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Standards for Small and Medium Sized Entities (SMEs)

Date recorded:

The Board considered the responses from commentators on the discussion paper on SMEs, and considered recommendations made by the sub-committee on SMEs.

The following responses from the comment letters were noted

  • An overwhelming majority of respondents believed that full IFRS was not suitable for all entities (however, the Board clarified that they do not believe this means all entities should be prohibited from applying full IFRS)
  • A majority of respondents believed separate standards should be developed for SMEs, with a minority favouring the existing standards simply stating which paragraphs need not be applied by SMEs (an 'IAS minus' approach)
  • Many respondents said that the decision as to whether full IFRS should apply to all listed entities should be left in the hands of local regulators. The Board noted that where an entity which did not qualify for SME accounting (as defined by the Board) used SME accounting (even under the direction of a regulator) this could not be claimed to be full IFRS or SME IFRS, and would instead be considered national GAAP
  • Nearly one half of respondents agreed with the objectives of the SME accounting as set out by the Board in the discussion paper, with the majority of reservations expressed being in relation to whether SME standards should be built on the same conceptual framework as IFRS (the Board also noted some confusion from respondents as to the use of the word 'enforceable' and noted that the Board had no intention or desire of enforcing standards, simply that their standards must be written in such a way as to be enforceable by the relevant regulatory bodies)
  • A majority of respondents agreed that a 'characteristics' approach was a better method of defining SMEs, rather than issuing quantitative guidelines.
  • Respondents supported a proposal that where SME standards did not address a particular issue the entity should be required to revert to the requirements of full IFRS in respect of that issue
  • A majority of respondents however disagreed with the proposal that where an entity wishes to apply full IFRS rather than the SME standards they should be allowed to (the Board had proposed that entities could adopt entire full IFRS standards in replace of the related SME standard if they so desired)
  • A majority of respondents agreed that the IASB should complete the SME project by starting with full IFRS and working back to SME standards, there was very little support for starting from scratch
  • Respondents noted that full IFRS should be amended where considered necessary after consideration of user needs and a cost/benefit analysis
  • A clear majority of respondents agreed that it was likely that disclosure and presentation modifications to full IFRS would be needed in respect of SMEs having taken into account user needs and cost/benefit analyses
  • A majority of respondents disagreed that the Board should approach this project with a presumption that no modification should be made to recognition and measurement requirements, believing instead that the Board should keep an open mind on this issue
  • A majority of respondents agreed that IASB Standards for SMEs should be published in a separate printed volume
  • Views of respondents as to whether SME standards should be presented in IFRS sequence or topically were divided
  • Having heard the views expressed by constituents, the chair of the sub-committee, Tom Jones, put forward the recommendations of the sub-committee.

The Board agreed that they are strongly committed to this project. The Board agreed that the project should focus on companies without public accountability that have external users. It was noted that the definition of SMEs should be framed in such a way as to presume full IFRS is appropriate to all entities, but noting that they are not designed with all entities in mind SME standards are necessary.

The Board agreed to keep an open mind as to the possibility of recognition and measurement differences between full IFRS and SME standards. The Board agreed that there should be two attestations - IFRS and IFRS for SMEs. It was noted that the term 'small and medium-sized entities' is misleading as it does not adequately disguise the entities being targeted by the Board and suggested that alternative names should be considered.

The Board agreed to require that where an issue is not dealt with in SME standards, an entity must apply full IFRS in respect of that issue. It was noted that the hierarchy for SMEs would be to look at the relevant SME standard, look at the remaining SME standards and then default into full IFRS and the hierarchy of IAS 8. The Board agreed by a narrow margin that an entity could not elect to apply full IFRS to particular scenarios - they must either use SME standards or full IFRS rather than cherry-picking between the two. One of the justifications for this was the issue of comparability, although the Board acknowledged the 'comparability' objective may not be as relevant to SMEs as it is to those with full public accountability. The Board agreed to proceed with this as its working assumption (that full IFRS standards could not be defaulted to on a voluntary basis) but noted that this decision may need to be revisited.

The Board agreed that IFRS for SMEs should be organised topically rather than by standard. It was noted that this was consistent with a project being undertaken in the US to re-codify US GAAP by topic. It was greed that the IASB would work on SME standards on a 'full IFRS standard by full IFRS standard' basis, and once those amendments are complete will consider the best way for structuring the SME standards. In presenting SME standards topically a concordance will be required in order to enable entities to identify where the requirements come from.

The Board agreed that standards should be consistent with the conceptual framework and amended to reflect user needs and cost benefit analysis. The Board agreed that there should not be a requirement for entities that feed full IFRS information up to a parent to prepare its own accounts on a full IFRS basis, despite the fact that cost benefit analyses would not be relevant as the information was prepared anyway.

Staff were asked to prepare a paper summarising the conclusions for circulation to the sub committee and agreement at the January Board meeting.

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