Cover paper (Agenda Paper 30)

In January 2020, the IASB published Request for Information (RfI) Comprehensive Review of the IFRS for SMEs Standard. The comment period ended on 27 October 2020.

After reviewing the feedback received on the RfI, the IASB 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 IASB started deliberating specific sections of the IFRS for SMEs Standard that could be aligned with new requirements in IFRS Accounting Standards in the scope of the review.

At this meeting the IASB continued to deliberate specific sections of the IFRS for SMEs Standard that could be aligned with IFRS Accounting Standards, amendments to IFRS Accounting 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 (Impairment of Financial Assets) (Agenda Paper 30A)

This paper discussed whether to incorporate an expected credit loss model in Section 11 Basic Financial Instruments of the IFRS for SMEs Standard to align with IFRS 9.

Staff recommendation

The staff recommended that the IASB:

• Retain the incurred loss model in Section 11 of the IFRS for SMEs Standard for trade receivables and contract assets within the scope of Section 23 Revenue of the IFRS for SMEs Standard
• Amend Section 11 of the IFRS for SMEs Standard to use an expected credit loss model for all other financial assets measured at amortised cost
• Retain the requirements for impairment of equity instruments measured at cost

IASB discussion

Some IASB members noted that the full expected credit loss (ECL) model may not be appropriate for SMEs given ECL is a complicated area under IFRS 9. They appreciated the staff’s recommendation as the recommended approach would enable the IASB to propose a simplified ECL model to be included in the ED. This will provide flexibility for the IASB to redeliberate based on the feedback that will be received in response to the ED and possibly change it back to the existing incurred loss model if the feedback from the ED is not in favour of introducing ECL. IASB members also raised a concern on whether applying the ECL model for assessing impairment of trade receivables and contract assets has any impacts on the outcome of the impairment comparing to apply the existing incurred loss model.

Some IASB members preferred one impairment model as complexity would be added to the Standard with two impairment models which also potentially add costs to maintain a system that has both the incurred loss and the ECL model.

Some IASB members supported the simplified ECL model in the agenda paper and believed that the staff did a good job on making the model more digestible for SMEs. They raised concerns on the staff recommendation (i.e. a hybrid approach) as it may give a wrong signal to the practice and it will be difficult to change this to a full ECL model in the future. They acknowledged that there may not be any outcome differences between the simplified ECL model and the incurred loss model when assessing impairment loss for trade receivables and contract assets. Therefore, they would recommend the simplified ECL model and only if there is pushback from the ED, they would recommend the incurred loss model.

One IASB member supported to retain the incurred loss model as the different approaches will give a similar outcome. The IASB member noted that the feedback received in response to the RFI indicates that SMEs do not include financial institutions, and therefore do not typically have significant long-term loan receivables or investments in bonds. There is no demand for the more sophisticated information provided under an ECL model for SMEs. The feedback also indicates that moving to an ECL model may involve significant implementation costs for SMEs without a significant change in impairment information and without any benefits for users of their financial statements.

IASB decision

7 of the 12 IASB members voted in favour of the staff recommendation.

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

This paper discussed possible simplifications to the requirements of IFRS 15 to align Section 23 Revenue of the IFRS for SMEs Standard with IFRS 15.

Staff recommendation

The staff recommended that the IASB to align Section 23 of the IFRS for SMEs Standard with IFRS 15, with simplification for:

• Contract modifications: an SME would be required to account for a contract modification as if it were a termination of the existing contract and the creation of a new contract, unless the promised goods or services not yet transferred at the date of the contract modification are not distinct
• Series of distinct goods or services: an SME would be permitted to account for a promise to transfer a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customers as separate performance obligations, if the amount of consideration varies in a way that corresponds with the value of the distinct goods or services transferred to the customer
• Performance obligation terminology: an SME would be required to identify each ‘promise to transfer a distinct good or service, or bundle of goods or services. The Standard would not include the term performance obligation
• Determining if a promise to transfer a good or service is separately identifiable: the IFRS for SMEs Standard would include only the factors in paragraphs 29(a)–(b) of IFRS 15 to help an SME determine whether a promised good or service is separately identifiable
• Constraining estimates of variable consideration: an SME would be required to recognise variable consideration only to the extent that it is highly probable that the variable amount will be recovered
• Significant financing component: an SME would be exempt from accounting for the effects of financing if the period between when the entity transfers a promised good or services to the customer, and when the customer pays for those goods or services, is one year or less
• Allocating discounts and variable consideration: an SME would be required to allocate discounts and variable consideration on a relative stand-alone selling price basis, unless an alternative method more faithfully depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each separate performance obligation
• Selection of methods for measuring progress towards complete satisfaction of a performance obligation: the IFRS for SMEs Standard would include a list of methods frequently used by entities to measure progress and describe circumstances where they may be appropriate
• Incremental costs of obtaining a contract: an SME would be required to recognise the incremental costs of obtaining a contract as an asset if the SME expects to recover those costs, only when these costs can be identified and assessed as recoverable without undue cost or effort. If an SME cannot identify and assess the incremental costs of obtaining a contract as recoverable without undue cost or effort, the SME will recognise these costs as expenses

IASB discussion

Contract modifications

One IASB member noted that some important analysis should be brought into the ED to explain why the ED proposes two approaches for IFRS for SMEs while under IFRS 15 there are three approaches. One IASB member agreed with having two approaches, but recommended that the staff modify the wording in the ED to consider simplified wording for situations that require prospective changes.

12 IASB members voted in favour of the staff recommendation and the staff will take on the recommendation made by the IASB member in the meeting.

Series of distinct goods or services

One IASB member noted that just deleting “a series of distinct goods or services…” from the definition of performance obligation in IFRS 15 may not get the simplification that the staff intended as there are still requirements for the allocation of the expected consideration. For this simplification, an entity still needs to consider the corresponding changes in considerations (i.e. not automatically the payment listed under the contract terms for each year). The ED should give an objective for the allocation (e.g. attribute consideration on the basis to the value delivered to the consumer each year).

12 IASB members voted in favour of the staff recommendation on the basis that the staff will make the suggested changes in the ED.

Performance obligation terminology

One IASB member challenged whether the long-term benefit may outweigh the short-term costs for aligning the performance obligation terminology to IFRS 15. The member also challenged the recommendation not to use the term ‘performance obligation’ as the IASB member was not convinced on how the staff concluded that SMEs are unfamiliar with the term and noted to instead improve and simplify the term for the IFRS for SMEs.

Some IASB members noted that there are not enough requirements under the IFRS for SMEs to build the same performance obligation terminology that is required under IFRS 15.

9 IASB members voted in favour of the staff recommendation.

Determining if a promise to transfer a good or service is separately identifiable

One IASB member was surprised that the staff recommended to omit the guidance on interdependency and interrelatedness in IFRS 15:29(c), which is very useful guidance for certain industries (e.g. media industry and also accounting for intellectual property, licences and software transactions). The member would like to keep it in the ED. Also, if the staff would like to gather more information in relation to this issue, it is more likely to receive feedback when incorporating the requirement within the ED.

Some IASB members noted that IFRS 15:29(c) was added to IFRS 15 as a part of an annual improvement project and the most difficult part of this improvement was trying to add paragraphs to the Standard so the Standard can help entities to apply the requirements. Therefore, it is better to retain IFRS 15:29(c) as it was intended to help an entity in applying the requirement in IFRS 15:29.

However, one IASB member agreed with the staff that IFRS 15:29(c) is not necessary to bring into the IFRS for SMEs because IFRS 15:29(a) and IFRS 15:29(b) capture almost all requirements and therefore IFRS 15:29(c) may add complexity to the Standard. 

6 of the 12 IASB members voted in favour of the staff recommendation, with the Chairman voting against. The IASB therefore decided to include IFRS 15:29(c) in the ED and ask a question in relation to whether it should be included in the IFRS for SMEs.

Constraining estimates of variable consideration

Some IASB members raised concerns on the wording proposed by the staff despite supporting the staff recommendation for simplification and ‘positive requirement’. The word ‘recoverable’ is automatically linked to credit expectations. However, staff’s intention on simplification is still within the revenue recognition model. Therefore, IASB members recommended the staff improve the wording in the ED to align the underlying principle for measuring variable consideration in IFRS 15 but with simplifications.

All IASB members voted in favour of the staff’s recommendation.

Significant financing component

Some IASB members challenged why advance payments should not be included in the IFRS for SMEs as two fifths of the SMEs use advance payments. The requirement of advance payments seems very relevant for SMEs and may have a big impact on the financials of SMEs. Therefore, they prefer that SMEs apply the practical expedient if the advance payment is less than one year instead of not making it appliable for SMEs.

Some IASB members supported the staff recommendation but noted the complication it may add if advance payments requirements are included in the IFRS for SMEs, e.g. further requirements under IFRS 15 may need to be added to the IFRS for SMEs in relation to whether the financial component is significant, etc. Therefore, they agreed with the staff the recommendation for the simplification.

7 IASB members voted in favour of the staff’s recommendation.

Allocating discounts and variable consideration

IASB members did not discuss this issue and all IASB members voted in favour of the staff’s recommendation.

Selection of methods for measuring progress towards complete satisfaction of a performance obligation

IASB members recommended the staff improve the wording in the ED that the method chosen by SMEs need to reflect the substance of the transaction (faithful presentation) and once a method is chosen, an entity should apply the choice consistently.

All IASB members voted in favour of the staff’s recommendation.

Incremental costs of obtaining a contract

One IASB member challenged the wording in relation to ‘undue cost or effort’ exemption. The wording in the ED needed to make sure that the use of ‘undue cost or effort’ exemption is not used as shorthand for an accounting policy choice. SMEs still need to assess whether there is an ‘undue cost or effort’.

All IASB members voted in favour of the staff’s recommendation.

Towards an Exposure Draft— Cryptocurrency (Agenda Paper 30C)

This paper discussed whether to propose amending IFRS for SMEs Standard to provide requirements for cryptocurrency for SMEs.

Staff recommendation

The staff recommended that the IASB:

• Retain unchanged the IFRS for SMEs Standard for cryptocurrency as part of this comprehensive review
• Revisit the topic in the next comprehensive review of the IFRS for SMEs Standard

IASB discussion

IASB members agreed that the IFRS for SMEs Standard should not ‘jump ahead’ of the development of IFRS Accounting Standards, which should be used as the starting point for developing the IFRS for SMEs Standard. IASB members also agreed that holdings of cryptocurrency and issues of crypto assets are not prevalent among SMEs.

IASB decision

All IASB members voted in favour the staff’s recommendation.

Towards an Exposure Draft— Other topics (Recognition and measurement of development costs) (Agenda Paper 30D)

This paper discussed whether and how to amend the recognition and measurement of development costs in the IFRS for SMEs Standard to align with IAS 38.

Staff recommendation

The staff recommended that the IASB proposes amendments to the IFRS for SMEs Standard in the ED to require an SME to recognise intangible assets arising from development costs meeting the criteria in paragraphs 57(a)–(f) of IAS 38 with an undue cost or effort exemption.

IASB discussion

Some IASB members raised concerns on costs and benefit of the staff’s proposal. Therefore, they considered the capitalisation as an accounting policy as SMEs are permitted rather than required to capitalise the development costs. Some IASB members also challenged the ‘undue cost or effort exemption’ proposed by the staff, as applying this exemption is very judgmental, which is less transparent than if an accounting policy is applied.

Some IASB members expressed support to the staff’s recommendation and agreed not to introduce too much choice in the Standard as an accounting policy choice is not helpful and adds complexity to the Standard. One IASB member also recommended the staff to consider transition requirements if this is a requirement.

One IASB member asked whether it could word the proposed requirement in the ED as ‘development costs should be expensed but if the criteria in IAS 38 paragraphs 57(a)–(f) are met, an entity shall capitalise the development costs’. The IASB member otherwise supported the staff’s recommendation.

Most IASB members were supportive to include this issue in the ED which will give opportunity to receive more feedback from the stakeholders.

IASB decision

Only 4 IASB members voted in favour of the staff’s recommendation to require SMEs to capitalise development costs with an undue cost or effort exemption.

10 IASB members voted in favour of the capitalisation of development costs being included as an option (i.e. an accounting policy choice) subject to meeting the criteria in paragraphs 57(a)–(f) of IAS 38.

Towards an Exposure Draft— IFRS 3 Business Combinations (Definition of a Business and Reacquired Rights) (Agenda Paper 30E)

This paper discussed whether to propose amendments to the IFRS for SMEs Standard to introduce a rebuttable presumption when applying the definition of a business and to provide guidance on reacquired rights as set out in IFRS 3 Business Combinations.

Staff recommendation

The staff recommend that the IASB:

• Propose aligning the definition of a business in the IFRS for SMEs Standard with the amended definition of a business issued in 2018, without introducing any rebuttable presumption
• Retain unchanged Section 19 of the IFRS for SMEs Standard for the improvements in IFRS 3 that provided additional guidance on reacquired rights (i.e. not to provide guidance on required rights for SMEs)

IABS discussion

Aligning the definition of a business

IASB members agreed with the staff’s recommendation that the definition of a business in IFRS 3 is more precise and simpler for SMEs to apply than a rebuttable presumption would be.

All IASB members supported the staff’s recommendation. to align the definition of a busines. 

Not to provide guidance on required rights for SMEs

IASB members noted the clear view of the SME Implementation Group (SMEIG) on not providing guidance on required rights for SMEs. IASB members also noted that ‘reacquired rights’ are not common for SMEs and thus the relevant criteria may not be met for adding such guidance into the IFRS for SMEs. In addition, accounting for reacquired rights might introduce complexities for SMEs if the guidance is not simplified.

All IASB members voted in favour of the staff’s recommendation not to provide guidance on reacquired rights for SMEs.

Towards an Exposure Draft — Other Issues (due to the alignment with IFRS 3, IFRS 10 and IFRS 11) (Agenda Paper 30F)

This paper discusses other issues that may require amendments to the IFRS for SMEs Standard due to the alignment with IFRS 3, IFRS 10 and IFRS 11.

Staff recommendations

The staff recommended that the IASB:

• Propose amendments to Section 9 of the IFRS for SMEs Standard to align with the requirements:
  • For step-disposals that result in loss of control as set out in paragraph 25(b) of IFRS 10
  • For changes in a parent’s ownership interests in a subsidiary without losing control as set out in paragraph 23 of IFRS 10
• Propose amendments to Section 15 of the IFRS for SMEs Standard to align with the requirements set out in paragraphs 23 and 25 of IFRS 11 and ask for further views in the ED

IASB discussion

Propose amendments to Section 9 of the IFRS for SMEs Standard

IASB members agreed that step-disposals that result in the loss of control are a significant economic event and the carrying amount of the retained investment should therefore be measured at the fair value to align with IFRS 10.

IASB members also agreed that changes in a parent’s ownership interests in a subsidiary without losing control are equity transactions and the alignment with paragraph 23 of IFRS 10 is consistent with the IASB tentative decision to align the IFRS for SMEs Standard with IFRS 3 and IFRS 10.

All IASB members voted in favour of the staff’s recommendation.

Propose amendments to Section 15 of the IFRS for SMEs Standard

IASB members agreed that the staff’s proposal will give the IASB an opportunity to ask a question in the ED on that topic. The staff’ proposal provides faithful presentation of the party’s interest in the joint arrangement if the party has the rights to the assets and obligations for the liabilities relating to the jointly controlled operation or the jointly controlled asset.

IASB members also agreed that this alignment is an improvement to the financial statements.

All IASB members voted in favour of the staff’s recommendation.