Accounting Standards for Small and Medium-sized Entities

Date recorded:

The Board continued the review it began in January of a preliminary draft of an Exposure Draft (ED) of an IFRS for Small and Medium-sized Entities (SMEs). In reviewing the draft ED, Board members considered the recommendations made by its SME Working Group, which reviewed the draft at its 30-31 January 2006 meeting.

The Board made the following tentative decisions:

Accounting policy options for SMEs

The Board was informed of constituents' wishes for a stand-alone standard without accounting alternatives. The staff informed the Board that to date their recommendations for the SME standard had been based on an assessment of what is viewed as the simpler alternative where such alternatives exist in the main IFRS. The Board reaffirmed its previous decision that all accounting policy options included in IFRSs should also be available to SMEs in the IFRS for SMEs and that a question should be added to the exposure draft to allow constituents to comment on this issue after reviewing the Board's proposals.

Construction contracts

Use the percentage of completion method, provided that the stage of completion, future costs, and collectibility can be estimated reliably. Include the standards on construction contracts in the section on revenue.

Government grants

An SME would use the principle for recognising grants in IAS 41 Agriculture as the basic principle for recognising all grants. However, an SME wishing to use one of the alternatives in IAS 20 Accounting for Government Grants and Disclosure of Government Assistance would be permitted to do so by cross-reference to IAS 20. Under the IAS 41 approach:

  • (a) an unconditional grant would be recognised in income when the grant is receivable
  • (b) a conditional grant would be recognised in income when the conditions are met;
  • (c) grants would be measured at the fair value of the asset received; and
  • (d) grants received before the income recognition criteria are satisfied would be recognised as deferred income (a liability).

Borrowing costs

Only the expense model will be included in the IFRS for SMEs. However, an SME could choose to use the capitalisation model by applying IAS 23 Borrowing Costs. The ED will note that the IASB has agreed to issue an exposure draft of an IFRS proposing to prohibit the expense model and invite comments on whether that is appropriate for SMEs as well.

Share-based payment

The IFRS for SMEs will address cash-settled options and will refer back to IFRS 2 Share-based Payment with respect to equity-settled share-based payments. The IFRS for SMEs will note that IFRS 2 permits the use of the intrinsic value method if fair value cannot be reliably measured.

Impairment of non-financial assets

This section will cover all non-financial assets in one place. The principle would be that non-financial assets other than inventories should not be measured at more than fair value less cost to sell. Inventory should not be measured at more than net realisable value.

Employee benefits

This section will include standards for:

  • (a) short term benefits;
  • (b) the following kinds of retirement plans: multi-employer plans, state plans, insured plans, and defined contribution plans. However, defined benefit retirement plans will be addressed by cross-reference to IAS 19;
  • (c) other long term benefits (including deferred compensation and long-service payments) and termination benefits (measurement at discounted present value, actuarial valuation not required, need not use the projected unit credit method).

Income taxes

Deferred tax assets and liabilities will be recognised for all temporary differences between the carrying amounts and the tax bases of assets and liabilities (the various exceptions and special rules in IAS 12 Income Taxes would be eliminated). Staff indicated that it will consider whether to make a special recommendation to the Board regarding deferred tax assets arising from operating loss carryforwards.

Interim financial reporting

Instead of having a separate section on interim reporting, the IFRS for SMEs will cross-refer to IAS 34 Interim Financial Reporting for guidance. However, the IFRS for SMEs will expressly permit an entity that is not subject to a periodic interim reporting requirements to present, as comparative information, a statement of income and retained earnings (or separate income and equity statements) and a cash flow statement of the immediately preceding year when the year-to-date comparative statements otherwise required by IAS 34 have not been prepared previously.

Classification of instruments as debt or equity

The exposure draft will acknowledge that the IASB and FASB are working jointly on standards for classifying puttable shares and similar instruments as debt or equity and will indicate that the final IFRS for SMEs would reflect the decision(s) in that project.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.