for this type of instruments either. Some Board members supported aligning the ECL model. However, they did not support either of the alternatives proposed by the staff. One Board member noted that IFRS 9 already contains simplifications, for example allowing past due information if unable to obtain forward information. The Board member much preferred to use the existing IFRS 9 features rather to switch to the best estimate model.

Some Board members noted it is not clear what ‘best estimate’ means. If implementing this approach is supposed to be similar to an incurred loss model, it is not appropriate to call it an ECL model. Some Board members noted that Alternative 2 will add complexity so they would rather retain the existing incurred loss model.

Some Board members preferred to align to the existing ECL model under IFRS 9 with simplifications for SMEs. However, the staff may need to explore more to be able to develop this ‘new model’ and asses how this may work. The Board member did not like Alternative 2 as it adds implementation complexity and feels like over engineering the IFRS for SMEs.

Some Board members noted that SMEs normally have simple financial instruments, and that the ECL or incurred loss model is just jargon for them. The Board member did not see whether using ECL or incurred loss model make any differences to the SMEs and did therefore not support the alignment. The Board member also spoke against creating a third model, which gives the label of ECL but works differently from an IFRS 9 ECL model. Therefore, the Board member would rather retain the existing requirement in Section 11.

Board decision

3 Board members agreed with Alternative 1.

1 Board member agreed with Alternative 2.

3 Board members agreed to retain the incurred loss model currently contained in Section 11 of the IFRS for SMEs.

10 Board members agreed to ask the staff to develop an approach that is in line with the ECL model but with some implementation simplifications.

5 Board members agreed that if the staff could not develop an appropriate solution, the Board would ask the staff to retain the existing incurred loss model contained in Section 11.

Towards an Exposure Draft—IFRS 9 Financial Instruments (issued financial guarantee contracts) (Agenda Paper 30E)

This paper discusssed whether and how to align Section 12 Other Financial Instrument Issues of the IFRS for SMEs Standard with IFRS 9 Financial Instruments.

Staff recommendations

The staff recommend that the Board:

  • Add the definition of a financial guarantee contract from IFRS 9
  • Require the issuer of a financial guarantee contract to initially measure the contract at the premium received (plus the present value of any future premium payments payable) and subsequently measure it at the higher of:
    • The amount of expected payments to reimburse the holder less any amounts that the entity expects to be reimbursed (would be measured consistently with any expected credit loss approach the IASB decides to follow as discussed in Agenda Paper 30D)
    • The amount initially recognised, if any, amortised on a straight-line basis over the life of the guarantee

Board decision

12 Board members agreed to align the IFRS for SMEs with the definition of a financial guarantee contract in IFRS 9.

The Board deferred the decision on initial and subsequent measurements of a financial guarantee contract given the impairment decision was undetermined.

Towards an Exposure Draft—amendments to IFRS Standards and IFRIC Interpretations (overview) (Agenda Paper 30F)

This paper gives an overview of whether and how to align the IFRS for SMEs Standard with amendments to IFRS Standards and IFRIC Interpretations set out in Agenda Papers 30G-30J.

Towards an Exposure Draft—amendments to IFRS Standards and IFRIC Interpretations (Agriculture: Bearer Plants) (Agenda Paper 30G)

This paper discusssed whether and how to align section 34 Specialised Activities of the IFRS for SMEs Standard with Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), which the Board issued in June 2014.

Staff recommendations

The staff recommended that the Board provide an exemption on initial recognition for separation of the bearer plants from the produce growing on bearer plants:

  • An SME would be required to account for a bearer plant on initial recognition separately from the produce growing on the bearer plant if the SME can measure the bearer plant and the produce growing on the bearer plant separately without undue cost or effort; otherwise
  • The SME would continue apply the requirements in Section 34 of the IFRS for SMEs Standard to the entire plant

Board discussion

Most Board members agreed that useful information would be provided when separating the bearer plant and the produce growing on the plant. Board members noted that many SMEs are in the agriculture industry. It would therefore be beneficial to account for produce separately at its fair value. However, it was noted that the staff need to revise the drafting to avoid confusion that the requirement is only applicable on transition.  

One Board member noted that given the nature of SMEs, most SMEs will apply the undue cost or effort exemption and account the entire plant at cost. Therefore, it seems meaningless to require accounting for the produce growing on a bearer plant separately.

Board decision

10 Board members agreed with the staff’s recommendations.

Towards an Exposure Draft—Amendments to IFRS Standards and IFRIC Interpretations (Package of amendments to IAS 1) (Agenda Paper 30H)

This paper discusssed whether and how to align Section 3 Financial Statement Presentation of the IFRS for SMEs Standard with the amendments to IAS 1 Presentation of Financial Statements resulting from different disclosure initiative projects.

Staff recommendations

The staff recommended that the Board align the IFRS for SMEs Standard with the following amendments to IFRS Standards:

  • Definition of Material (Amendments to IAS 1 and IAS 8)
  • Disclosure Initiative (Amendments to IAS 1)
  • Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)

Board decision

All 12 Board members agreed to align the definitions as it will bring clarification without significantly changing the existing requirements in the IFRS for SMEs.

Towards an Exposure Draft—Amendments to IFRS Standards and IFRIC Interpretations (topics with amendments recommended) (Agenda Paper 30I)

This paper discusssed whether and how to align the IFRS for SMEs Standard with some amendments to IFRS Standards and some IFRIC Interpretations.

Staff recommendations

The staff recommended that the Board align the IFRS for SMEs Standard with the following amendments to IFRS Standards:

  • Disclosure Initiative (Amendments to IAS 7)
  • Transfers of Investment Property (Amendments to IAS 40)
  • Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) under both section 17 and section 18 of the IFRS for SMEs
  • Annual Improvements to IFRSs 2010–2012 Cycle (IFRS 2)
  • Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2)
  • Annual Improvements to IFRSs 2011–2013 Cycle (IAS 40)
  • Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12)
  • IFRIC 22 Foreign Currency Transactions and Advance Consideration
  • IFRIC 23 Uncertainty over Income Tax Treatments

Board discussion

Most Board members were supportive of the staff’s recommendations. Some Board members commented on the alignment with the IAS 7 amendment and noted that there were mixed results from full IFRS reporters on whether it would be more appropriate to align this once there is more practice experience. However, they acknowledged the simplification and useful information provided by the amendments. For IFRIC 23, some Board members did not support a cost relief as it would compromise the level of information the alignment provides.

Board decision

12 Board members agreed the staff’s recommendations.

Towards an Exposure Draft— Amendments to IFRS Standards and IFRIC Interpretations (topics with no amendments recommended) (Agenda Paper 30J)

This paper discusssed amendments to IFRS Standards and IFRIC Interpretations for which the staff does not recommend that the Board propose amendments to the IFRS for SMEs Standard to align with these new requirements.

Staff recommendations

The staff recommended that the Board not align the IFRS for SMEs Standard with the following amendments to IFRS Standards and Interpretations:

  • Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36)
  • Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
  • Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12)
  • Annual Improvements to IFRS Standards 2014– 2016 Cycle (IFRS 12)
  • Annual Improvements to IFRSs 2012–2014 Cycle (IFRS 7)
  • Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)
  • Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)
  • Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12)
  • Annual Improvements to IFRSs 2010–2012 Cycle (IAS 38)
  • Effective Date of IFRS 15
  • Defined Benefit Plans: Employee Contributions (Amendments to IAS 19)
  • Plan Amendment, Curtailment or Settlement (Amendments to IAS 19)
  • Annual Improvements to IFRS Standards 2015– 2017 Cycle (IAS 12)
  • Annual Improvements to IFRSs 2011–2013 Cycle (IFRS 1)
  • Annual Improvements to IFRS Standards 2014– 2016 Cycle (IFRS 1)
  • IFRIC 21 Levies

Board decision

12 Board members agreed with the staff recommendations. Board members also suggested that the staff revise the rationale as to why IFRIC 21 should not be aligned and clarify why the staff did not propose to align the Recoverable Amount Disclosure for Non-Financial Assets (amendments to IAS 36).

Towards an Exposure Draft—other topics with amendments recommended (Agenda Paper 30K)

This paper discussed topics raised in questions N4 and N5 of the Request for Information Comprehensive review of the IFRS for SMEs Standard for which the staff recommend the Board propose amendments to the IFRS for SMEs Standard.

Staff recommendations

The staff recommended that the Board:

  • Amend Section 22 Liabilities and Equity of the IFRS for SMEs Standard by removing paragraph 22.7(a) of the Standard
  • Discuss in the ED proposing amendments to the IFRS for SMEs Standard, or in supporting material to the ED, the inconsistencies between the IFRS for SMEs Standard and the European Accounting Directive
  • Amend Section 26 Share-based Payment of the IFRS for SMEs Standard to include the scope exclusions similar to those in paragraph 5 of IFRS 2
  • Amend Section 26 of the IFRS for SMEs Standard on share-based payment with settlement options to require equity-settled as the default treatment rather than cash-settled

Board discussion

Some Board members noted that the Board does not normally comment on jurisdictional issues and strongly disagreed to add comments on jurisdictional issues in the ED. However, some Board members supported  including the discussion in supporting material.

Some Board members raised concerns on removing paragraph 22.7(a) of the IFRS for SMEs as removing this requirement would be different from never having it in the beginning. They noted that confusion will arise by the deletion.

Most Board members also raised concerns on the default treatment for share-based payment where there is a settlement option. The default treatment does not faithfully represent the definition of equity or cash-settled share-based payments and do not provide transparent information to the users.

Board decision

5 Board members agreed with removing paragraph 22.7(a) of the IFRS for SMEs.

4 Board members agreed with adding in supporting material (but not in the ED) an explanation for the inconsistencies between the IFRS for SMEs Standard and the European Accounting Directive.

12 Board members agreed with amending Section 26 Share-based Payment of the IFRS for SMEs Standard to include the scope exclusions similar to those in paragraph 5 of IFRS 2.

No Board members agreed with amending Section 26 of the IFRS for SMEs Standard on share-based payment with settlement options to require equity-settled as the default treatment rather than cash-settled.

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