IFRS for Small and Medium-sized Entities (SMEs)

Date recorded:

The Board held an initial discussion on the responses to the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED) based on a high-level comment letter analysis prepared by the staff. No decisions were made. The staff noted that 162 comment letters have been received and that 116 companies from 20 jurisdictions participated in the field tests. In addition, the staff pointed out that approximately 50 roundtable discussions were held around the world.

The Board was particularly interested in the outcome of the field tests, that is, the problems encountered in implementing the ED. The staff responded that the quality of implementation varied, but that the problems encountered by the field test companies were relatively minor; in particular, no company was unable to implement the ED.

One Board member asked whether there is a correlation between the quality of implementation and the proximity of the respective national GAAP to IFRSs. The staff said they would try to include this information in the detailed field test analysis.


General issues raised in the comment letters

The staff highlighted the following key issues raised by constituents.

Need for an IFRS for SMEs

Some comment letters still questioned the need for an IFRS for SME even though this issue was not addressed in the invitation to comment. These respondents suggested that SMEs should follow tax accounting requirements and should not keep two sets of books.

The staff pointed out that it is not the IASB's decision which entities have to apply an IFRS for SME but that this decision has to be made in each jurisdiction. The staff expressed the view that the IFRS for SME is intended for those entities that are required to prepare general purpose financial statements that are used by lenders, vendors, credit rating agencies, outside shareholders, and other capital providers.

The Board agreed.

One Board member requested that the final standard should clarify what general purpose financial statements means to avoid any confusion.

Cross references to full IFRSs / Accounting policy options

A vast majority of respondents recommended that the IFRS for SME should be a (fully) stand-alone standard and therefore suggested to remove all cross references to full IFRSs or to keep the number of cross-references to an absolute minimum. Further, a majority of constituents expressed the view that all or most options in full IFRSs should also be available to SMEs. Some of these respondents noted that this would be particularly important for subsidiaries of entities reporting under full IFRSs.

The staff raised the concern that having a stand-alone standard including all or most options available under full IFRSs could significantly increase the size of the IFRS for SMEs. This would contradict the goal of keeping the standard simple which was also required by these constituents.

It seemed that a majority of Board members was in favour of keeping the options and cross references, though no formal decision was made.

One Board member suggested to keep the printed version of the Standard as simple as possible but to include links to full IFRSs relating to the options in an electronic version. The Board agreed to take this proposal into consideration.

Anticipating changes to full IFRSs

Some respondents pointed out that anticipating decisions made in current Board projects would not be an appropriate policy because such potential changes have not yet been through a complete public due process.

The staff noted that in the ED the elimination of the corridor approach and the elimination of certain exceptions to recognition of deferred taxes could be seen as anticipated changes.

No strong views were expressed.

Disclosure requirements

Many constituents suggested making further simplifications to the disclosure requirements.

The staff pointed out that the respondents often did not specify which disclosures they consider as being not helpful or too complex.

One Board member expressed the view that there are areas where even more disclosures should be required for SMEs, for example, significant customers and other economic dependencies. The staff responded that it will consider this issue in the recommendations that it will bring to the Board in May.

The Board encouraged the staff to address the disclosure issue with the working group, in particular, to seek input from the representatives of users on this topic.

Title of the standard

Many constituents noted that the term 'small and medium-sized entities' implies a size test because it is defined by using quantitative thresholds in some jurisdictions. Therefore, these respondents suggested alternative terms such as 'non-publicly accountable entity' or 'non-public-interest entity'.

The Board acknowledged these concerns and asked the staff to find a more appropriate title for the standard.


Some constituents recommended reconsidering whether the IFRS for SMEs is suitable for micro-entities, small listed entities, and other entities that have public accountability because they act in a fiduciary capacity such as travel agencies and unit trusts managed for a small number of investors.

With regard to the micros, Board members noted that jurisdictions will decide which entities should use the IFRS for SMEs and that, in turn, will depend on whether the micro-sized entity is required to produce general purpose financial statements. With regard to the small listed entities and others that act in a fiduciary capacity, there seemed to be no willingness among Board members to widen the scope of the IFRS for SMEs for any of these entities.

Use of fair value in general

Many respondents suggested restricting the use of fair values to situations where a market price is quoted or readily determinable, plus all derivatives.

The staff noted that in the ED the mandatory use of fair values as the basis for measuring non-financial assets is already restricted to agricultural assets. However use of a current valuation cannot be avoided for impairment testing and valuation allowances for many both financial and non-financial assets.

No strong views were expressed and the staff will prepare a detailed analysis on this topic for discussion at a future meeting.

Post-issuance review / Interpretations of the IFRS for SMEs

Some constituents recommended that the Board commit to conduct comprehensive post-implementation reviews on a regular basis (approximately every two years). In addition, a formal process should be implemented for amending the Standard and developing Interpretations.

Regarding the first issue there seemed to be consensus to conduct such a review after two full years of implementation. The staff noted that the second issue is also a 'version control issue' when an IFRS is amended - do cross references continue to refer to the old version or automatically refer to the revised IFRS.

Regarding the second issue the Board did not support developing a formal process for publishing interpretations of the IFRS for SMEs. The Board noted that substantial guidance for implementing the IFRS for SMEs will be provided by the IASC Foundation Education Team's planned IFRS for SMEs training materials, which are expected to be released in mid- to late-2009. Further, the implementation guidance in full IFRSs can be used by SMEs under the hierarchy in paragraph 4 of section 10 of the ED. It was decided to clarify this in the standard.

Key issues related to specific sections in the ED

The staff highlighted the following key issues arising from the comment letters:

  • Format of financial statements
  • Requirements for statements of cash flows
  • Requirements for consolidated financial statements
  • Amortisation of goodwill and other indefinite life intangibles
  • Default measurement basis for financial instruments
  • Measuring stock options if equity instruments are not traded (intrinsic value)
  • Proposed simplified value in use calculation for impairment test
  • Accounting for employee benefits
  • Accounting for deferred taxes

The topics were discussed in detail, but will be part of the detailed comment letter analysis to be presented at the April 2008 Board meeting.

Work plan

The Board agreed to proceed with the project as follows:

  • April 2008: Second education session including a detailed comment letter analysis and report on field tests
  • May to July 2008: Decisions on technical issues
  • September or October 2008: Deliberation of revised draft of the ED
  • December 2008: Vote on final standard

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