Cover paper (Agenda Paper 30)

In September 2022, the IASB published exposure draft (ED) Third edition of the IFRS for SMEs Accounting Standard. The purpose of this meeting was for the IASB to continue its redeliberations of the proposals in the ED.

Reconciliation liabilities arising from financing activities (Agenda Paper 30A)

The purpose of this paper was to ask the IASB to consider feedback on paragraph 7.19A of the ED, which proposes to require SMEs to disclose a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities and decide whether to make any changes to that paragraph.

Staff recommendation

The staff recommended that the IASB should finalise the disclosure requirement proposed in paragraph 7.19A of the ED.

IASB discussion

IASB members supported the staff recommendation to finalise the disclosure requirement proposed in paragraph 7.19A of the ED. IASB members agreed with the staff analysis that requiring a reconciliation in paragraph 7.19A of the ED could provide users of financial statements with an improved understanding of an entity’s financing activities, particularly when SMEs have financing arrangements other than a simple bank loan, for example SME lessees in finance leases.

IASB decision

All IASB members voted in favour of the staff recommendations.

Agriculture: Bearer plants (Agenda Paper 30B)

The purpose of this paper was to ask the IASB to consider feedback on the proposed amendments to align the IFRS for SMEs with Agriculture: Bearer Plants (Amendments to IAS 16 Property, Plant and Equipment and IAS 41 Agriculture) published in 2014 and decide whether to make any changes to these proposed amendments.

Staff recommendation

The staff recommended that the IASB finalise the proposal in the ED to align Section 34 of the IFRS for SMEs with Agriculture: Bearer Plants (Amendments to IAS 16  and IAS 41), but clarify that Section 34 does not apply to bearer plants that can be measured separately from the produce on them without undue cost or effort on an ongoing basis.

IASB discussion

Overall, IASB members were supportive of the staffs’s recommendations to finalise the proposal in the ED to align Section 34 of the standard with the amendments, but suggested to clarify that Section 34 does not apply to bearer plants that can be measured separately from the produce on them without undue cost or effort on both initial recognition and on an ongoing basis.

One IASB member suggested the staff incorporate the diagrams presented in the appendix of the staff paper into either educational material or the basis for conclusions of the standard to illustrate the accounting for bearer plants. 

IASB decision

All IASB members voted in favour of the staff recommendations.

Impairment of financial assets (Agenda Paper 30C)

The purpose of this paper is for the IASB to consider feedback on the proposals for impairment of financial assets in Section 11 of the ED and decide whether to make any changes to these proposals.

Staff recommendation

The staff recommends that the IASB retains the incurred loss model for impairment of financial assets for SMEs that do not provide financing to customers as one of its primary businesses and requires SMEs that provide financing to customers as one of its primary businesses to apply an expected credit loss model for impairment of financial assets, which is aligned with the simplified approach in IFRS 9.

IASB discussion

Several IASB members agreed with the staff analysis that the ECL model is relevant to a small population of SMEs that have a significant exposure to credit risk and applying an ECL model would improve the information for users of the SMEs’ financial statements due to the timely recognition of credit losses. Some IASB members challenged the staff analysis in relation to ‘relevance to SMEs’ and noted that the ECL model is complex, and the costs will outweigh the benefits for the population of entities that apply the ECL model.

One IASB member noted that most respondents to the UK FRC consultation on the comprehensive review of UK Financial Reporting Standard (FRS) 102 agreed with the FRC’s preliminary view that it may be appropriate to define the scope of entities that are required to apply an ECL model for cost-benefit reasons. These respondents noted that for some entities, such as building societies and providers of debt, applying the ECL model could outweigh the costs.

Despite agreeing that the ECL model is relevant for some SMEs, IASB members raised concerns about complexities that may be created to determine whether an entity provides financing to customers as one of its primary businesses. In addition, complexity will be created when applying both the ECL model and the incurred loss model within one entity.

Some IASB members noted that further ex¬pos¬ure and targeted outreach may be required to understand cost-benefit factors for an SME that provides financing to customers and applies the ECL model. It is also important to understand whether it is more onerous to apply the ECL model to all groups of assets held by the entity or to apply both the incurred loss model and ECL model within one entity.

IASB decision

10 of the 14 IASB members agreed that there is a small population of SMEs with significant exposure to credit risk and therefore, for this population, the relevance principle is met.

10 IASB members agreed that SMEs that provide financing to customers as one of its primary businesses could be used to define the population of SMEs with significant exposure to credit risk.

8 IASB members agreed that SMEs that provide financing to customers as one of its primary businesses should be required to apply an ECL model.

12 IASB members agreed with the staff recommendation to retain the incurred loss model for impairment of financial assets for SMEs that do not provide financing to customers as one of its primary businesses.

9 IASB members agreed with the staff recommendation to require SMEs that provide financing to customers as one of its primary businesses to apply an ECL model, aligned with the simplified approach in IFRS 9, to measure the impairment of their financial assets.

Section 20 Leases and IFRS 16 Leases (Agenda Paper 30D)

The purpose of this paper is to ask the IASB to consider the feedback on the ED on amending the IFRS for SMEs to align it with IFRS 16 in a future review of the standard, including cost-benefit considerations of aligning the  Standard with IFRS 16 and decide whether to consider aligning the standard with IFRS 16 in the next comprehensive review of the standard.

Staff recommendation

The staff recommends that the IASB consider aligning the Standard with IFRS 16 in the next comprehensive review of the standard.

IASB discussion

IASB members agreed with the staff recommendation that an interim review is costly. Therefore, considering aligning the standard with IFRS 16 in the next comprehensive review instead of conducting an interim review provides SMEs with a stable platform.

IASB decision

All IASB members voted in favour of the staff recommendation.