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Accounting Standards for Small and Medium-sized Entities (SMEs)

Date recorded:

The staff noted that a discussion paper on this topic would be formally issued on Thursday, 24 June 2004, with comments due by 24 September. The staff has identified 40 organisations of SMEs, primarily in Europe, to which the discussion paper will be sent in an attempt to elicit comments from those directly involved in preparing SME financial statements, in addition to IASB's normal respondent base.

The Board then discussed extractions of SME standards from full IFRSs, considering IAS 1, IAS 8, and the IASB Framework. The Board will continue to consider extractions of standards at its July and September meetings while awaiting responses to the discussion paper. The Board agreed that the process for extractions would be to identify the principles in each existing IFRS, consider the appropriateness of the principles for SMEs, consider what additional requirements are needed to operationalise the standard, and where necessary provide additional guidance.

Accounting policy choices. If there is an accounting policy choice in an IFRS, the Board considered whether all of the policy choices in the IFRS should also be available in the related SME standard. The Board agreed that the SME standard should identify the policy choice that it believes is the simplest and most relevant, and generally include only that policy choice in the SME standard, with a cross-reference to the additional choice(s) in the IFRS, which SMEs may elect to apply.

Optional fallback to IFRS. The Board had already agreed that if an entity chooses to apply a treatment in a full IFRS rather than the SME provisions, it must apply the entire IFRS in which that treatment is addressed. For example, if the SME borrowing costs standard does not provide for capitalising borrowing costs, an SME could elect to capitalise by applying IAS 23. In that case, however, IAS 23 would be applied in its entirety.

Mandatory fallback. The Board then considered the 'mandatory fallback' when an SME standard does not address a particular transaction that is addressed in the full IFRS. For example, if the SME employee benefits standard only discussed how to account for defined contribution plans, which requirements would an SME with defined benefit plans be required to comply with? The Board agreed the mandatory fallback to an IFRS should be on an issue by issue basis, rather than a standard by standard basis. Accordingly, in this example, the entity would be required to comply with the requirements of IAS 19 as they relate to defined benefit plans, but would not be required to comply with all other requirements of IAS 19.

Preface. The Board agreed that there is a need for a preface, or similar document, for the SME series of standards. Such a document would explain which entities are eligible to use the SME standards and the rules relating to voluntary and mandatory fall-backs to full IFRSs. The staff agreed to prepare a proposed preface once comments on the SME discussion paper have been received.

Interpretations. The Board considered the role of SIC Interpretations and IFRIC Interpretations in the SME regime and agreed that if, for any reason, an entity must look to full IFRS in accounting for a transaction, that entity is also required to take account of the related SIC interpretations. The Board agreed that where Interpretations are relevant to SMEs those interpretations should be incorporated into the relevant SME standard.

Justifications for changing an IFRS in the SME version. The Board discussed appropriate reasons for the SME standards departing from full IFRS and agreed that a departure from full IFRS should be considered for the SME standards in the following situations:

  • The issues are unlikely to be relevant to SMEs.
  • Where the departures will better meet SME user needs.
  • On the basis of a cost/benefit analysis.
  • Where it is possible to simplify a measurement calculation without detracting from the principle.
  • Where it is possible to provide guidance for a type of transaction that may be common for SMEs.

The Board agreed that the basis for conclusions of each SME standard should explain the rationale for changes to the full IFRS.

Going concern. The Board considered the requirement in IAS 1 for an entity to disclose whether or not it is a going concern, and agreed that this requirement should be retained in the SME standard. The Board considered the merits of providing guidance as to how to complete the accounting for an entity that is not considered to be a going concern and decided against it.

Classified balance sheet. The Board considered whether the SME version of IAS 1 should include balance sheet presentation both on the current/non-current basis and also the liquidity basis. The Board agreed that both alternatives should be retained in the SME standard, and further guidance should be provided on identifying which of the two alternatives provides the most relevant and reliable information.

Analysis of expenses. The Board considered whether the SME standard should require expenses to be analysed only by nature (IAS 1 allows a choice of nature or function), and agreed to leave both alternatives in the SME standard.

Illustrative guidance. The Board discussed the status of the illustrative examples to IAS 1 and agreed that those examples should be retained in the SME standard with the same status as they have in IAS 1. That is, those examples that form part of the standard will be considered mandatory, and those that are identified as being an accompaniment to, rather than a part of, the standard will be considered non-mandatory.

Statement of changes in equity. The Board considered the format of the statement of changes in equity, and which of the alternatives in IAS 1 is most relevant to SME users. The Board agreed that the format that includes transactions with owners as owners is most relevant and should be required as part of the SME regime, with the SME standard cross-referring to IAS 1 should entities wish to use an alternative format.

Disclosure of management judgements and assumptions. The Board agreed that the requirement to disclose significant management judgements used in preparing the accounts should not be retained in the SME regime, but the requirement to disclose information about key assumptions concerning the future and other key sources of estimation uncertainty at balance sheet date should be included in the SME standard.

True and fair override. The Board discussed the appropriateness of including the "true and fair override" in the SME standard. The Board agreed that this requirement should be mentioned in the SME standard with a cross-reference to the explanation of the requirement in IAS 1.

Liability classification. One Board member noted that the FASB was unlikely to converge with the IASB on the classification of a liability as current at balance sheet date if a breach of a covenant is cured after balance sheet date but before the financial statements have been authorised for issue, because SMEs, in particular, often may be unlikely to identify a breach before the balance sheet date, and therefore would not have an opportunity to rectify it until after balance sheet date.

The Board agreed that if time permitted they would return to this topic at a later point in the meeting.

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