Accounting Standards for Small and Medium-sized Entities

Date recorded:

The Board considered a marked version of the revised draft ED International Financial Reporting Standard for Small and Medium-sized Entities. In addition, the Board began deliberations of some specific issues identified by the staff. The Board started by discussing the notion of 'mandatory fallback' to the full text of IFRSs. The Board agreed that this phrase had raised undue alarm amongst constituents and indicated its intention that the draft ED should clearly state that:

  • The SME standard is intended to be a stand-alone document for a typical entity with about 50 employees.
  • Where IFRSs provide an accounting policy choice, the Board has concluded that SMEs should have the same options. The simpler option is set out in he IFRS for SMEs, and the other option or options are permitted by cross reference to IFRSs.
  • The IFRS for SMEs omits some accounting topics that are addressed in full IFRSs, because the Board believes that the typical SME is not likely to encounter such transactions. However the IFRS for SMEs has an explicit cross-reference telling an SME that happens to encounter such a transaction to look to a particular IFRS.
  • The SME standard states that if the IFRS for SMEs does not address a transaction, event, or condition or provide an explicit cross-reference back to an IFRS, an SME should select an accounting policy that results in relevant and reliable information.
    • In making this judgement, an SME should consider, first, whether appropriate accounting can be determined by analogising from the principles in the IFRS for SMEs.
    • Only if no analogies can be derived, the full text of IFRS should be consulted as a 'fallback'. The Board considered whether the second tier of the hierarchy would be operational as auditors are likely to force preparers to apply the full IFRS guidance if no specific guidance exists in the SME Standard.
    • The Board voted and agreed that the approach they were taking could result in different accounting for similar transactions if entered into by entities following the SME Standard and those following the full IFRSs.
  • In adopting the IFRS for SMEs, a jurisdiction could elect to add, as an appendix to the IFRS for SMEs, the full text of an IFRS that they deem especially relevant to SMEs in that jurisdiction, even though in the IFRS for SMEs itself that IFRS is cross-referenced rather than included. For example, in hyperinflationary economies, the full text of IAS 29 may be incorporated into the SME Standard for such jurisdictions.
  • The Board will seek views from constituents about whether all of the options in full IFRS should be available to SMEs or, if not, which option(s) should be retained.

The Board commenced deliberations of specific sections of the draft ED and will continue tomorrow. During today's discussion, the Board asked the staff to perform an exercise of checking that the simplifications and cross-references made in the draft ED and its accompanying glossary are faithful to the meanings intended in the full text of IFRS so as to avoid unintentional differences in meaning.

Based on progress made to date, it was noted that an exposure draft is likely to be released for public comment in September or October 2006.

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