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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) 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 9 Financial Instruments (‘fallback’ to full IFRS recognition and measurement requirements) (Agenda Paper 30A)

This paper discussed whether the option to apply the recognition and measurement requirements in full IFRS Standards for financial instruments in Section 11 and Section 12 of the IFRS for SMEs Standard (the ‘fallback’ to full IFRS Standards) should be removed when aligning those sections with IFRS 9.

Staff recommendations

  • The staff recommended that the Board remove the option to apply the recognition and measurement requirements in full IFRS Standards for financial instruments in Sections 11 and 12 of the IFRS for SMEs Standard (i.e. remove the existing fallback to IAS 39, without replacing it with a fallback to IFRS 9).
  • The recommendation was conditional on the Board considering alignment of Sections 11 and 12 with IFRS 9 through applying the Board’s alignment approach during this review.

Board discussion

Board members supported the staff’s recommendation to remove the ‘fallback’. The Board members agreed that the IFRS for SMEs is a self-contained, stand-alone accounting standard and if entities need to report complicated financial instruments, they should be able to apply the full IFRS Standards. One Board member pointed out that the users of SMEs reporters would not expect complicated financial instruments to be addressed under the IFRS for SMEs Standard.

One Board member noted that if the SMEs Standard allows a fallback to IFRS 9, it will be complicated every time IFRS 9 is amended. This is contradictory to the initial design principle of the IFRS for SMEs Standard to provide a stable accounting platform for SMEs.

Some Board members also noted that the fallback option is rarely used by SMEs and possibly only used by SMEs that are subsidiaries of entities applying the full IFRS Standards. These subsidiaries may find it more appropriate to apply the reduced disclosure for subsidiaries that are SMEs (another work-in-progress IASB project).

All Board members agreed with the staff’s recommendations.

Towards an Exposure Draft—IFRS 9 Financial Instruments (hedge accounting) (Agenda Paper 30B)

This paper discussed whether and how to propose amendments to the hedge accounting requirements in Section 12 of the IFRS for SMEs Standard to align with IFRS 9. It also considers whether Section 12 needs to continue to include hedge accounting requirements.

Staff recommendations

The staff recommended that the Board retain the existing hedge accounting requirements unchanged in Section 12 of the IFRS for SMEs Standard (i.e. the hedge accounting requirements would remain unaligned with IFRS 9).

Board discussion

Board members supported the staff recommendation to retain the existing hedge accounting requirements under the IFRS for SMEs Standard. The Board members noted the changes between IFRS 9 hedge accounting and IAS 39 hedge accounting were made to address the accounting treatment of more complicated hedging strategies. Board members agreed that the issues addressed by IFRS 9 are not relevant for a ‘typical’ SME and users of their financial statements. Aligning IFRS 9 hedge accounting will add costs and complexity to the existing IFRS for SMEs Standard without much relevancy or added value to users.

One Board member pointed out that if entities would like to apply full IFRS 9 for hedge accounting, they may find the proposed reduced disclosure framework for subsidiaries that are SMEs more appropriate.

All Board members agreed with the staff’s recommendations.

Towards an Exposure Draft—IFRS 13 Fair Value Measurement (Agenda Paper 30C)

This paper discusses whether and how to propose amending the IFRS for SMEs Standard to align with IFRS 13.

Staff recommendations

The staff recommended that the Board:

  • Align the definition of fair value in the IFRS for SMEs Standard with IFRS 13
  • Align the guidance on fair value measurement in the IFRS for SMEs Standard with IFRS 13
  • Include examples relevant to SMEs that illustrate how to apply the hierarchy
  • Move the guidance and related disclosure requirements for fair value to a new section of the IFRS for SMEs

Board discussion

A Board member expressed concerns over developing completely new examples for the IFRS for SMEs Standard that illustrate how to apply the hierarchy. The Board member noted that the IFRS for SMEs will have an exceptional high alignment with IFRS 13, so any new examples in the context of the SMEs Standard will also be appliable to the users of IFRS 13. As such, to develop anything new, the staff need to get broader inputs including from those who do not apply the IFRS for SMEs. This can be costly to do.

Most Board members supported the staff recommendation to have additional education material along with the Standard. One Board member noted that education material is sometimes missed by users.

One Board member asked whether the illustrative example would be part of the Standard as an appendix to the section or whether it would be a separate section in the Standard. That Board member expressed concerns about overcomplicating the Standard.

One Board member noted the tension between not overcomplicating the SMEs Standard and achieving the same outcome as applying IFRS 13. The Board member recommended that the staff ensure that different results between applying IFRS 13 and the fair value section of the SMEs Standard are avoided.

One Board member noted that issues may arise if the concepts of IFRS 13 were explained differently in the IFRS for SMEs, as the meaning could be lost when translating to another language or interpreted differently. 

One Board member raised the practical question as to whether the existing examples in IFRS 13 are relevant for SMEs, given that the IFRS 13 examples were designed for big corporates. The Board member suggested that it may be worth to develop some specific examples for SMEs.

One Board member noted that it is possible to propose amendments to IFRS 13 to add the new examples developed for the IFRS for SMEs Standard and exposure both the proposed amendments to the IFRS for SMEs and to IFRS 13 at the same time.

All Board members agreed with the staff recommendations. The Board also agreed to develop new examples relevant to SMEs that illustrate how to apply the hierarchy.

Towards an Exposure Draft—IFRS 14 Regulatory Deferral Accounts (Agenda Paper 30D)

This paper discussed whether and how to propose amending the IFRS for SMEs Standard to align with IFRS 14.

Staff recommendations

The staff recommended that the Board do not propose aligning the IFRS for SMEs Standard with IFRS 14 as part of this comprehensive review, and revisit this topic in a future review of the IFRS for SMEs Standard once it has completed its project on rate-regulated activities.

Board discussion

Board members noted that rate regulation is not very relevant to SMEs and that there is an ongoing IABS project on Rate-regulated Activities. Some Board members noted the difficulties for certain industries to apply the IFRS for SMEs standards and questioned whether those industries’ entities should be within the scope of the IFRS for SMEs Standard.

All Board members agreed with the staff recommendations.

Towards an Exposure Draft—IFRS 15 Revenue from Contracts with Customers (Agenda Paper 30E)

This paper discussed whether and how to propose amending the IFRS for SMEs Standard to align with IFRS 15.

Staff recommendations

The staff recommended that the Board:

  • Develop amendments to the IFRS for SMEs Standard to align with IFRS 15 by rewriting Section 23 to reflect the principles and language used in IFRS 15
  • Provide transition relief permitting an entity to continue its current revenue recognition policy for any contracts already in progress at the transition date or scheduled to be completed within a set time after the transition date

Board discussion

Board members agreed with the option of completely rewriting the revenue section of the IFRS for SMEs Standards as it ensures the words in the Standard are more precise and meanings are not lost in translation and interpretation.

One Board member expressed concerns that there has not been a post-implementation review (PIR) of IFRS 15 and noted there may be a lack of information from user experience. As such, the staff may need to do more outreach than normal when determining simplifications and providing cost and benefit information of these simplifications.

One Board member noted the complicated issues addressed by IFRS 15 may not be relevant for SMEs and suggested the staff reach out to preparers who have done IFRS 15 implementation as most companies have not been affected by IFRS 15.

Most of the Board members noted that it was too early to look at the transition relief and it will depend on the outcome of the detailed simplifications proposal to align with IFRS 15; however, they supported the staff’s direction to provide a transition relief. One Board member noted that SMEs may have limited resources, so transitional relief is important for SMEs.

Some Board members agreed with the staff recommendations as the “transfer control” concept in IFRS 15 is far better than the existing risk and reward model. They supported the staff recommendations given the proposal can help SMEs to improve their internal control and bring consistent accounting for similar transactions. As a result, they agreed not to wait for the PIR.

One Board member supported the staff direction; however, the Board member raised a couple of concerns about how to do this: If the staff focus too much on the changes, it may increase inconsistency and the meaningfulness of aligning with IFRS 15 might be lost. The Board should not defer this proposal until after the PIR, given it had made strategic decisions to incorporate major new IFRS Standards into the IFRS for SMEs Standard. The staff need to carefully consider which simplifications should be provided for SMEs and be cautious to omit requirements as SMEs may still have complicated transactions. It may be possible to address the complicated issues somewhere else in the Standard.

One Board member suggested that the staff look at the questions submitted to the IFRS 15 transition resource group and the IFRS Interpretations Committee to decide which simplifications should be provided for SMEs.

Some of the Board members raised issues in relation to cost and benefits and thought it was necessary to treat simple contracts and complicated contracts differently. For example, if a contract is very simple, the five-step approach might not be required. Board members noted that most of the SMEs will not expect changes for revenue recognition from changing from the risk and reward model to the transfer control model, so it will be challenging to expect them to perform additional assessments that are not necessary.

One Board member noted that valuable education material could be developed at the same time while developing the ED.

All Board members agreed with the staff recommendation to rewrite Section 23 of the IFRS for SMEs Standard to reflect the principles and language used in IFRS 15.

All Board members also voted in support of considering a transition relief. The Board will decide which relief will be provided once they understand more about which amendments will be proposed to the IFRS for SMEs Standard to align with IFRS 15.

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