Second Comprehensive Review of the IFRS for SMEs Standard

Date recorded:

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 will deliberate:

  • Feedback on the scope (including the definition of public accountability) and name of the IFRS for SMEs Accounting Standard
  • Topics identified when developing the ED after considering the tentative decisions made by the IASB in deliberating this comprehensive review that are:
    • Potential inconsistencies between the revised Section 2 Concepts and Pervasive Principles of the IFRS for SMEs Accounting Standard and other sections of the standard
    • Sweep issues—consequential to amendments to the IFRS for SMEs Accounting Standard that the IASB has tentatively decided to propose
    • Other sweep issues identified by the staff
  • Transition requirements for an entity applying the amendments to the IFRS for SMEs Accounting Standard for the first time
  • The effective date of the amendments to be proposed

Towards an Exposure Draft—Scope and name of the IFRS for SMEs Accounting Standard (Agenda Paper 30A)

This paper discusses whether to propose amendments to the scope and name of the IFRS for SMEs Accounting Standard.

Scope

At the start of this second comprehensive review, the IASB conducted outreach with its consultative groups and national standard-setters on whether to amend the scope of the IFRS for SMEs Accounting Standard to allow some publicly accountable entities to apply the Standard by permitting exceptions to the definition of public accountability. Responses to outreach supported the IASB’s view that changes to the scope of the IFRS for SMEs Accounting Standard might require other changes that would increase the complexity of the Standard. Furthermore, concerns were raised about the difficulty in clearly defining the group of entities with public accountability that would be permitted to apply the IFRS for SMEs Accounting Standard. At the March 2019 International Forum of Accounting Standard Setters (IFASS) meeting, IFASS members did not support suggestions to provide exceptions to the definition of public accountability and expressed concerns about the difficulty of drafting such exceptions.

Name

The IASB discussed the name of the Standard ‘IFRS for SMEs’ and the use of the term ‘small and medium-sized entities’ (SMEs) on several occasions during development of the Standard. After soliciting views in the 2004 Discussion Paper Preliminary Views on Accounting Standards for Small and Medium-sized Entities, the IASB chose the term ‘small and medium-sized entities (SMEs)’ to describe the entities eligible to apply the standard, primarily because SME is recognised globally. However, many respondents said that ‘SME’ is not appropriate because ‘small’ and ‘medium’ imply a size test and the term SME already has precise, and differing, quantified definitions in many jurisdictions and two definitions for the same term would lead to confusion.

The IASB decided that the best alternative for the name of the Standard was ‘IFRS for SMEs’ after several rounds of discussions, which included considering all of the alternatives suggested by respondents to the RFI. The name ‘IFRS for SMEs’ is now well established as a recognised brand and changes to the name risk weakening this brand. The standard is commonly recognised and adopted by jurisdictions as the alternative to local GAAP for the middle tier of entities, i.e. those entities that do not have public accountability and are not covered by a local standard for micro-sized entities. Furthermore, changing the name might cause problems for local laws or regulations.

Staff recommendation

The staff recommend the IASB does not amend the scope and the name of the IFRS for SMEs Accounting Standard.

Towards an Exposure Draft—Definition of public accountability (Agenda Paper 30B)

This paper discusses whether the definition of public accountability in the IFRS for SMEs Accounting Standard (and the draft Standard Subsidiaries without Public Accountability: Disclosures) is still fit for purpose or needs further clarification.

Staff recommendation

The staff recommend the IASB should:

  • Clarify the definition of public accountability in the IFRS for SMEs Accounting Standard (and also in the Standard Subsidiaries without Public Accountability: Disclosures, if the IASB finalises the draft Standard) to improve understanding
  • Clarify in the Standard Subsidiaries without Public Accountability: Disclosures, if finalised, that an intermediate parent assesses its eligibility to use that standard in its separate financial statements on the basis of its own status without considering whether other group entities have, or the group as a whole has, public accountability, using similar wording to that of paragraph 1.7 of the IFRS for SMEs Accounting Standard
  • Make the guidance on public accountability in Module 1 Small and Medium-sized Entities (the educational material on Section 1 of the IFRS for SMEs Accounting Standard) available on the IFRS Foundation website as guidance on the Standard Subsidiaries without Public Accountability: Disclosures, if finalised

Towards an Exposure Draft—Review for inconsistencies between revised Section 2 and other Sections of the IFRS for SMEs Accounting Standard (Agenda Paper 30C)

This paper summarises the findings from the review for inconsistencies between:

  • Section 2 Concepts and Pervasive Principles of the IFRS for SMEs Accounting Standard that the IASB tentatively decided to propose to amend to align it with the 2018 Conceptual Framework
  • Other Sections of the IFRS for SMEs Accounting Standard—after considering all of the IASB’s tentative decisions to propose amendments to the IFRS for SMEs Accounting Standard as part of this comprehensive review

IAS 37 includes the 1989 Framework definition of a liability. IAS 38 includes the 1989 Framework definition of an asset. Both standards were not amended following the revision of the definitions in 2018 Conceptual Framework. Equivalent Sections in the IFRS for SMEs Accounting Standard (Section 21 Provisions and Contingencies and Section 18 Intangible Assets other than Goodwill) do not include the definitions of an asset and a liability. In developing the ED, the staff consider including the definitions of an asset and a liability in Section 18 and Section 21.

Staff recommendation

The staff recommend the IASB propose amendments to the standard to:

  • Include the 1989 Framework definitions of an asset and a liability in Section 21 and Section 18
  • Remove the references to the recognition criteria in Section 2 from Section 17 Property, Plant and Equipment and Section 18 Intangible Assets other than Goodwill

Towards an Exposure Draft—Sweep issues (Agenda Paper 30D)

This paper discusses sweep issues for the IASB to consider that:

  • Are consequential to amendments to the IFRS for SMEs Accounting Standard that the IASB has tentatively decided to propose
  • Have been identified by the staff in developing the ED

Staff recommendation

The staff recommend the IASB:

  • Propose amendments to Section 19 of the IFRS for SMEs Accounting Standard:
    • To align with the requirements set out in paragraph 11 of IFRS 3 Business Combinations (as amended in May 2020)
    • To align with the requirement of IFRS 3 that an acquirer cannot recognise a contingency that is not a liability
  • Propose amendments to the IFRS for SMEs Accounting Standard to align with the definition of accounting estimates as set out in IAS 8 as amended in February 2021 and consequently, introduce the application guidance relevant to SMEs as set out in IAS 8
  • Propose amendments to paragraph 9 of Section 11 Basic Financial Instruments of the IFRS for SMEs Accounting Standard to reflect the 2017 amendments to IFRS 9 to enable SMEs to measure at amortised cost debt instruments that have prepayment features with negative compensation
  • Propose amendments to paragraph 8 of Section 14 Investments in Associates of the IFRS for SMEs Accounting Standard to reflect the 2017 amendments to IAS 28 and to clarify, for SMEs, the treatment of financial instruments that form part of an entity’s net investment in an associate or jointly controlled entity
  • Propose amendments to Section 33 Related Party Disclosures of the IFRS for SMEs Accounting Standard to align it with IAS 24, with some proposed simplifications

Towards an Exposure Draft–IFRS for SMEs Accounting Standard transition requirements for alignment with new IFRS Accounting Standards (Agenda Paper 30E)

This paper discusses how entities applying the IFRS for SMEs Accounting Standard would initially apply the proposed amendments to align with new IFRS Accounting Standards in the scope of the second comprehensive review.

Staff recommendation

The staff recommend the IASB use the transition requirements and reliefs of the new IFRS Accounting Standards as the starting point and supplement these with reliefs for SMEs, which are set out in detail in the agenda paper on a section-by-section basis.

Towards an Exposure Draft—Effective date (Agenda Paper 30F)

The purpose of this paper is to ask the IASB to consider the effective date for the revised IFRS for SMEs Accounting Standard.

Staff recommendation

The staff recommend the IASB propose that the effective date for the revised IFRS for SMEs Accounting Standard be a minimum of two years after the revised version is issued, with early application permitted.

Correction list for hyphenation

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