Cover paper (Agenda Paper 30)

In March 2021, the Board tentatively decided to develop an Exposure Draft (ED) of 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 16 Leases (Agenda Paper 30A)

This paper discussesed whether and how to propose amending the IFRS for SMEs Standard to align with IFRS 16, including possible simplifications.

Staff recommendations

The staff recommended the Board develop amendments to the IFRS for SMEs Standard to align Section 20 with IFRS 16, with simplifications for the determination of the discount rate and the subsequent measurement of the lease liability (reassessment).

Board discussion

One Board member noted the alignment of the IFRS for SMEs Standard to the full IFRS Standards is the starting point of the IFRS for SMEs Standard but not necessarily the end position. IFRS 16 is complicated for the preparers to align and costly to implement. Although the alignment can improve the SMEs’ financial reporting, it should allow a longer term for SMEs to align. If the requirement to align is a result of the subsidiary accounts, there is a different IASB project for subsidiaries that are SMEs.

One Board member noted the basic concept needs to be aligned and needs to be carefully looked into simplifications for cost-benefits.

One Board member noted that leases are frequently and commonly used by SMEs, therefore the alignment should be encouraged. The Board member did not agree with only improving the disclosure requirements for operating leases without changing the recognition and measurement requirements in the IFRS for SMEs Standard as the Board should not ask people to implement two changes (disclosure first and then the recognition and measurement).

One Board member noted that more information is needed to understand the issues of IFRS 16 and it may therefore make sense to wait for the post-implementation review (PIR) of IFRS 16. As a result, it will be more appropriate to wait for the next round of the IFRS for SMEs Standard review to align with IFRS 16.

One Board member agreed that the improvements to financial reporting that were introduced by IFRS 16 are relevant to SMEs as lease obligation is a common obligation for the SMEs. In particular during the COVID-19 period, leases are certainly a financing component for most SMEs and should be presented in the balance sheet. Applying IFRS 16 will also help companies to monitor and control lease agreements. 

One Board member noted that SMEs are big users of leases. Investors and lenders (normally banks) not only look at the cash flows of the SMEs but also at its balance sheet, e.g. the leverage ratio. Therefore, the Board member supported the alignment. However, the Board member agreed that there are costs associated with the alignment and therefore simplification is important. For example, whether it is more appropriate to align Section 20 with the main principle of IFRS 16 by extending the existing accounting for finance leases in the IFRS for SMEs Standard to all leases and provide a simplification of the measurement so not to bring the complicated calculation of right-of-use assets and lease liabilities which is designed for complicated lease transactions from IFRS 16 to the IFRS for SMEs Standard.

Board members agreed that the improvements made under IFRS 16 are relevant to SMEs. However, it is costly and complicated to do the transition which SMEs are less willing to do. Also, the outreach revealed mixed views and would mean many changes. Therefore, it is risky to introduce complexity and uncertainties at this stage without the PIR.

Board decision

Only 5 of the 12 Board members agreed to pursue an alignment now while the other 7 Board members agreed to align to IFRS 16, however only at a later time. 

All Board members agreed not to improve disclosure requirements for operating leases without changing the recognition and measurement requirements in the IFRS for SMEs Standard.

Summary of feedback on aligning the IFRS for SMEs Standard with IFRS 16 Leases (Agenda Paper 30B)

This paper provided a summary of all forms of feedback on the Request for Information (RfI), supplementary meetings, and the recommendations of the SME Implementation Group (SMEIG) to the Board in relaton to the IFRS for SMEs Standard to align with IFRS 16. This paper was provided to assist the Board in considering Agenda Paper 30A. This paper ded not provide any staff recommendations and did not include any questions for Board members.

There was no discussion on this paper.

Towards an Exposure Draft—IAS 19 Employee Benefits (2011) (Agenda Paper 30C)

This paper discussed whether and how to propose amending the IFRS for SMEs Standard to align with the 2011 amendments to IAS 19.

Staff recommendations

The staff recommended that the Board:

• Align with the 2011 amend­ments to IAS 19 in re­spec­tive of the recog­ni­tion re­quire­ment for ter­mi­na­tion benefits
• Eliminate the accounting policy option to present actuarial gains and losses either in profit or loss or in other comprehensive income

Board discussion

Board members supported the staff’s recommendation to align the IAS 19’s recognition requirement for termination benefits and agreed aligning the wording in Section 28 with the 2011 amendments to IAS 19. This was seen as a clarification of current requirements which will not increase complexity for the preparers of the IFRS for SMEs Standard.

Some Board members raised concerns of eliminating the accounting policy option to present actuarial gains and losses either in profit or loss or in other comprehensive income of the IFRS for SMEs Standard. One Board member noted it is not worth making the change because to split the actuarial gains or losses from other gains or losses can be challenging. The option to recognise everything in the profit or loss in the current period is easier to apply because it does not require further computation to calculate the split. Another Board member noted the defined benefit (DB) pension scheme is not common for SMEs and an accounting mismatch can be created if the actuarial gains or losses are moved to other comprehensive income for an entity that has a guarantee in the defined benefit plan. The Board member therefore supported to preserve the accounting policy choice option.

Some Board members supported the staff’s second recommendation as some respondents to the RfI stated support for aligning with IAS 19 by eliminating the option although this question was not specifically asked in the RfI. One Board member supported the full alignment and believed, in practice, the accounting policy choice does make any difference for SMEs as they normally receive IAS 19 reports from a third-party actuarial expert.

Board decision

All Board members agreed with the staff’s recommendation to align with the 2011 amendments to IAS 19 in respective of the recognition requirement for termination benefits.

Only 2 out of 12 Board members agreed to eliminate the accounting policy option to present actuarial gains and losses either in profit or loss or in other comprehensive income.

Towards an Exposure Draft—Simplifications permitted by paragraph 28.19 (Agenda Paper 30D)

This paper discussed whether to propose removing or amending paragraph 28.19 of the IFRS for SMEs Standard, which provides sim­pli­fi­ca­tions to the mea­sure­ment of defined benefit oblig­a­tions.

Staff rec­om­men­da­tions

The staff recommended the Board remove paragraph 28.19.

If the Board disagrees with the staff’s recommendation, the Board could:

• Clarify an SME may apply any, or all, of the simplifications permitted by paragraph 28.19 when measuring a defined benefit obligation
• Clarify paragraph 28.19 applies to the measurement of defined benefit obligations therefore discounting is required after applying the simplifications
• Provide examples clarifying future services includes:
  • The probability of employees not meeting the vesting conditions when the vesting conditions relate to future service (future turnover rate)
  • The effects of a benefit formula that give employees greater benefits for later years of service

Board discussion

Board members were supportive of the staff’s recommendation. However, Board members would like the staff to add explicit questions in the invitation for comment for the upcoming ED and set up alternatives for what the simplification in paragraph 28.19 meant for the IFRS for SMEs Standard. Although Board members agreed to remove this paragraph, they would also like the staff to ask whether any SME preparers use the simplification and how they use it. If the comments to be received suggest a lot of people actually use this simplification, the Board may clarify the simplification instead.

One board member noted that the way preparers use this simplification in practice could be very different. It follows that the Board should be clear in sending a message that a clarification is intended for paragraph 28.19 of the IFRS for SMEs Standard and this may not be the way how the simplification is currently used.

Board decision

All Board members agreed to remove the paragraph 28.19 of the IFRS for SMEs Standard.

Subsequently, the Board members also voted on whether to ask respondents to the upcoming ED if they would prefer the alternative to the staff recommendation presented above. They also voted on whether to ask those who disagree with removing paragraph 28.19 about how they used the simplification. 10 out of 12 Board members agreed with this proposal.

Towards an Exposure Draft—Other topics with no amendments recommended (Agenda Paper 30E)

This paper discussed responses to Questions N4 and N5 of the RfI, i.e. whether there are any topics the IFRS for SMEs Standard does not address that respondents think should be the subject of specific requirements and to describe any additional issues that respondents would like to bring to the Board’s attention relating to the IFRS for SMEs Standard.

Staff rec­om­men­da­tions

The staff recommended that the Board:

• Do not propose amend­ments to the IFRS for SMEsStandard for the topics listed below
• Ask a question in the upcoming ED on whether there has been any new in­for­ma­tion since the first com­pre­hen­sive review of the IFRS for SMEs Standard that might warrant the Board to re­con­sider the sim­pli­fied accounting model for de­vel­op­ment and borrowing costs would allow accounting policy choice

Board discussion

One Board member agreed with the staff recommendations not to propose amend­ments to the IFRS for SMEs Standard except for two items. Firstly, there should be an option for SMEs to capitalise certain development and borrowing costs. Secondly, introduce the option to use the cost model of IAS 40 also to the IFRS for SMEs Standard. In the Board member’s view not hiving the option presents a hurdle for SMEs. Another Board member disagreed with this notion. Given there are only limited exceptions to use the cost model, the Board member thought that removing available options in full IFRS Standards would be a simplification. Unless the staff has heard about any issues in this area, there was no need to propose any changes.

Board members agreed that it is necessary to ask whether there is any new information since the first comprehensive review of the IFRS for SMEs Standard relating to de­vel­op­ment and borrowing costs. However, most of the Board members did not agree with the process as the Board cannot publish the ED without having consulted across all stakeholders on what may be the potential changes on capitalisation borrowing and development costs. It is likely that only those who want changes respond and that the staff will receive a very unsymmetric answer. Therefore, the staff should not ask this question in the ED without proposed changes. The Board members would not encourage any changes to borrowing costs given the complicated requirement and cost-benefit reasons.

Board members agreed that the Basis for Conclusions to the IFRS for SMEs Standard should identify the requirements in the IFRS for SMEs Standard which intends to provide similar information to IFRS 5 as well as the Board’s rationale for not aligning the IFRS for SMEs Standard with IFRS 5.

Board decision

None of the Board members agreed to ask a question in the ED on whether there is any new information that might warrant the Board to reconsider the simplified accounting model for development and borrowing costs would allow accounting policy choice without a positive proposals in the ED. All Board members agreed not to ask any questions on borrowing costs. Only 4 out of 12 Board members agreed not to ask any questions on development costs. The Board therefore asked the staff to bring a positive proposal for the likely changes on development costs for the IFRS for SMEs Standards in the next meeting.

All Board members agreed not to propose amendments to the IFRS for SMEs Standard for the topics listed below.

List of topics for which the staff recommended no amend­ments to the IFRS for SMEs Standard:

• Re­quire­ments for financial in­stru­ments in relation to IBOR reform
• Re­quire­ments for not-for-profit entities
• Re­quire­ments for earnings per share and operating segments
• Re­quire­ments for the consensus of IFRIC 2
• Re­quire­ments for non-gov­ern­men­tal grants
• Re­quire­ments for interim financial reporting
• Re­quire­ments for assets held for sale and dis­con­tin­ued op­er­a­tions
• The existing con­sol­i­da­tion exemption
• Useful life of in­tan­gi­ble assets
• Sim­pli­fi­ca­tion of accounting treatment—director loans
• In­tro­duc­ing specific dis­clo­sures in the IFRS for SMEs Standard for tax au­thor­i­ties and lenders
• Amending dis­clo­sures in the IFRS for SMEs Standard for related party trans­ac­tions
• Applying a new IFRS Standard
• Un­cer­tainty
• Agri­cul­ture—bi­o­log­i­cal assets
• Cap­i­tal­i­sa­tion of de­vel­op­ment costs and borrowing costs
• Sub­se­quent mea­sure­ment of in­vest­ment property
• Recog­ni­tion re­quire­ments for gov­ern­ment grants
• Primary Financial Statement project (General Pre­sen­ta­tion and Dis­clo­sure)
• Business Com­bi­na­tions Under Common Control project
• Goodwill and Im­pair­ment project
• Going concern