Cover paper (Agenda Paper 30)

In September 2022, the IASB published Exposure Draft Third edition of the IFRS for SMEs Accounting Standard (the ED). The ED was open for comment for 180 days, which ended on 7 March 2023.

At its June 2023 meeting, the IASB discussed the feedback on the ED and provided suggestions on questions for the SME Implementation Group (SMEIG) to consider. The IASB also redeliberated the proposed clarification to the definition of public accountability in the ED.

The SMEIG met on 13 July 2023 to discuss the feedback on the ED and provided advice to the IASB.

At the September IASB meeting, the IASB:

• Discussed the following overarching topics, which will assist the IASB in its redeliberations of the proposals in the ED:
  • The project plan
  • Research on characteristics of SMEs
  • Approach to updating the IFRS for SMEs educational modules and also when guidance to include guidance in the IFRS for SMEs Accounting Standard (the Standard)
• Discussed two topics in the ED:
  • Findings from fieldwork on the proposed revised Section 23 Revenue from Contracts with Customers
  • Approaches to address the feedback on the proposals for impairment of financial assets

Project plan (Agenda Paper 30A)

This paper summarised the staff’s proposed project direction and plan for redeliberation of the proposals in the ED for the IASB to discuss.

The staff recommended that the IASB finalise the draft Standard as set out in the ED by:

• Continuing to use the alignment approach
• Confirming that the scope of the review is to consider alignment for requirements that are effective at the publication date of the Request for Information

IASB discussion

All IASB members agreed with the staff recommendations to finalise the draft Standard as set out in the ED. Some IASB members raised concerns about the timeline. Specifically, that there is only a short gap between the completion of the IASB’s main redeliberations in the first half of 2024 and the planned publication of the third edition of the IFRS for SMEs Accounting Standard in the fourth quarter of 2024.

IASB decision

All IASB members voted in favour of the staff recommendations.

Characteristics of SMEs (Agenda Paper 30B)

This paper discussed the characteristics of entities that apply the IFRS for SMEs Accounting Standard and the information needs of the users of their financial statements. This paper is intended to help IASB members by providing a context for the redeliberations of the proposals in the ED. This paper was for discussion only and the IASB was not asked to make any decisions on this paper at this meeting.

IASB discussion

IASB members found the research and analysis provided by the staff in this paper are useful and some IASB members in particularly liked the ‘map’ in Appendix A of the agenda paper for adoption of the IFRS for SMEs Accounting Standard by jurisdiction.

No decision was made.

Approach to providing educational material on the Standard (Agenda Paper 30C)

The purpose of this paper was to ask the IASB to:

• Discuss the objective of providing educational material on the Standard; and
• With this objective in mind:
  • Decide on the approach to updating the IFRS for SMEs educational modules on the IFRS Foundation website, or providing alternative educational material
  • Discuss how to strike an appropriate balance of providing guidance and examples in the Standard versus providing guidance and examples in separate educational material

The staff have identified four options for the IASB to consider for updating the IFRS for SMEs educational modules: 

• Option 1—do not update the educational modules, that is withdraw the modules and do not provide similar comprehensive educational material on the Standard
• Option 2—update the IFRS for SMEs educational modules
• Option 3—update and improve the IFRS for SMEs educational modules
• Option 4—replace the IFRS for SMEs educational modules with a new type of educational material, for example eLearning

The staff recommended that the IASB:

• Commits to either updating the IFRS for SMEs educational modules or providing similar comprehensive educational material
• Uses the following factors when including guidance in the Standard or separate educational material:
  • In general, guidance should be included in the Standard (and form part of the mandatory requirements) if it meets both of the following factors:
    • It is relevant to many SMEs
    • It is necessary to operationalise principles in Standard
  • In general, guidance should be included in separate educational material if it is:
    • Non-mandatory
    • About specific fact patterns
    • Not relevant to many SMEs

IASB discussion

All IASB members agreed that educational material is necessary for the users of the IFRS for SMEs Accounting Standard. Some IASB members raised concerns about the e-learning option and noted the resource constraints for developing e-learnings. Therefore, these members did not support Option 4. Some IASB members noted that Option 2 is the most realistic solution and suggested the staff focus on accessibility and visibility to maximise the return for developing the education material. It is not necessary to have new content and functionality as suggested in Option 3.

In relation to the factors when including guidance in the Standard or separate educational material, some IASB members agreed and liked the factors proposed by the staff. One IASB member suggested that ‘non-mandatory’ is a general requirement for all guidance to be included in the educational material and not one of the three factors. Some IASB members suggested ‘necessary to operationalise principles in Standard’ should be the only factor to have guidance in the Standard and the factor in relation to ‘relevant only’ helps to make the decision on whether guidance is necessary to operationalise principles.

The staff acknowledged some degree of judgement will be necessary to determine whether guidance should be included In the Standard or in separate educational material. There will be situations in which the factors proposed would not be used to make the decision.

IASB decision

All IASB members voted in favour of the staff recommendation that the IASB commits to either updating the IFRS for SMEs educational modules or providing similar comprehensive educational material.

No decisions were made on the factors for deciding when guidance belongs in the Standard or in separate educational material and the staff will work on the educational material based on the feedback received from IASB members.

Proposed revised Section 23 Revenue from Contracts with Customers—Fieldwork methodology (Agenda Paper 30D)

This paper described the methodology used for the fieldwork on the requirements for revenue proposed in the ED. The paper is provided to assist the IASB in considering the findings from the fieldwork in Agenda Paper 30E of this meeting. This paper was provided for information only and the IASB was not asked to make any decisions.

This paper was discussed together with Agenda Paper 30E.

Proposed revised Section 23 Revenue from Contracts with Customers—Findings from fieldwork (Agenda Paper 30E)

This paper discussed the findings from the fieldwork on the requirements for revenue proposed by the IASB in the ED. The fieldwork focused on the judgements that an SME would be required to make when applying Section 23 Revenue from Contracts with Customers of the ED. The methodology used for the fieldwork is described in Agenda Paper 30D of this meeting. This paper was provided for information only and the IASB was not asked to make any decisions.

IASB discussion

Agenda Papers 30D and 30E were discussed together.

One IASB member suggested that the staff look at the PIR of IFRS 15 when deciding whether some of the requirements in IFRS 15 are unclear and whether they would be an issue for SMEs to apply those. Some IASB members suggested that the staff give more insights into and context on the feedback (e.g. who made the feedback and why the feedback was made).

Some IASB members thought that the length of the proposed change to Section 23 of the IFRS for SMEs Accounting Standard was too long and the length would be problematic for readers.

Some IABS members noted the good work that the staff have put into the two papers and suggested that the staff balance the simplification to be proposed in the Standard and the quality of the information that will be provided as a result of the amendments. Some IASB members were concerned about too many deviations from IFRS 15 if the staff want to address all feedback received.

No decision was made.

Impairment of financial assets (Agenda Paper 30F)

The purpose of this paper was to ask the IASB to:

• Consider feedback on the proposals for impairment of financial assets in the ED
• Provide direction on alternative approaches to address that feedback

If the IASB affirms that the expected credit losses (ECL) model meets the relevance principle for SMEs, the staff seek the IASB’s view on whether to explore further any of the following alternatives for incorporating a simplified ECL model into the Standard:

• Alternative 1—retaining or refining the proposals in the ED
• Alternative 2—providing an accounting policy option to use either the simplified ECL model or the incurred loss model
• Alternative 3—only requiring application of the simplified ECL model if an SME provides financing to customers as a main business activity
• Alternative 4—retain an incurred loss model for all SMEs, with additional credit risk disclosures for the small subset of SMEs that provide financing to customers as main business activity

The staff specifically asked the following questions:

• Does the IASB think that the ECL model meets the relevance principle for SMEs?
• If the IASB is not satisfied that the ECL model meets the relevance principle, does the IASB agree to retain an incurred loss model for financial assets measured at cost or amortised cost and consider whether to introduce additional disclosure requirements?
• If the IASB is satisfied that the ECL model meets the relevance principle, which of the alternatives mentioned in this agenda paper would the IASB like the staff to develop further?

IASB discussion

One IASB member agreed that ECL is relevant to both small and big entities. He agreed that applying the ECL model to some financial assets would not meet cost-benefit criteria. However, for complicated instruments applying the ECL model is necessary.

One IASB member noted that the ECL model is not relevant for SMEs and explained that the objective of IFRS 9 is to have a single impairment model. The ED introduced two models for different financial assets which made impairing financial assets under the IFRS for SMEs Accounting Standard even more onerous than under IFRS 9.

Some IASB members considered that for most (e.g. 99.9% of) SMEs it would not make a difference whether they applied the incurred loss model or the ECL model. Therefore, they did not think that the ECL model is relevant for SMEs.

Some IASB members agreed that SMEs with more complex lending arrangements should apply the ECL model. Therefore, these IASB members supported Alternative 3.

Some IASB members expressed concerns about what degree of judgement will be applied to define whether an SME provides financing as a primary or major business activity. Some IASB members agreed that this is a scope issue as the fact whether an entity’s primary or major business activity is to provide financing should be in the scope of the IFRS for SMEs Accounting Standard.

IASB decision

7 of the 14 IASB members decided that the problem the IASB addressed in introducing the ECL model in IFRS 9 does not meet its principle of relevance to SMEs because the population of entities eligible to apply the IFRS for SMEs Accounting Standard that have significant exposure to credit risk is expected to be small. The Chair used his additional casting vote, making the vote 8:7 in favour of the decision.

The staff will bring a paper to a future IASB meeting on Alternative 3, Alternative 4 and other options for further consideration.