IFRS for Small and Medium-sized Entities (SMEs)

Date recorded:

The Board held a second discussion on the responses to the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED). At this meeting the staff presented the main issues identified in the field tests, that is, the problems encountered in implementing the ED. The staff's summary of issues raised in the field test is presented in Agenda Paper 6 available on the IASB's website. No decisions were made.

The staff noted that 116 entities from 20 countries participated in the field tests. The staff pointed out that they did not work with the individual field test entities but that professional accounting bodies and accounting standard-setters took the lead in identifying field test entities and in helping those entities preparing their reports.

The entities were asked to:

  • provide background information about their business and reporting requirements,
  • submit their most recent annual financial statements under their existing accounting framework,
  • prepare financial statements in accordance with the ED for the same financial year (without presenting comparative prior year information)
  • respond to a series of questions designed by IASB staff to identify specific problems the field test entity encountered in applying the ED.


Demographics of the field test entities

The staff provided an overview and, among other things, highlighted the following:

  • Of the 116 entities 12 entities were full IFRS reporters because national law permits or requires unlisted entities to use IFRSs, whereas all other participants currently report under their national GAAP.
  • Approximately 70% of the field test entities have 50 or fewer employees, including 35% with less than 10 employees.
  • Approximately 60% of the field test entities have an annual turnover of less than US$ 5 million including 35% with annual turnover of less than US$ 1 million.

The Board was particularly interested in whether there was a correlation between the problems encountered and the demographics and asked the staff whether it would be possible to analyse the field test results using criteria such as size and proximity of the respective national GAAP to IFRSs (including a separate analysis for the 12 full IFRS reporters). One Board member pointed out that the responses of entities with less than 10 employees (so called 'micros') should be considered separately.

The staff responded that such an analysis would be possible and indicated that the quality of implementation was mainly influenced by the proximity of the respective national GAAP to IFRSs rather than the size of the entities. In particular, the staff explained that the 12 entities already applying full IFRSs in general reported fewer problems than the other entities. Limitations encountered during the field testing

The staff noted that overall the feedback received from the field test entities was very helpful and that only minor limitations were encountered.

Among other things the staff highlighted the following:

  • Some field test entities provided financial statements without responding to the IASB's field test questionnaire and vice versa. The staff noted that the reasons for not providing financial statements often were concerns regarding confidentiality of the data rather than the inability of the entity to apply the ED, that is, the financial statements were prepared in accordance with the ED but not sent to the IASB.
  • Some field test entities did not prepare a full set of financial statements. The parts omitted by these entities were mainly the statement of cash flows, the statement of changes in equity and certain note disclosures. The staff was of the view that in many cases the omitted parts were considered to be too onerous to prepare for a voluntary field test but that the entities would be able to prepare them if required for financial statements.


General issues raised in the field test comments

The staff highlighted a number of key issues that are not related to a specific section of the ED. The Board discussion focussed on the following topics:

Overall impression

The staff noted that overall the responses received from field test entities were positive. In particular, about half of the field test entities listed no, or only one or two, issues or problems.

Use of fair value

Many field test entities noted that the requirement to perform annual fair value measurements for common financial instruments and residual values of non-financial assets is complex, costly, and often not possible due to lack of reliable values and inability to bear necessary specialists' fees.

The Board asked whether these concerns relate to complex financial instruments only. The staff assumed that this issue would be more a classification issue since many field test entities were not certain which financial instruments qualify for measurement at cost or amortised cost less impairment.

Disclosures are too burdensome

Another significant area of concern was the nature, volume and complexity of disclosures.

  • A significant number of the field test entities commented that the required disclosures are too onerous to prepare, in terms of time and costs.
  • A few field test entities noted that, in some cases, they were required to publicly disclose sensitive information. The staff explained that disclosures on remuneration of key management personnel (for instance, some SMEs have only one key manager) and related parties are the main areas of concern in this context.

Further simplifications are required

In addition to disclosure requirements being identified as too complex, many field test entities stated the ED itself should be simplified because it currently provides little relief from full IFRSs.


Field test issues related to specific sections in the ED

Only a few topics were mentioned and no strong views were expressed.

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