Cover paper (Agenda Paper 30)

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

At the February 2024 IASB meeting, the IASB continued its redeliberations of the proposals in the ED.

Proposed amendments to Section 9 Consolidated and Separate Financial Statements (Agenda Paper 30A)

The purpose of this paper was for the IASB to consider feedback on its proposal in Section 9 Consolidated and Separate Financial Statements of the ED and ask the IASB to decide whether to amend Section 9 of the IFRS for SMEs Accounting Standard.

Staff recommendation

The staff recommended that the IASB should:

• delete paragraph 9.23(b) of the IFRS for SMEs Accounting Standard which requires an SME to disclose the basis for concluding that control exists when the parent does not own, directly or indirectly through subsidiaries, a majority of the voting rights of the other entity; and
• update paragraph 8.6 of Section 8 Notes to the Financial Statements of the standard to include examples of the types of judgements that management might have made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

IASB discussion

IASB members were supportive of the staff recommendation to have a single requirement in paragraph 8.6 of the standard. The disclosure of judgements made when applying the control model (i.e. judgements made by SMEs in determining whether it controls or does not control another entity) should be added as an example of a disclosure meeting the requirement in paragraph 8.6.

IASB decision

All IASB members voted in favour of the staff recommendation.

Proposed amendments to Section 19 Business Combinations and Goodwill (Agenda Paper 30B)

The purpose of this paper was to ask the IASB to consider feedback on the proposals in the ED to align Section 19 Business Combinations and Goodwill of the IFRS for SMEs Accounting Standard with the acquisition method of accounting in IFRS 3 and decide whether to proceed with its proposals in the ED to amend Section 19 of the standard.

Staff recommendation

The staff recommended that the IASB should make the following amendments to Section 9 of the IFRS for SMEs Accounting Standard in the ED among other proposals:

• Introduce requirements for an acquisition achieved in stages (step acquisitions) as set out in IFRS 3
• Not introduce the fair value option for measuring non-controlling interest in the acquiree
• Not introduce application guidance, as set out in IFRS 3:B36 and B53, on reacquired rights regarding the settlement of pre-existing relationships
• Remove the non-mandatory appendix to Section 19 (Appendix B) and include those examples in separate educational material and consider suggestions for additional guidance and illustrative examples when updating the separate educational material

IASB discussion

IASB members agreed with the staff recommendation to introduce step acquisition accounting as set out in IFRS 3 given the strong evidence received in the feedback which satisfies the relevance principle in the IASB’s alignment approach.

IASB members were supportive of not introducing the fair value option for measuring non-controlling interest in the acquiree since introducing such an option increases complexity and reduces comparability.

IASB members were supportive of moving the non-mandatory appendix to Section 19 (Appendix B) to separate educational material in line with the IASB discussion in September 2023. The discussion was in relation to which type of guidance to include in the standard and which to include in educational material and included a suggestion to move non-mandatory guidance from the standard to separate educational material for consistency. This will keep the standard concise.

IASB decision

All IASB members voted in favour of the staff recommendations.

Proposed revised Section 23 Revenue from Contracts with Customers—Redeliberation topics (Agenda Paper 30C)

The purpose of this paper was to ask the IASB to consider feedback on eight topics where stakeholders requested changes to, or raised concerns about, the requirements proposed in Section 23 Revenue from Contracts with Customers of the ED and to decide whether to change the requirements proposed in the ED.

Staff recommendation

The staff recommended that the IASB should:

• remove the option for an SME to account for a contract modification as a separate contract if the modification meets the criteria in paragraph 23.15(a)–(b) of the ED. Instead, require an SME to account for a contract modification as a separate contract if the modification meets the criteria in paragraph 23.15(a)-(b) of the ED;
• remove the requirement for an SME to determine if the effect of accounting for an option that provides a material right to a customer as a separate promise is significant to the individual contract. Instead, require an SME to account for an option that provides a material right to a customer as a separate promise, unless doing so involves undue cost or effort;
• remove the requirement for an SME to recognise the incremental costs of obtaining a contract as an asset if the SME can identify and assess the costs as recoverable without undue cost or effort. Instead, require an SME to recognise costs to obtain a contract as an expense when incurred; and
• retain the proposed requirements on:
  • performance obligation/promise terminology;
  • measuring variable consideration;
  • non-cash consideration (but include the term ‘barter’ in the description of non-cash consideration; and present separately the requirement to measure the fair value of non-cash consideration and the exemption from the requirement to measure the fair value of non-cash consideration);
  • allocation based on stand-alone selling prices (but include guidance on methods for estimating the standalone selling price in separate educational material instead of the revised Section 23); and
  • allocating variable consideration (but combine the requirements for allocating variable consideration and discounts).

IASB discussion

IASB members agreed with the staff recommendation to require an SME to account for a contract modification as a separate contract if the modification criteria are met. IASB members noted that the justification for introducing such a requirement is clear in the staff paper. They conceded that the proposed simplification in the ED is not straightforward to apply.

Overall, IASB members were supportive of the staff recommendation to require an SME to account for an option within a contract that provides a material right to a customer as a separate promise, unless doing so involves undue cost or effort. One IASB member raised concerns over whether the undue cost or effort exemption would lead to inappropriate accounting when those options are material in economic terms.  However, the IASB member acknowledged that the undue cost or effort exemption addresses concerns about SMEs that do not have systems to capture information about customer options. Therefore, the IASB member agreed with the staff recommendation as there are no better alternatives here.

IASB members agreed that costs to obtain a contract are normally immaterial in an SME context while the cost of applying the proposed requirements to recognise such costs as an asset is higher than its benefits. In addition, the users of SME accounts focus on cash flows rather than the timing of expense. Therefore, IASB members supported to expense such costs.

IASB members agreed with the staff recommendation to use the term ‘promise’ in the revised Section 23, instead of the term ‘performance obligation’ for simplification. IASB members noted that no difficulties were identified by participants in the fieldwork to apply the simplified terminology. In addition, ‘promise’ is easier for the SMEs community to understand. Some IASB members raised concerns that using the term ‘promise’ in the IFRS for SMEs standard would be confusing for preparers and for users that are familiar with IFRS 15. The staff explained that the different terms do not directly change the outcome reached by an entity when determining if a good or service is distinct.

IASB members agreed to retain the requirements proposed in the ED for measuring variable consideration in the revised Section 23 although they acknowledged some complex contracts can be challenging when determining variable consideration.

No objections were made in relation to the staff recommendations for non-cash consideration, allocation based on stand-alone selling prices and allocating variable consideration.

IASB decision

All IASB members voted in favour of the staff recommendations.