At its January 2006 meeting, the Board had its initial discussion of a preliminary draft of an Exposure Draft (ED) of an International Financial Reporting Standard for Small and Medium-sized Entities (SMEs). Discussion of that draft continued in February.

On 30-31 January 2006 - subsequent to the Board's January meeting - the IASB's Working Group (WG) on Accounting Standards for SMEs met in London to discuss the draft ED. A preliminary summary of the views and recommendations of Working Group members arising from their January 2006 meeting was provided to the Board in advance of the Board's February meeting. In reviewing the draft ED, Board members considered the WG's recommendations.

The Board made the following decisions on significant issues:

Mandatory Fallback

The Board discussed the WG recommendation of a stand-alone, self-contained IFRS for SMEs - with designated fallbacks to full IFRSs on specific matters, but not a general mandatory fallback. After discussion, by vote of 11/3, the Board reached the following view on this issue:

• Standards in full IFRSs that address transactions, events, or conditions commonly encountered by SMEs should be included in the IFRS for SMEs, either directly or by cross-reference back to the full IFRS. Conversely, standards relating to transactions, events, or conditions not generally encountered by SMEs should not be included in the IFRS for SMEs. The goal would be to minimise the circumstances in which an SME would need to fall back to full IFRSs.
• If the IFRS for SMEs does not specifically address a transaction, event, or condition, an SME should be required to look to the requirements and guidance elsewhere in the IASB Standard for SMEs dealing with similar and related issues (that is, select an appropriate accounting policy by analogy). Failing that, the SME should be required to look to the requirements and guidance in IFRSs and Interpretations of IFRSs dealing with similar and related issues.

Disclosures

Put all disclosures in a separate section.

Glossary

Define all terms in a glossary at the end of the IFRS for SMEs. Highlight defined terms the first time they are used in each section.

Preface

A short preface to the IFRS for SMEs should be included, explaining the nature of IFRSs for SMEs. This material is now in the Introduction section of the draft ED.

Basis for conclusions

The Exposure Draft of the IFRS for SMEs will include a basis for conclusions explaining the basis for any changes from full IFRSs.

Scope

Definition of SMEs should be included in a scope section. This is now included in the Introduction section of the draft ED.

IASB Framework

The draft ED currently includes the objective of financial reporting, qualitative characteristics, definitions of financial statement elements, and recognition concepts from the IASB Framework. This section should be retained.

Pervasive principles

The draft ED currently includes certain pervasive measurement principles intended to be guidance if the IFRS for SMEs does not specifically address a transaction, event, or condition encountered by an SME. Some Board members favoured retaining these pervasive principles, with modifications. Others favoured deleting them. After discussion the Board asked the staff to prepare revised pervasive principles for consideration at a future meeting.

'True and fair override'

The Board decided that a 'true and fair override' similar to that in paragraph 17 of IAS 1 should not be included in the IFRS for SMEs. However, a question about whether to do so should be included in the invitation to comment on the exposure draft.

Use of IFRS for SMEs by small listed entities

The Board believes that full IFRSs are appropriate for an entity whose securities are publicly traded. This should be explained in the basis for conclusions. A jurisdiction that believes that the standards in the IFRS for SMEs are appropriate for small listed entities could adopt those standards, even word for word, as their national standards for small listed entities, in which case the financial statements would be described as conforming to national GAAP.

Combined statement of income and retained earnings

The IFRS for SMEs will provide that if the only changes in an SMEs equity during a period arise from net profit or loss and payment of dividends, the SME may present a combined statement of income and retained earnings in place of separate income and equity statements.

Cash flow statement

The IFRS for SMEs will illustrate only the indirect method. An SME electing the direct method would be cross-referred to IAS 7 for guidance.

Consolidation

An SME group (parent and one or more subsidiaries) will be required to prepare consolidated financial statements. The IFRS for SMEs will include only the basic principles for consolidation, with a cross-reference to IAS 27 for detailed guidance.

Combined financial statements

Guidance should be added regarding preparation of combined financial statements of two SMEs controlled by the same shareholder(s).

Correction of errors

Retrospective treatment should be the principle, as it is in IAS 8. Adjust of retained earnings if retrospective restatement is impractical.

Investments in associates

Allow an SME to elect either (a) the cost method with impairment or (b) fair value through profit and loss in addition to equity method. Cross-reference to IAS 28 would replace the details of the equity method.

Investments in joint ventures

Allow an SME to elect either (a) the cost method with impairment or (b) fair value through profit and loss in addition to (c) equity method and (d) proportionate consolidation. Cross-reference to IAS 31 would replace the details of methods (c) and (d).

Investment property

The section on investment property should be brief. A simple definition of investment property should be included in the glossary. The IAS 40 accounting policy choice of (a) cost-depreciation-impairment model and (b) fair value through profit and loss model should be retained. An SME electing (a) should be referred to the property, plant, and equipment section of the IFRS for SMEs for guidance. An SME electing (b) should be referred to IAS 40.

Business combinations

SMEs need not separate out acquired indefinite-lived intangible assets other than goodwill - may include in goodwill.

Goodwill and indefinite-lived intangible assets that are separated from goodwill

Do an impairment test only if there is an indication of impairment. The Board did not support an amortisation approach.

Leases

Retain the distinction between operating and finance leases.

Assets held for sale

No need for a separate section in the IFRS for SMEs. Include in the section on property, plant, and equipment.

Provisions

Consider whether this section can be simplified. Consider which of the examples in the appendix to IAS 37 should be included in the IFRS for SMEs. Address restructurings and onerous contracts as examples.

Equity - redeemable and puttable capital

The IASB is developing a general exposure draft on this topic. It is a transaction frequently encountered by SMEs. Include the general exposure draft principles in the IFRS for SMEs. Also include the guidance on cooperatives in IFRIC 2.

Next steps

The Board will continue its consideration of the remaining sections of the draft ED at its March 2006 meeting. Staff plans to bring a revised draft to the Board at the May 2006 meeting, including the two sections (financial instruments and income taxes) that are not included in the current draft.